<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999
REGISTRATION NO. 333-72433
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
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> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(1)(2) REGISTRATION FEE(3)
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock ($0.001 par value)......... 3,910,000 $14.00 $54,740,000 $15,218
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</TABLE>
(1) Includes 510,000 shares that the underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act.
(3) $11,190 of this amount has been previously paid.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 MARCH 31, 1999
PROSPECTUS
3,400,000 SHARES
[LAUNCH MEDIA LOGO]
COMMON STOCK
This is an initial public offering of common stock by Launch Media, Inc. We
are selling 3,400,000 shares of common stock. Under an agreement between Launch
and Sony Music Entertainment, Inc., Launch has agreed to sell to Sony at the
initial public offering price shares in this offering having an aggregate
purchase price of $1.0 million. The estimated initial public offering price is
between $12.00 and $14.00 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.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<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 510,000 additional shares of common stock. The underwriters are
severally underwriting the shares being offered on a firm commitment basis.
-------------------------
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
FRONT COVER
Discover LAUNCH on broadband
Moving from CD-ROM to broadband
Our history producing the monthly LAUNCH on CD-ROM positions us to help the
growing number of broadband users discover new music.
[Image from Launch on CD-ROM and consumer trials with MediaOne and @Home
depicting the interior of the area known as "The Hang." Includes images of
recording artist Canibus and Lee Jeans' advertising mascot Buddy Lee. Also
depicts a sign providing access to more information about recording artists
Barenaked Ladies and Natalie Inbruglia.]
[caption beneath photo] Currently on LAUNCH on CD-ROM and in trial with MediaOne
and @Home.
[Image depicting view of launch.com through Roadrunner Beta Version.
Incorporates browser window with advertisements for Time Warner Cable, HBO and
Cyborgcasino.com. Also includes a still of a BackStreet Boys video.]
Roadrunner Beta Version
[Image from Launch on CD-ROM and consumer trials with MediaOne and @Home
depicting an interactive advertisement for Surge. Includes images of
young adults playing street hockey in an urban setting.]
<PAGE> 4
GATEFOLD
On LAUNCH.com, music fans find the latest breaking news, exclusive artist
interviews, full-length music videos, free personalized home pages, user
reviews and live chats.
[Image depicting view of launch.com through browser window. Incorporates banner
advertisement for Lee Jeans and links to various music information on
launch.com. Also includes image of and information about the rock band Bush.]
[Images from Launch video of recording artists Canibus and Johnny Lang as well
as Alanis Morisette and No Doubt CD covers.]
The Destination For Music
LAUNCH.com combines personalized editorial content with access to a growing
community of music fans.
[Image depicting view of launch.com through browser window. Incorporates
advertisement for msn. Also includes image of recording artist Celine Dion and
information about the Grammy Awards.]
Through strategic alliances with leading internet players, LAUNCH.com reaches
over one million active music consumers.
[Images of logos for America Online, GO Network, Yahoo!, NBC.com and msn.]
[Image of a group of young adults from the Generation Y demographic group.]
[Image depicting view of launch.com through browser window. Incorporates
advertisement for Nintendo. Also includes personalized music news, information
and graphic for music videos on demand.]
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.
[Image of Launch logo.]
LAUNCH(r)
launch.com. Discover New Music(TM)
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 24
Dividend Policy............................................. 24
Capitalization.............................................. 25
Dilution.................................................... 26
Selected Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Business.................................................... 43
Management.................................................. 63
Certain Transactions........................................ 71
Principal Stockholders...................................... 74
Description of Capital Stock................................ 78
Shares Eligible For Future Sale............................. 82
Underwriting................................................ 83
Legal Matters............................................... 85
Experts..................................................... 85
Additional Information...................................... 86
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
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.
2
<PAGE> 6
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 March 1,
1999, launch.com had approximately 1.0 million registered users. MediaMatrix,
Inc. reported that, in December 1998, launch.com reached 1.5% of all Internet
users, approximately 849,000 unique users. As of March 1999, Launch on CD-ROM
had approximately 265,000 subscribers.
Music is one of the most popular forms of entertainment and a multi-billion
dollar consumer industry. Consumers in the 10 to 34 age group purchased 62% of
the music sold in the U.S. in 1997. According to Soundscan, Inc., more than
32,000 new albums were released in the U.S. in 1997, but fewer than 100 sold
more than 500,000 copies. This same small group of titles accounted for 47% of
new album sales in the U.S. 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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<PAGE> 7
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. We
intend to invest significant financial and management resources to pursue our
strategy, and it is possible that, for competitive or other reasons, we will be
unsuccessful.
RECENT EVENTS
On February 28, 1999, we completed the acquisition of Musicvideos.com. As a
result of this acquisition, we have significantly expanded our content by
offering streaming music videos on launch.com. In addition, on March 24, 1999,
we entered into an agreement with Sony Music to purchase SW Networks. SW
Networks produces editorial content and news features focused primarily on
music. SW Networks distributes this content for radio broadcast and Internet
syndication. We intend to continue to distribute SW Networks' content to
traditional media and to make this content available on launch.com. We believe
that this acquisition will enhance the content available on launch.com, and that
it will increase awareness of the Launch brand. As part of this acquisition
transaction, Sony has agreed to purchase shares in this offering that have an
aggregate purchase price of $1.0 million.
ABOUT US
We incorporated in February 1994 as 2Way Media, Inc. and changed our name
to Launch Media, Inc. in March 1998. Our headquarters are located at 2700
Pennsylvania Avenue, Santa Monica, California 90404, and our telephone number is
(310) 526-4300.
4
<PAGE> 8
THE OFFERING
Common stock offered by Launch........... 3,400,000 shares
Common stock to be outstanding after this
offering............................... 12,428,592 shares(1)
Use of proceeds.......................... General corporate purposes,
including sales and marketing,
capital expenditures and working
capital.
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 includes 1,153,846 shares to be issued to Sony
Music in connection with Launch's acquisition of SW Networks and 144,734
shares of common stock issuable to two of Launch's stockholders upon
conversion of outstanding convertible notes which will occur upon completion
of this offering, in both cases assuming that the initial public offering
price is $13.00 per share. Outstanding share information excludes 1,389,305
shares subject to outstanding options and warrants at a weighted average
exercise price of $3.02 per share and 448,437 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
February 28, 1999. See "Capitalization."
-------------------------
Unless otherwise noted, the information in this prospectus assumes (a)
completion of a 1-for-5 reverse stock split effected in March 1999, (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, reflects the
acquisition of Musicvideos.com in February 1999 and assumes completion of the SW
Networks acquisition. 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 and SW Networks acquisitions.
5
<PAGE> 9
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,
(b) the Musicvideos.com acquisition, (c) the SW Networks acquisition and (d) the
conversion of outstanding convertible notes into shares of common stock, which
will occur automatically upon completion of this offering. The pro forma as
adjusted balance sheet data summarized below reflects the application of the
estimated net proceeds from the sale of the 3,400,000 shares of common stock
offered hereby at an assumed initial public offering price of $13.00 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, PRO FORMA
------------------------------ YEAR ENDED
1996 1997 1998 DECEMBER 31, 1998
------- ------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 1,375 $ 3,137 $ 5,014 $ 9,356
Loss from operations.......... (4,653) (6,675) (13,804) (23,399)
Net loss...................... $(4,488) $(6,692) $(13,419) $(23,016)
Basic and diluted net loss per
share(1)................... $ (5.37) $ (7.89) $ (16.36) $ (2.80)
Shares used in per share
calculation(1)............. 920 925 934 8,209
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................. $ 6,728 $ 7,935 $48,141
Working capital................................. 4,366 5,590 45,796
Intangible assets............................... 2,404 25,017 25,017
Total assets.................................... 13,164 38,727 78,933
Long-term obligations, net of current portion... 639 668 668
Mandatory redeemable convertible preferred
stock........................................ 36,707 -- --
Total stockholders' equity (deficit)............ (27,827) 34,316 74,522
</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.
6
<PAGE> 10
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 THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT
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. 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. 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. Any
future growth in our business will depend substantially upon our ability to meet
the challenges described in the risk factors below.
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
$27.6 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, our financial performance will likely be
adversely affected. See "Selected Financial Data."
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
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. Accordingly, 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 operating results will be below the
expectations of public market analysts and investors. In this event, the price
of our common stock will
7
<PAGE> 11
likely decline. Factors which may cause our revenues and operating results to
fluctuate 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 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.
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. Because advertising
orders are typically short term and subject to cancellation without penalty
until shortly before the advertisement runs, our quarterly operating results are
difficult to forecast. 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.
WE MUST INCREASE ADVERTISING SALES TO GROW OUR BUSINESS
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.
8
<PAGE> 12
Our failure to achieve one or more of these objectives could adversely affect
our business.
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. We have historically entered into barter
transactions with advertisers that we do not believe would pay cash for such
advertisements. We expect to substantially reduce both the dollar volume and
frequency of such transactions 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.
SALES CYCLES VARY FOR ADVERTISING AND MAY CAUSE OUR OPERATING RESULTS TO
FLUCTUATE
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. 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.
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.
WE MUST INCREASE THE SIZE OF OUR AUDIENCE TO ATTRACT ADVERTISERS AND STRATEGIC
ALLIANCES
Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. If we cannot increase the size of our audience, then
we may be unable to attract new or retain existing advertisers. In addition, we
may be at a relative disadvantage to other digital media companies with larger
audiences who may be able to leverage their audience to access more advertisers
and significant strategic alliances. 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;
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<PAGE> 13
- 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.
WE NEED TO CONTINUE TO DEVELOP COMPELLING CONTENT TO ATTRACT OUR TARGET AUDIENCE
Our future success depends on our ability to continue to develop content
that is interesting and engaging to our target audience. If our audience
determines that our content does not reflect its 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. 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.
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
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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
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, AND THE LOSS OF A NUMBER OF THESE
ADVERTISERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS
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 sufficient number of
advertisers during a particular period could adversely affect our results of
operations.
WE MUST MAINTAIN AND ESTABLISH STRATEGIC ALLIANCES TO INCREASE OUR AUDIENCE AND
ENHANCE OUR BUSINESS
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 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. 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.
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COMPETITION AMONG MEDIA AND OTHER COMPANIES FOCUSED ON MUSIC IS INTENSE
Competition among media companies seeking to attract the active music
consumer is intense. Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which could adversely
affect our business. 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, mp3.com 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.
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.
THE LOSS OF ANY KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
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 have an
employment agreement with only one of our executive officers, and we do not
anticipate that other executive officers or key personnel will enter into
employment agreements. 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
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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.
OUR GROWTH IN OPERATIONS IS PLACING A STRAIN ON OUR RESOURCES
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.
ACCEPTANCE AND EFFECTIVENESS OF DIGITAL MEDIA FOR ADVERTISING ARE UNPROVEN,
WHICH
DISCOURAGES SOME ADVERTISERS FROM ADVERTISING ON LAUNCH
Our future is highly dependent on an increase in the use of the Internet
and other forms of digital media for advertising. 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.
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.
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.
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TRACKING AND MEASUREMENT STANDARDS FOR ADVERTISING ARE EVOLVING AND CREATE
UNCERTAINTY ABOUT THE VIABILITY OF OUR BUSINESS MODEL
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. The absence or insufficiency of these
standards could adversely impact our ability to attract and retain advertisers.
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.
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.
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.
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WE EXPECT TO MAKE ACQUISITIONS WHICH MAY DILUTE OUR STOCKHOLDERS' INTERESTS IN
LAUNCH
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. Such acquisitions could cause our
operating results or the price of our common stock to decline. 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 SW Networks, 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.
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE MUSICVIDEOS.COM, SW NETWORKS OR OTHER
BUSINESSES WE MAY ACQUIRE IN THE FUTURE
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.
We may not be able to effectively integrate the operations of acquired
businesses with its ongoing operations. Such failure could harm our business by
diverting management and other resources. Further, the personnel of acquired
businesses may elect not to continue with Launch after completion of any
acquisition, which could diminish the value of any acquisition. In that regard,
we cannot assure you that the personnel of Musicvideos.com or of SW Networks
will continue as employees of Launch.
The acquisition of SW Networks from Sony Music poses risks because
continuation of the SW Networks business requires us to integrate our content
development operations with those of SW Networks. Content developed by SW
Networks after the acquisition will be sold, in part, to radio stations
throughout the United States, and we have not previously sold content to
traditional media. As compensation for providing content to radio stations, we
will typically receive either on-air inventory of radio advertisements or direct
cash payments. To the extent that radio stations pay for our content with radio
advertisement inventory, we intend to continue SW Networks' practice of selling
the majority of this inventory to
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traditional radio advertisers. Selling radio advertising is highly competitive.
We will depend on Global Media, a third-party advertising agency, to sell a
majority of its radio advertisement inventory. We will compete for traditional
media advertising sales with national radio networks and syndicators. National
radio networks typically have larger and more established sales organizations as
compared to Launch. We cannot assure you that Global Media will effectively sell
our inventory of radio advertisements. In addition, the competitive pressures of
traditional media advertising sales may adversely affect our business.
WE MAY NEED ADDITIONAL FINANCING TO ACHIEVE OUR BUSINESS OBJECTIVES
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.
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.
We may need to raise additional funds 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.
See "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.
IF THE USE OF DIGITAL MEDIA, INCLUDING THE INTERNET, DOES NOT CONTINUE TO GROW,
OUR
MARKET MAY NOT DEVELOP ADEQUATELY
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.
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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 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 TO REMAIN COMPETITIVE
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. Exodus provides Web site hosting services. 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
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these occurrences. Our insurance policies may not adequately compensate us for
any losses that may occur due to any failures or 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. We
also rely on a third-party provider for our e-commerce services. If we
experience service problems with our e-commerce transactions, we could also be
subject to liability. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. It 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, the European Union 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
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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 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. Further, the parties
who license material to us may face increasing costs to develop or acquire that
material as a result of evolving laws regarding intellectual property, and these
licensors may pass any such additional costs on to us. 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. We
currently use certain content without first obtaining a license because we
believe that a license is not required under existing law. However, this area of
law remains uncertain and may not be resolved for a number of years. When this
area of law is resolved, we may be required to obtain licenses for such content.
Licenses may not be available on reasonable terms, if at all. 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.
Launch has trademark applications pending in several jurisdictions, but we
cannot guarantee that we will be able to register our trademarks in all
jurisdictions in which we intend to do business. 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.
In addition, we rely on a third party to provide services enabling our
e-commerce transactions. We could become subject to infringement actions by
third parties based upon our use of intellectual property provided by our
third-party provider. There is no provision for indemnification of Launch by the
third-party provider. 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
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trademarks, alteration of content or payment of financial damages will not
adversely affect our business.
IMPOSITION OF SALES AND OTHER TAXES ON E-COMMERCE TRANSACTIONS MAY HINDER
E-COMMERCE
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.
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 ISSUES COULD ADVERSELY AFFECT OUR BUSINESS
Launch may discover Year 2000 compliance problems in its systems that will
require substantial revision. The failure of Launch to fix or replace its
systems on a timely basis could have a material adverse effect on Launch's
business. 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. Failure of third parties to be Year 2000
compliant 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.
EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS OF LAUNCH WILL CONTROL
59.2% 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 59.2% 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.
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BECAUSE OUR SHARES HAVE NOT BEEN PUBLICLY TRADED BEFORE THIS OFFERING, THE
INITIAL
PUBLIC OFFERING PRICE MAY NOT ACCURATELY REFLECT THE TRADING PRICE OF OUR
STOCK
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
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.
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, option holders or warrant holders sell substantial
amounts of our common stock in the public market following this offering, the
market price of our common stock could decline. Sales in the public market also
might make it more difficult for us to sell our securities in the future at an
appropriate time and price. The number of shares of common stock available for
sale in the public market is limited by legal and contractual restrictions.
Holders of approximately 99% of Launch's stock have agreed that they will not
sell, pledge or otherwise dispose 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 some or
all of the common stock from the restrictions of the lockup agreements before
the end of the 180-day period. After this offering, based upon shares
outstanding as of February 28, 1999, we will have outstanding 12,428,592 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants after February 28, 1999. Of
these shares, the 3,400,000 shares sold in this offering will be freely tradable
unless they are purchased by persons subject to contractual or legal
restrictions prohibiting resale. 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) 7,653,418 are subject to the lock-up agreements and will become
eligible for resale 180 days after the date of this offering or earlier
with the written consent of Hambrecht & Quist and
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(c) 469,394 shares will be eligible for resale in the public market
beginning on the date of this prospectus.
On or before 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.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION
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 $9.02 in net tangible book value per share, or approximately 69.4%
of the assumed offering price of $13.00 per share. In contrast, existing
stockholders paid an average price of $6.92 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 principally for the following purposes:
- expansion of sales and marketing;
- brand promotion;
- working capital;
- content development;
- 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.
OUR CHARTER DOCUMENTS CONTAIN CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY
DISCOURAGE TAKEOVER ATTEMPTS
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 or delay potential acquisition or other change
of control proposals that could involve a premium stock price or other benefits
to our stockholders. 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
the following:
- Launch's business strategy;
22
<PAGE> 26
- 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.
Other statements about our plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts may also be
forward-looking statements. 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.
23
<PAGE> 27
USE OF PROCEEDS
Launch will receive net proceeds of $40,206,000 from the sale of the
3,400,000 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 $13.00 per share. If
the underwriters exercise their over-allotment option in full, Launch will
receive net proceeds of $46,371,900, after deducting estimated expenses of
$900,000 and estimated underwriting discounts and commissions.
In the 12 months following this offering, we intend to use approximately
$23.0 million of the net proceeds for expansion of sales and marketing,
including brand promotion, approximately $10.0 million for content and product
development and the remainder for general corporate purposes, including
approximately $1.0 million for capital expenditures. 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 SW Networks. 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.
24
<PAGE> 28
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 875,556 shares of
common stock in connection with the acquisition of Musicvideos.com, (b)
the issuance of shares of common stock, having an aggregate value of
$15.0 million, which would be equal to 1,153,846 shares assuming an
initial public offering price of $13.00 per share, in connection with the
acquisition of SW Networks, (c) the conversion upon completion of the
offering of all outstanding shares of preferred stock into 5,918,230
shares of common stock and (d) conversion of outstanding convertible
notes into 144,734 shares of common stock, which will occur automatically
upon completion of this offering; and
- on a pro forma basis as adjusted to reflect the sale of the common stock
offered hereby at an assumed initial public offering price of $13.00 per
share and the application of the net proceeds therefrom.
The outstanding share information excludes (a) 1,389,305 shares of common
stock issuable upon the exercise of outstanding stock options and warrants, at a
weighted average exercise price of $3.02 per share, (b) 1,410,898 shares of
common stock reserved for future grant 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) 448,437 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. Outstanding share information also excludes 1,893
shares issued upon exercise of outstanding options subsequent to December 31,
1998. See notes 11 and 12 of notes to financial statements.
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....................................... 36,707 -- --
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; 9,026,699 shares
issued and outstanding, pro forma; and 12,426,699 shares
issued and outstanding, pro forma as adjusted........... 1 9 13
Additional paid-in capital................................ 986 63,121 103,323
Unearned deferred compensation............................ (1,208) (1,208) (1,208)
Accumulated deficit....................................... (27,606) (27,606) (27,606)
-------- -------- --------
Total stockholders' equity (deficit)............... (27,827) 34,316 74,522
-------- -------- --------
Total capitalization............................... $ 9,519 $ 34,984 $ 75,190
======== ======== ========
</TABLE>
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<PAGE> 29
DILUTION
As of December 31, 1998, Launch had a pro forma net tangible book value of
approximately $9.3 million, or $1.03 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 and SW Networks
acquisitions. "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 3,400,000 shares of common stock offered hereby at an
assumed initial public offering price of $13.00 per share, the pro forma net
tangible book value of Launch as of December 31, 1998 would have been
approximately $49.5 million or $3.98 per share. This represents an immediate
increase in pro forma net tangible book value of $2.95 per share to existing
stockholders and an immediate dilution of $9.02 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........ $13.00
Pro forma net tangible book value per share before
the offering........................................ $1.03
Increase per share attributable to new investors..... 2.95
-----
Pro forma net tangible book value per share after this
offering.............................................. 3.98
------
Dilution per share to new investors.................... $ 9.02
======
</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 $13.00 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.... 9,026,699 72.6% $ 62,471,615 58.6% $ 6.92
New investors............ 3,400,000 27.4 44,200,000 41.4 13.00
---------- ----- ------------ -----
Total............... 12,426,699 100.0% $106,671,615 100.0%
========== ===== ============ =====
</TABLE>
Other than as noted above, the foregoing computations assume that no
options or warrants have been or are exercised after December 31, 1998 and
exclude 1,893 shares of common stock issued upon exercise of outstanding options
subsequent to December 31, 1998. As of February 28, 1999, options and warrants
were outstanding to purchase an aggregate of 1,389,305 shares of common stock at
a weighted average exercise price of $3.02 per share. In addition, warrants to
purchase 448,437 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
notes 11 and 12 of notes to financial statements.
26
<PAGE> 30
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. The pro forma financial data for the year ended
December 31, 1998 are derived from the unaudited Pro Forma Combined Financial
Information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA
YEAR
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------ DECEMBER 31,
1994 1995 1996 1997 1998 1998(1)
------- ------- ------- ------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Advertising............................... $ -- $ 720 $ 837 $ 1,859 $ 3,038 $ 6,632
Subscription.............................. -- 10 65 798 1,463 1,463
Merchandise and other..................... -- 390 473 480 513 1,261
------- ------- ------- ------- -------- --------
Total net revenues...................... -- 1,120 1,375 3,137 5,014 9,356
Operating expenses:
Cost of goods sold and distribution....... -- 373 812 1,735 3,185 3,185
Sales and marketing....................... -- 1,593 3,189 4,225 9,011 10,221
Content and product development........... 64 330 1,006 2,454 4,407 8,283
General and administrative................ 303 787 1,021 1,398 2,215 5,321
Amortization of excess purchase price..... -- -- -- -- -- 5,745
------- ------- ------- ------- -------- --------
Loss from operations........................ (367) (1,963) (4,653) (6,675) (13,804) (23,399)
Interest income (expense), net.............. -- (16) 167 (14) 389 387
------- ------- ------- ------- -------- --------
Loss before provision for income taxes...... (367) (1,979) (4,486) (6,689) (13,415) (23,012)
Provision for income taxes.................. (1) (1) (2) (3) (4) (4)
------- ------- ------- ------- -------- --------
Net loss.................................... (368) (1,980) (4,488) (6,692) (13,419) (23,016)
Accretion of mandatory redeemable
convertible preferred stock............... -- -- (456) (608) (1,851) --
------- ------- ------- ------- -------- --------
Net loss attributable to common
stockholders.............................. $ (368) $(1,980) $(4,944) $(7,300) $(15,270) $(23,016)
======= ======= ======= ======= ======== ========
Basic and diluted net loss per share(2)..... $ (0.46) $ (2.30) $ (5.37) $ (7.89) $ (16.36) $ (2.80)
======= ======= ======= ======= ======== ========
Weighted average shares outstanding used in
basic and diluted per share
calculation(2)............................ 808 862 920 925 934 8,209
</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 36,707
Total stockholders' equity (deficit)................... (109) (2,053) (7,006) (14,186) (27,827)
</TABLE>
- ---------------
(1) The pro forma 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 and SW Networks acquisitions.
(2) 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.
27
<PAGE> 31
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 music. Launch leverages the
inherent advantages of digital media to offer consumers a compelling music
discovery experience while providing record labels, artists, advertisers and
merchants a valuable marketing platform. 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 March 1999,
launch.com had approximately 1.0 million registered members, and Launch on
CD-ROM had approximately 265,000 subscribers. Media Metrix reported that in
December 1998, launch.com reached 1.5% of all Internet users, approximately
849,000 unique users.
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 $27.6 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 which makes an evaluation of our business difficult"
and "-- We have a history of losses and anticipate increased 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 which the advertisement is displayed, provided that no
significant Launch obligations remain. With respect to SW Networks' business,
Launch will obtain on-air radio
28
<PAGE> 32
advertising inventory in exchange for content. Launch intends to sell this
inventory for cash and will recognize revenue when the radio stations broadcast
the advertisement.
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 $9.3
million, will be allocated to net tangible and intangible assets acquired. The
excess purchase price over net tangible assets is estimated to be $9.2 million
and will be amortized over an expected estimated average useful life of 36
months. The acquisition of SW Networks will be accounted for using the purchase
method of accounting and, accordingly, the purchase price, estimated to be $15.0
million, will be allocated to net tangible and intangible assets acquired. The
excess purchase price over net tangible assets is estimated to be $13.4 million
and will be amortized over an expected estimated average useful life of 60
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> 33
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
---------------------------- PRO FORMA
YEAR ENDED DECEMBER 31, YEAR ENDED
---------------------------- DECEMBER 31,
1996 1997 1998 1998
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Advertising..................... 60.9% 59.3% 60.6% 70.9%
Subscription.................... 4.7 25.4 29.2 15.6
Merchandise and other........... 34.4 15.3 10.2 13.5
------ ------ ------ ------
Total net revenues...... 100.0 100.0 100.0 100.0
Operating expenses:
Cost of goods sold and
distribution................. 59.0 55.3 63.5 34.0
Sales and marketing............. 231.9 134.7 179.7 109.3
Content and product
development.................. 73.2 78.2 87.9 88.5
General and administrative...... 74.3 44.6 44.2 56.9
Amortization of excess purchase
price........................ -- -- -- 61.4
------ ------ ------ ------
Loss from operations.............. (338.4) (212.8) (275.3) (250.1)
Interest income (expense), net.... 12.2 (0.4) 7.8 4.1
------ ------ ------ ------
Loss before provision for income
taxes........................... (326.2) (213.2) (267.5) (246.0)
Provision for income taxes........ 0.2 0.1 0.1 0.1
------ ------ ------ ------
Net loss.......................... (326.4)% (213.3)% (267.6)% (246.1)%
====== ====== ====== ======
</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. In addition, in 1998, we distributed two
additional issues of Launch on CD-ROM in connection with the transition from
bi-monthly to monthly distribution.
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
30
<PAGE> 34
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
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. 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.
Content and Product Development Expenses. Content and product development
expenses consist primarily of editorial, which includes 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
31
<PAGE> 35
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 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 $1.9 million in 1996, 1997 and 1998,
respectively. The carrying amount of the preferred stock was $36.7 million
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<PAGE> 36
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.
SELECTED OPERATING RESULTS OF SW NETWORKS FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1998
Net Revenues. SW Networks derives revenue primarily from the sale of radio
advertising time and, to a lesser extent, from cash which it receives in
exchange for providing the related radio stations with music information and
news. SW Networks' net revenues for the twelve months ended December 31, 1998
were $4.1 million. SW Networks recognizes advertising revenues, net of agency
and media representation fees, when the advertisement is broadcast.
Sales and Marketing Expenses. Sales and marketing expenses for SW Networks
consist primarily of affiliate marketing staff who are responsible for selling
SW Networks' content to radio stations Sales and marketing expenses were $1.2
million, or 29% of net revenues, for the twelve months ended December 31, 1998.
Content and Product Development Expenses. Content and product development
expenses for SW Networks consist primarily of editorial staff and production
costs for its music information and news. Content and product development
expenses were $3.7 million, or 91% of net revenues, for the twelve months ended
December 31, 1998.
General and Administrative Expenses. General and administrative expenses
for SW Networks 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 were $2.7 million, or
66% of net revenues, 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. In addition, during 1997, we increased
advertising rates for advertising on Launch on CD-ROM.
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
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<PAGE> 37
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.
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.
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<PAGE> 38
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> 39
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.
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<PAGE> 40
SELECTED QUARTERLY PRO FORMA OPERATING RESULTS
The following table sets forth certain unaudited pro forma statements of
operations data on an absolute basis and as a percentage of net revenues for the
four most recent quarters. The following pro forma data reflect the acquisitions
of Musicvideos.com and SW Networks as if such acquisitions had occurred as of
January 1, 1998. Pro forma historical results are not necessarily indicative of
the results to be expected in the future. See "Pro Forma Combined Financial
Information."
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Advertising................................. $ 827 $ 1,347 $ 2,127 $ 2,349
Subscription................................ 251 514 268 430
Merchandise and other....................... 266 225 233 536
------- ------- ------- -------
Total net revenues.................. 1,344 2,086 2,628 3,315
Operating expenses:
Cost of goods sold and distribution......... 417 647 1,112 1,010
Sales and marketing......................... 1,773 2,539 3,023 2,985
Content and product development............. 1,641 2,072 2,087 2,465
General and administrative.................. 1,128 1,207 1,328 1,432
------- ------- ------- -------
Loss from operations.......................... (3,615) (4,379) (4,922) (4,577)
Interest income (expense), net................ (38) 172 166 90
------- ------- ------- -------
Loss before provision for income taxes........ (3,653) (4,207) (4,756) (4,487)
Provision for income taxes.................... (3) -- (1) --
------- ------- ------- -------
Net loss...................................... $(3,656) $(4,207) $(4,757) $(4,487)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
---------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Advertising.................................. 61.5% 64.6% 80.9% 70.9%
Subscription................................. 18.7 24.6 10.2 13.0
Merchandise and other........................ 19.8 10.8 8.9 16.1
------ ------ ------ ------
Total net revenues................... 100.0 100.0 100.0 100.0
Operating expenses:
Cost of goods sold and distribution.......... 31.0 31.0 42.3 30.5
Sales and marketing.......................... 131.9 121.7 115.0 90.0
Content and product development.............. 122.1 99.3 79.4 74.4
General and administrative................... 84.0 57.8 50.6 43.2
------ ------ ------ ------
Loss from operations........................... (269.0) (209.8) (187.3) (138.1)
Interest income (expense), net................. (2.8) 8.2 6.3 2.7
------ ------ ------ ------
Loss before provision for income taxes......... (271.8) (201.6) (181.0) (135.4)
Provision for income taxes..................... (0.2) -- -- --
------ ------ ------ ------
Net loss....................................... (272.0)% (201.6)% (181.0)% (135.4)%
====== ====== ====== ======
</TABLE>
37
<PAGE> 41
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. In that event, the aggregate discount from the initial
public offering price will be recorded as additional interest expense. 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
38
<PAGE> 42
investments in businesses, products and technologies, and plans to expand its
sales 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 -- We may need
additional financing to achieve our business objectives."
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 the following:
(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
second 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
39
<PAGE> 43
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 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.
40
<PAGE> 44
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.
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
SW Networks Acquisition
Launch has entered into an agreement to purchase SW Networks. SW Networks
produces entertainment and news features focused on the music and entertainment
industry. SW Networks distributes this content for radio broadcast and Internet
syndication. Launch intends to continue to distribute SW Networks' content to
traditional media and to make this content available on launch.com. Launch
believes that this acquisition will significantly enhance the content available
on launch.com and that it will increase awareness of the Launch brand through
traditional radio media.
Launch intends to effect the acquisition of SW Networks by purchasing all
of the outstanding shares of SW Holdings, Inc., a subsidiary corporation of
Sonic Music Entertainment, Inc. Launch has agreed to pay the purchase price in
shares of Launch common stock valued at $15.0 million concurrent with the
closing of this offering. The number of shares that Launch will actually issue
is determined by dividing $15.0 million by the initial public offering price per
share. The closing of this acquisition transaction is contingent upon completion
of this offering with aggregate proceeds of at least $20.0 million. In addition,
as a condition of this acquisition, Sony Music, has agreed to purchase shares of
Launch common stock in this offering valued at $1.0 million.
Musicvideos.com Acquisition
On January 15, 1999, Launch entered into a definitive agreement to acquire
AreohveeOnline Partnership, doing business as Musicvideos.com, a provider of
music
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<PAGE> 45
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 issued a total of 875,556 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 closed February 28, 1999.
Both of these acquisitions 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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<PAGE> 46
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.
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 a
report, dated March 1997, by Soundata, Inc., a research firm focused on the
music industry, 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 shipments grew from $6.2 billion in 1988 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, Inc., a research firm
focused on the music industry, more than 32,000 new albums were released in the
U.S. in 1997, but fewer than 100 sold more than 500,000 copies. This same small
group of titles accounted for 47% of new album sales in the U.S. 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 10 to 34 age group purchased 62% 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 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
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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 an August 1998 report by International Data Corporation, U.S.
home PC penetration has grown from 39.4% in 1996 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. In a report
dated June 1998, Jupiter Communications, a market research firm, 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 a March 1996 report from eMarketer, an
Internet research firm, 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 ages of 12 and 34.
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
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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 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 410,000 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 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.
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As of March 1, 1999, launch.com had approximately 1.0 million registered
users. Media Metrix, Inc., reported that, in December 1998, launch.com reached
1.5% of all Internet users, approximately 849,000 unique users. As of December
1999, Launch on CD-ROM had approximately 265,000 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. The acquisition of SW Networks will expand
our content offering to include in depth music content across genres. 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 March 1,
1999, launch.com users 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-
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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 March 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
to 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 the multimedia audience research
firm, Mediamark Research Inc. (MRI), in December 1998, demonstrates that our
audience is principally composed of members of Generation Y and others in the 12
to 34 age group. We believe that our audience members generally:
- spend substantial amounts of time learning about and listening to music;
- identify strongly with music they like;
- value being the first to discover new music;
- enjoy being a member of a community built around music; and
- adopt technological advancements early.
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
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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. We also intend to use
the music content generated by SW Networks on launch.com. 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. We also believe that our pending
acquisition of SW Networks will increase awareness of the Launch brand in the
music industry. To increase awareness of the Launch brand, we are developing a
half-hour television show. Our television concept leverages our expertise in
video 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
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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. We also believe that acquisitions of complementary
businesses, such as Musicvideos.com and SW Networks, will help us to rapidly
expand our content offering. 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
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.
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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. As of March 1999, Launch had
approximately 1.0 million registered members. 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 content experience when interacting with the site. This information
also creates a robust community rating base.
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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;
- 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
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- 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 March 1999, total monthly distribution for the CD-ROM was approximately
300,000 units, including 265,000 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.
Other 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. In March 1999, we entered into an agreement with Serviceco LLC,
doing business as Road Runner. Under that agreement, we will provide Road Runner
with music-related content for its high speed, cable modem service. The content
we provide will appear on co-branded pages which link back to launch.com. The
initial term of the agreement expires in March 2000 and may be renewed by the
parties. 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."
After completion of our pending acquisition of SW Networks, we intend to
continue SW Networks' business of selling music content to radio stations
throughout the United States. Radio stations broadcast the music news and
features that SW Networks creates to their audiences. Radio stations pay for
this content either by making cash payments or by delivering on-air inventory of
radio advertising space that SW Networks resells.
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
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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
licensed from Sony Music, on a non-exclusive basis, the rights to certain music
videos for streaming music video channels. 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 reasonable terms,
or at all. See "Risk Factors -- We need to continue to develop compelling
content to attract our target audience" 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>
Our pending acquisition of SW Networks will increase the quantity and
expand the scope of Launch's music content. SW Networks provides music news and
information in various format-specific genres, such as country, adult
contemporary and urban, to radio stations and Internet-based entertainment
companies. Launch also intends to use this content on launch.com. SW Networks,
reporting and news gathering infrastructure consists of approximately 20
full-time staff based at three bureaus located in New York, Los Angeles and
Nashville.
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. Specific
placement depends on the particular advertiser's media and creative goals. We
negotiate pricing based on the size of the unique audience for all Launch
properties, the extent of the placement and the length of the agreement.
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
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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. Banner advertisements are typically sold based on a
cost-per-thousand-impressions (CPM) basis. Targeted banners typically sell for
higher CPM's than run-of-site banners.
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.
Upon completion of Launch's pending acquisition of the business of SW
Networks from Sony Music, Launch intends to begin selling advertising to
traditional radio advertisers. SW Networks has been engaged in the production of
entertainment and news content regarding the music and entertainment industry
for radio broadcast and Internet syndication, and Launch intends to continue
this business. As compensation for providing such content to radio stations,
Launch will typically receive either on-air inventory of radio advertisements or
direct cash payments. To the extent that radio stations pay for Launch's content
with radio advertisement inventory, Launch intends to continue SW Networks'
practice of selling the majority of this inventory to traditional radio
advertisers. Launch will depend on Global Media, a third-party advertising
agency, to sell a majority of its radio advertisement inventory. See "Risk
Factors -- We may be unable to integrate effectively Musicvideos.com, SW
Networks or other businesses we may acquire in the future."
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>
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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 must increase advertising sales to grow our business," "-- We must
increase the size of our audience to attract advertisers and strategic
alliances," "-- Sales cycles vary for advertising and may cause our operating
results to fluctuate," "-- We depend on a limited number of advertisers and the
loss of a number of these advertisers could adversely affect our operating
results" and "-- Effectiveness and acceptance of digital media for advertising
are unproven which discourages some advertisers from advertising on Launch."
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, Sponsorship and Technology. Our future success depends to a significant
extent upon the execution and success of these strategic relationships. See
"Risk Factors -- We must maintain and establish strategic alliances to increase
our audience and enhance our business."
Media Arrangement
Launch is the exclusive branded music content provider for the
entertainment areas of NBC.com. Launch is also the primary provider of
musiccontent 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 or controls 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 areas of
NBC.com that have 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 or may be created within these gateways, such as
the upcoming "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
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interviews, live performances and excerpts from recordings of acoustic
performances and music videos. Launch sells and the parties share advertising
revenue generated from the co-branded site. Launch receives additional promotion
for its content and site on NBC's Videoseeker site.
Pursuant to the agreement, NBC agrees to make good faith efforts to provide
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 specified 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 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 fee and provides certain
promotion on 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 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 can be 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 Snap!'s Project Cyclone, Snap's enhanced,
high-speed version of its general Internet search and portal service that
focuses on rich
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media content. All Launch music links and portions of content on Cyclone take
the user to either a Launch branded area on Cyclone or to a Launch page. The
initial term of the agreement expires in August 1999 and may be terminated by
either party at any time upon 15 days notice.
Content, Sponsorship and Technology
Launch and Sony Music have agreed, concurrently with and contingent upon
the closing of the SW Networks acquisition, to enter into two other agreements:
a sponsorship and content license agreement and a music video license. Under the
sponsorship content license, Launch grants to Sony Music a nonexclusive license
to the content generated by SW Networks and supplied by Launch to radio
stations. In return, Sony Music will pay Launch a quarterly license fee of
$50,000. In addition, this license agreement provides that Sony Music and its
affiliates will purchase advertising and promotional spots on Web sites or other
media properties owned by Launch, in a minimum aggregate amount of $800,000 in
the first year of the agreement, $1.3 million in the second year of the
agreement and $1.3 million in each additional year of the agreement if renewed.
Any advertising or promotional purchases by Sony Music or certain affiliates of
Sony Music in excess of such minimum amounts shall be applied towards the next
year's minimum commitment. The initial term of this agreement is two years, with
extensions of three successive one-year terms at the option of Sony Music.
The music video license involves the nonexclusive license by Sony Music to
Launch of certain music videos for streaming video channels that Sony Music
makes generally available to third parties for exhibition. As part of this
license, Launch will share advertising, sponsorships and e-commerce revenues
generated in connection with Launch's music video content on launch.com. The
term of this Agreement is 12 months from the initial viewing of music videos
provided by Sony Music on launch.com, but in no event longer than 13 months from
the date of the initial execution of the agreement.
The music videos and audio channels available on launch.com use Microsoft's
Windows Media Player technology for displaying 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
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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 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 seventeen 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 is in the process of implementing Vignette Story Server
4.0, a content managing and publishing system.
Launch maintains all of its launch.com production servers at the Irvine,
California Data Center of Exodus Communications, Inc. 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
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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 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, mp3.com 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.
Launch believes that the primary competitive factors in creating a music
destination that attracts a large audience composed of our target demographic
group are the following:
- quality and diversity of content;
- ability to personalize content;
- community experience; and
- brand awareness.
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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 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.
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.
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
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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 -- Imposition of sales and other taxes on e-commerce
transactions may hinder e-commerce."
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 may have multiple copyright owners, some with
rights in the sound recording, covering the particular performance, others with
rights in the musical composition, covering the lyrics and music, and in the
case of music videos, others with rights to the visual content. 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. In
certain cases, we use content without a license because we do not believe a
license is required; however, the laws in this area are uncertain. Our
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
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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 office and studio production space in Santa Monica, California. Our
sublease for the Santa Monica facility provides for rental payments of $365,704
per year and 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 provides for rental payments of $78,676
per year and 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 March 30, 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 entrepreneurial 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
writer/producer in the programming department, then as manager, news projects,
and finally as
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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.
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Officers are elected by and serve at the discretion of the board of directors.
There are no family relationships among the directors or officers of Launch.
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
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board of directors the compensation and benefits of all officers of Launch and
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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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by Launch to Launch's chief executive officer 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>
- -------------------------
(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."
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<PAGE> 70
(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(3)... 4,625 25,375 32,438 167,563
</TABLE>
- -------------------------
(1) All options were granted under Launch's 1994 and 1998 stock option plans.
These options vest over four years and otherwise generally conform to the
terms of the option plans.
(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.
(3) All options held by Ms. Arnof-Fenn become fully exercisable upon completion
of this offering. Any shares acquired upon exercise of such options may not
be sold or otherwise transferred prior to two years following the date of
this prospectus without the prior written consent of the board of directors.
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<PAGE> 71
STOCK PLANS
1994 Stock Option Plan. Launch's 1994 stock option plan authorizes Launch
to grant stock options to employees, including officers, and directors of
Launch. Under the 1994 plan, Launch may grant incentive stock options to
employees or nonstatutory stock options to any person who provides services to
Launch. As of February 28, 1999, options to purchase an aggregate of 199,800
shares of common stock at a weighted average price of $1.25 per share were
outstanding under the 1994 plan. The board of directors has determined not to
grant options under the 1994 plan in the future.
1998 Stock Option Plan. Launch's 1998 stock option plan was approved by the
board of directors and the stockholders in March 1998. The 1998 plan authorizes
Launch to grant incentive stock options to employees, and 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.
A committee of the Board of Directors administers the 1998 plan. The
administering committee 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 administering
committee. Options granted under the 1998 plan cannot be transferred except 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
2,000,000 shares, of which, as of February 28, 1999, 1,295 shares have been
issued upon the exercise of options. Options to purchase of a total of 589,102
shares of common stock at a weighted average exercise price of $2.34 per share
were outstanding and 1,410,898 shares were available for future option grants.
1999 Employee Stock Purchase Plan. Launch has reserved a total of 300,000
shares of common stock for issuance under the 1999 employee stock purchase plan.
Launch will not issue any of these shares prior to the effective date of this
offering. The purchase plan, which is intended to qualify under section 423 of
the Internal Revenue Code, is administered by the board of directors or by a
committee of the
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<PAGE> 72
board. Employees, including officers and employee directors, 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 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.
Participants will purchase shares on the last day of each purchase period during
the initial offering and the last day of each subsequent offering period. 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, as 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 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 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
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<PAGE> 73
Launch. We believe that these provisions and agreements are necessary to attract
and retain qualified persons as directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Launch
pursuant to the provisions of our charter documents, Delaware law or the
agreements described above, 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.
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<PAGE> 74
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 15.9% 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 388,437 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 (1) $22.95 per share or (2) 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)(1) Launch completes an initial public offering, (2) NBC has provided
certain on-air, music-related promotions for Launch on NBC.com and (3) NBC
agrees to extend the term of the strategic alliance agreement for two years; or
(c) if certain other conditions are met.
The warrants terminate upon the earlier of (a) February 27, 2003 or (b) the
consummation of Launch's initial public offering in which shares of common stock
are issued at a per share price of at least $15.00 and Launch receives aggregate
proceeds of at least $15.0 million.
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 3,345,227
shares of series D stock at $7.65 per share in a preferred stock financing
transaction. The
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<PAGE> 75
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 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 10.2% 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
February 28, 1999, approximately $102,650 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 7.6% stockholder, and a
convertible subordinated promissory note in the amount of $500,000 to Goran
Enterprises Limited, a 11.2% 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:
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<PAGE> 76
(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.
During 1997 and 1998, Launch received advertising revenue from Intel
Corporation of $12,000 and $219,000, respectively, of which $102,550 was
included in accounts receivable of Launch at December 31, 1998.
Launch has entered into a stock purchase agreement with Sony Music
Entertainment, Inc., and Launch and Sony have agreed to enter into a sponsorship
and content license agreement and a music video license agreement simultaneously
with the closing of this offering. This transaction is described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Events" and "Business -- Strategic Alliances."
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. Launch's policy is to require that a majority of the
independent and disinterested outside directors on our board of directors
approve all future transactions between Launch and its officers, directors,
principal stockholders and their affiliates. Such transactions will continue to
be on terms no less favorable to Launch than it could obtain from unaffiliated
third parties.
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<PAGE> 77
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Launch's common
stock as of February 28, 1999 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 7,730,012 shares
of common stock outstanding as of February 28, 1999 and 12,428,593 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 February 28, 1999 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)........................... 407,200 5.3% 3.3%
Robert D. Roback(2)............................ 217,832 2.8 1.7%
Jeffrey M. Mickeal(3).......................... 66,686 * *
Spencer A. McClung, Jr.(4)..................... 29,165 * *
Paige M. Arnof-Fenn(5)......................... 7,124 * *
Thomas C. Hoegh(6)............................. 868,102 11.2 7.0%
Richard D. Snyder(7)........................... 588,235 7.6 4.7%
Sergio Zyman (8)............................... 17,777 * *
</TABLE>
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<PAGE> 78
<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 21.2 13.2
1000 Second Avenue, Suite 3600
Seattle, WA 98104
NBC Multimedia, Inc.(10)....................... 1,232,749 15.9 9.3
30 Rockefeller Plaza
Suite 1076E
New York, NY 10112
General Electric Capital Corporation(11)....... 1,232,749 15.9 9.3
120 Long Ridge Road
Stamford, CT 06927
Sony Music Entertainment, Inc.(12)............. 1,230,769 13.7 9.9
550 Madison Avenue
New York, NY 10022
Arts Alliance(13).............................. 868,102 11.2 7.0
Suite 2, Borough House,
Rue du Pre,
St. Peter Port,
Guernsey GY1 1EF
Channel Islands
Intel Corporation.............................. 792,225 10.2 6.4
Mail Stop SC-210
2200 Mission College Blvd.
Santa Clara, CA 95052
Lee Entertainment L.L.C.(14)................... 631,579 8.2 5.1
500, 5-GA, Namdaemoon-No
Chung-Ku, Seoul 100-095, Korea
Avalon Technology LLC.......................... 588,235 7.6 4.7
201 S. Main Street
Ann Arbor, MI 48104
Allen & Company Incorporated(15)............... 580,205 7.5 4.7
711 Fifth Avenue
New York, NY 10022
SOFTBANK Ventures, Inc.(16).................... 421,052 5.4 3.4
1-16-8 Nihonbashi-Kakigaracho
Chuo-ku, Tokyo 103-0014, Japan
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(9 persons)(17).............................. 2,202,121 27.9 17.5
</TABLE>
- -------------------------
* Less than 1%
(1) Includes 9,000 shares subject to options issued under the 1994 stock option
plan and 10,832 shares subject to options issued under the 1998 stock
option plan, all of which are exercisable within 60 days of February 28,
1999.
(2) Includes 27,000 shares subject to options issued under the 1994 stock
option plan and 10,832 shares subject to options issued under the 1998
stock option plan, all of which are exercisable within 60 days of February
28, 1999.
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<PAGE> 79
(3) Includes 55,750 shares subject to options issued under the 1994 stock
option plan and 2,936 shares subject to options issued under the 1998 stock
option plan, all of which are exercisable within 60 days of February 28,
1999.
(4) Represents 18,437 shares subject to options issued under the 1994 stock
option plan and 10,728 shares subject to options issued under the 1998
stock option plan, all of which are exercisable within 60 days of February
28, 1999.
(5) Represents 5,333 shares subject to options issued under the 1994 stock
option plan and 1,791 shares subject to options issued under the 1998 stock
option plan, all of which are exercisable within 60 days of February 28,
1999.
(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 17,777 shares subject to options issued under the 1998 stock
option plan, all of which are exercisable within 60 days of February 28,
1999.
(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 388,437 shares subject to warrants exercisable within 60 days of
February 28, 1999. 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 February 28,
1999. 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
February 28, 1999. Also includes 388,437 shares held by NBC Multimedia,
Inc.
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<PAGE> 80
and 414,432 shares subject to warrants held by NBC Multimedia, Inc. and
exercisable within 60 days of February 28, 1999. NBC Multimedia, Inc. and
General Electric Capital Corporation are under common control of entities
affiliated with the General Electric Company.
(12) Represents 1,153,846 shares issuable to Sony upon the closing of this
offering in connection with Launch's acquisition of SW Networks and the
76,923 shares that Sony has agreed to purchase in this offering and
assuming an initial public offering price of $13.00 per share.
(13) Represents 457,516 shares held by Goran Enterprises Limited and 410,586
shares held by Digital Ventures Limited.
(14) Mie Kyung Lee is an officer of Lee Entertainment and has certain investment
and voting power over these shares.
(15) Represents 580,205 shares subject to warrants exercisable within 60 days of
February 28, 1999.
(16) Yoshitaka Kitao is the president and chief executive officer of SOFTBANK
and has certain investment and voting power over these shares.
(17) Includes 133,297 shares subject to options issued under the 1994 stock
option plan and 37,119 shares subject to options issued under the 1998
stock option plan, all of which are exercisable within 60 days of February
28, 1999. 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> 81
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 February 28, 1999, there were 1,811,782 shares of common stock
outstanding held of record by 34 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> 82
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 28,
1999.
On February 27, 1998, Launch issued warrants to purchase 388,437 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 proceeds to Launch of at least $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,
(c) that number of shares issuable upon conversion of $1.5 million
convertible subordinated promissory notes, which would be 144,734 shares,
assuming an initial public offering price of $13.00 per share, and
(d) that number of shares issuable to Sony in connection with the SW
Networks acquisition, which would be 1,153,846 shares, assuming an initial
public offering price of $13.00 per share
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. Sony also
has the right, acting individually, to require, on one occasion, that Launch use
its best efforts to register its shares for resale to the public. 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
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<PAGE> 83
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.
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.
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<PAGE> 84
Our certificate of incorporation and 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 and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called at any time by the board of directors, the chairman of the board of
directors or the president and chief executive officer. These provisions may
have the effect of deterring hostile takeovers or delaying changes in control of
the management of Launch.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation.
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<PAGE> 85
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 12,428,592
shares of common stock, assuming the issuance of 3,400,000 shares of common
stock offered hereby and no exercise of options after February 28, 1999. Of
these shares, the 3,400,000 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 or by persons subject to other contractual or legal
restrictions on resale. Sales by affiliates would be subject to certain
limitations and restrictions described below.
The remaining 9,028,592 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, approximately
7,653,418 shares will be subject to "lock-up" agreements described below on the
effective date of the offering and 1,322,097 will be subject to similar
restrictions on transfer. On the effective date of the offering, 3,453,077
shares not subject to the lock-up agreements described below or similar
agreements 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 February 28, 1999, there were a total of 199,800 shares of common
stock subject to outstanding options under our 1994 stock option plan, 139,352
of which were vested and exercisable, and a total of 589,102 shares of common
stock subject to outstanding options under our 1998 stock option plan, 55,310 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. 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 the holders of approximately 99% of the
outstanding shares 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> 86
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 numbers of shares of common stock
set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
Allen & Company Incorporated................................
NationsBanc Montgomery Securities LLC.......................
---------
Total............................................. 3,400,000
=========
</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 by this prospectus if
any of these shares are purchased.
The following tables show the per share and total underwriting discounts
and commissions Launch will pay 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 $900,000.
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 that price less a concession not in
excess of $ per share. The underwriters may allow and these dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares has been completed, 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 by this prospectus.
In connection with Launch's acquisition of SW Networks, Sony Music will
purchase shares of common stock in this offering with an aggregate purchase
price of
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<PAGE> 87
$1.0 million at the initial public offering price. The number of shares
available for sale to the general public in the offering will be reduced by the
number of shares sold to Sony.
Launch has granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to 510,000 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 this option only to cover over-allotments made in connection with the
sale of shares of common stock offered by this prospectus.
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 collectively own 7,653,418 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, these 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.
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<PAGE> 88
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 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.
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.
Under 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,
and the financial statements of SW Networks Inc. as of March 31, 1998 and
December 31, 1998 and for the year ended March 31, 1998 and the nine months
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.
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<PAGE> 89
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 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> 90
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-22
Pro Forma Combined Statement of Operations for the Year
Ended December 31, 1998................................ F-24
Pro Forma Combined Balance Sheet at December 31, 1998..... F-25
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-26
AREOHVEE ONLINE PARTNERSHIP DBA MUSICVIDEOS.COM:
Report of Independent Accountants......................... F-28
Balance Sheets at December 31, 1997 and 1998.............. F-29
Statements of Operations for the Period from Inception
(August 1, 1997) through December 31, 1997 and for the
Year Ended December 31, 1998........................... F-30
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-31
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-32
Notes to Financial Statements............................. F-33
SW NETWORKS INC:
Report of Independent Accountants......................... F-36
Balance Sheets at March 31 and December 31, 1998.......... F-37
Statements of Operations for the Year Ended March 31, 1998
and the Nine Months Ended December 31, 1998............ F-38
Statements of Changes in Owners' Equity for the Year Ended
March 31, 1998 and the Nine Months Ended December 31,
1998................................................... F-39
Statements of Cash Flows for the Year Ended March 31, 1998
and for the Nine Months Ended December 31, 1998........ F-40
Notes to the Financial Statements......................... F-41
</TABLE>
F-1
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
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, except for
Note 14 as to which the
date is March 24, 1999
F-2
<PAGE> 92
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 36,706,546 $ --
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........................ -- 986,280 37,686,908
Unearned compensation............................. -- (1,207,862) (1,207,862)
Accumulated deficit............................... (14,186,889) (27,605,650) (27,605,650)
------------ ------------ ------------
Total stockholders' equity (deficiency)........... (14,185,956) (27,826,297) $ 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> 93
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) (1,851,582)
----------- ----------- ------------
Net loss attributable to common
stockholders....................... $(4,943,850) $(7,299,546) $(15,270,343)
=========== =========== ============
Basic and diluted net loss per common
share.............................. $ (5.37) $ (7.89) $ (16.36)
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> 94
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
Issuance of warrants to
purchase common
stock................. -- -- 1,435,000 -- -- 1,435,000
Accretion of mandatory
redeemable convertible
preferred stock....... -- -- (1,851,582) -- -- (1,851,582)
Net loss................ -- -- -- -- (13,418,761) (13,418,761)
---------- -------- ----------- ----------- ------------ ------------
Balance, December 31,
1998.................. 934,333 935 986,280 (1,207,862) (27,605,650) (27,826,297)
Assumed conversion of
mandatory redeemable
convertible preferred
stock................. 5,918,230 5,918 36,700,628 -- -- 36,706,546
---------- -------- ----------- ----------- ------------ ------------
Balance, December 31,
1998 pro forma........ 6,852,563 $ 6,853 $37,686,908 $(1,207,862) $(27,605,650) $ 8,880,249
========== ======== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 95
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
Issuance of warrants in connection with sale of Series D
stock................................................ $ -- $ -- $ 1,435,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 96
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 effected 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> 97
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 on other Web sites. Revenues and expenses from barter
transactions are recorded at the lower of estimated fair value of the
advertisements received or delivered based on advertising rates currently in
effect. Barter revenues 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 and expenses recognized from barter
transactions were approximately $131,000, $903,000 and $1,345,000 in 1996, 1997
and 1998, respectively. The Company did not enter into any barter transactions
with affiliates or related parties in 1996, 1997 or 1998.
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.
F-8
<PAGE> 98
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORY
Inventory consists primarily of merchandise and is recorded at the lower of
cost (first in, first out) or market.
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.
F-9
<PAGE> 99
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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
F-10
<PAGE> 100
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 448,437 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.
F-11
<PAGE> 101
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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> 102
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> 103
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> 104
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> 105
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> 106
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
financial advisory services and the Series D Stock offering, the Company issued
warrants in 1997 and 1998 to purchase an aggregate of 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 448,437
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 $10.00 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> 107
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> 108
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 $ 16.36
Pro forma $ 5.38 $ 7.91 $ 16.42
</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> 109
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS:
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 closed on February 28, 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 $9.3 million is comprised of 875,556
shares of the Company's common stock with an estimated fair value of
approximately $8.9 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, a stockholder, and a
convertible subordinated promissory note in the amount of $500,000 to Goran
Enterprises Limited, a 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. In that event, the
aggregate discount from the initial public offering price will be recorded as
additional interest expense. 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> 110
LAUNCH MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In March 1999, the Company entered into an agreement to purchase the
outstanding shares of SW Networks Inc. in exchange for shares of the Company's
common stock having an aggregate value of $15 million. SW Networks is a provider
of entertainment information/news content to radio stations and Internet-based
entertainment companies. The acquisition will close concurrently with the
Company's IPO 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.
F-21
<PAGE> 111
LAUNCH MEDIA, INC.
PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW
ACQUISITION OF MUSICVIDEOS.COM
On February 26, 1999, the Company acquired 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 being 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 $9.3 million is comprised of
875,556 shares of the Company's common stock with an estimated fair value of
approximately $8.9 million, a cash payment of approximately $300,000 and assumed
liabilities and transaction costs of approximately $100,000. For purposes of
this pro forma combined financial information, the excess purchase price over
net tangible assets acquired is estimated to be approximately $9.2 million and
is being amortized over a preliminary estimated average useful life of 36
months.
ACQUISITION OF SW NETWORKS, INC.
On March 26, 1999, the Company entered into an agreement to purchase all of
the outstanding shares of SW Networks Inc., an entertainment information/news
content provider to radio stations and Internet-based entertainment companies,
in exchange for shares of the Company's common stock having an aggregate value
of $15.0 million. The acquisition will close concurrently with the Company's IPO
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 number of shares to be issued will be
dependent upon the IPO price per share. For purposes of this pro forma combined
financial information, the excess purchase price over net tangible assets
acquired is estimated to be approximately $13.4 million and is assumed to be
amortized, on a preliminary basis, over an estimated average useful life of 60
months.
The acquisitions have 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 these acquisitions as if they had occurred on January 1, 1998, by
combining the results of operations of Musicvideos.com for the year ended
December 31, 1998 and of SW Networks for the twelve months ended December 31,
1998 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 the acquisitions as if they had occurred on December 31, 1998 by
combining the balance sheets of the three companies as of December 31, 1998.
F-22
<PAGE> 112
The unaudited pro forma combined statement of operations is not necessarily
indicative of the operating results that would have been achieved had the
transactions 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, Musicvideos.com and SW
Networks 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-23
<PAGE> 113
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
LAUNCH MEDIA,
INC. MUSICVIDEOS.COM SW NETWORKS INC.(1) ADJUSTMENTS PRO FORMA
------------- --------------- ------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues.................. $ 5,014,161 $257,649 $ 4,103,930 $ (20,000)(A) $ 9,355,740
Operating expenses:
Cost of goods sold and
distribution.............. 3,185,319 -- 3,185,319
Sales and marketing......... 9,011,482 22,013 1,206,938 (20,000)(A) 10,220,433
Content and product
development............... 4,407,018 126,756 3,748,578 8,282,352
General and
administrative............ 2,214,789 99,076 2,722,180 285,000(B) 5,321,045
Amortization of excess
purchase price............ -- -- -- 3,056,514(C)_ 5,745,237
2,688,723(D)
------------ -------- ----------- ------------
Income (loss) from
operations.................. (13,804,447) 9,804 (3,573,766) (23,398,646)
Interest income (expense),
net......................... 389,282 (3,432) -- 385,850
------------ -------- ----------- ------------
Loss before provision for
income taxes................ (13,415,165) 6,372 (3,573,766) (23,012,796)
Provision for income taxes.... (3,596) -- -- (3,596)
------------ -------- ----------- ------------
Net loss...................... (13,418,761) 6,372 (3,573,766) (23,016,392)
Accretion of mandatory
redeemable convertible
preferred stock............. (1,851,582) -- -- (1,851,582)
------------ -------- ----------- ------------
Net loss attributable to
common stockholders......... $(15,270,343) $ 6,372 $(3,573,766) $(24,867,974)
============ ======== =========== ============
Basic and diluted net loss per
share....................... $ (16.36) $ (8.39)
============ ============
Weighted average shares
outstanding used in per
share calculation........... 933,502 2,962,905
============ ============
Pro forma basic and diluted
net loss per share.......... $ (2.17) (E) $ (2.80)
============ ============
Weighted average shares
outstanding used in pro
forma per share
calculation................. 6,179,816 (E) 8,209,219
============ ============
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information.
F-24
<PAGE> 114
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
AS OF DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
LAUNCH MEDIA, SW NETWORKS
INC. MUSICVIDEOS.COM INC. ADJUSTMENTS PRO FORMA
------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ 1,734,864 $ 9,505 $ 1,000 $ (301,944)(F) $ 1,442,425
(1,000)(G)
Short-term investments....... 4,992,721 -- -- 4,992,721
Accounts receivable, net..... 568,590 118,283 1,427,133 (1,427,133)(G) 686,873
Inventory.................... 124,476 -- -- 124,476
Prepaids and other current
assets..................... 590,139 -- 86,454 (86,454)(G) 590,139
------------ --------- ------------ ------------
Total current
assets.............. 8,010,790 127,788 1,514,587 7,836,634
Property and equipment, net.... 2,587,212 65,631 1,556,384 4,209,227
Excess purchase price.......... -- -- -- 9,169,542(H) 22,613,158
13,443,616(H)
Other assets................... 2,566,000 1,600 -- 2,567,600
------------ --------- ------------ ------------
Total assets.......... $ 13,164,002 $ 195,019 $ 3,070,971 $ 37,226,619
============ ========= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable............. $ 1,619,177 $ 21,142 $ 174,821 $ (174,821)(G) $ 1,640,319
Accrued expenses............. 783,920 25,000 1,037,462 (1,037,462)(G) 845,125
36,205(H)
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 1,212,283 3,747,251
Related party payables......... -- 200,237 -- (200,237)(I) --
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 1,212,283 4,415,699
------------ --------- ------------ ------------
Mandatory redeemable
convertible preferred
stock........................ 36,706,546 -- -- 36,706,546
Stockholders' equity
(deficiency):
Capital stock................ 987,215 -- 55,033,421 (55,033,421)(J) 24,917,886
8,930,671(H)
15,000,000(H)
Partners' deficiency......... -- (100,959) -- 100,959(J) --
Unearned deferred
compensation............... (1,207,862) -- -- (1,207,862)
Accumulated deficit.......... (27,605,650) -- (53,174,733) 53,174,733(J) (27,605,650)
------------ --------- ------------ ------------
Total stockholders'
deficiency.......... (27,826,297) (100,959) 1,858,688 (3,895,626)
------------ --------- ------------ ------------
Total liabilities and
stockholders'
equity.............. $ 13,164,002 $ 195,019 $ 3,070,971 $ 37,226,619
============ ========= ============ ============
</TABLE>
See accompanying notes to Pro Forma Combined Financial Information.
F-25
<PAGE> 115
LAUNCH MEDIA, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
1. The historical statement of operations for SW Networks Inc. has been derived
by combining the statement of operations for the nine months ended December 31,
1998, included elsewhere in this prospectus, with that for the three months
ended March 31, 1998 as follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998 TOTAL
------------ ------------ -----------
<S> <C> <C> <C>
Net revenues.............................. $ 3,370,671 $ 733,259 $ 4,103,930
Operating expenses:
Sales and marketing..................... 948,830 258,108 1,206,938
Content and product development......... 2,785,738 962,840 3,748,578
General and administrative.............. 2,069,340 652,840 2,722,180
----------- ----------- -----------
Net loss.................................. $(2,433,237) $(1,140,529) $(3,573,766)
=========== =========== ===========
</TABLE>
2. The following adjustments were applied to the Company's historical financial
statements and those of Musicvideos.com and SW Networks Inc. 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
$9,169,542 for Musicvideos.com over the preliminary estimated average useful
life of 36 months.
(D) To record amortization of the estimated excess purchase price of
$13,443,616 for SW Networks Inc. over the preliminary estimated average useful
life of 60 months.
(E) 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.
(F) Adjustment to cash, for the cash portion of the Musicvideos.com
acquisition price of $301,944.
(G) Adjustment to eliminate the assets and liabilities of SW Networks not
being acquired by the Company.
F-26
<PAGE> 116
(H) Adjustment to record intangible assets as a result of the acquisitions
of Musicvideos.com and SW Networks Inc.:
<TABLE>
<CAPTION>
MUSICVIDEOS.COM SW NETWORKS
--------------- -----------
<S> <C> <C>
Total consideration:
Common stock........................................ $8,930,671 $15,000,000
Cash................................................ 301,944 --
Other............................................... 36,205 --
---------- -----------
9,268,820 15,000,000
Less net assets....................................... (99,278) (1,556,384)
---------- -----------
Total intangibles................................... $9,169,542 $13,443,616
========== ===========
</TABLE>
The actual allocations of the purchase prices will be based on the
estimated fair values of the net tangible and intangible assets acquired at the
dates of purchase. For purposes of the unaudited pro forma combined balance
sheet, the preliminary purchase price allocation has been estimated as follows:
<TABLE>
<CAPTION>
MUSICVIDEOS.COM SW NETWORKS
--------------- -----------
<S> <C> <C>
Membership database................................... $6,769,542 $ --
Goodwill and other.................................... 2,400,000 13,443,616
---------- -----------
$9,169,542 $13,443,616
========== ===========
</TABLE>
(I) Adjustment to eliminate amounts due to Musicvideos.com partners.
(J) Adjustment to reflect the elimination of all of the Musicvideos.com
partners' deficiency and SW Network's stockholder deficiency balances.
F-27
<PAGE> 117
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-28
<PAGE> 118
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-29
<PAGE> 119
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-30
<PAGE> 120
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-31
<PAGE> 121
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-32
<PAGE> 122
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-33
<PAGE> 123
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-34
<PAGE> 124
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-35
<PAGE> 125
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of SW Networks Inc.,
In our opinion, the accompanying balance sheets and the related statements
of operations, owners equity and cash flows present fairly, in all material
respects, the financial position of SW Networks Inc., (the "Company") at
December 31, 1998 and March 31, 1998, and the results of its operations and its
cash flows for the nine-month period ended December 31, 1998 and for the year
ended March 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.
As discussed in Note 1, the sale of the Company is being negotiated.
As discussed in or referenced from Note 9, the Company is a member of a
group of affiliated companies and, as discussed in the financial statements, has
certain transactions and relationships with members of the group.
PricewaterhouseCoopers LLP
New York, New York
March 12, 1999
F-36
<PAGE> 126
SW NETWORKS INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ------------
<S> <C> <C>
Current assets
Cash.......................................... $ 1,000 $ 1,000
Accounts receivable (net of allowance for
doubtful accounts of $145,183 and $28,843,
respectively).............................. 1,427,133 724,104
Prepaid expenses.............................. 86,454 111,196
------------ ------------
Total current assets....................... 1,514,587 836,300
Property and equipment, net (Note 4)............ 1,556,384 1,924,926
------------ ------------
Total assets............................... $ 3,070,971 $ 2,761,226
============ ============
LIABILITIES AND OWNER'S EQUITY
Current liabilities
Accounts payable.............................. $ 174,821 $ 163,156
Accrued expenses.............................. 735,161 1,220,118
Accrued workforce related costs (Note 5)...... 302,301 376,435
------------ ------------
Total current liabilities.................. 1,212,283 1,759,709
Commitments and contingencies (Note 8).......... -- --
Owner's equity
Common stock, par value $.10; authorized 100
shares; issued and outstanding 100
shares..................................... 10 10
Additional paid-in-capital.................... 55,033,411 51,743,003
Accumulated deficit........................... (53,174,733) (50,741,496)
------------ ------------
Total owner's equity....................... 1,858,688 1,001,517
------------ ------------
Total liabilities and owner's equity....... $ 3,070,971 $ 2,761,226
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE> 127
SW NETWORKS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
------------ -------------
<S> <C> <C>
OPERATING REVENUES
Advertising revenue............................... $ 4,335,570 $ 4,909,298
Less: Agency and media rep fees................. 1,509,807 1,737,166
----------- -----------
Net advertising revenue......................... 2,825,763 3,172,132
Other revenues.................................... 544,908 449,009
----------- -----------
Total operating revenues........................ 3,370,671 3,621,141
----------- -----------
Operating Expenses
Costs of services and products.................. 2,785,738 5,636,426
General and administrative...................... 1,584,340 2,492,221
Selling and marketing........................... 948,830 1,642,148
Depreciation and amortization................... 485,000 700,346
Restructuring costs............................. -- 1,427,240
----------- -----------
Total operating expenses........................ 5,803,908 11,898,381
----------- -----------
Gain on sale of programming rights (Note 3)....... -- 125,000
----------- -----------
OPERATING LOSS.................................... (2,433,237) (8,152,240)
Interest expense (Note 9)......................... -- (88,752)
----------- -----------
LOSS BEFORE INCOME TAXES.......................... (2,433,237) (8,240,992)
Income taxes...................................... -- --
----------- -----------
NET LOSS.......................................... $(2,433,237) $(8,240,992)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE> 128
SW NETWORKS INC.
STATEMENT OF CHANGES IN OWNERS' EQUITY
<TABLE>
<CAPTION>
PARTNER'S PARTNER'S
CAPITAL CAPITAL COMMON ADDITIONAL
(DEFICIT) (DEFICIT) STOCK PAID-IN ACCUMULATED TOTAL OWNERS'
SDR CPE PAR VALUE CAPITAL DEFICIT EQUITY
----------- ----------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- MARCH 31, 1997.... $ 729,913 $ 729,913 $-- $ -- $ -- $ 1,459,826
Net loss for the period April
1, 1997 -- October 31,
1997....................... (3,382,146) (3,382,146) (6,764,292)
Merger with and into CPE
Management Inc. -- November
1, 1997
(Note 1)................... 2,652,233 2,652,233 10 43,960,320 (49,264,796) --
Net loss for the period
November 1, 1997 -- March
31, 1998................... (1,476,700) (1,476,700)
Capital contributions........ 7,782,683 7,782,683
----------- ----------- --- ----------- ------------ -----------
BALANCE -- MARCH 31, 1998.... -- -- 10 51,743,003 (50,741,496) 1,001,517
Net loss for the period April
1, 1998 -- December 31,
1998....................... (2,433,237) (2,433,237)
Capital contributions........ 3,290,408 3,290,408
----------- ----------- --- ----------- ------------ -----------
BALANCE -- DECEMBER 31,
1998....................... $ -- $ -- $10 $55,033,411 $(53,174,733) $ 1,858,688
=========== =========== === =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 129
SW NETWORKS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(2,433,237) $(8,240,992)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization............ 485,000 700,346
Provision for doubtful accounts.......... 116,340 22,655
Gain on sale of programming rights....... -- (125,000)
Decrease (increase) in operating assets:
Accounts receivable...................... (819,369) (127,598)
Other current assets..................... -- 153,424
Prepaid expenses......................... 24,742 (90,112)
Other assets............................. -- 21,181
Increase (decrease) in operating
liabilities:
Accounts payable......................... 11,665 88,104
Accrued expenses......................... (484,957) (125,031)
Accrued workforce related costs (Note
5)..................................... (74,134) 12,047
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES......... (3,173,950) (7,710,976)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to property and equipment......... (116,458) (196,698)
Proceeds from sale of programming rights.... -- 125,000
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES......... (116,458) (71,698)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Capital contributions (Note 7).............. 3,290,408 7,782,674
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 3,290,408 7,782,674
----------- -----------
Net change in cash............................ -- --
Cash at beginning of period................... 1,000 1,000
----------- -----------
CASH AT END OF PERIOD......................... $ 1,000 $ 1,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 130
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION
SW Networks ("SWN" or the "Company"), a 50/50 general partnership, was
equally owned by Sony Digital Radio Inc. ("SDR") and CPE Management Inc.
("CPE"), both indirect, wholly owned subsidiaries of Sony Corporation of America
("SCA"). The primary purpose of SWN was to develop, produce, acquire and
distribute advertiser-supported music and entertainment related long-form and
network radio programming.
On November 1, 1997, CPE acquired, from SDR, the remaining 50% interest in
SWN. In connection with CPE attaining 100% ownership of SWN, the partnership of
SWN was dissolved and its operations were merged with and into CPE. Also on
November 1, 1997, Sony Music Entertainment Inc. ("SMEI"), a wholly owned
subsidiary of SCA, acquired all of the issued and outstanding common stock of
CPE.
Prior to November 1, 1997, CPE had no assets or operations other than its
investment in SWN. CPE, which is now known as SWN, legally changed its name to
SW Networks Inc. in January 1999.
Immediately prior to the above outlined activity the Company adopted a plan
to sell and/or discontinue its long-form and twenty-four hour programming, and
to restructure its operations. Refer to Note 3 -- Restructuring, for a further
discussion of the restructuring activity.
Subsequent to the restructuring, the Company's primary focus is to develop,
produce, acquire and distribute entertainment information/news to radio
stations, and more recently to Internet-based entertainment companies. The
Company currently provides entertainment information in 10 format-specific
genres (e.g., country, adult contemporary, urban) and has over 1,000 agreements
to provide content to affiliated radio stations.
The Company's network of radio station affiliates primarily contracts for
information in exchange for commercial broadcast advertising time. The Company
then sells the advertising time via a media rep agency. Less than 2% of the
total affiliates pay for their content in cash as opposed to exchanging
advertising time as described above.
The Company's reporting and news gathering infrastructure consists of three
bureaus located in New York, Los Angeles and Nashville. Information is
distributed to the affiliated radio stations via satellite, an ISDN line, or the
Internet, as well as through more traditional means.
In addition, the Company provides various engineering services, mainly
comprised of studio rental and CD duplication.
SMEI is currently negotiating the sale of the Company.
F-41
<PAGE> 131
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are prepared in accordance with generally accepted
accounting principles ("GAAP"). The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ADVERTISING REVENUES
The Company's revenues are primarily derived from selling advertising on
commercial radio broadcasts. Advertising revenues are recognized, net of agency
and media rep fees, when the related advertisement is broadcast. The Company
obtains its advertising time in exchange for providing daily music and
entertainment news and/or information to its network of affiliated radio
stations.
OTHER REVENUES
Other revenues consist primarily of cash sales of music and entertainment
news, studio rental income, CD duplication fees and other ancillary operating
income. Revenues are recognized as services are rendered.
COST OF SERVICES AND PRODUCTS
Costs of developing, producing, acquiring and distributing music and
entertainment news consists of mainly workforce related costs (refer to Note 5)
and expenses incurred to distribute its content via satellite, an ISDN line, the
Internet and other more traditional means. Expenses are recognized as incurred.
ADVERTISING COSTS
Advertising costs, primarily consisting of print advertisements, are
expensed as incurred. These costs, recorded within selling and marketing
expense, amounted to approximately $77,000 and $162,000 for the nine-month
period ending December 31, 1998 and the year ended March 31, 1998, respectively.
COMPREHENSIVE INCOME
The Company does not have any items that would be classified as other
comprehensive income.
F-42
<PAGE> 132
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. The cost of additions and improvements are capitalized, while
maintenance and repairs are charged to expense when incurred. Depreciation is
calculated on a straight-line basis, principally over the estimated useful lives
of the related assets ranging from 3 to 7 years.
INCOME TAXES
Income taxes are provided using the liability method in accordance with the
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 provides that deferred tax assets and liabilities
are recognized based on differences between the book and tax bases of assets and
liabilities using presently enacted tax rates. The provision for income taxes is
the sum of the amount of taxes paid or payable for the year as determined by
applying the provisions of enacted tax laws to taxable income for that year and
the net changes during the year in the Company's deferred tax assets and
liabilities. Refer to Note 6 for further discussion of the Company's change in
tax status.
CONCENTRATION OF RISK
As described in Note 1, SWN barters its music and entertainment information
and news gathering service in exchange for advertising time with its network of
affiliated radio stations. The Company has an exclusive agreement with a media
rep agency, which is solely responsible for selling this commercial broadcast
time to advertisers and collecting the associated revenues. The risk of
uncollected debt is somewhat limited because of the large number of advertisers
that comprise the amounts due from the media representative.
Effective January 1, 1999, the Company changed its media rep agency to
another major agency. The new agreement expires on December 31, 1999.
The Company distributes a majority of its information through a single
third party distributor. The distributor provides proprietary software and
technical support to the Company and its affiliates, which enables the
distribution of programming content electronically. Should the Company lose the
ability to distribute its information via this distributor without finding a
comparable replacement, the additional cost of distributing via other means
could be significant.
3. RESTRUCTURING
In October 1997, the Company adopted a plan to sell and/or discontinue its
long-form and twenty-four hour music programming, and to restructure its
operations. As a result of said plan, the Company recorded a liability of
approximately $1,427,240 in the third quarter of fiscal 1998 to provide for
associated costs. The charge represented approximately $683,100 related to
workforce termination costs, $424,040 related to the write-off of leasehold
improvements and programming related
F-43
<PAGE> 133
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
assets which had no further economic benefit as of the date of the plan and
$320,100 related to other costs. Other costs primarily related to the cost of
future lease payments attributable to floor space that became idle as a result
of the plan, as well as other documented contractual services. Approximately 31
programming, engineering, marketing and administrative members of the workforce
were affected by the plan, of which 30 were terminated as of March 31, 1998. The
final member was terminated as of December 31, 1998.
Movements in the restructuring reserve, which is recorded within accrued
expenses, were as follows (amounts in thousands):
<TABLE>
<CAPTION>
WORKFORCE ASSET OTHER
RELATED WRITE-OFFS COSTS TOTAL
--------- ---------- ----- -------
<S> <C> <C> <C> <C>
Original reserve..................... $ 683 $ 424 $ 320 $ 1,427
Utilized through March 1998.......... (543) (424) (246) (1,213)
----- ----- ----- -------
Balance at March 31, 1998............ 140 -- 74 214
Utilized through December 1998....... (140) -- (74) (214)
----- ----- ----- -------
Balance at December 31, 1998......... $ -- $ -- $ -- $ --
===== ===== ===== =======
</TABLE>
In connection with the Company's restructuring plan, certain long-form
programming was sold, resulting in a gain of $125,000 recorded within operating
results. None of the assets that were written down within the restructuring
charge of $424,040 were related to the programs sold.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ----------
<S> <C> <C>
Machinery & Equipment................. $2,166,122 $2,166,122
Computer Equipment.................... 806,547 803,047
Leasehold Improvements................ 753,073 635,923
Furniture & Fixtures.................. 248,642 252,834
---------- ----------
3,974,384 3,857,926
Less: accumulated depreciation and
amortization........................ 2,418,000 1,933,000
---------- ----------
$1,556,384 $1,924,926
========== ==========
</TABLE>
5. WORKFORCE
The Company has no employees. The Company has, historically, contracted for
the services of its workforce with Sony Corporation of America or wholly owned
subsidiaries of Sony Corporation of America. The associated salary and bonus
related costs incurred by these related parties are recharged to the Company
based upon actual amounts incurred. The costs of any fringe benefits provided to
the workforce by their employer, including any related employee taxes, are
charged to the
F-44
<PAGE> 134
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Company based upon estimates of actual amounts incurred. For the nine months
ended December 31, 1998 and the year ended March 31, 1998, total workforce
charges approximated $2,877,000 and $5,300,000, respectively.
6. INCOME TAXES
Effective November 1, 1997, the Company changed its tax status from a
nontaxable enterprise, a partnership, to a taxable enterprise, a corporation. As
a result of the change in tax status, the Company recognized a net deferred tax
asset of $2,600,000 and a corresponding valuation allowance for the same amount
at the date of change, in accordance with generally accepted accounting
principles.
The Company has been included in consolidated federal, state and local
income tax returns filed by SCA. However, the tax benefit/(expense) reflected in
the Statements of Operations and deferred tax assets/liabilities reflected in
the Balance Sheets have been prepared as if such expense/(benefits) were
computed on a separate return basis. The tax losses generated by the Company
have been included by SCA in its consolidated net operating loss or used by SCA
to reduce its consolidated taxable income. Currently, no tax sharing agreement
exists between the Company and SCA. The Company's tax year-end is October 31, in
accordance with the SCA tax year-end.
The Company has $9,376,000 and $6,759,000 of net operating loss
carry-forwards as of the nine-month period ended December 31, 1998 and the year
ended March 31, 1998, respectively. These losses begin to expire in 2018. A full
valuation allowance has been provided against these net operating losses since
the Company believes that it is more likely than not that these tax benefits
will not be realized. As a result, there is no income tax benefit or expense for
the period ended March 31, 1998 and the period ended December 31, 1998.
A reconciliation of the U.S Federal statutory tax rate to the Company's
effective tax rate on income (losses) before income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
<S> <C> <C>
Statutory U.S. tax rate................................. 35% 35%
State and local taxes, net of federal benefit........... 11% 2%
Partnership income not subject to tax................... 0% (29)%
Valuation allowance..................................... (46)% (8)%
--- ---
Effective tax rate...................................... 0% 0%
=== ===
</TABLE>
F-45
<PAGE> 135
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ -----------
<S> <C> <C>
Deferred tax asset:
Reserves & accrued expenses........................ $ 155,400 $ 251,500
Net operating loss carry-forwards.................. 4,927,600 3,514,600
----------- -----------
Total gross deferred tax asset.................. 5,083,000 3,766,100
Valuation allowance.................................. (4,397,600) (3,280,400)
----------- -----------
685,400 485,700
----------- -----------
Deferred tax (liability):
Book/tax basis differences in fixed assets......... (121,600) (83,600)
State & Local deferred tax benefit................. (563,800) (402,100)
----------- -----------
Total gross deferred tax (liability)............ (685,400) (485,700)
----------- -----------
Net deferred tax asset/(liability)................... -- --
=========== ===========
</TABLE>
7. CAPITAL CONTRIBUTIONS
Net operating losses funded by SCA or SMEI are invested in the Company and
have been reflected as additional paid-in-capital in the Statement of Changes in
Owners' Equity. As of December 31, 1998 and March 31, 1998, contributed capital
approximating $55,033,411 and $51,743,003, respectively, has been invested in
the Company. SMEI confirmed their present intention to provide sufficient
financial resources to the Company to enable it to meet its obligations as they
fall due and to carry on its business without significant curtailment of
operations as long as it continues to be a wholly owned subsidiary of SMEI.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain facilities in New York and Nashville under
agreements that are classified as operating leases. Future minimum payments in
the aggregate, under the aforementioned leases with the initial remaining terms
in excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE PAYMENTS
----------------------
<S> <C>
Three months ended March 31,
1999.......................... $ 269,000
Year ended March 31:
2000.......................... 1,076,000
2001.......................... 365,000
2002.......................... 2,000
Thereafter...................... --
----------
Total........................... $1,712,000
==========
</TABLE>
F-46
<PAGE> 136
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The Company's New York lease expires on July 31, 2000. The lease for the
Company's news bureau facility located in Nashville, Tennessee, expires in June
2001. Lease payments are subject to adjustment if real estate taxes exceed
certain base levels.
In connection with the restructuring discussed in Note 3, the Company
vacated one floor of its premises in New York. Associated rental expense of
$141,300 was included in the restructuring charge for the period November 1,
1997 through March 31, 1998. On April 1, 1998, SCA, or a wholly-owned subsidiary
of SCA, effectively assumed the obligation of the lease of this space through
July 31, 2000, representing approximately $563,000 of the remaining minimum
lease payments outlined above.
Rental expense for the nine months ended December 31, 1998 and the year
ended March 31, 1998 was approximately $576,000 and $1,054,000, respectively.
The rental expense for the year ended March 31, 1998 is net of amounts included
in the restructuring charge of $141,300.
WORKFORCE AGREEMENTS
Several key members of the workforce have agreements pursuant to which
approximately $683,000 is required to be paid through March 31, 2000.
LITIGATION
The Company is party to several routine legal claims involving employment
matters in the ordinary course of business. Management believes that any
liability resulting from these claims will not have a material adverse effect on
the Company's financial condition, results of operation or liquidity.
9. RELATED PARTY TRANSACTIONS
The Company recognized advertising revenues of $98,100 and $22,050 during
the nine months ended December 31, 1998 and the year ended March 31, 1998,
respectively, in connection with the sale of commercial broadcast time to
related companies. Pursuant to the Company's media rep agreement, SWN is not
charged for agency or media rep commissions on related party advertisement
sales, as there is no sales effort put forth by either the media rep or an
advertising agency in connection with these sales.
Additionally, the Company recognized $100,000 in Other Revenues for the
cash sale of entertainment information to a related company during the nine
months ended December 31, 1998. The Accounts Receivable balance as of December
31, 1998 includes a $35,000 receivable in connection with the above-mentioned
transaction. There are no such transactions or balances in the year ended March
31, 1998.
Related companies provide various accounts payable and payroll processing
services, as well as general corporate and/or support services (e.g., finance,
legal,
F-47
<PAGE> 137
SW NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
tax) to the Company. The Company is charged for such services based upon
allocations applicable to the related charges. For the nine months ended
December 31, 1998 and the year ended March 31, 1998, such charges amounted to
$227,000 and $166,000, respectively.
The Company's telecommunication services are provided under a third party
agreement entered into with SMEI. The Company is charged amounts based upon
actual usage and costs. Telecommunication costs for the nine months ended
December 31, 1998 and the year ended March 31, 1998 approximated $178,500 and
$288,900, respectively.
The Company leases office space from a related company on a month-to-month
basis. Total rental expense approximated $23,000 and $7,100 for the nine months
ended December 31, 1998 and the year ended March 31, 1998, respectively.
Exclusive of the amounts discussed above, expenses approximating $193,000
were incurred by the Company primarily in connection with CD duplication
services rendered by related companies during the year ended March 31, 1998.
There were no such expenses incurred during the nine months ended December 31,
1998.
Through October 31, 1997, the Company was charged interest on its
outstanding loan balances from an indirect, wholly-owned subsidiary of SCA. In
connection with the merger with and into CPE as discussed in Note 1, all
outstanding loan balances and the related accrued interest were converted into
contributed capital on November 1, 1997, upon which, interest expense was no
longer charged to the Company. Interest expense amounted to $88,752 for the year
ended March 31, 1998 based upon an average annual rate of approximately 6%.
Refer to Notes 1, 5, 7 and 8 for other related party transactions.
F-48
<PAGE> 138
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,400,000 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> 139
BACKCOVER
[Image of male youth slouched in a chair with a remote control in his hand.]
Zach watched 1,826 hours of music television last year hoping to discover new
music.
[Image of recording artist Johnny Lang.]
[The following phrases are presented in a semi-circle.]
Breaking music news, exclusive artist reviews, free music home pages, album
reviews, sound samples, music videos on-demand, buzzing music community, live
artist chats, local concert information, special offers and contests, radio play
lists.
You just need to log on
[Image of Launch logo.] LAUNCH.com
<PAGE> 140
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........................................ $ 15,218
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...................................... 12,757
--------
Total............................................. $900,000
========
</TABLE>
II-1
<PAGE> 141
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
448,437 shares of its series D stock to two accredited
investors -- General Electric Capital Corporation and NBC Multimedia,
Inc.
(6) From inception to February 28, 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 23,562 shares have been
exercised and (b) options to purchase an aggregate of 600,200 shares of
common stock
II-2
<PAGE> 142
under the 1998 stock option plan, of which options to purchase 1,295
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 7.6% stockholder, and Goran Enterprises
Limited, a 11.2% 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.
(8) On February 26, 1999, pursuant to an exchange agreement, Launch issued
an aggregate of 875,556 shares of its common stock to the following
partners of AreohveeOnline Partnership: Gregory Morrow, Peter Gorla, G.
Scott Barrett, Anthony Alfaro, D. Scott Kosch and Tiffany Faircloth, in
partial consideration for the acquisition of such partners' interests
in the partnership. In addition, on the same date and pursuant to the
exchange agreement, the securityholders of Launch's predecessor
corporation exchanged all of their issued and outstanding common stock,
preferred stock, options to purchase common stock and warrants for
equal amounts of common stock, preferred stock, options to purchase
common stock and warrants in Launch.
(9) On March 24, 1999, Launch entered into a stock purchase agreement with
Sony Music Entertainment Inc., SW Holdings Inc. and SW Networks Inc. in
which Launch agreed to issue shares of its common stock valued at $1.0
million to Sony Music Entertainment Inc., in connection with Launch's
acquisition of SW Networks Inc.
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) and 26(a)(9)
were deemed exempt from registration under the Securities Act in reliance on
II-3
<PAGE> 143
Section 4(2) of the Securities Act as transactions by an issuer not involving a
public offering. The issuances described in Item 26(a)(8) were deemed exempt
from registration under the Securities Act in reliance on Section 3(a)(10) of
the Securities Act. 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.
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 d.b.a.
Musicvideos.com dated January 15, 1999.
3.1 Second Amended and Restated Certificate of Incorporation of
Launch (formerly 2Way Media, Inc.)
3.2 Amended and Restated 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.
</TABLE>
II-4
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
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.
10.19 Financial Advisory Services Letter Agreement between Launch
and Allen & Company Incorporated dated September 8, 1997.
10.20 Fee Agreement between Launch and Allen & Company
Incorporated dated September 8, 1997.
10.21 Employment Agreement between Launch and Jeffrey Mickeal
dated April 10, 1995.
10.22++ Stock Purchase Agreement between Launch, SW Networks Inc.,
SW Holdings Inc. and Sony Music Entertainment Inc. dated
March 24, 1999.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Moss Adams LLP.
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.4 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>
- -------------------------
* Previously filed with the Registrant's Registration Statement on Form SB-2
(File No. 333-72433) on February 16, 1999.
+ 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 24 above or otherwise,
Launch has been
II-5
<PAGE> 145
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-6
<PAGE> 146
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 30th day of March, 1999.
LAUNCH MEDIA, INC.
By: DAVID B. GOLDBERG*
-----------------------------------
David B. Goldberg
Chief Executive Officer
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>
DAVID B. GOLDBERG* Chief Executive Officer and March 30, 1999
- ------------------------------------------------ Director (Principal
David B. Goldberg Executive Officer)
ROBERT D. ROBACK* President and Director March 30, 1999
- ------------------------------------------------
Robert D. Roback
JEFFREY M. MICKEAL* Chief Financial Officer and March 30, 1999
- ------------------------------------------------ Secretary (Principal
Jeffrey M. Mickeal Financial and Accounting
Officer)
THOMAS C. HOEGH* Director March 30, 1999
- ------------------------------------------------
Thomas C. Hoegh
SERGIO S. ZYMAN* Director March 30, 1999
- ------------------------------------------------
Sergio S. Zyman
RICHARD D. SNYDER* Director March 30, 1999
- ------------------------------------------------
Richard D. Snyder
*By /s/ JEFFREY M. MICKEAL
---------------------------------------------
Jeffrey M. Mickeal,
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 147
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 d.b.a.
Musicvideos.com dated January 15, 1999.
3.1 Second Amended and Restated Certificate of Incorporation of
Launch (formerly 2Way Media, Inc.).
3.2 Amended and Restated 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.
10.19 Financial Advisory Services Letter Agreement between Launch
and Allen & Company Incorporated dated September 8, 1997.
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.20 Fee Agreement between Launch and Allen & Company
Incorporated dated September 8, 1997.
10.21 Employment Agreement between Launch and Jeffrey Mickeal
dated April 10, 1995.
10.22++ Stock Purchase Agreement between Launch, SW Networks Inc.,
SW Holdings Inc. and Sony Music Entertainment Inc. dated
March 24, 1999.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2 Consent of Moss Adams LLP.
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.4 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>
- -------------------------
* Previously filed with the Registrant's Registration Statement on Form SB-2
(File No. 333-72433) on February 16, 1999.
+ To be filed by amendment
++ Confidential Treatment has been requested for certain portions of this
agreement.
<PAGE> 1
EXHIBIT 1.1
LAUNCH MEDIA, INC.
__________ SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
_____________, 1999
HAMBRECHT & QUIST LLC
ALLEN & COMPANY INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
LAUNCH MEDIA, INC., a Delaware corporation (herein called the "Company"),
proposes to issue and sell __________ shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the "Common Stock") (said
__________ shares of Common Stock being herein called the "Underwritten Stock").
The Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to __________ additional shares of Common Stock (herein
called the "Option Stock" and with the Underwritten Stock herein collectively
called the "Stock"). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the "Underwriters," which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the "Commission") a registration
statement on Form SB-2 (No. 333-72433), including the related preliminary
prospectus, for the registration under the Securities Act of 1933, as amended
(herein called the "Securities Act") of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus (meeting the requirements of Rule 430A of the rules and
regulations of the Commission) heretofore filed by the Company with the
Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the "Effective
Date"), shall also mean (from and after the effectiveness of such amendment)
such registration statement as so amended (including any Rule 462(b)
registration statement). The term Prospectus as used in this Agreement shall
mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement or
amendment to such prospectus after the Effective Date, shall also mean (from and
after the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has
- --------
(1) Plus an option to purchase from the Company up to __________ additional
shares to cover over-allotments.
1.
<PAGE> 2
caused to be delivered to you copies of each Preliminary Prospectus and has
consented to the use of such copies for the purposes permitted by the Securities
Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full
corporate power and authority to own or lease and operate its properties
and conduct its business as described in the Registration Statement and
the Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the
character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary (except where the failure
to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
any materially adverse change in the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the ordinary
course of business, other than as set forth in the Registration Statement
and the Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.
(iii) The Registration Statement and the Prospectus comply,
and on the Closing Date (as hereinafter defined) and any later date on
which Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to
the Company by or on behalf of the Underwriters for use in the
Registration Statement or the Prospectus.
(iv) The Stock, when issued and sold to the Underwriters as
provided herein, will be duly and validly issued, fully paid and
nonassessable and conforms to the description thereof in the Prospectus.
No further approval or authority of the stockholders or the Board of
Directors of the Company will be required for the issuance and sale of the
Stock as contemplated herein.
(v) Prior to the Closing Date the Stock to be issued and
sold by the Company will be authorized for quotation on the Nasdaq
National Market upon official notice of issuance.
(vi) The Company is not infringing or otherwise violating any
copyrights, trade secrets, trademarks, service marks or other proprietary
information or materials, of others that could affect materially the use
thereof by the Company, and there are no infringements by others of any of
the Company's copyrights, trade secrets, trademarks, service marks or
other proprietary information or materials that could affect materially
the use thereof by the Company.
(vii) The Company owns, possesses sufficient licenses to use,
or otherwise has the right to use, all copyrights, trade secrets,
trademarks, service marks or other proprietary information or materials
necessary to conduct the business now being or proposed to be conducted by
the Company as described in the Prospectus.
2.
<PAGE> 3
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell __________ shares of the Underwritten Stock to the several Underwriters and
each of the Underwriters agrees to purchase from the Company the respective
aggregate number of shares of Underwritten Stock set forth opposite its name in
Schedule I. The price at which such shares of Underwritten Stock shall be sold
by the Company and purchased by the several Underwriters shall be $___ per
share. In making this Agreement, each Underwriter is contracting severally and
not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to __________ shares in the aggregate of the Option Stock from
the Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth under "Underwriting" in the
Registration Statement, any Preliminary Prospectus and the Prospectus relating
to the Stock filed by the Company (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the Underwriters to
the Company for
3.
<PAGE> 4
inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later than 7:00 A.M., San Francisco time, on the date
two business days preceding the Closing Date), and payment therefor, shall be
made at the office of Gray, Cary, Ware & Friedenrich LLP, 400 Hamilton Avenue,
Palo Alto, California 94301 at 7:00 a.m., San Francisco time, on the [fourth](2)
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day, as
shall be agreed upon in writing by the Company and you. The date and hour of
such delivery and payment (which may be postponed as provided in Section 3(b)
hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of Gray, Cary, Ware &
Friedenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301 at 7:00 a.m.,
San Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made
to the Company or its order by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective
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(2) This assumes the transaction will be priced after the close of market and
that T + 4 will apply to the transaction. If the pricing takes places before or
during market hours (which will generally not be the case), the closing would be
three business days after pricing.
4.
<PAGE> 5
amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities or
blue sky laws; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing
5.
<PAGE> 6
memoranda for the Underwriters) paid by or for the account of the Underwriters
or their counsel in qualifying the Stock under state securities or blue sky laws
and in the review of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company upon the exercise of
options granted under the stock option plans of the Company (the "Option Plans")
or upon the exercise of warrants outstanding as of the date hereof, all as
described in footnote (__) to the table under the caption "Capitalization" in
the Preliminary Prospectus, and (C) options to purchase Common Stock granted
under the Option Plans.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Securities Exchange Act of 1934, as amended
(herein called the "Exchange Act"), or the common law or otherwise, and the
Company agrees to reimburse each such Underwriter and controlling person for any
legal or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in
6.
<PAGE> 7
this paragraph (a) and the representations and warranties of the Company
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal
7.
<PAGE> 8
or other expenses incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received by
the Company and the total underwriting discount received by the Underwriters, as
set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by each indemnifying party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such Underwriter
or any person who controls such Underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company,
8.
<PAGE> 9
(v) declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company to the Underwriters
and no liability of the Underwriters to the Company; provided, however, that in
the event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the performance
of the obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Cooley Godward LLP, counsel for the Underwriters.
(c) You shall have received from Gray, Cary, Ware & Friedenrich
LLP, counsel for the Company, an opinion, addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A hereto, and if
Option Stock is purchased at any date after the Closing Date, additional
opinions from each such counsel, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing Date in
such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company or its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
9.
<PAGE> 10
(f) You shall have received from each of PricewaterhouseCoopers
LLP and Moss Adams LLP, a letter or letters, addressed to the Underwriters and
dated the Closing Date and any later date on which Option Stock is purchased,
confirming that they are independent public accountants with respect to the
Company within the meaning of the Securities Act and the applicable published
rules and regulations thereunder and based upon the procedures described in
their letter delivered to you concurrently with the execution of this Agreement
(herein called the Original Letter), but carried out to a date not more than
three business days prior to the Closing Date or such later date on which Option
Stock is purchased (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing Date
or such later date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of the Original Letter or to reflect the
availability of more recent financial statements, data or information. The
letters shall not disclose any change, or any development involving a
prospective change, in or affecting the business or properties of the Company or
any of its subsidiaries, which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Stock or the purchase of
the Option Stock as contemplated by the Prospectus.
(g) You shall have received from PricewaterhouseCoopers LLP a
letter stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as at December 31, 1998, did
not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized for quotation on the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from
all directors, officers, and beneficial holders of the outstanding capital stock
and outstanding options and warrants to purchase Common Stock agreements, in
form reasonably satisfactory to Hambrecht & Quist LLC, stating that without the
prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
such person or entity will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters, directly
or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Cooley Godward LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the
10.
<PAGE> 11
Company to the Underwriters and without liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, Launch Media, Inc., 2700
Pennsylvania Avenue, Santa Monica, California 90404, Attention: Robert D.
Roback. All notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraph
(k) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
11.
<PAGE> 12
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
LAUNCH MEDIA, INC.
By_______________________________________
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
ALLEN & COMPANY INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
By Hambrecht & Quist LLC
By__________________________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
12.
<PAGE> 13
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC ....................................................................
Allen & Company Incorporated .............................................................
NationsBanc Montgomery Securities LLC.....................................................
------
Total................................................. ======
</TABLE>
<PAGE> 14
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF GRAY, CARY, WARE & FRIEDENRICH,
COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each state of the United
States of America in which its ownership or leasing of property or the
conduct of its business requires such qualification (except where the
failure to be so qualified or in good standing would not have a material
adverse effect on the business, properties, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole), and
has full corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; all of
the issued and outstanding capital stock of each of the subsidiaries of
the Company has been duly authorized and validly issued and is fully paid
and nonassessable, and is owned by the Company free and clear of all
liens, encumbrances and security interests, and to the best of such
counsel's knowledge, no options, warrants or other rights to purchase
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) immediately prior to the consummation of the transfer,
pursuant to Section 351 of the Internal Revenue Code of 1986, as amended,
of all outstanding capital stock and rights to acquire capital stock of
[Old Launch Media, Inc.] and all of the partnership interests in
AreOhVeeOnline Partnership, a California general partnership (the
"Partnership"), to [New Launch Media, Inc.] in exchange for shares of
capital stock of [New Launch Media, Inc.] (the "Exchange"), the authorized
capital stock of [Old Launch] consisted of ______ shares of Series A
Preferred Stock, of which ______ shares were outstanding; ______ shares of
Series B Preferred Stock, of which ______ shares were outstanding; ______
shares of Series C Preferred Stock, of which ______ shares were
outstanding; ______ shares of Series D Preferred Stock, of which ______
shares were outstanding; ______ shares of Common Stock, par value $___, of
which ______ shares were outstanding; outstanding warrants to purchase
_____ shares of Series D Preferred Stock (convertible into ____ shares of
Common Stock); outstanding warrants to purchase _____ shares of Common
Stock; and outstanding options to purchase ________ shares of Common
Stock, and __% of the interest in the Partnership was held by _________,
__% was held by _________, __% was held by _________, __% was held by
_________, ___% was held by _________, and __% was held by _________; each
of the Launch Exchange Agreement, dated as of __________ (the "Launch
Agreement") and the [AO Exchange Agreement] (the "AO Agreement") and [any
related transfer or assignment documents] was duly and validly executed
and delivered and constitutes valid and binding obligations of the
respective parties thereto; the performance of and compliance with the
terms of each of the Launch Agreement, the AO Agreement [and any related
transfer or assignment documents] did not and does not violate any
provision of any applicable federal or state law, rule or regulation, or
any judgment or decree binding on any of the parties thereto; and the
Launch Agreement and [any related transfer or assignment documents] were
effective to transfer all right, title and interest of the stockholders of
[Old Launch] in the capital stock and rights to acquire capital stock of
[Old Launch] to [New Launch] and the AO Agreement and [any related
transfer or assignment documents] were effective to transfer all right,
title and interest in the partnership interests of the partners of the
Partnership to [New Launch];
(iii) the authorized capital stock of the Company consists of
__________shares of Series A Preferred Stock, of which there are
outstanding __________ shares, __________ shares of Series B Preferred
Stock, of which there are outstanding __________ shares; __________ shares
of Series C Preferred Stock, of which there are outstanding __________
shares; __________ shares of Series D Preferred Stock, of which there are
outstanding __________ shares, and __________ shares of Common Stock,
$__________ par value, of which there are __________ shares outstanding
(including the Underwritten Stock plus the number of shares of Option
Stock issued on the date hereof). In addition, there are outstanding (a)
warrants to purchase ______ shares of Series D Stock, which are
convertible into _______ shares of Common Stock, and (b) options to
purchase _______ shares of Common Stock. Upon the closing of this
offering, all outstanding shares of preferred stock will convert into an
aggregate of _______ shares of Common Stock. The warrants to purchase
Series D Preferred Stock will expire upon the consummation of this
offering. Proper corporate proceedings have been taken validly to
authorize such authorized capital stock; all of the outstanding shares of
such capital stock (including the Underwritten Stock and the shares of
Option Stock issued, if any) have been duly and validly issued and are
fully paid and nonassessable; any Option Stock purchased after the Closing
Date, when issued and delivered to and paid for by the Underwriters as
provided in the Underwriting Agreement, will have been duly and validly
issued and be fully paid and nonassessable; and no preemptive rights of,
or rights of
1.
<PAGE> 15
refusal in favor of, stockholders exist with respect to the Stock, or the
issue and sale thereof, pursuant to the Certificate of Incorporation or
Bylaws of the Company and, to the knowledge of such counsel, there are no
contractual preemptive rights that have not been waived, rights of first
refusal or rights of co-sale which exist with respect to the issue and
sale of the Stock;
(iv) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending
or preventing the use of the Prospectus is in effect and no proceedings
for that purpose have been instituted or are pending or contemplated by
the Commission;
(v) the Registration Statement and the Prospectus (except as to
the financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Securities Act
and with the rules and regulations of the Commission thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9--"Legal Proceedings" and, insofar as it
relates to such counsel, Item 13--"Interest of Named Experts and Counsel"
of Form SB-2 is, to the best of such counsel's knowledge, accurately and
adequately set forth therein in all material respects or no response is
required with respect to such Items; the information set forth under the
caption "Description of Capital Stock," to the extent that it constitutes
matters of law, legal conclusions or descriptions of documents or
instruments, is a fair and accurate summary of such matters, conclusions,
documents or instruments; and, the description of the Company's stock
option and purchase plans and the options and rights granted and which may
be granted thereunder and the options and rights granted otherwise than
under such plans set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to said plans
and options and rights to the extent required by the Securities Act and
the rules and regulations of the Commission thereunder; the descriptions
of agreements of the Company set forth in the Registration Statement and
the Prospectus under the caption "Business--Strategic Alliances" are
accurate and fairly present the terms of such agreements; and the
statements set forth in the Registration Statement and the Prospectus
under the captions "Business--Governmental Regulation" and
"Business--Intellectual Property," to the best of such counsel's knowledge
and belief, are accurate and complete statements or summaries of the
matters set forth therein;
(vii) such counsel do not know of any franchises, agreements,
contracts, leases, documents (including any relating to governmental
regulation affecting the Company's copyrights, trade secrets, trademarks,
service marks or proprietary information or materials), or governmental or
legal proceedings, pending or threatened, which in the opinion of such
counsel are of a character required to be described or referred to in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described or referred to or filed as
required;
(viii) the Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(ix) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company and is a valid and binding agreement of the
Company;
(x) the issue and sale by the Company of the shares of Stock sold
by the Company as contemplated by the Underwriting Agreement will not
conflict with, or result in a breach of, the Certificate of Incorporation
or Bylaws of the Company or any of its subsidiaries or any agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or any applicable law or regulation, or so far as
is known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
(xi) except as set forth in the Registration Statement and
Prospectus, no holders of securities of the Company have registration
rights with respect to such securities, and all holders of securities of
the Company having rights to the registration of shares of Common Stock,
or other securities, because of the filing of the Registration Statement
by the Company, have waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to
file the Registration Statement;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under state
2.
<PAGE> 16
securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters;
(xiii) the Stock issued and sold by the Company will have been duly
authorized for quotation on the Nasdaq National Market upon official
notice of issuance; and
(xiv) to the best of such counsel's knowledge, the Company is not
presently (a) in material violation of its charter or bylaws, or (b) in
material breach of any order, writ or decree of any court or governmental
agency or body having jurisdiction over the Company or over any of its
properties or operations.
(xv) except as set forth in the Prospectus, to the best of such
counsel's knowledge, (a) the Company is not infringing or otherwise
violating any copyrights, trade secrets, trademarks, service marks or
other proprietary information or materials, of others, which, in the
judgment of such counsel, could affect materially the use thereof by the
Company, and (b) there are no infringements by others of any of the
Company's copyrights, trade secrets, trademarks, service marks or other
proprietary information or materials, which, in the judgment of such
counsel, could affect materially the use thereof by the Company; and
(xvi) to the best of such counsel's knowledge, the Company owns,
possesses sufficient licenses to use, or otherwise has the right to use,
all copyrights, trade secrets, trademarks, service marks or other
proprietary information or materials necessary to conduct the business now
being or proposed to be conducted by the Company as described in the
Prospectus.
------------------------------------
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to the attention of such counsel that leads them to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial data contained therein or statistical data derived therefrom, as
to which such counsel need not express any opinion or belief) at the Effective
Date contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, that the Prospectus (except as to the financial
statements and schedules and other financial data contained therein or
statistical data derived therefrom, as to which such counsel need not express
any opinion or belief) as of its date or at the Closing Date (or any later date
on which Option Stock is purchased), contained or contains any untrue statement
of a material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
3.
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF NEW LAUNCH MEDIA, INC.
The undersigned, for the purpose of amending and restating the
Certificate of Incorporation of New Launch Media, Inc. (the "Corporation") under
the laws of the State of Delaware, hereby certifies as follows:
A. The Corporation was incorporated under the name New Launch
Media, Inc. pursuant to an original Certificate of Incorporation filed with the
Secretary of State of the State of Delaware on December 21, 1998.
B. The provisions of the Certificate of Incorporation of the
Corporation are hereby restated and integrated into the single instrument which
is hereinafter set forth, and which is entitled the Second Amended and Restated
Certificate of Incorporation of New Launch Media, Inc.
C. The amendments and the restatement of the Amended and Restated
Certificate of Incorporation herein certified have been duly adopted by the
stockholders in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware. Prompt written notice of
the adoption of the amendments herein certified has been given to those
stockholders who have not consented in writing thereto, as provided in Section
228 of the General Corporation Law of the State of Delaware.
D. At a meeting of the Board of Directors of the Corporation, a
resolution was duly adopted, pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware, setting forth a Second Amended and
Restated Certificate of Incorporation and deeming said Second Amended and
Restated Certificate of Incorporation to be advisable.
<PAGE> 2
E. The Certificate of Incorporation of the Corporation, as amended
and restated herein, shall, at the effective time of this Second Amended and
Restated Certificate of Incorporation, read as follows:
<PAGE> 3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NEW LAUNCH MEDIA, INC.
FIRST. The name of this Corporation is Launch Media, Inc.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, Wilmington, Delaware 19805. The name of its
registered agent at such office is Prentice Hall Corporation System, Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is 81,580,405 shares, of which 75,000,000 shares, par
value $0.001 per share, are to be of a class designated "Common Stock" and
6,580,405 shares, par value $0.001 per share, are to be of a class designated
"Preferred Stock." 380,160 shares of such Stock are designated Series A Stock
("Series A" or "Series A Stock"), 612,820 shares of such Stock are designated
Series B Stock ("Series B" or "Series B Stock"), 1,580,023 shares of such Stock
are designated Series C Stock ("Series C" or "Series C Stock") and 4,007,402
shares of such Stock are designated Series D Stock ("Series D" or "Series D
Stock"). Effective upon the filing of this Second Amended and Restated
Certificate of Incorporation (the "Effective Time"), every five (5) shares of
Common Stock of the Corporation outstanding immediately prior to the Effective
Time shall, without any action on the part of the holder thereof, become one (1)
share of Common Stock, and every five (5) shares of Preferred Stock of the
Corporation outstanding immediately prior to the Effective Time shall, without
any action on the part of the holder thereof, become one (1) share of Preferred
Stock.
The Corporation shall from time to time in accordance with the laws of
the State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and available
for issuance shall not be sufficient to permit conversion of the Series A,
Series B, Series C and Series D Stock. The Board of Directors may decrease (but
not below the number of shares then outstanding) the number of shares of any
Series subsequent to the issue of shares of that Series.
The relative powers, preferences, special rights, qualifications,
limitations and restrictions granted to or imposed on the respective classes of
the shares of capital stock of the Corporation are as follows:
I. COMMON STOCK
1. Voting Rights. Each holder of record of Common Stock shall be
entitled to one vote for each share of Common Stock standing in his name on the
books of the Corporation.
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Except as otherwise required by law or as provided in Part II of this Article
FOURTH, the holders of Common Stock and the Series A, Series B, Series C and
Series D Stock shall vote as a single class on all matters submitted to the
stockholders for a vote.
2. Dividends. Subject to the provisions of law and Part II of this
Article FOURTH, dividends may be declared and paid on the Common Stock at such
times and in such amounts from funds legally available therefor as the board of
directors may determine in its sole discretion.
3. Liquidation. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after payment or provision
for payment of all debts and liabilities of the Corporation and all amounts to
which the holders of the Series A, Series B, Series C and Series D Stock are
entitled pursuant to Part II of this Article FOURTH, the holders of Common Stock
shall be entitled to share ratably in the assets of the Corporation available
for distribution.
II. SERIES A, SERIES B, SERIES C AND SERIES D STOCK
1. Dividends.
(a) Series B, Series C and Series D Noncumulative Dividends.
Prior to the payment of any dividend to the holders of Common Stock or Series A
Stock, the holders of Series B Stock, Series C Stock and Series D Stock,
respectively, shall be entitled to receive when and as declared by the board of
directors, out of funds legally available therefor, dividends at the rate of
$0.19, $0.285, and $0.46 per share, respectively per annum. Such dividends shall
not be cumulative, and no right shall accrue to holders of Series B Stock,
Series C Stock or Series D Stock and under this Section 1(a) by reason of the
fact that dividends on said shares are not declared in any prior period.
(b) Series A Noncumulative Dividends. Prior to the payment
of any dividend to the holders of Common Stock, the holders of Series A Stock
shall be entitled to receive when and as declared by the board of directors, out
of funds legally available therefor, dividends at the rate of $0.17 per share
per annum. Such dividends shall not be cumulative, and no right shall accrue to
holders of Series A Stock under this Section 1(b) by reason of the fact that
dividends on said shares are not declared in any prior period.
(c) Other Dividends. After the payment or setting apart for
payment to the holders of the Series A, Series B, Series C and Series D Stock of
the dividends referred to in Sections 1(a) and (b) above, no dividend or
distribution shall be declared or paid on any shares of Common Stock or Series
A, Series B, Series C or Series D Stock unless at the same time an equivalent
dividend or distribution is declared or paid on all outstanding shares of Common
Stock and Series A, Series B, Series C and Series D Stock. Any dividend or
distribution on Series A, Series B, Series C or Series D Stock under this
Section 1(c) shall be payable at the same rate per share as would be payable on
the shares of Common Stock which the holder of Series A, Series B, Series C or
Series D Stock would be entitled to receive if such holder had
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<PAGE> 5
converted the shares of Series A, Series B, Series C or Series D Stock into
Common Stock immediately prior to the record date of such distribution. The
right to dividends on shares of Common Stock and Series A, Series B, Series C
and Series D Stock under this Section 1(c) shall not be cumulative, and no right
shall accrue to holders of Common Stock or Series A, Series B, Series C and
Series D Stock under this Section 1(c) by reason of the fact that dividends on
said shares are not declared in any prior period.
2. Liquidation Preference.
(a) Series C and Series D Preference. Upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of the shares of Series C Stock and Series D Stock shall be
entitled, before any distribution or payment is made upon the Series B Stock,
Series A Stock, the Common Stock or any other class or Series of stock ranking
on liquidation junior to Series C Stock or Series D Stock, to be paid an amount
equal to: (i) $4.75 per share plus, in the case of each share, an amount equal
to dividends declared but unpaid thereon (such amount, with respect to all
shares of Series C Stock is referred to as the "Series C Liquidation Preference
Payments") for the Series C Stock and (ii) $7.65 per share plus, in the case of
each share, an amount equal to dividends declared but unpaid thereon (such
amount, with respect to all shares of Series D Stock is referred to as the
"Series D Liquidation Preference Payments") for the Series D Stock. If upon such
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets of the Corporation available for distribution to its
stockholders shall be insufficient to permit payment in full to the holders of
Series C Stock of the Series C Liquidation Preference Payments and the holders
of the Series D Stock of the Series D Liquidation Preference Payments, then the
remaining assets of the Corporation available for distribution shall be
distributed ratably among the holders of the Series C Stock and the Series D
Stock in a manner that the amount distributed to each holder of Series C Stock
and Series D Stock shall equal the amount obtained by multiplying (a) the entire
assets and funds of the corporation legally available for distribution
hereunder, by (b) a fraction, the numerator of which shall be the aggregate
Series C Liquidation Preference Payments of the shares of Series C Stock held by
such holder or the aggregate Series D Liquidation Preference Payments of the
shares of Series D Stock held by such holder, as the case may be, and the
denominator of which shall be the sum of (x) the aggregate Series C Liquidation
Preference Payments of all shares of Series C Stock then outstanding and (y) the
aggregate Series D Liquidation Preference Payments of all shares of Series D
Stock then outstanding.
(b) Series B Preference. Upon any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the shares of Series B Stock shall be entitled, before any distribution or
payment is made upon the Series A Stock, the Common Stock or any other class or
Series of stock ranking on liquidation junior to Series B Stock, to be paid an
amount equal to: (i) $3.195785 per share plus, in the case of each share, an
amount equal to dividends declared but unpaid thereon (such amount, with respect
to all shares of Series B Stock is referred to as the "Series B Liquidation
Preference Payments") for the Series B Stock. If upon such liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the assets of the Corporation available for distribution to its
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<PAGE> 6
stockholders shall be insufficient to permit payment in full to the holders of
Series B Stock of the Series B Liquidation Preference Payments, then the
remaining assets of the Corporation available for distribution shall be
distributed among the holders of Series B Stock pro rata, so that each holder
receives the portion of the assets available for distribution as the number of
shares of Series B Stock held by such holder bears to the total number of shares
of Series B Stock then outstanding.
(c) Series A Preference. Upon any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the shares of Series A Stock shall be entitled, before any distribution or
payment is made upon the Common Stock or any other class or Series of stock
ranking on liquidation junior to Series A Stock, to be paid an amount equal to
$1.7361 per share plus, in the case of each share, an amount equal to dividends
declared but unpaid thereon (such amount, with respect to all shares of Series A
Stock is referred to as the "Series A Liquidation Preference Payments"). If upon
such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets of the Corporation available for
distribution to its stockholders shall be insufficient to permit payment in full
to the holders of Series A Stock of the Series A Liquidation Preference Payments
then the remaining assets of the Corporation available for distribution shall be
distributed among the holders of Series A Stock pro rata, so that each holder
receives the portion of the assets available for distribution as the number of
shares of Series A Stock held by such holder bears to the total number of shares
of Series A Stock then outstanding.
All of the preferential amounts to be paid to the holders of the Series
A, Series B, Series C and Series D Stock under this Section 2 shall be paid or
set apart for payment before the payment or setting apart for payment of any
amount for, or the distribution of any assets of this Corporation to, the
holders of the Common Stock in connection with such liquidation, dissolution or
winding up.
(d) Series D, Series C and Series B Stock and Common Stock.
After payment has been made to the holders of the Series A, Series B, Series C
and Series D Stock of the full preferential amounts set forth in Section 2(a),
(b) and (c) above, the holders of Series B, Series C and Series D Stock and the
holders of Common Stock shall be entitled to share in all such remaining assets
and funds in the same manner as if all shares of Series B, Series C and Series D
Stock had been converted into Common Stock; provided, however, that at such time
as the distribution of proceeds from liquidation equal to $12.80 per share of
Series B Stock, $19.00 per share of Series C Stock and $30.60 per share of
Series D Stock shall have been paid with respect to such share of Series B,
Series C and Series D Stock, respectively such share shall not participate in
any further distribution of proceeds from liquidation. Thereafter, all shares of
Common Stock shall continue to participate pro rata in the distribution of any
remaining assets and funds.
(e) Consolidation or Merger. A merger, consolidation or sale
of all or substantially all of the assets of the Corporation which will result
in the Corporation's stockholders immediately prior to such transaction not
holding (by virtue of such shares or
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<PAGE> 7
securities issued solely with respect thereto) at least 50% of the voting power
of the surviving, continuing or purchasing entity, shall be deemed to be a
liquidation, dissolution or winding up within the meaning of this Section 2;
provided, further, that any payments made may be made in cash or in securities
or other property received from the acquiring entity or in a combination
thereof, on the closing of such transaction.
(f) Noncash Distributions. If any of the assets of the
Corporation are to be distributed other than in cash under this Section 2 or for
any purpose, then the Board of Directors of the Corporation shall promptly
engage independent competent appraisers to determine the value of the assets to
be distributed to the holders of Series A, Series B, Series C and Series D Stock
or Common Stock. The Corporation shall, upon receipt of such appraiser's
valuation, give prompt written notice to each holder of shares of Series A,
Series B, Series C and Series D Stock or Common Stock of the appraiser's
valuation. Notwithstanding the above, any securities to be distributed to the
stockholders shall be valued as follows:
(i) If traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 30-day period ending three (3) business days prior to the
closing;
(ii) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) business days prior to the closing; and
(iii) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of not less than a majority of the outstanding
shares of Series A, Series B, Series C and Series D Stock, provided that if the
Corporation and the holders of a majority of the outstanding shares of Series A,
Series B, Series C and Series D Stock are unable to reach agreement, then by
independent appraisal by an investment banker hired and paid by the Corporation,
but acceptable to the holders of at least a majority of the outstanding shares
of Series A, Series B, Series C and Series D Stock.
3. Redemption.
(a) At any time after the fifth anniversary of the closing
date of the first sale of the Corporation's Series D Stock, the Corporation
shall (if it may lawfully do so), at each holder's option and upon the written
request of such holder, redeem all, but not less than all, of the (i)
outstanding Series D Stock held by such holder by paying therefor an amount in
cash per share equal to $7.65 (subject to adjustment for stock splits,
recapitalizations and the like) plus any dividends declared but
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<PAGE> 8
unpaid, with respect to such share to the Redemption Date (as hereinafter
defined) and interest thereon from the Closing Date of the Series D Financing
through the applicable Redemption Date calculated at a rate equal to six percent
(6%) per annum (such amount is hereinafter referred to as the "Series D
Redemption Price"), (ii) outstanding Series C Stock held by such holder by
paying therefor an amount in cash per share equal to $4.75 (subject to
adjustment for stock splits, recapitalizations and the like) plus any dividends
declared but unpaid, with respect to such share to the Redemption Date (as
hereinafter defined) and interest thereon from March 29, 1996 through the
applicable Redemption Date calculated at a rate equal to six percent (6%) per
annum (such amount is hereinafter referred to as the "Series C Redemption
Price), (iii) outstanding Series B Stock held by such holder by paying therefor
an amount in cash per share equal to $3.195785 (subject to adjustment for stock
splits, recapitalizations and the like) plus any dividends declared but unpaid,
with respect to such share to the Redemption Date (as hereinafter defined) and
interest thereon from the Closing Date of the Series D Financing through the
applicable Redemption Date calculated at a rate equal to six percent (6%) per
annum (such amount is hereinafter referred to as the "Series B Redemption
Price") and (iv) outstanding Series A Stock held by such holder by paying
therefor an amount in cash per share equal to $1.7361 (subject to adjustment for
stock splits, recapitalizations and the like) plus any dividends declared but
unpaid, with respect to such share to the Redemption Date (as hereinafter
defined) and interest thereon from the Closing Date of the Series D Financing
through the applicable Redemption Date calculated at a rate equal to six percent
(6%) per annum (such amount is hereinafter referred to as the "Series A
Redemption Price"). The Series A Redemption Price, Series B Redemption Price,
Series C Redemption Price and Series D Redemption Price are sometimes
individually referred to herein as the "Redemption Price." One-fifth (1/5) of
the Redemption Price shall be paid by the Company on the Redemption Date and
one-fifth (1/5) of the Redemption Price shall be paid by the Company on each of
the four anniversaries thereof immediately following the Redemption Date. Simple
interest shall be paid by the Company on such amounts during the Redemption
payment period at a rate of six percent (6%) per annum, which such interest
shall be added to the redemption principal payments.
(b) Mechanics of Redemption.
(i) At least 30, but no more than 60, days prior to
the date fixed by a Holder for any redemption of Series A, Series B, Series C or
Series D Stock ("Redemption Date"), written notice shall be mailed first class,
postage prepaid, to each holder of record who has elected to have his or her
Series A, Series B, Series C or Series D Stock redeemed (at the close of
business on the business day next preceding the day on which notice is given) at
the address shown on the records of the Corporation for such holder or given by
the holder to the Corporation for the purpose of notice or if no such address
appears or is given at the place where the principal executive office of the
Corporation is located, notifying such holder of the redemption from such
holder, the Redemption Date, the Redemption Price, the place at which payment
may be obtained and the date on which such holder's Conversion Rights (as
hereinafter defined) as to such shares terminate and calling upon such holder to
surrender to the Corporation, in the manner and at the place designated, such
holder's certificate or certificates representing the shares to be redeemed (the
"Redemption Notice"). Except as provided in subsection 3(c)(ii), on or after the
Redemption Date, each holder of Series A, Series B, Series C or Series D Stock
to be redeemed shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place designated
in the Redemption Notice, and thereupon the Redemption Price shall be payable to
the order of the person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate shall be canceled.
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(ii) From and after the Redemption Date, unless there
shall have been a default in payment of the Redemption Price, all rights of the
holders of such shares as holders of Series A, Series B, Series C or Series D
Stock elected to be redeemed (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of this Corporation or be deemed to be outstanding for
any purpose whatsoever. If the funds of the Corporation legally available for
redemption of shares are insufficient to redeem the total number of shares of
Series A, Series B, Series C and Series D Stock to be redeemed on such date,
those funds which are legally available will be used to redeem the maximum
possible number of shares pro rata among the holders of such Series D shares to
be redeemed in proportion to the number of Series D shares held by each such
holder. If funds of the Corporation legally available for redemption of shares
of Series C remain after redemption of the Series D shares, such funds will be
used to redeem the maximum possible number of shares pro rata among the holders
of such Series C shares to be redeemed in proportion to the number of Series C
shares held by such holder. If funds of the Corporation legally available for
redemption of shares of Series B remain after redemption of the Series C shares,
such funds will be used to redeem the maximum number of shares pro rata among
the holders of such Series B shares to be redeemed in proportion to the number
of Series B shares held by each such holder. If funds of the Corporation legally
available for redemption of shares of Series A remain after redemption of the
Series B shares, such funds will be used to redeem the maximum number of shares
pro rata among the holders of such Series A shares to be redeemed in proportion
to the number of Series A shares held by each such holder. The shares of Series
A, Series B, Series C or Series D Stock not redeemed shall remain outstanding
and entitled to all the rights and preferences provided herein. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of shares of Series A, Series B, Series C or Series D Stock, such
funds will immediately be used to redeem in the order specified above the
balance of the shares which the Corporation has become obligated to redeem on
the Redemption Date but which it has not redeemed.
(iii) Should the holders of Series A, Series B, Series
C or Series D Stock elect to redeem the shares held by such holders as set forth
in this Section 3, the Company must notify in writing the holders of all other
Series of Series A, Series B, Series C or Series D Stock who have not themselves
elected to redeem their stock of the intention of any such holders of Series A,
Series B, Series C or Series D Stock to redeem their shares.
4. Voting Rights.
(a) Series A, Series B, Series C and Series D Stock. Except
as otherwise provided in this Section 4 or required by law, the holder of each
share of Series A, Series B, Series C and Series D Stock shall be entitled to
vote on all matters and shall be entitled to the number of votes equal to the
number of shares of Common Stock into which each share of Series A, Series B,
Series C or Series D Stock could be converted pursuant to Section 5 hereof at
the record date for the determination of the stockholders entitled to vote on
such matters or, if no such record date is established, at the date such vote is
taken. Except as otherwise provided
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herein or required by law, the Series A, Series B, Series C Stock and Series D
shall have voting rights and powers equal to the voting rights and powers of the
Common Stock. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula shall be rounded to
the nearest whole number (with one-half rounded upward to one).
(b) Board Size; Election of Directors.
(i) So long as there are any shares of Series A,
Series B, Series C or Series D Stock outstanding, the number of directors
constituting the full board of directors of the Corporation shall be seven (7),
and such number may be changed only by the written consent or affirmative vote,
given in writing or by vote at a meeting, as set forth in Section 6(a)(vii)
below. From and after such time as there shall no longer be any shares of Series
A, Series B, Series C or Series D Stock issued and outstanding, the number of
directors constituting the full board of directors shall be fixed and determined
by the majority vote of the board of directors of the Corporation. One (1)
member of the board of directors shall be elected by the holders of the Series B
Stock, voting as a separate class, two (2) members of the board of directors
shall be elected by the holders of the Series C Stock, voting as a separate
class, one (1) member of the board of directors shall be elected by the holders
of the Series D Stock, voting as a separate class, and two (2) directors shall
be elected by the holders of Common Stock voting as a separate class and the
remaining one (1) director shall be elected 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. The number of votes to which each share of Series A, Series B, Series C
or Series D Stock is entitled shall be as set forth in Section 4(a) above.
(ii) Immediately upon the conversion of each share of
Preferred Stock into shares of Common Stock as set forth in Section 5(b) below,
the number of directors shall initially be five (5) and thereafter shall be
fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board for adoption). All
directors shall hold office until their respective successors are elected,
except in the case of the death, resignation, or removal of any director.
(c) Election by Ballot. The election of directors need not
be by written ballot unless the Bylaws of the Corporation shall so provide.
5. Conversion. The holders of Series A, Series B, Series C and
Series D Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert. Each share of Series A, Series B,
Series C or Series D Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share at the office of
the Corporation or any transfer agent for such Series A, Series B, Series C or
Series D Stock. Each share of Series A, Series B, Series C or Series D
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Stock shall be convertible into the number of shares of Common Stock which
results from dividing the "Conversion Price" per share in effect for such Series
of Series A, Series B, Series C or Series D Stock at the time of conversion into
the "Conversion Value" per share of such Series of Series A, Series B, Series C
or Series D Stock. The number of shares of Common Stock into which each Series
of Series A, Series B, Series C or Series D Stock is convertible is hereinafter
collectively referred to as the "Conversion Rate" for such series. The
Conversion Price per share of (i) Series A Stock shall be $1.7361, (ii) Series B
Stock shall be $3.195785, (iii) Series C Stock shall be $4.75 and (iv) Series D
Stock shall be $7.65. The Conversion Value per share of (i) Series A Stock shall
be $1.7361, (ii) Series B Stock shall be $3.195785, (iii) Series C Stock shall
be $4.75 and (iv) Series D Stock shall be $7.65. The Conversion Price of each
Series of Series A, Series B, Series C or Series D Stock shall be subject to
adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of Series A, Series B,
Series C or Series D 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 $10.00 and with aggregate
gross proceeds to the Company, at the public offering price, of at least
$15,000,000.
(c) Mechanics of Conversion. Before any holder of Series A,
Series B, Series C or Series D Stock shall be entitled to convert the same into
shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for such Series A, Series B, Series C or Series D Stock and shall give
written notice to the Corporation at such office that he elects to convert the
same. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A, Series B, Series C or Series
D Stock a certificate or certificates for the number of shares of Common Stock
to which he shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on (i) the date such
written notice is given (provided that such holder's certificate or certificates
are delivered to the Corporation within two business days after such notice is
given) or (ii) in any other case, on the date of such surrender of the shares of
Series A, Series B, Series C or Series D Stock to be converted, and the person
or persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date. Notwithstanding the foregoing, no
written notice of election to convert or surrender of certificates shall be
required in the event of an automatic conversion pursuant to Section 5(b).
(d) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series A, Series B, Series C or Series D
Stock. In lieu of any fractional shares to which the holder would otherwise be
entitled, the Corporation shall pay cash equal to such fraction multiplied by
the fair market value of one share of Common Stock on the date of conversion, as
determined in good faith by the Board.
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(e) Adjustment of Conversion Price. The Conversion Price of
each Series of Series A, Series B, Series C or Series D Stock shall be subject
to adjustment from time to time as follows:
(i) Series B, Series C and Series D Weighted Average
Antidilution Adjustment. If the Corporation shall issue any Common Stock (other
than "Excluded Stock," as defined below, or stock dividends, subdivisions,
split-ups, combinations or dividends, which are covered by Sections 5(e)(iii),
(iv), (v) and (vi)), for a consideration per share less than the Conversion
Price for Series B, Series C or Series D Stock, respectively, in effect
immediately prior to the issuance of such Common Stock, the Conversion Price for
such Series B, Series C or Series D Stock in effect immediately after each such
issuance shall forthwith be adjusted to a price equal to the quotient obtained
by dividing:
(A) an amount equal to the sum of
(w) the total number of shares of
Common Stock outstanding (including any shares of Common Stock deemed to have
been issued pursuant to subdivision (3) of this Section 5(e)(i) and to Section
5(e)(ii) below and all shares of Excluded Stock) immediately prior to such
issuance multiplied by the Conversion Price for such Series of Series B, Series
C or Series D Stock in effect immediately prior to such issuance, plus
(x) the total consideration received
by the Corporation upon such issuance, by
(B) the total number of shares of Common
Stock outstanding (including any shares of Common Stock deemed to have been
issued pursuant to subdivision (3) of this Section 5(e)(i) and to Section
5(e)(ii) below and all shares of Excluded Stock) immediately after the issuance
of such Common Stock.
For the purposes of any adjustment of a Conversion Price pursuant to this
Section 5(e)(i), the following provisions shall be applicable:
(1) In the case of the issuance of
Common Stock for cash, the consideration shall be deemed to be the amount of
cash paid therefor without deducting any discounts or commissions paid or
incurred by the Corporation in connection with the issuance and sale thereof.
(2) In the case of the issuance of
Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined in good faith by the Board of Directors of the Corporation, in
accordance with generally accepted accounting treatment; provided, however, that
if, at the time of such determination, the Corporation's Common Stock is traded
in the over-the-counter market or on a national or regional securities exchange,
such fair market value as determined by the Board of Directors of the
Corporation shall not exceed the aggregate "Current Market Price" (as defined
below) of the shares of Common Stock being issued.
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(3) In the case of the issuance of
(i) options to purchase or rights to subscribe for Common Stock (other than
Excluded Stock), (ii) securities by their terms convertible into or exchangeable
for Common Stock (other than Excluded Stock), or (iii) options to purchase or
rights to subscribe for securities by their terms convertible into or
exchangeable for Common Stock (other than Excluded Stock):
(A) the aggregate maximum number of shares
of Common Stock deliverable upon exercise of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subdivisions (1) and (2)
above), if any, received by the Corporation upon the issuance of such options or
rights plus the minimum purchase price provided in such options or rights for
the Common Stock covered thereby;
(B) the aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities, or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof, shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in subdivisions (1) and (2) above);
(C) on any change in the number of shares of
Common Stock deliverable upon exercise of any such options or rights or
conversion of or exchange for such convertible or exchangeable securities, or on
any change in the minimum purchase price of such options, rights or securities,
other than a change resulting from the antidilution provisions of such options,
rights or securities, the Conversion Price for such Series shall forthwith be
readjusted to such Conversion Price as would have obtained had the adjustment
made upon (x) the issuance of such options, rights or securities not exercised,
converted or exchanged prior to such change, as the case may be, been made upon
the basis of such change or (y) the options or rights related to such securities
not converted or exchanged prior to such change, as the case may be, been made
upon the basis of such change; and
(D) on the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price for such Series shall forthwith be readjusted
to such Conversion Price as would have obtained had the adjustment made upon the
issuance of such options,
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<PAGE> 14
rights, convertible or exchangeable securities or options or rights related to
such convertible or exchangeable securities, as the case may be, been made upon
the basis of the issuance of only the number of shares of Common Stock actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such convertible or exchangeable securities or upon the exercise of
the options or rights related to such convertible or exchangeable securities, as
the case may be.
(ii) Excluded Stock. "Excluded Stock" shall mean:
(A) all shares of Common Stock and Series A,
Series B, Series C and Series D Stock issued and outstanding on the date hereof;
(B) all shares of Common Stock into which
the shares of Series A, Series B, Series C and Series D Stock are convertible;
(C) 2,300,000 shares of Common Stock
issuable to employees, officers, consultants or directors of, the Corporation,
under any agreement, arrangement or plan, including any incentive stock plan,
approved by the board of directors of the Corporation.
(D) A warrant to purchase 543,812 shares of
Common Stock issued to Allen & Company Incorporated, as adjusted pursuant to the
terms of said Warrant Agreement and all shares of Common Stock issuable upon
conversion thereof.
(E) A warrant to purchase 388,437 shares of
Series D Stock issued to NBC Multimedia, Inc., plus any other warrant issued to
NBC pursuant to the Company's Series D Securities Purchase Agreement and all
shares of Series D Stock and/or Common Stock issuable upon exercise and/or
conversion thereof.
(F) A warrant to purchase 60,000 shares of
Series D Stock issued to General Electric Capital Corporation, as adjusted
pursuant to the terms of said warrant and all shares of Series D Stock and/or
Common Stock issuable upon exercise and/or conversion thereof.
All shares of Excluded Stock shall be deemed to be outstanding for all purposes
of the computations provided for in Section 5(e)(i) above as well as for
purposes of stock dividends, subdivisions, split-ups, combinations or dividends
which are covered by Sections 5(e)(iii), (iv), (v) and (vi).
(iii) Stock Splits; Dividends. If the number of shares
of Common Stock outstanding at any time after the date hereof is increased by a
stock dividend payable in shares of Common Stock or by a subdivision or split-up
of shares of Common Stock, then, on the date such payment is made or such change
is effective, the Conversion Price for the Series A, Series B, Series C and
Series D Stock shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of any shares of the Series A, Series B,
Series C or Series D Stock shall be increased in proportion to such increase of
outstanding shares.
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(iv) Other Dividends and Distributions. In the event
the Corporation at any time or from time to time after the date hereof makes, or
fixes a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in cash, shares of its capital
stock (other than Common Stock), stock or other securities of other persons,
evidences of indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or options or rights (excluding options to purchase
and rights to subscribe for Common Stock or other securities of the Corporation
convertible into or exchangeable for Common Stock), then, and in each such case,
the holders of shares of Preferred Stock shall, concurrent with the distribution
to holders of Common Stock, receive a like distribution based upon the number of
shares of Common Stock into which such Preferred Stock is then convertible.
(v) Stock Combinations; Reverse Splits. If the
number of shares of Common Stock outstanding at any time after the date hereof
is decreased by a combination of the outstanding shares of Common Stock, then,
on the effective date of such combination, the Conversion Price for such Series
shall be appropriately increased so that the number of shares of Common Stock
issuable on conversion of shares of the Series A, Series B, Series C or Series D
Stock shall be decreased in proportion to such decrease in outstanding shares.
(vi) Reclassifications, etc. In case, at any time
after the date hereof, of any capital reorganization, or any reclassification of
the stock of the Corporation (other than a change in par value or as a result of
a stock dividend or subdivision, split-up or combination of shares), or the
consolidation or merger of the Corporation with or into another person (other
than a consolidation or merger in which the Corporation is the continuing entity
and which does not result in any change in the Common Stock), or of the sale or
other disposition of all or substantially all the properties and assets of the
Corporation as an entirety to any other person, the shares of Series A, Series
B, Series C and Series D Stock shall, after such reorganization,
reclassification, consolidation, merger, sale or other disposition, be
convertible into the kind and number of shares of stock or other securities or
property or cash of the Corporation or of the entity resulting from such
consolidation or surviving such merger or to which such properties and assets
shall have been sold or otherwise disposed to which such holder would have been
entitled if immediately prior to such reorganization, reclassification,
consolidation, merger, sale or other disposition he had converted his shares of
Series A, Series B, Series C or Series D Stock into Common Stock. The provisions
of this Section 4(e)(vi) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales or other dispositions.
(vii) Rounding. All calculations under this Section 5
shall be made to the nearest cent or to the nearest one hundredth (1/100) of a
share, as the case may be.
(viii) Stock Quotations. For the purpose of any
computation pursuant to this Section 5(e), the "Current Market Price" at any
date of one share of Common Stock shall be deemed to be the average of the
highest reported bid and the lowest reported offer prices on the preceding
business day as furnished by the National Quotation Bureau, Incorporated (or
equivalent recognized source of quotations); provided, however, that if the
Common Stock is not
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traded in such manner that the quotations referred to in this Section 5(e) are
available for the period required hereunder, Current Market Price shall be
determined in good faith by the Board of Directors of the Corporation, but if
challenged by the holders of more than forty percent (40%) of the outstanding
Series A, Series B, Series C and Series D Stock, then as determined by an
independent appraiser selected by the Board of Directors of the Corporation, the
cost of such appraisal to be borne by the challenging parties.
(f) Minimal Adjustments. No adjustment in a Conversion Price
need be made if such adjustment would result in a change in a Conversion Price
of less than $0.01. Any adjustment of less than $0.01 which is not made shall be
carried forward and shall be made at the time of and together with any
subsequent adjustment which, on a cumulative basis, amounts to an adjustment of
$0.01 or more in a Conversion Price.
(g) No Impairment. The Corporation will not, through any
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
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Series A, Series B, Series C or Series D
Stock against impairment. This provision shall not restrict the Corporation from
amending its Certificate of Incorporation in accordance with the General
Corporation Law of the State of Delaware.
(h) Certificate as to Adjustments. Upon the occurrence of
each event requiring adjustment or readjustment of the Conversion Rate pursuant
to this Section 5, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series A, Series B, Series C or Series D Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon written request at any time of any holder of Series A, Series B,
Series C or Series D Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Rate at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of the Series A, Series B, Series C or Series D
Stock held by such holder.
(i) Notices of Record Date. In the event of any taking by
the Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution or to vote on any
merger, consolidation, or sale of assets, the Corporation shall mail to each
holder of Series A, Series B, Series C and Series D Stock and to each holder of
outstanding warrants, options or other rights to acquire Series A, Series B,
Series C or Series D Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or vote.
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(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the outstanding shares of Series A, Series B, Series C and Series
D Stock and all shares of Series A, Series B, Series C and Series D Stock
issuable upon exercise of outstanding warrants and options such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A, Series B, Series C and Series
D Stock and all shares of Series A, Series B, Series C and Series D Stock
issuable upon exercise of outstanding warrants and options; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of Series A,
Series B, Series C and Series D Stock and all shares of Series A, Series B,
Series C and Series D Stock issuable upon exercise of outstanding warrants and
options, the Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
(k) Notices. Any notice required by the provisions of this
Section 5 to be given to the holder of shares of Series A, Series B, Series C or
Series D Stock or warrants, options or other rights to acquire Series A, Series
B, Series C or Series D Stock shall be deemed given if deposited in the United
States mail, postage prepaid, and addressed to each such holder of record at his
address appearing on the books of the Corporation.
6. Protective Provisions.
(a) The Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of more
than two-thirds (2/3) of the then outstanding shares of Series A, Series B,
Series C and Series D Stock, voting together as a separate class:
(i) Authorized Number. Increase or decrease the
authorized number of shares of Common Stock or Series A, Series B, Series C and
Series D Stock; or
(ii) Create Any New Class or Series. Create any new
class or Series of shares having any powers, preferences, or special rights
superior to or on a parity with Series B, Series C or Series D Stock in any
respect; or
(iii) Redemptions or Repurchases. Except pursuant to
this Second Amended and Restated Certificate of Incorporation and agreements
existing on the date this Second Amended and Restated Certificate of
Incorporation is filed with the Delaware Secretary of State, redeem or
repurchase any shares of Common Stock or Series A, Series B, Series C or Series
D Stock, other than repurchases of restricted stock issued to employees or
consultants, approved by the Board of Directors, at a repurchase price not in
excess of the original issue price of such shares.
(iv) Dividends. Pay or declare any dividend on any
shares of Common Stock or Series A, Series B, Series C or Series D Stock; or
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(v) Merger or Consolidation. Merge or consolidate
with or into any other Corporation if the stockholders of the Corporation
immediately prior to such transaction will own immediately after such
transaction less than fifty percent (50%) of the outstanding voting securities
of the surviving entity in such transaction or its parent; or
(vi) Sale of Assets. Sell, convey, or otherwise
dispose of, all or substantially all of the property or business of the
Corporation.
(vii) Change Board Size. Change the authorized number
of directors of the Corporation to a number greater than or less than seven (7).
(viii) Liquidation or Dissolution. Liquidate or
dissolve.
(b) The Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of
two-thirds (2/3) of the then outstanding shares of a Series of Series A, Series
B, Series C or Series D Stock, with each such Series voting as a separate class,
under the following circumstances:
(i) No Adverse Change. Adversely alter or change the
rights, preferences or privileges of such Series of any Series A, Series B,
Series C or Series D Stock.
(ii) Authorized Number. Increase or decrease the
authorized number of shares of such Series of Series A, Series B, Series C or
Series D Stock.
7. No Reissuance of Preferred Stock. Any share of Preferred Stock
acquired by the Corporation, whether by redemption, repurchase, conversion or
otherwise, shall be canceled and shall not be reissuable.
FIFTH. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation or other cause (including removal from office
by a vote of the stockholders) may be filled only by a majority vote of the
directors then in office, though less than a quorum, or by the sole remaining
director, and directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders and until their respective successors are
elected, except in the case of the death, resignation, or removal of any
director.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any directors, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
SIXTH. The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation
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of the powers of the Corporation and of its directors and stockholders:
1. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Certificate of
Incorporation or the By-laws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
2. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
3. Special meetings of stockholders of the Corporation may be
called only by either the Board of Directors, the Chairman of the Board of
Directors or the President and Chief Executive Officer.
SEVENTH. The Board of Directors is expressly empowered to adopt, amend
or repeal By-laws of the Corporation. The stockholders shall also have the power
to adopt, amend or repeal the By-laws of the Corporation. Any adoption,
amendment or repeal of By-laws of the Corporation by the stockholders shall
require, in addition to any vote of the holders of any class or series of stock
of the Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
EIGHTH. The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 66-2/3% of the voting power of all
of the then outstanding shares of the capital stock of the Corporation entitled
to vote generally in the election of directors, voting together as a single
class, shall be required to amend or repeal this Article EIGHTH, Article FIFTH,
Article SIXTH or Article SEVENTH.
NINTH. The Corporation is to have perpetual existence.
TENTH. A director shall not be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that the elimination or limitation of liability
is not permitted under the Delaware General Corporation Law as in effect when
such liability is determined. No amendment or repeal of this provision shall
deprive a director of the benefits hereof with respect to any act or omission
occurring prior to such amendment or repeal.
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ELEVENTH. The Corporation shall, to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as it may be amended and
supplemented from time to time, indemnify any and all persons whom it shall have
power to indemnify under such law against any expenses, liabilities, or other
matters referred to in or covered by that section. The indemnification provided
for herein shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in
their official capacities and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Robert D. Roback, its President, and attested by Jeffrey Mickeal, its
Secretary, this 29th day of March, 1999.
NEW LAUNCH MEDIA, INC.
By: /S/ Robert D. Roback
---------------------------------
Robert D. Roback, President
ATTEST:
/s/ Jeffrey Mickeal
- --------------------------
Jeffrey Mickeal, Secretary
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
LAUNCH MEDIA, INC.
ARTICLE I.
OFFICES
Section 1. The registered office of the Corporation shall be in the City
of Wilmington, State of Delaware. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II.
STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of the stockholders
for the election of directors or for any other purpose shall be held at such
time and place, within or without the State of Delaware, as shall be designated
by the Board of Directors. In the absence of a designation of a place for any
such voting by the Board of Directors, each such meeting shall be held at the
principal office of the Corporation.
Section 2. Annual Meetings. An annual meeting of stockholders shall be
held for the purpose of electing directors and transacting such other business
as may properly be brought before the meeting. The date of the annual meeting
shall be determined by the Board of Directors.
Section 3. Special Meetings. Special meetings of stockholders may be
called at any time by the Board of Directors, the Chairman of the Board or the
President and Chief Executive Officer. Business transacted at any special
meeting of stockholders shall be confined to the purpose or purposes stated in
the notice of meeting.
Section 4. Notice of Meetings. Written notice of each meeting of the
stockholders stating the place, date and time of the meeting shall be given not
less than ten (10) nor more than sixty (60) days before the date of the meeting,
to each stockholder entitled to vote at such meeting. The notice of any special
meeting of stockholders shall state the purpose or purposes for which the
meeting is called. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice. Neither the business to
be transacted at, nor the purpose of, an annual or special meeting of
stockholders need be specified in any written waiver of notice.
<PAGE> 2
Section 5. Quorum; Adjournments. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise required by
these By-laws, the Certificate of Incorporation or the Delaware General
Corporation Law as from time to time in effect (the "Delaware Law"). If a quorum
is not represented, the holders of the stock present in person or represented by
proxy at the meeting and entitled to vote thereat shall have power, by the
affirmative vote of the stockholders of a majority of such stock, to adjourn the
meeting to another time and/or place, without notice other than announcement at
the meeting, except as hereinafter provided, until a quorum shall be present or
represented. At such adjourned meeting, at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the original meeting. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting. Withdrawal of stockholders from any meeting
shall not cause the failure of a duly constituted quorum at such meeting.
Section 6. Voting.
(a) At all meetings of the stockholders, a stockholder shall be
entitled to vote, in person, or by proxy printed in an instrument in writing
subscribed by the stockholder or otherwise appointed in accordance with Section
212 of the Delaware Law, each share of voting stock owned by such stockholder of
record on the record date for the meeting. Each stockholder shall be entitled to
one vote for each share of voting stock held by such stockholder, unless
otherwise provided in the Delaware Law or the Certificate of Incorporation.
(b) When a quorum is present at any meeting, the affirmative vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy and voting shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of law or
of the Certificate of Incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Any stockholder who is in attendance at a meeting of stockholders either in
person or by proxy, but who abstains from the vote on any such matter, shall not
be deemed present or represented at such meeting for purposes of the preceding
sentence with respect to such vote, but shall be deemed present or represented
at such meeting for all other purposes.
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Section 7. Voting Procedures and Inspectors of Election.
(a) The Corporation shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and make a
written report thereof. The Corporation may designate one or more persons as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate is able to act at a meeting of stockholders, the person presiding
at the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his ability.
(b) The inspectors shall (i) ascertain the number of shares
outstanding and the voting power of each, (ii) determine the shares represented
at a meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and obtain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares represented at the
meeting, and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors.
(c) The date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 212(c)(2) of the Delaware Law, ballots and the regular books and records
of the Corporation, except that the inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for the limited purpose permitted
herein, the inspectors at the time they make their certification pursuant to
subsection (b)(v) of this Section 8 shall specify the precise information
considered by them including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 8. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting
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is to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder of the Corporation
who is present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section Section 9 of this Article ARTICLE II or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 10. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
ARTICLE III.
DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the Corporation except as otherwise provided by
law or the Certificate of Incorporation. In the event of a vacancy in the Board
of Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
Section 2. Number and Term of Office. The number of directors shall
initially be five (5) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). All directors shall hold
office until their respective successors are elected, except in the case of the
death, resignation or removal of any director.
Section 3. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (including removal from
office by a vote of the stockholders) may be filled only by a majority vote of
the directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the next annual meeting of stockholders
and until their respective successors are elected, except in the case of death,
resignation or removal of any director. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 4. Place of Meetings. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
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Section 5. Meetings. The Board of Directors shall hold a regular
meeting, to be known as the annual meeting, immediately following each annual
meeting of the stockholders. Other regular meetings of the Board of Directors
shall be held at such time and place as shall from time to time be determined by
the Board. No notice of regular meetings need be given, other than by
announcement at the immediately preceding regular meeting. Special meetings of
the Board may be called by the Chief Executive Officer or the President or by
the Secretary on the written request of a majority of the Board of Directors.
Notice of any special meeting of the Board shall be given at least two days
prior thereto, either in writing, or telephonically if confirmed promptly in
writing, to each director at the address shown for such director on the records
of the Corporation.
Section 6. Waiver of Notice; Business and Purpose. Notice of any meeting
of the Board of Directors may be waived in writing signed by the person or
persons entitled to such notice either before or after the time of the meeting.
The attendance of a director at any meeting shall constitute a waiver of notice
of such meeting, except where a director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting is
not lawfully called or convened and at the beginning of the meeting records such
objection with the person acting as secretary of the meeting and does not
thereafter vote on any action taken at the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
need be specified in the notice or waiver of notice of such meeting, unless
specifically required by the Delaware Law.
Section 7. Quorum and Manner of Acting. At all meetings of the Board of
Directors a majority of the total number of directors shall constitute a quorum
for the transaction of business. If a quorum shall not be present at any meeting
of the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present. The act of a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors,
except as may be otherwise specifically provided by the Delaware Law or by the
Certificate of Incorporation. Withdrawal of directors from any meeting shall not
cause the failure of a duly constituted quorum at such meeting. A director who
is in attendance at a meeting of the Board of Directors but who abstains from
the vote on any matter shall not be deemed present at such meeting for purposes
of the preceding sentence with respect to such vote, but shall be deemed present
at such meeting for all other purposes.
Section 8. Organization. The Chairman of the Board, if elected, shall
act as chairman at all meetings of the Board of Directors. If the Chairman of
the Board is not elected or, if elected, is not present, the Vice Chairman, if
any, or if no such Vice Chairman is present, a director chosen by a majority of
the directors present, shall act as chairman at such meeting of the Board of
Directors.
Section 9. Committees. The Board of Directors, by resolution adopted by
a majority of the whole Board, may designate one or more directors to constitute
an Executive Committee. The Board of Directors, by resolution adopted by a
majority of the whole Board, may create one or more other committees and appoint
one or more directors to serve on such committee or
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committees. Each director appointed to serve on any such committee shall serve,
unless the resolution designating the respective committee is sooner amended or
rescinded by the Board of Directors, until the next annual meeting of the Board
or until their respective successors are designated. The Board of Directors, by
resolution adopted by a majority of the whole Board, may also designate
additional directors as alternate members of any committee to serve as members
of such committee in the place and stead of any regular member or members
thereof who may be unable to attend a meeting or otherwise unavailable to act as
a member of such committee. In the absence or disqualification of a member and
all alternate members designated to serve in the place and stead of such member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another director to act at the meeting in the place and
stead of such absent or disqualifed member.
The Executive Committee shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation between the meetings of the Board of Directors, and
any other committee may exercise the power and authority of the Board of
Directors to the extent specified by the resolution establishing such committee,
or the Certificate of Incorporation or these By-laws; provided, however, that no
committee may take any action that is expressly required by the Delaware Law or
the Certificate of Incorporation or these By-laws to be taken by the Board of
Directors and not by a committee thereof. Each committee shall keep a record of
its acts and proceedings, which shall form a part of the records of the
Corporation in the custody of the Secretary, and all actions of each committee
shall be reported to the Board of Directors at the next meeting of the Board.
Meetings of committees may be called at any time by the Chairman of the
Board, if any, the Chief Executive Officer, the President or the chairman of the
respective committee. A majority of the members of the committee shall
constitute a quorum for the transaction of business and, except as expressly
limited by this section, the act of a majority of the members present at any
meeting at which there is a quorum shall be the act of such committee. Except as
expressly provided in this section or in the resolution designating the
committee, a majority of the members of any such committee may select its
chairman, fix its rules of procedure, fix the time and place of its meetings and
specify what notice of meetings, if any, shall be given.
Section 10. Action without Meeting. Unless otherwise specifically
prohibited by the Certificate of Incorporation or these By-laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting, if all members of the
Board of Directors or such committee, as the case may be, execute a consent
thereto in writing setting forth the action so taken, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
such committee.
Section 11. Attendance by Telephone. Members of the Board of Directors,
or any committee thereof, may participate in and act at any meeting of the Board
of Directors, or such committee, as the case may be, through the use of a
conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear
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each other. Participation in such meeting shall constitute attendance and
presence in person at the meeting of the person or persons so participating.
Section 12. Compensation. By resolution of the Board of Directors,
irrespective of any personal interest of any of the members, the directors may
be paid their reasonable expenses, if any, of attendance at each meeting of the
Board of Directors and may be paid a fixed sum of attendance at meetings or a
stated salary as directors. These payments shall not preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV.
OFFICERS
Section 1. Enumeration. The officers of the Corporation shall be chosen
by the Board of Directors and shall include a Chief Executive Officer, a
President and a Secretary. The Board of Directors may also elect a Chairman of
the Board (or one or more Co-Chairmen of the Board), a Vice Chairman, a Chief
Financial Officer, a Chief Operating Officer, one or more Assistant Secretaries
and Assistant Treasurers and such other officers and agents as it may deem
appropriate. Any number of offices may be held by the same person.
Section 2. Term of Office. The officers of the Corporation shall be
elected at the annual meeting of the Board of Directors and shall hold office
until their successors are elected and qualified, or until their earlier death,
termination, resignation or removal from office. Any officer or agent of the
Corporation may be removed at any time by the Board of Directors, with or
without cause. Any vacancy in any office because of death, resignation,
termination, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term.
Section 3. Chairman of the Board. The Chairman of the Board, when and if
elected, shall preside over the meetings of the Board of Directors and of the
stockholders at which he shall be present. If there be more than one, the
Co-Chairmen designated by the Board of Directors will perform such duties. The
Chairman of the Board shall perform such other duties as may be assigned to him
or them by the Board of Directors. The Chairman of the Board, if any, shall be a
member of the Board of Directors of the Corporation.
Section 4. Vice Chairman. The Vice Chairman, if any, in the absence of
the Chairman or in the event of the Chairman's inability or refusal to act,
shall have the authority to perform the duties of the Chairman and such other
duties as may from time to time be prescribed by the Board of Directors or the
Chairman of the Board. The Vice Chairman, if any, shall be a member of the Board
of Directors of the Corporation.
Section 5. Chief Executive Officer. The Board of Directors shall
designate a Chief Executive Officer. The Chief Executive Officer shall have
general responsibility for implementation of the policies of the Corporation, as
determined by the Board of Directors, and for the management, supervision,
direction and control of the business and affairs of the Corporation.
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Section 6. President. In the absence of a designation of a Chief
Operating Officer by the Board of Directors, the President shall be the Chief
Operating Officer of the Corporation and shall have such functions, authority
and duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors or the Chief Executive Officer. He may
execute any deed, mortgage, bond, contract or other instrument, except in cases
where the execution thereof shall be expressly delegated by the Board of
Directors or by these By-laws to some other officer or agent of the Corporation
or shall be required by law to be otherwise executed.
Section 7. Chief Operating Officer. The Board of Directors may designate
a chief operating officer. The Chief Operating Officer shall have the
responsibilities and duties as set forth by the Board of Directors or the Chief
Executive Officer.
Section 8. Vice President. Each Vice President shall perform such duties
and have such other powers as may from time to time be prescribed by the Board
of Directors, the Chief Executive Officer or the President.
Section 9. Secretary. The Secretary shall: (a) keep a record of all
proceedings of the stockholders, the Board of Directors and any committees
thereof in one or more books provided for that purpose; (b) give, or cause to be
given, all notices that are required by law or these By-laws to be given by the
Secretary; (c) be custodian of the corporate records and, if the Corporation has
a corporate seal, of the seal of the Corporation; (d) have authority to affix
the seal of the Corporation to all instruments the execution of which requires
such seal and to attest such affixing of the seal; (e) keep a register of the
post office address of each stockholder which shall be furnished to the
secretary by such stockholder; (f) sign, with the Chairman or the Vice Chairman,
if any, or Chief Executive Officer, President or any Vice President, or any
other officer thereunto authorized by the Board of Directors, any certificates
for shares of the Corporation, or any deeds, mortgages, bonds, contracts or
other instruments which the Board of Directors has authorized to be executed by
the signature of more than one officer; (g) have general charge of the stock
transfer books of the Corporation; (h) have authority to certify as true and
correct, copies of the By-laws, or resolutions of the stockholders, the Board of
Directors and committees thereof, and of other documents of the Corporation; and
(i) in general, perform the duties incident to the office of secretary and such
other duties as from time to time may be prescribed by the Board of Directors,
the Chief Executive Officer or the President. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest such affixing of the seal.
Section 10. Assistant Secretary. The Assistant Secretary, or if there
shall be more than one, each Assistant Secretary in the absence of the Secretary
or in the event of the Secretary's inability or refusal to act, shall have the
authority to perform the duties of the Secretary, subject to such limitations
thereon as may be imposed by the Board of Directors, and such other duties as
may from time to time be prescribed by the Board of Directors, the Chief
Executive Officer, the President or the Secretary.
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Section 11. Chief Financial Officer. The Chief Financial Officer, if
any, shall be the principal accounting and financial officer of the Corporation.
The Chief Financial Officer shall: (a) have charge of and be responsible for the
maintenance of adequate books of account for the Corporation; (b) have charge
and custody of all funds and securities of the Corporation, and be responsible
therefor and for the receipt and disbursement thereof; and (c) perform the
duties incident to the office of Chief Financial Officer and such other duties
as may from time to time be prescribed by the Board of Directors, the Chief
Executive Officer or the President. The Chief Financial Officer may sign with
the Chairman or the Vice Chairman, if any, or the Chief Executive Officer,
President, or any Vice President, or any other officer thereunto authorized by
the Board of Directors, certificates for shares of the Corporation. If required
by the Board of Directors, the Chief Financial Officer shall give a bond for the
faithful discharge of his or her duties in such sum and with such surety or
sureties as the Board of Directors may determine.
Section 12. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, each Assistant Treasurer, in the absence of the Chief
Financial Officer or in the event of the Chief Financial Officer's inability or
refusal to act, shall have the authority to perform the duties of the Chief
Financial Officer, subject to such limitations thereon as may be imposed by the
Board of Directors, and such other duties as may from time to time be prescribed
by the Board of Directors, the Chief Executive Officer, the President or the
Chief Financial Officer.
Section 13. Other Officers and Agents. Any officer or agent who is
elected or appointed from time to time by the Board of Directors and whose
duties are not specified in these By-laws shall perform such duties and have
such powers as may from time to time be prescribed by the Board of Directors,
the Chief Executive Officer or the President.
ARTICLE V.
CERTIFICATES OF STOCK AND THEIR TRANSFER
Section 1. Form. The shares of the Corporation shall be represented by
certificates; provided, however, the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
the Corporation's stock shall be uncertificated shares. Each certificate for
shares shall be consecutively numbred or otherwise identified. Certificates of
stock in the Corporation, shall be signed by or in the name of the Corporation
by the Chairman or the Vice Chairman, if any, or the Chief Executive Officer,
President, or any Vice President, or any other officer thereunto authorized by
the Board of Directors, and by the Chief Financial Officer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation. Where a
certificate is countersigned by a transfer agent, other than the Corporation or
an employee of the Corporation, or by a registrar, the signatures of one or more
officers of the Corporation may be facsimiles. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, the certificate may be issued by
the Corporation with the same effect as if such officer, transfer agent or
registrar were such officer, transfer agent or registrar at the date of its
issue.
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Section 2. Transfer. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate of
stock or uncertificated shares in place of any certificate theretofore issued by
the Corporation to the person entitled thereto, cancel the old certificate and
record the transaction in its stock transfer books.
Section 3. Replacement. In case of the loss, destruction, mutilation or
theft of a certificate for any stock of the Corporation, a new certificate of
stock or uncertificated shares in place of any certificate theretofore issued by
the Corporation may be issued upon the surrender of the mutilated certificate
or, in the case of loss, destruction or theft of a certificate, upon
satisfactory proof of such loss, destruction or theft and upon such terms as the
Board of Directors may prescribe. The Board of Directors may in its discretion
require the owner of the lost, destroyed or stolen certificate, or his legal
representative, to give the Corporation a bond, in such sum and in such form and
with such surety or sureties as it may direct, to indemnify the Corporation
against any claim that may be made against it with respect to the certificate
alleged to have been lost, destroyed or stolen.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
Section 1. Third Party Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, including all appeals (other than an
action, suit or proceeding by or in the right of the Corporation) by reason of
the fact that he is or was a director or officer, of the Corporation (and the
Corporation, in the discretion of the Board of Directors, may so indemnify a
person by reason of the fact that he is or was an employee or agent of the
Corporation or is or was serving at the request of the Corporation in any other
capacity for or on behalf of the Corporation), against expenses (including
attorneys' fees), judgments, decrees, fines, penalties, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; provided, however, the
Corporation shall be required to indemnify an officer or director in connection
with an action, suit or proceeding initiated by such person only if such action,
suit or proceeding was authorized by the Board of Directors. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith or in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
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Section 2. Actions By or in the Right of the Corporation. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action or suit,
including all appeals, by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of the Corporation (and the Corporation, in the discretion of the Board
of Directors, may so indemnify a person by reason of the fact that he is or was
an employee or agent of the Corporation or is or was serving at the request of
the Corporation in any other capacity for or on behalf of the Corporation),
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been finally adjudged to be liable for negligence or misconduct in
the performance of his duty to the Corporation unless and only to the extent
that the court in which such action or suit was brought, or any other court of
competent jurisdiction, 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 expenses as such
court shall deem proper. Notwithstanding the foregoing, the Corporation shall be
required to indemnify an officer or director in connection with an action, suit
or proceeding initiated by such person only if such action, suit or proceeding
was authorized by the Board of Directors.
Section 3. Indemnity if Successful. To the extent that a director,
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit, or proceeding referred to in
Section 1 or 2 of this Article, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Section 4. Standard of Conduct. Except in a situation governed by
Section 3 of this Article, any indemnification under Section 1 or 2 of this
Article (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Section 1 or 2, as
applicable, of this Article. Such determination shall be made (i) by a majority
vote of directors acting at a meeting at which a quorum consisting of directors
who were not parties to such action, suit or proceeding is present, or (ii) if
such a quorum is not obtainable, or even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders. The determination required by clauses (i)
and (ii) of this Section 4 may in either event be made by written consent of the
majority required by each clause.
Section 5. Expense. Expenses (including attorneys' fees) of such officer
and director hereunder indemnified actually and reasonably incurred in defending
any civil, criminal, administrative or investigative action, suit or proceeding
or threat thereof shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this
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Article. Such expenses (including attorneys' fees) incurred by employees and
agents may be so paid upon the receipt of the aforesaid undertaking and such
terms and conditions, if any, as the Board of Directors deems appropriate.
Section 6. Nonexclusivity. The indemnification and advancement of
expenses provided by, or granted pursuant to, other sections of this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may now or hereafter be entitled
under any law, by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
Section 7. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another Corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provision of the Delaware Law.
Section 8. Definitions. For purposes of this Article, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had the power and authority to indemnify any or all of its directors,
officers, employees and agents, so that any person who was a director, officer,
employee or agent of such constituent corporation, or was serving at the request
of such constituent corporation in any other capacity, shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as such person would have had with respect to such
constituent corporation if its separate existence had continued as such
corporation was constituted immediately prior to such merger.
For purposes of this Article, references to "other capacities" shall
include serving as a trustee or agent for any employee benefit plan; references
to "fines" shall include any excise taxes assessed on a person with respect to
an employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee, or
agent of the Corporation which imposes duties on, or involves services by such
director, officer, employee, or agent with respect to an employee benefit plan,
its participants, or beneficiaries. A person who acted in good faith and in a
manner he or she reasonably believed to be in the best interests of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the corporation" as
referred to in this Article.
Section 9. Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain in
full force and effect in such jurisdiction, and the remaining provisions hereof
shall be liberally construed to effectuate the provisions
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hereof, and the invalidity of any provision hereof in any jurisdiction shall not
affect the validity or enforceability of such provision in any other
jurisdiction.
Section 10. Amendment. The right to indemnification conferred by this
Article shall be deemed to be a contract between the Corporation and each person
referred therein until amended or repealed, but no amendment to or repeal of
these provisions shall apply to or have any effect on the right to
indemnification of any person with respect to any liability or alleged liability
of such person for or with respect to any act or omission of such person
occurring prior to such amendment or repeal.
ARTICLE VII.
GENERAL PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
fixed from time to time by resolution of the Board of Directors.
Section 2. Corporation Seal. The corporate seal, if any, of the
Corporation shall be in such form as may be approved from time to time by the
Board of Directors. The seal may be used by causing it or a facsimile thereof to
be impressed or affixed or in any other manner reproduced.
Section 3. Notices and Mailings. Except as otherwise provided in the
Act, the Articles of Incorporation or these By-laws, all notices required to be
given by any provision of these By-laws shall be deemed to have been given (i)
when received, if given in person, (ii) on the date of acknowledgment of
receipt, if sent by telex, facsimile or other wire transmission, (iii) one day
after delivery, properly addressed, to a reputable courier for same day or
overnight delivery or (iv) three days after being deposited, properly addressed,
in the U.S. Mail, certified or registered mail, postage prepaid.
Section 4. Waiver of Notice. Whenever any notice is required to be given
under the Delaware Law or the provisions of the Certificate of Incorporation or
these By-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time started therein, shall
be deemed equivalent to notice.
Section 5. Interpretation. In these By-laws, unless a clear contrary
intention appears, the singular number includes the plural number and vice
versa, and reference to either gender includes the other gender.
ARTICLE VIII.
AMENDMENTS
Section 1. By the Board of Directors. Except as otherwise set forth in
these By-laws, these By-laws may be altered, amended or repealed or new By-laws
may be adopted by the
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affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present.
Section 2. By the Stockholders. Except as otherwise set forth in these
By-laws, these By-laws may be altered, amended or repealed or new By-laws may be
adopted by the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the shares of the capital stock of the
Corporation issued and outstanding and entitled to vote at any annual meeting of
stockholders, or at any special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new By-laws shall have been stated
in the notice of such special meeting.
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EXHIBIT 5.1
[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]
March 30, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: LAUNCH MEDIA, INC. REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
As counsel to Launch Media, Inc. (the "Company"), we are rendering this
opinion in connection with a proposed sale of those certain shares of the
Company's newly-issued Common Stock as set forth in the Registration Statement
on Form SB-2 to which this opinion is being filed as Exhibit 5.1 (the "Shares").
We have examined all instruments, documents and records which we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares
identified in the above-referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, validly authorized, legally issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
GRAY CARY WARE & FREIDENRICH LLP
<TABLE>
<S> <C>
SILICON VALLEY SAN DIEGO SAN FRANCISCO AUSTIN LA JOLLA IMPERIAL VALLEY MEXICO
</TABLE>
<PAGE> 1
EXHIBIT 10.2
LAUNCH MEDIA, INC.
1998 STOCK OPTION PLAN
SECTION 1
General
1.1. Purpose. LAUNCH Media, Inc. (the "Company") has established the
LAUNCH Media, Inc. 1998 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
stockholders of the Company, the Plan shall be effective as of March 12, 1998;
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 Options (as defined in Section 3) 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 stockholders 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 2,000,000 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, canceled or settled in such a manner
that all or some shares subject to the Option are not issued to the Participant,
such shares 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, reverse stock split, reclassification, 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
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outstanding Options under the Plan and the terms thereof shall 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. Right to Continue Service; Stockholder 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 or service of the Company (or any parent corporation or subsidiary
corporation of the Company, as such terms are defined in Section 424(e) and (f)
of the Internal Revenue Code of 1986, as amended (the "Code")), 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 stockholder 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 employees,
directors and consultants of the Company (or any parent corporation or
subsidiary corporation of the Company) who shall be "Participants" in the Plan.
In making this determination, the Board or the Committee shall take into account
the individual's contribution and potential contribution to the Company and any
other factors that the Board or the Committee determines to be relevant.
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 (or any parent or subsidiary corporation of the Company)
and that satisfies all of the requirements of section 422 of 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
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<PAGE> 3
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 stockholder of the Company or any parent or subsidiary corporation 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 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 of 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 of 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 stockholder of the
Company or any parent or subsidiary corporation 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, or such other longer or shorter
period of time (not less than six months) as established by the Board or the
Committee, 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, or such other longer or
shorter period of time (not less than thirty days) as established by the Board
or the Committee, after the date on which the Participant's employment with the
Company (or service as a director of the Company)
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<PAGE> 4
is terminated for any reason other than (i) disability, (ii) death, or (iii) for
Cause (as defined below); or
(e) the date on which the Participant's employment with the
Company (or service as a director of the Company) is terminated for Cause.
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 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) by the assignment of the proceeds of a sale or loan with respect to some
or all of the shares being acquired upon the exercise of the Option (including,
without limitation, through an exercise complying with the provisions of
Regulation T as promulgated from time to time by the Board of Governors of the
Federal Reserve System) (a "Cashless Exercise"), by the Participant's promissory
note in a form approved by the Company, or in any combination thereof.
Notwithstanding the foregoing, the Company reserves, at any and all times, the
right, in the Company's sole and absolute discretion, to establish, decline to
approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise. In addition, no promissory note shall be permitted
if the exercise of an Option using a promissory note would be a violation of any
law, and any permitted promissory note shall be on such terms as the Board or
the Committee shall determine at the time the Option is granted. If applicable,
in the discretion of the Board or the Committee, separate certificates
representing the shares purchased by exercise of Incentive Stock Option and by
exercise of Non-Qualified Option 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
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<PAGE> 5
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,
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 affected or
obtained free of any condition not acceptable to the Company.
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 by the Participant except 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.
3.9. Provision of Information. At least annually, copies of the
Company's balance sheet and income statement for the just completed fiscal year
shall be made available to each Participant and purchaser of shares of Stock
upon the exercise of an Option. The Company shall not be required to provide
such information to persons whose duties in connection with the Company assure
them access to equivalent information.
SECTION 4
4.1. Termination or Amendment of Plan. The Board may terminate or amend
the Plan at any time. However, subject to changes in applicable law, regulations
or rules that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of subsection 1.5), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no other amendment of the Plan that
would require approval of the Company's stockholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Participant.
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4.2. Stockholder Approval. The Plan or any increase in the maximum
number of shares of Stock issuable thereunder as provided in subsection 1.4 (the
"Maximum Shares") shall be approved by the stockholders of the Company within
twelve (12) months of the date of adoption thereof by the Board. Options granted
prior to stockholder approval of the Plan or in excess of the Maximum Shares
previously approved by the stockholders shall become exercisable no earlier than
the date of stockholder approval of the Plan or such increase in the Maximum
Shares, as the case may be.
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<PAGE> 1
EXHIBIT 10.3
LAUNCH MEDIA, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
Adopted by the Board on February 12, 1999
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. This 1999 Employee Stock Purchase Plan (the
"PLAN") is hereby established effective as of the effective date of the initial
registration by the Company of its Stock under Section 12 of the Securities
Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of Company and its stockholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by
the Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted herein,
including, without limitation, the power to amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(d) "COMPANY" means LAUNCH Media, Inc., a Delaware
corporation, or any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any Offering
Period, base wages or salary, commissions, overtime, bonuses, annual awards,
other incentive payments, shift premiums, and all other compensation paid in
cash during such Offering Period before deduction for any contributions to any
plan maintained by a Participating Company and described in Section 401(k) or
Section 125 of the Code. Compensation shall not include reimbursements of
expenses, allowances, long-term disability, workers' compensation or any amount
deemed received without the actual transfer of cash or any amounts directly or
indirectly paid pursuant to the Plan or any other stock purchase or stock option
plan, or any other compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. For purposes of an
individual's participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the Company
shall be final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "ENTRY DATE" means (i) the Offering Date of an
Offering Period, or (ii) with respect to persons who first become Eligible
Employees after the commencement of the Initial Offering Period (as defined in
Section 6.1 below) but prior to the commencement of the final Purchase Period of
the Initial Offering Period, the first day of the Purchase Period following the
date on which such person becomes an Eligible Employee. Notwithstanding the
foregoing, in the event that the Fair Market Value of a share of Stock on the
first, second or third Purchase Date of the Initial Offering Period is less than
the Fair Market Value of a share of Stock on the Entry Date for a Participant
who was participating in the Offering as of such Purchase Date, the Entry Date
for such Participant for the remainder of the Offering shall be the first day of
the Purchase Period following such Purchase Date.
(i) "FAIR MARKET VALUE" means, as of any date, if there is
then a public market for the Stock, the closing price of a share of Stock (or
the mean of the closing bid and asked prices if the Stock is so quoted instead)
as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such
other national or regional securities exchange or market
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system constituting the primary market for the Stock, as reported in The Wall
Street Journal or such other source as the Company deems reliable. If the
relevant date does not fall on a day on which the Stock has traded on such
securities exchange or market system, the date on which the Fair Market Value
shall be established shall be the last day on which the Stock was so traded
prior to the relevant date, or such other appropriate day as shall be determined
by the Board, in its discretion. If, as of any date, there is then no public
market for the Stock, the Fair Market Value on any relevant date shall be as
determined by the Board. Notwithstanding the foregoing, the Fair Market Value
per share of Stock on the Effective Date shall be deemed to be the public
offering price set forth in the final prospectus filed with the Securities and
Exchange Commission in connection with the initial public offering of the Stock.
(j) "OFFERING" means an offering of Stock as provided in
Section 6.
(k) "OFFERING DATE" means, for any Offering, the first day
of the Offering Period with respect to such Offering.
(l) "OFFERING PERIOD" means a period established in
accordance with Section 6.1.
(m) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee who has
become a participant in an Offering Period in accordance with Section 0 and
remains a participant in accordance with the Plan.
(o) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall be
Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in
time, the Company and all other corporations collectively which are then
Participating Companies.
(q) "PURCHASE DATE" means the last day of (i) any Purchase
Period during the Initial Offering Period, or (ii) an Offering Period which
begins after the Initial Offering Period.
(r) "PURCHASE PERIOD" means a period established in
accordance with Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of
Stock may be purchased under the Plan, as determined in accordance with Section
9.
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(t) "PURCHASE RIGHT" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided in
Section 8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from the right of
a Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(u) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(v) "SUBSCRIPTION AGREEMENT" means a written agreement in
such form as specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the Plan from
the Employee's Compensation.
(w) "SUBSCRIPTION DATE" means the last business day prior
to an Entry Date or such other date as the Company shall establish.
(x) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall determine
all of the relevant terms and conditions of Purchase Rights granted pursuant to
the Plan; provided, however, that all Participants granted Purchase Rights
pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
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3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be three hundred thousand (300,000) and shall
consist of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of such Purchase Right shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 0
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
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5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, such Employee would own
or hold options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS.
(a) INITIAL OFFERING PERIOD. The Plan shall be implemented
by sequential Offerings (an "OFFERING PERIOD"). The first Offering Period shall
commence on the Effective Date and end on April 30, 2001 (the "INITIAL OFFERING
PERIOD").
(b) SUBSEQUENT OFFERING PERIODS. After the completion of
the Initial Offering Period, subsequent Offerings shall commence on the first
day of May and November of each year and end on the last day of October and
April, respectively, occurring thereafter, and will have a duration of
approximately six (6) months.
6.2 PURCHASE PERIODS. The Initial Offering Period shall consist
of four (4) consecutive Purchase Periods of approximately six (6) months
duration. Purchase Periods shall commence on the Effective Date, November 1,
1999, May 1, 2000 and November 1, 2000. Purchase Periods beginning on the first
day of May and November and shall end on the last day of October and April,
respectively, occurring thereafter. The Purchase Period commencing on the
Effective Date shall end on October 31, 1999.
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<PAGE> 7
6.3 DISCRETION TO VARY DURATION. Notwithstanding the foregoing,
the Board may establish a different duration for one or more Offering Periods or
Purchase Periods or different commencing or ending dates for such periods;
provided, however, that no Offering Period may have a duration exceeding
twenty-seven (27) months. If the first or last day of an Offering Period or a
Purchase Period is not a day on which the national securities exchanges or
Nasdaq Stock Market are open for trading, the Company shall specify the trading
day that will be deemed the first or last day, as the case may be, of the
period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the Company not later than the close of business for
such office on the Subscription Date established by the Company for the
applicable Entry Date. An Eligible Employee who does not deliver a properly
completed Subscription Agreement to the Company's designated office on or before
the Subscription Date shall not participate in that Offering Period or any
subsequent Offering Period unless such Eligible Employee subsequently delivers a
properly completed Subscription Agreement to the appropriate office of the
Company on or before the Subscription Date for such subsequent Offering Period.
An Employee who becomes an Eligible Employee after the Offering Date of an
Offering Period (other than the Initial Offering Period) shall not be eligible
to participate in such Offering Period but may participate in any subsequent
Offering Period provided such Employee is still an Eligible Employee as of the
Offering Date of such subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 10.7 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically, on his or her Entry Date, a Purchase Right
consisting of an option to purchase, on each Purchase Date within such Offering
Period, that number of whole shares of Stock determined by dividing the
aggregate payroll deductions collected from the Participant by the applicable
Purchase Price on such Purchase Date; provided, that no Participant may purchase
more than one thousand (1,000) shares of Stock on any Purchase Date.
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<PAGE> 8
8.2 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Entry Date for such Offering
Period. The limitation described in this Section shall be applied in conformance
with applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired
in an Offering Period upon the exercise of all or any portion of a Purchase
Right shall be established by the Board; provided, however, that the Purchase
Price shall not be less than eighty-five percent (85%) of the lesser of (a) the
Fair Market Value of a share of Stock on the Participant's Entry Date of the
Offering Period or (b) the Fair Market Value of a share of Stock on the Purchase
Date. Unless otherwise provided by the Board prior to the commencement of an
Offering Period, the Purchase Price for that Offering Period shall be
eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share
of Stock on the Participant's Entry Date of the Offering Period, or (b) the Fair
Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period (after the Participant's
Entry Date) shall be determined by the Participant's Subscription Agreement. The
Subscription Agreement shall set forth the percentage of the Participant's
Compensation to be deducted on each payday during an Offering Period (after the
Participant's Entry Date) in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions made effective following the first payday during an Offering after
the Participant's Entry Date) or more than ten percent (10%). Notwithstanding
the foregoing, the Board may change the limits on payroll deductions effective
as of any future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Entry Date and shall continue to the
end of the Offering Period unless sooner altered or terminated as provided
herein.
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10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company an
amended Subscription Agreement authorizing such change on or before the "Change
Notice Date." The "CHANGE NOTICE DATE" shall be a date prior to the beginning of
the first pay period for which such election is to be effective as established
by the Company from time to time and announced to the Participants. A
Participant who elects to decrease the rate of his or her payroll deductions to
zero percent (0%) shall nevertheless remain a Participant in the current
Offering Period unless such Participant withdraws from the Plan as provided in
Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll deductions
in excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted during a calendar year under the
limit set forth in Section 8.2. Payroll deductions shall be resumed at the rate
specified in the Participant's then effective Subscription Agreement at the
beginning of the next Purchase Period the Purchase Date of which falls in the
following calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall
be maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company a written notice on a form provided by the Company for
such purpose. A Participant who withdraws the entire remaining balance credited
to his or her Plan account shall be deemed to have withdrawn from the Plan in
accordance with Section 12.1. Amounts withdrawn shall be returned to the
Participant as soon as practicable after the withdrawal and may not be applied
to the purchase of shares in any Offering under the Plan. The Company may from
time to time establish or change limitations on the frequency of withdrawals
permitted under this Section, establish a minimum dollar amount that must be
retained in the Participant's Plan account, or terminate the withdrawal right
provided by this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date, each
Participant who has not withdrawn from the Plan and whose participation in the
Offering has not terminated before such Purchase Date shall automatically
acquire pursuant to the exercise of the Participant's Purchase Right the number
of whole shares of Stock determined by dividing (a) the total amount of the
Participant's payroll deductions accumulated in the Participant's Plan
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<PAGE> 10
account during the Purchase Period and not previously applied toward the
purchase of Stock by (b) the Purchase Price. No shares of Stock shall be
purchased on a Purchase Date on behalf of a Participant whose participation in
the Offering or the Plan has terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number
of shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right
is exercised, in whole or in part, or at the time a Participant disposes of some
or all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised
all or part of his or her Purchase Right shall receive, as soon as practicable
after the Purchase Date, a report of such Participant's Plan account setting
forth the total payroll deductions accumulated prior to such exercise, the
number of shares of Stock purchased, the Purchase Price for such shares, the
date of purchase and the cash balance, if any, remaining immediately after such
purchase that is to be refunded or retained in the Participant's Plan account
pursuant to Section 11.4. The report
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required by this Section may be delivered in such form and by such means,
including by electronic transmission, as the Company may determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may
withdraw from the Plan by signing and delivering to the Company a written notice
of withdrawal on a form provided by the Company for such purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period;
provided, however, that if a Participant withdraws from the Plan after the
Purchase Date of a Purchase Period, the withdrawal shall not affect shares of
Stock acquired by the Participant on such Purchase Date. A Participant who
voluntarily withdraws from the Plan is prohibited from resuming participation in
the Plan in the same Offering from which he or she withdrew, but may participate
in any subsequent Offering by again satisfying the requirements of Sections 5
and 7.1. The Company may impose a requirement that the notice of withdrawal from
the Plan be on file with the Company for a reasonable period prior to the
effectiveness of the Participant's withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Section 12.1, the Participant's accumulated
payroll deductions which have not been applied toward the purchase of shares of
Stock shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan or the Offering, as applicable, shall terminate. Such accumulated
payroll deductions to be refunded in accordance with this Section may not be
applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the Participant's
Plan account since the last Purchase Date shall, as soon as practicable, be
returned to the Participant or, in the case of the Participant's death, to the
Participant's legal representative, and all of the Participant's rights under
the Plan shall terminate. Interest shall not be paid on sums returned pursuant
to this Section 13. A Participant whose participation has been so terminated may
again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in
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<PAGE> 12
which the Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event
of a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Purchase Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner otherwise
than by will or the laws of descent and distribution and shall be exercisable
during the lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if the
issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any securities exchange or market system upon which the
Stock may then be listed. In addition, no Purchase Right may be exercised unless
(a) a registration statement under the Securities Act of 1933, as amended, shall
at the time of exercise
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of the Purchase Right be in effect with respect to the shares issuable upon
exercise of the Purchase Right, or (b) in the opinion of legal counsel to the
Company, the shares issuable upon exercise of the Purchase Right may be issued
in accordance with the terms of an applicable exemption from the registration
requirements of said Act. The inability of the Company to obtain from any
regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares under the Plan shall relieve the Company of any liability in respect of
the failure to issue or sell such shares as to which such requisite authority
shall not have been obtained. As a condition to the exercise of a Purchase
Right, the Company may require the Participant to satisfy any qualifications
that may be necessary or appropriate, to evidence compliance with any applicable
law or regulation, and to make any representation or warranty with respect
thereto as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue of
the Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present to
the Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
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19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a Purchase
Right within two (2) years from the date of granting such Purchase Right or one
(1) year from the date of exercise of such Purchase Right. The Company may
require that until such time as a Participant disposes of shares acquired upon
exercise of a Purchase Right, the Participant shall hold all such shares in the
Participant's name (or, if elected by the Participant, in the name of the
Participant and his or her spouse but not in the name of any nominee) until the
lapse of the time periods with respect to such Purchase Right referred to in the
preceding sentence. The Company may direct that the certificates evidencing
shares acquired by exercise of a Purchase Right refer to such requirement to
give prompt notice of disposition.
20. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except
that (a) such termination shall not affect Purchase Rights previously granted
under the Plan, provided that the Board may terminate the Plan (and any Offering
thereunder) on any Purchase Date if the Board determines that such termination
is in the best interests of the Company and its stockholders except as permitted
under the Plan, and (b) no amendment may adversely affect a Purchase Right
previously granted under the Plan (except to the extent permitted by the Plan or
as may be
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necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of Stock under applicable federal, state or foreign securities laws). In
addition, an amendment to the Plan must be approved by the stockholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more shares than are authorized for
issuance under the Plan or would change the definition of the corporations that
may be designated by the Board as Participating Companies. In the event that the
Board approves an amendment to increase the number of shares authorized for
issuance under the Plan (the "ADDITIONAL SHARES"), the Board, in its sole
discretion, may specify that such Additional Shares may only be issued pursuant
to Purchase Rights granted after the date on which the stockholders of the
Company approve such amendment, and such designation by the Board shall not be
deemed to have adversely affected any Purchase Right granted prior to the date
on which the stockholders approve the amendment.
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LAUNCH MEDIA, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): _________________________________________________________
(Last) (First) (Middle)
ADDRESS: ________________________________________________________________
MY SOCIAL SECURITY NUMBER: ___________________________________________________
[ ] SWITCH ARGUMENT NOT SPECIFIED. Original Application for the Offering
Period beginning ____________________, 199__.
[ ] SWITCH ARGUMENT NOT SPECIFIED. Change in Payroll Deduction rate
effective with the pay period ending ___________________, 199__.
I hereby elect to participate in the 1999 Employee Stock Purchase Plan
(the "PLAN") of LAUNCH Media, Inc. (the "COMPANY") and subscribe to purchase
shares of the Company's Stock in accordance with this Subscription Agreement and
the Plan.
I hereby authorize payroll deductions in the amount of ________ percent
(in whole percentages not less than 1% or more than 15%) of my "COMPENSATION" on
each payday throughout the "OFFERING PERIOD" in accordance with the Plan. I
understand that these payroll deductions will be accumulated for the purchase of
shares of Stock at the applicable purchase price determined in accordance with
the Plan. I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set
forth below. (Shares may be issued in the participant's name alone or together
with the participant's spouse as community property or in joint tenancy.)
NAME(S): __________________________________________________________
[ ] In my name alone [ ] Community Property [ ] Joint Tenancy
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may, but
will not be obligated to, withhold from my compensation the amount necessary to
meet such withholding obligations.
I agree that while I hold shares acquired under the Plan, unless
otherwise permitted by the Company, I will hold such shares in the name(s)
entered above (and not in the name of any nominee) for at least two years from
the first day of the Offering Period in which, and at least one year from the
Purchase Date on which, I acquired such shares (this restriction only applies to
the name(s) in which shares are held and does not affect the ability to dispose
of Plan shares).
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING PARAGRAPH
(A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE PLAN. I
FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF A
DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE COMPANY
MAY TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A DISQUALIFYING
DISPOSITION AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE SERVICE THE
ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING DISPOSITION.
I am familiar with the provisions of the Plan and agree to participate
in the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
Date: _______________________ Signature:________________________________
<PAGE> 17
LAUNCH MEDIA, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): __________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under LAUNCH Media, Inc.
1999 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating (the
"CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[ ] A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions
from my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if
any) not previously used to purchase shares under the Plan shall
not be used to purchase shares on the next Purchase Date of the
Current Offering. Instead, I request that all such amounts be
paid to me as soon as practicable. I understand that this
election immediately terminates my interest in the Current
Offering and in the Plan.
[ ] B. I elect to terminate my participation in the Current Offering
and in the Plan following my purchase of shares on next Purchase
Date of the Current Offering.
I request that the Company cease all further payroll deductions
from my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if
any) not previously used to purchase shares under the Plan shall
be used to purchase shares on the next Purchase Date of the
Current Offering to the extent permitted by the Plan. I
understand that this election will terminate my interest in the
Current Offering and in the Plan immediately following such
purchase. I request that any cash balance remaining in my
account under the Plan after my purchase of shares be paid to me
as soon as practicable.
I understand that by making this election I am terminating my interest
in the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date: _______________________ Signature:________________________________
<PAGE> 1
EXHIBIT 10.12
STANDARD FORM OF OFFICE LEASE
THE REAL ESTATE BOARD OF NEW YORK, INC.
AGREEMENT OF LEASE, made as of this 22nd day of January, 1997, between
CITYSPIRE CENTRE LLC, having an address at c/o Broadway Management
Co., Inc., 39 Broadway, New York, New York 10006 (hereinafter referred
to as "Landlord" or "Owner") and INTERSHOE, INC., a New York
corporation having an office at 1370 Avenue of the Americas, New York,
New York (hereinafter referred to as "Tenant").
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from
Owner the entire fifteenth (15th) floor and portions of the fourteenth
(14th) floor known as Suites 1401, 1402 and 1403, as approximately
shown hatched on the floor plans annexed hereto as Schedule A
(hereinafter called the "demised premises"), in the building known as
156 West 56th Street, New York, New York (hereinafter called the
"Building"), for a term of approximately sixteen (16) years and four
(4) months (or until such term shall sooner cease and expire as
hereinafter provided), such term to commence and end on the dates set
forth in Article 53 hereof, at an annual rental rate as set forth in
Article 57 hereof,
which Tenant agrees to pay in lawful money of the United States which shall be
legal tender in payment of all debts and dues, public and private, at the time
of payment, in equal monthly installments in advance on the first day of each
month during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant
shall pay the first full monthly installment(s) on the execution hereof (unless
this lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns,
hereby covenant as follows:
REAL OCCUPANCY
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for the "Permitted
Use" (as defined in Article 35 hereof) and for no other purpose.
TENANT ALTERATIONS:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. All such alterations,
installations, additions or improvements shall be performed by Tenant in
accordance with Landlord's Uniform Rules and Regulations for Alterations. Tenant
shall, before making any alterations, additions, installations or improvements,
at its expense, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner and Tenant agrees to carry and
<PAGE> 2
will cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to, Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by filing the bond required by law. All fixtures and all
paneling, partitions, railings and like installations, installed in the premises
at any time, either by Tenant or by Owner in Tenant's behalf, shall, upon
installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises unless Owner, by notice to Tenant no later
than twenty days prior to the date fixed as the termination of this lease,
elects to relinquish Owner's right thereto and to have them removed by Tenant,
in which event the same shall be removed from the premises by tenant prior to
the expiration of the lease, at Tenant's expense. Nothing in this Article shall
be construed to give Owner title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
from the premises or upon removal of other installations as may be required by
Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building due to such removal. All property
permitted or required to be removed, by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed from
the premises by Owner, at Tenant's expense.
MAINTENANCE AND REPAIRS:
4. Tenant shall, throughout the term of this lease, take good care
of the demised premises and the fixtures and appurtenances therein. Tenant shall
be responsible for all damage or injury to the demised premises or any other
part of the building and the systems and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exist)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. it is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.
<PAGE> 3
WINDOW CLEANING:
5. Tenant will not clean nor require, permit, suffer or allow any
window in the demised premises to be cleaned from the outside in violation of
Section 202 of the Labor Law or any other applicable law or of the Rules of the
Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction.
REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's use or manner of use of the premises or the building (including
the use permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a company
satisfactory to Owner, contest and appeal any such laws, ordinances, orders,
rules, regulations or requirements provided same is done with all reasonable
promptness and provided such appeal shall not subject Owner to prosecution for a
criminal offense or constitute a default under any lease or mortgage under which
Owner may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be done
in or to the demised premises which is contrary to law, or which will invalidate
or be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or which
shall or might subject Owner to any liability or responsibility to any person or
for property damage. Tenant shall not keep anything in the demised premises
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or
damages, which may be imposed upon Owner by reason of Tenant's failure to comply
with the provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time thereafter,
be higher than it otherwise would be, then Tenant shall reimburse Owner, as
additional rent hereunder, for that portion of all fire insurance premiums
thereafter paid by Owner which shall have been charged because of such failure
by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a
schedule or "make-up" of rate for the building or demised premises issued by the
New York Fire Insurance Exchange, or other body making fire insurance rates
applicable to said premises shall be conclusive evidence of the facts therein
stated and of the several items and charges in the fire insurance rates then
applicable to said premises. Tenant shall not place a load upon any floor of the
demised premises exceeding the floor load per square foot area which it was
designed to carry and which is allowed by law. Owner reserves the right to
prescribe the weight and position of all safes, business machines and mechanical
equipment. Such installations shall be placed and maintained by Tenant, at
Tenant's expense, in settings sufficient, in Owner's judgment, to absorb and
prevent vibration, noise and annoyance.
SUBORDINATION:
7. This lease is subject and subordinate to the Declaration of
Condominium and the By-Laws and all ground or underlying leases and to all
mortgages which may now or hereafter affect such leases or the real property of
which demised premises are a part and to all renewals, modifications,
consolidations, replacements and extensions of any such underlying leases and
mortgages. This clause shall be self-operative and no further instrument of
subordination shall be required by any ground or underlying lessor or by any
mortgagee, affecting any lease or the real property of which the demised
premises are a part. In confirmation of such subordination, Tenant shall execute
promptly any certificate that Owner may request.
<PAGE> 4
PROPERTY -- LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY:
8. Owner or its agents shall not be liable for any damage to property
of Tenant or of others entrusted to employees of the building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees, or licensees, of any covenant or
condition of this lease, or the carelessness, negligence or improper conduct of
the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant, and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.
DESTRUCTION, FIRE AND OTHER CASUALTY:
9. (a) If the demised premises or any part thereof shall be damaged by fire or
other casualty, Tenant shall give immediate notice thereof to Owner and this
lease shall continue in full force and effect except as hereinafter set forth.
(b) If the demised premises are partially damaged or rendered partially unusable
by fire or other casualty, the damages thereto shall be repaired by and at the
expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or (whether or not the demised premises are damaged in whole or
in part) if the building shall be so damaged that Owner shall decide to demolish
it or to rebuild it, or if the damage shall result in an election by the unit
owners of the Condominium, pursuant to the provisions of Section 339-cc of the
Real Property Law, not to repair or restore the Building, then, in any of such
events. Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, specifying a date for the
expiration of the lease, which date shall not be more than 60 days after the
giving of such notice, and upon the date specified in such notice the term of
this lease shall expire as fully and completely as if such date were the date
set forth above for the termination of this lease and Tenant shall forthwith
quit, surrender and vacate the premises without prejudice however, to Landlord's
rights and remedies against Tenant under the lease provisions in effect prior to
such termination, and any rent owing shall be paid up to such date and any
payments of rent made by Tenant which were on account of any period subsequent
to such date shall be returned to Tenant. Unless Owner shall serve a termination
notice as provided for herein, Owner shall make the repairs and restorations
under the conditions of (b) and (c) hereof, with all reasonable expedition,
subject to delays due to adjustment of insurance claims, labor troubles and
causes beyond Owner's control. After any such casualty, Tenant shall cooperate
with Owner's restoration by removing from the premises as promptly as reasonably
possible, all of Tenant's salvageable inventory and movable equipment,
furniture, and other property. Tenant's liability for rent shall resume
days after written notice from Owner that the premises are substantially ready
for Tenant's occupancy. (c) Nothing contained hereinabove shall relieve Tenant
from liability that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any insurance in
its favor before making any claim against the other party for recovery for loss
or damage resulting from fire or other casualty, and to the extent that such
insurance is in force and collectible and to the extent permitted by law. Owner
and Tenant each hereby releases and waives all right of recovery against the
other or any one claiming through or under each of them by way of subrogation or
otherwise. The foregoing release and waiver shall be in force only if both
releasors' insurance policies contain a clause providing that such a release
<PAGE> 5
or waiver shall not invalidate the insurance. If, and to the extent, that such
waiver can be obtained only by the payment of additional premiums, then the
party benefitting from the waiver shall pay such premium within ten days after
written demand or shall be deemed to have agreed that the party obtaining
insurance coverage shall be free of any further obligation under the provisions
hereof with respect to waiver of subrogation. Tenant acknowledges that Owner
will not carry insurance on Tenant's furniture and/or furnishings or any
fixtures or equipment, improvements, or appurtenances removable by Tenant and
agrees that Owner will not be obligated to repair any damage thereto or replace
the same. (f) Tenant hereby waives the provisions of Section 227 of the Real
Property Law and agrees that the provisions of this article shall govern and
control in lieu thereof.
EMINENT DOMAIN:
10. If the whole or any part of the demised premises shall be
acquired or condemned by Eminent Domain for any public or quasi public use or
purpose, then and in that event, the term of this lease shall cease and
terminate from the date of title vesting in such proceeding and Tenant shall
have no claim for the value of any unexpired term of said lease and assigns to
Owner, Tenant's entire interest in any such award.
ASSIGNMENT, MORTGAGE, ETC.:
11. Tenant, for itself, its heirs, distributors, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance. If
this lease be assigned, or if the demised premises or any part thereof be
underlet or occupied by anybody other than Tenant, Owner may, after default by
Tenant, collect rent from the assigner, under-tenant or occupant, and apply the
net amount collected to the rent herein reserved, but no such assignment,
underletting, occupancy or collection shall be deemed a waiver of this covenant,
or the acceptance of the assignee, under-tenant or occupant as tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. The consent by Owner to an assignment or
underletting shall not in any wise be construed to relieve Tenant from obtaining
the express consent in writing of Owner to any further assignment or
underletting.
ELECTRIC CURRENT:
12. Rates and conditions in respect to submetering or rent inclusion,
as the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
ACCESS TO PREMISES:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the premises for any emergency at any time, and, at other
reasonable times, to examine the same and to make such repairs, replacements and
improvements as Owner may deem necessary and reasonably desirable to the demised
premises or to any other portion of the building or which Owner may elect to
perform. Tenant shall permit Owner to use and maintain and replace pipes and
conduits in and through the demised premises and to erect new pipes and conduits
therein provided they are concealed within the walls, floor, or ceiling. Owner
may, during the progress of any work in the demised premises, take all necessary
materials and equipment into said premises without the same constituting an
eviction nor shall the Tenant be entitled to any abatement of rent while such
work is in progress nor to any damages by reason of loss or interruption of
business or otherwise. Throughout the term hereof Owner shall have the right to
enter the demised premises at reasonable hours for the purpose of showing the
same to prospective purchasers or mortgagees of the building, and during the
last six months of the term for the purpose of showing the same to prospective
tenants. If Tenant is not present to open and permit an entry into the premises,
Owner or Owner's agents may enter the same whenever such entry may be necessary
or permissible by master key or forcibly and provided reasonable care is
exercised to safeguard Tenant's property, such entry shall not render Owner or
its agents liable therefor, nor in any event shall the obligations of Tenant
hereunder be affected. If during the last month of the term Tenant shall have
removed all or substantially all of Tenant's property therefrom. Owner may
immediately enter, alter, renovate or redecorate the demised premises without
limitation or abatement of rent, or incurring liability to Tenant for any
compensation and such act shall have no effect on this lease or Tenant's
obligations hereunder.
<PAGE> 6
VAULT, VAULT SPACE, AREA:
14. No Vaults, vault space or area, whether or not enclosed or
covered, not within the property line of the building is leased hereunder,
anything contained in or indicated on any sketch, blue print or plan, or
anything contained elsewhere in this lease to the contrary notwithstanding.
Owner makes no representation as to the location of the property line of the
building. All vaults and vault space and all such areas not within the property
line of the building, which Tenant may be permitted to use and/or occupy, is to
be used and/or occupied under a revocable license, and if any such license be
revoked, or if the amount of such space or area be diminished or required by any
federal, state or municipal authority or public utility, Owner shall not be
subject to any liability nor shall Tenant be entitled to any compensation or
diminution or abatement of rent, nor shall such revocation, diminution or
requisition be deemed constructive or actual eviction. Any tax, fee or charge of
municipal authorities for such vault or area shall be paid by Tenant.
OCCUPANCY:
15. Tenant will not at any time use or occupy the demised premises
in violation of the certificate of occupancy issued for the building of which
the demised premises are a part. Tenant has inspected the premises and accepts
them as is, subject to the riders annexed hereto with respect to Owner's work,
if any, in any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether
or not of record.
BANKRUPTCY:
16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time after the happening of any one
or more of the following events: (1) the commencement of a case in bankruptcy or
under the laws of any state naming Tenant as the debtor or (2) the making by
Tenant of an assignment or any other arrangement for the benefit of creditors
under any state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the premises demised but shall forthwith quit and
surrender the premises. If this lease shall be assigned in accordance with its
terms, the provisions of this Article 16 shall be applicable only to the party
then owning Tenant's interest in this lease.
(b) it is stipulated and agreed that in the event of the
termination of this lease pursuant to (a) hereof, Owner shall forthwith,
notwithstanding any other provisions of this lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount equal to the
differences between the rent reserved hereunder for the unexpired portion of
the term demised and the fair and reasonable rental value of the demised
premises for the same period. In the computation of such damages the difference
between any installment of rent becoming due hereunder after the date of
termination and the fair and reasonable rental value of the demised premises
for the period for which such installment was payable shall be discounted to
the date of termination at the rate of per annum. If such
premises or any part thereof be relet by the Owner for the unexpired term of
said lease, or any part thereof, before presentation of proof of such liquidated
damages to any court, commission or tribunal, the amount of rent reserved upon
such reletting shall be deemed to be the fair and reasonable rental value for
the part or the whole of the premises so re-let during the term of the
re-letting. Nothing herein contained shall limit or prejudice the right of the
Owner to prove for and obtain as liquidated damages by reason of such
termination, an amount equal to the maximum allowed by any statue or rule of law
in effect at the time when, and governing the proceedings in which, such damages
are to be proved, whether or not such amount be greater, equal to, or less than
the amount of the differences referred to above.
DEFAULT:
17. (1) If Tenant defaults in fulfilling any of the covenants of
this lease other than the covenants for the payment of rent or additional rent;
or if the demised premises becomes or if any execution or attachment shall be
issued against Tenant or any of Tenant's property whereupon the demised premises
shall be taken or occupied by someone other than Tenant; or if this lease be
rejected under ss 235 of Title 11 of the U.S. Code (bankruptcy code); or
<PAGE> 7
if Tenant shall fail to move into or take possession of the premises
within days after the commencement of the term of the lease, then, in
any one or more of such events, upon Owner serving a written days notice
upon Tenant specifying the nature of said default and upon the expiration of
said days, if Tenant shall have failed to comply with or remedy such
default, or if the said default or omission complained of shall be of a nature
that the same cannot be completely cured or remedied within said day
period, and if Tenant shall not have diligently commenced during such default
within such day period, and shall not thereafter with reasonable
diligence and in good faith, proceed to remedy or cure such default, then Owner
may serve a written three (3) days' notice of cancellation of this lease upon
Tenant, and upon the expiration of said three (3) days this lease and the term
thereunder shall end and expire as fully and completely as if the expiration of
such three (3) day period were the day herein definitely fixed for the end and
expiration of this lease and the term thereof and Tenant shall then quit and
surrender the demised premises to Owner but Tenant shall remain liable as
hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been
given, and the term shall expire as aforesaid: or if Tenant shall make default
in the payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required:
then and in any of such events Owner may without notice, re-enter the demised
premises either by force or otherwise, and dispossess Tenant by summary
proceedings or otherwise, and the legal representative of Tenant or other
occupant of demised premises and remove their effects and hold the premises as
if this lease had not been made, and Tenant hereby waives the service of notice
of intention to re-enter or to institute legal proceedings to that end. If
Tenant shall make default hereunder prior to the date fixed as the commencement
of any renewal or extension of this lease, Owner may cancel and terminate such
renewal or extension agreement by written notice.
REMEDIES OF OWNER AND WAIVER OF REDEMPTION:
18. In case of any such default, re-entry, expiration and/or
dispossess by summary proceedings or otherwise, (a) the rent shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or
expiration, (b) Owner may re-let the premises or any part or parts thereof,
either in the name of Owner or otherwise, for a term or terms, which may at
Owner's option be less than or exceed the period which would otherwise have
constituted the balance of the term of this lease and may grant concessions or
free rent or charge a higher rental than that in this lease, and/or (c) Tenant
or the legal representatives of Tenant shall also pay Owner as liquidated
damages for the failure of Tenant to observe and perform said Tenant's
covenants herein contained, any deficiency between the rent hereby reserved
and/or covenanted to be paid and the net amount, if any, of the rents collected
on account of the lease or leases of the demised premises for each month of the
period which would otherwise have constituted the balance of the term of this
lease. The failure of Owner to re-let the premises or any part or parts thereof
shall not release or affect Tenant's liability for damages. In computing such
liquidated damages there shall be added to the said deficiency such expenses as
Owner may incur in connection with re-letting, such as legal expenses,
attorneys' fees, brokerage, advertising and for keeping the demised premises in
good order or for preparing the same for re-letting. Any such liquidated
damages shall be paid in monthly installments by Tenant on the rent day
specified in this lease and any suit brought to collect the amount of the
deficiency for any month shall not prejudice in any way the rights of Owner to
collect the deficiency of any subsequent month by a similar proceeding. Owner,
in putting the demised premises in good order or preparing the same for
re-rental may, at Owner's option, make such alterations, repairs, replacements,
and/or decorations in the demised premises as Owner, in Owner's sole judgment,
considers advisable and necessary for the purpose of re-letting the demised
premises, and the making of such alterations, repairs, replacements, and/or
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises, or in the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, an in no event shall Tenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of
the covenants or provisions hereof, Owner shall have the right of injunction
and the right to invoke any remedy allowed at law or in equity as if re-entry,
summary proceedings and other remedies were not herein provided for. Mention in
this lease of any particular remedy, shall not preclude Owner from any other
remedy, in law or in equity. Tenant hereby expressly waives any and all rights
of redemption granted by or under any present or future laws in the event of
Tenant being evicted or dispossessed for any cause, or in the event of Owner
obtaining possession of demised premises, by reason of the violation by Tenant
of any of the covenants and conditions of this lease, or otherwise.
<PAGE> 8
FEES AND EXPENSES:
19. If Tenant shall default in the observance or performance of any
term or covenant on Tenant's part to be observed or performed under or by
virtue of any of the terms or provisions in any article of the lease, then,
unless otherwise provided elsewhere in this lease, Owner may immediately or at
any time thereafter and without notice perform the obligation of Tenant
thereunder. If Owner, in connection with the foregoing or in connection with
any default by Tenant in the covenant to pay rent hereunder, makes any
expenditures or incurs any obligations for the payment of money, including but
not limited to attorney's fees, in instituting, prosecuting or defending any
action or proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within five (5) days of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.
BUILDING ALTERATIONS AND MANAGEMENT:
20. Owner shall have the right at any time without the same
constituting an eviction and without incurring liability to Tenant therefor to
change the arrangement and/or location of public entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets or other public parts of the
building and to change the name, number or designation by which the building
may be known. There shall be no allowance to Tenant for diminution of rental
value and no liability on the part of Owner by reason of inconvenience,
annoyance or injury to business arising from Owner or other Tenants making any
repairs in the building or any such alterations, additions and improvements.
Furthermore, Tenant shall not have any claim against Owner by reason of Owner's
imposition of such controls of the manner of access to the building by Tenant's
social or business visitors as the Owner may deem necessary for the security of
the building and its occupants.
NO REPRESENTATIONS BY OWNER:
21. Neither Owner nor Owner's agents have made any representations
or promises with respect to the physical condition of the building, the land
upon which it is erected or the demised premises, the rents, leases, expenses
of operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was so taken. All understanding and agreements
heretofore made between the parties hereto are merge in this contract, which
alone fully and completely expresses the agreement between Owner and Tenant and
any executory agreements hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of it in whole or in part, unless such
executory agreement is in writing and signed by the party against whom
enforcement of the change, modification, discharge or abandonment is sought.
END OF TERM:
22. Upon the expiration or other termination of the term of this
lease, Tenant shall quit and surrender to Owner the demised premises, broom
clean, in good order and condition, ordinary wear and damages which Tenant is
not required to repair as provided elsewhere in this lease excepted, and Tenant
shall remove all its property. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of this lease. If
the last day of the term of this Lease or any other renewal thereof, falls on
Sunday, this lease shall expire at noon on the preceding Saturday unless it be
a legal holiday in which case it shall expire at noon on the preceding business
day.
QUIET ENJOYMENT:
23. Owner covenants and agrees with Tenant that upon Tenant paying
the rent and additional rent and observing and performing all the terms,
covenants and conditions, on Tenant's part to be observed and performed, Tenant
may peaceably and quietly enjoy the premises hereby demised, subject,
nevertheless, to the terms and conditions of this lease including, but not
limited to, Article 31 hereof and to the ground leases, underlying leases and
mortgages hereinbefore mentioned.
<PAGE> 9
FAILURE TO GIVE POSSESSION:
24. If Owner is unable to give possession of the demised premises on
the date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy had not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this leases, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.
NO WAIVER:
25. The failure of Owner to seek redress for violation of, or to
insist upon the strict performance of any covenant or condition of this lease or
of any of the Rules of Regulations, set forth or hereafter adopted by Owner,
shall not prevent a subsequent act which would have originally constituted a
violation from having all the force and effect of an original violation. The
receipt by Owner of rent with knowledge of the breach of any covenant of this
lease shall not be deemed a waiver of such breach and no provision of this lease
shall be deemed to have been waived by Owner unless such waiver be in writing
signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount
than the monthly rent herein stipulated shall be deemed to be other than on
account of the earliest stipulated rent, nor shall any endorsement or statement
of any check or any letter accompanying any check or payment as rent be deemed
an accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. No act or thing done by Owner or Owner's
agents during the term hereby demised shall be deemed an acceptance of a
surrender of said premises, and no agreement to accept such surrender shall be
valid unless in writing signed by Owner. No employee of Owner or Owner's agent
shall have any power to accept the keys of said premises prior to the
termination of the lease and the delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
WAIVER OF TRIAL BY JURY:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counter-claim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.
INABILITY TO PERFORM:
27. This Lease and the obligation of Tenant to pay rent hereunder
and perform all of the other covenants and agreements hereunder on part of
Tenant to be performed shall in no wise be affected, impaired or excused because
Owner is unable to fulfill any of its obligations under this lease or to supply
or is delayed in supplying any service expressly or impliedly to be supplied or
is unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.
<PAGE> 10
BILLS AND NOTICES:
28. Except as otherwise in this lease provided, a bill, statement,
notice or communication which Owner may desire or be required to give to Tenant,
shall be deemed sufficiently given or rendered if, in writing, delivered to
Tenant personally or sent by registered or certified mail addressed to Tenant at
the building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
SERVICES PROVIDED BY OWNERS:
29. As long as Tenant is not in default under any of the covenants of
this lease, Owners shall provide: (a) necessary elevator facilities on business
days from 8 a.m. to 6 p.m. and have one elevator subject to call at all other
times; (c) water for ordinary lavatory purposes, but if Tenant uses or consumes
water for any other purposes, or in unusual quantities (of which fact Owner
shall be the sole judge), Owner may install a water meter at Tenant's expense
which Tenant shall thereafter maintain at Tenant's expense in good working order
and repair to register such water consumption and Tenant shall pay for water
consumed as shown on said meter as additional rent as and when bills are
rendered; (d) cleaning services for the demised premises on business days at
Owner's expense provided that the same are kept in order by Tenant. If, however,
said premises are to be kept clean by Tenant, it shall be done at Tenant's sole
expense, in a manner satisfactory to Owner and no one other than persons
approved by Owner shall be permitted to enter said premises of the building of
which they are a part for such purpose; (f) Owner reserves the right to stop
services of the heating, elevators, plumbing, air-conditioning, power systems or
cleaning or other services. If any, when necessary by reason of accident or for
repairs, alterations, replacements or improvements necessary or desirable in the
judgment of Owner for as long as may be reasonably required by reason thereof.
If the building of which the demised premises are a part supplies manually
operated elevator service, Owner at any time may substitute automatic-control
elevator service and upon ten days' written notice to Tenant, proceed with
alterations necessary therefor without in any wise affecting this lease or the
obligation of Tenant hereunder. The same shall be done with a minimum of
inconvenience to Tenant and Owner shall pursue the alteration with due
diligence.
CAPTIONS:
30. The Captions are inserted only as a matter of convenience and
for reference and in no way define, limit or describe the scope of this lease
nor the intent of any provisions thereof.
DEFINITIONS:
31. The term "office", or "offices", wherever used in this lease,
shall not be construed to mean premises used as a store or stores, for the sale
or display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgages in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building, or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof). Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC services.
<PAGE> 11
ADJACENT EXCAVATION -- SHORTAGE:
32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundation without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
RULES AND REGULATIONS:
33. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations adopted by the Board of Managers of the Condominium, including,
without limitation, the Rules and Regulations attached hereto as Schedule E,
and such other and further reasonable Rules and Regulations as Owner or Owner's
agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Owner within ten (10) days after the giving of notice thereof.
Nothing in this lease contained shall be construed to impose upon Owner any
duty or obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant an Owner shall not
be liable to Tenant for violation of the same by any other tenant, its
servants, employees, agents, visitors or licensees.
SECURITY:
34. Tenant has deposited with Owner the Security Amount (as defined
in Article 35 hereof) as security for the faithful performance and observance
by Tenant of the terms, provisions and conditions of this lease: it is agreed
that in the event Tenant defaults in respect of any of the terms, provisions
and conditions of this lease, including, but not limited to, the payment of
rent and additional rent, Owner may use, apply or retain the whole or any part
of the security so deposited to the extent required for the payment of any rent
and additional rent or any other sum as to which Tenant is in default or for
any sum which Owner may expend or may be required to expend by reason of
Tenant's default in respect of any of the terms, covenants and conditions of
this lease, including but not limited to, any damages or deficiency in the
re-letting of the premises, whether such damages or deficiency accrued before
or after summary proceedings or other re-entry by Owner. In the event that
Tenant shall fully and faithfully comply with all of the terms, provisions,
covenants and conditions of this lease, the security shall be returned to
Tenant after the dated fixed as the end of the Lease and after delivery of
entire possession of the demised premises to Owner. In the event of a sale of
the land and building or leasing of the building, of which the demised premises
form a part, Owner shall have the right to transfer the security to the vendee
or lessee and Owner shall thereupon be released by Tenant from all liability
for the return of such security; and Tenant agrees to look to the new Owner
solely for the return of said security, and it is agreed that the provisions
hereof shall apply to every transfer or assignment made of the security to a
New Owner. Tenant further covenants that it will not assign or encumber or
attempt to assign or encumber the monies deposited herein as security and that
neither Owner nor its successors or assigns shall be bound by any such
assignment, encumbrances, attempted assignments or attempted encumbrances.
ESTOPPEL 34A CERTIFICATE:
Tenant, at any time, and from time to time, upon at least 10
days' prior notice by Owner, shall execute, acknowledge and deliver to Owner,
and/or to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists an
default by Owner under this Lease, and, if so, specifying each such default.
SUCCESSORS 34B AND ASSIGNS:
The covenants, conditions and agreements contained in this lease
shall bind and inure to the benefit of Owner and Tenant and their respective
heirs, distributees, executors, administrators, successors, and except as
otherwise provided in this lease, their assigns.
<PAGE> 12
FOOTNOTES TO STANDARD FORM OF OFFICE LEASE
1. Notwithstanding the foregoing, Landlord's right to require Tenant to
remove installations shall be limited to those of a non-Building standard
nature such as private bathrooms, stairways, raised flooring, vaults and
other installations which are unusually difficult or costly to remove.
2. and the base building air-conditioning system
3. Landlord shall cause the interior and exterior surfaces of the windows of
the demised premises to be cleaned no less frequently than four (4) times
per year.
4. The floor load of the demised premises is 50 pounds per square foot.
5. except for the arbitrary acts of Landlord,
6. thirty (30)
7. Notwithstanding anything to the contrary contained in this Article 9, if
the demised premises or any part thereof shall be damaged by fire or other
casualty in the manner as set forth in this Section 9(d), and Landlord is
required to or elects to repair and restore the demised premises, if
Landlord has not substantially completed the required repairs and restored
the demised premises on or before the date (the "Restoration Deadline")
which is nine (9) months after the date of such damage or destruction
(which Restoration Deadline is subject to delay by reasons of occurrence
of a condition constituting force majeure, as described in Article 27
hereof), then Tenant shall have the right to terminate this lease upon
written notice to Landlord, which notice shall be given within ten (10)
days after the Restoration Deadline (time being of the essence with
respect to the giving of such notice) and such termination shall be
effective upon the expiration of thirty (30) days after the date of such
notice.
8. Nothing contained in this Article 10 shall prohibit Tenant from making a
separate claim with the condemning authority for (a) the value of the
personal property owned by Tenant and (b) any moving expenses incurred by
Tenant as a result of such condemnation provided, however, that such
separate claim shall not reduce or adversely affect Landlord's claim of
the amount of Landlord's award.
9. ,upon reasonable advance notice to Tenant, which may be given orally,
10. and in the case of a proceeding not commenced by Tenant, not discharged
within sixty (60) days thereafter,
10A. eight percent (8%)
11. abandoned
12. forty-five (45)
13. fifteen (15)
14. ,provided however, that Landlord agrees that such change shall not
materially adversely impede Tenant's means of access to demised premises
14A. ,except that, at any time when Tenant shall conduct a show in the demised
premises, Landlord shall provide such elevator service to the floors upon
which the demised premises are located as is available during business
days
15. in accordance with the cleaning specifications annexed hereto as Schedule
I
<PAGE> 13
RIDER ANNEXED TO AND MADE A PART OF LEASE BETWEEN CITYSPIRE CENTRE LLC,
LANDLORD, AND INTERSHOE, INC., TENANT, COVERING THE ENTIRE 15TH FLOOR AND
PORTIONS OF THE 14TH FLOOR KNOWN AS SUITES 1401, 1402 AND 1403, IN THE BUILDING
LOCATED AT 156 WEST 56TH STREET, NEW YORK, N.Y.
35. Definitions:
The following definitions shall have the meanings hereinafter set forth
wherever used in this lease or any Exhibits or Schedules annexed hereto (if
any):
(a) "Tax Base" shall mean the average of the products obtained by
multiplying (i) the amounts for which the tax lot(s) of which the Unit forms a
part is assessed for the purpose of establishing real estate taxes to be paid by
Landlord for the Tax Year (as defined in Section 36(a) hereof) commencing July
1, 1996 and ending June 30, 1997 and for the Tax Year commencing July 1, 1997
and ending June 30, 1998, by (ii) the real estate tax rates for such Tax Years,
respectively.
(b) "Operating Year" shall mean each calendar year, subsequent to the
calendar year 1996, in which occurs any part of the term of this lease.
(c) "Base Year" shall mean the calendar year 1997.
(d) "Tenant's Operating Proportionate Share" shall mean 8.3 (8.3%)
percent.
(e) "Tenant's Tax Proportionate Share" shall mean 7.8 (7.8%) percent.
(f) "Broker" shall mean, collectively, Newmark & Company Real Estate, Inc.
(which is representing Landlord) and Cushman & Wakefield, Inc.
(g) "Interest Rate" shall mean a rate per annum equal to the lesser of (a)
2% above the lending rate announced from time to time by Chemical Bank (New
York) as such bank's prime rate for 90-day unsecured loans, in effect from time
to time or (b) the maximum applicable legal rate, if any.
(h) "Legal Requirements" shall mean laws, statutes and ordinances
(including building codes and zoning regulations and ordinances), the
Declaration, the By-laws and the orders, rules, regulations, directives and
requirements of all federal, state, county, city and borough departments,
bureaus, boards, agencies, offices, commissions and other subdivisions thereof,
or of any official thereof, or of any other governmental public or quasi-public
authority or of the Board of Managers or like body governing the Condominium of
which the Unit is a part (the "Board of Managers"), whether now or hereafter in
force, which may be applicable to the Land or Building or the demised premises
or any part thereof, or the sidewalks, curbs or areas adjacent thereto and all
requirements, obligations and conditions of all instruments of record on the
date of this lease.
(i) "Security Amount" shall mean $221,532.50.
(j) "Permitted Use" shall mean general, executive and sales offices and
shoe showroom facility.
(k) "ERIF" (as defined in Section 37(b)(i)) shall mean $56,965.50.
(l) "Unit" shall mean the Commercial Unit of the CitySpire Condominium (as
defined in Section 60(a) hereof).
36. Adjustments of Rent
(a) For the purposes of this Article 36, the following definitions shall
apply:
<PAGE> 14
(i) The term "Taxes" shall mean (A) all real estate taxes,
assessments, sewer rents and water charges, governmental levies, municipal
taxes, county taxes or any other governmental or district charge, general or
special, ordinary or extraordinary, unforeseen as well as foreseen, of any
kind or nature whatsoever, which are or may be assessed, levied or imposed upon
all or any part of the tax lot(s) of which the Unit forms a part (the "Unit
Lot"), including any tax, excise or fee measured by or payable with respect to
any rent, and levied against Landlord and/or the Unit Lot, under the laws of
the United States, the State of New York, or any political subdivision thereof,
or by the City of New York, or any political subdivision thereof, and (B) any
expenses incurred by Landlord in contesting any of the foregoing set forth in
clause (A) of this sentence or the assessed valuations of all or any part of
the Unit Lot, or collecting any refund. If, due to a future change in the
method of taxation or in the taxing authority, a new or additional real estate
tax, or a franchise, income, transit, profit or other tax or governmental
imposition, however designated, shall be levied against Landlord, and/or the
Unit Lot, in addition to, or in substitution in whole or in part for any tax
which would constitute "Taxes", or in lieu of additional Taxes, such tax or
imposition shall be deemed for the purposes hereof to be included within the
term "Taxes".
(ii) The term "Tax Year" shall mean each period of twelve
months, commencing on the first day of July of each such period, in which
occurs any part of the term of this lease or such other period of twelve
months occurring during the term of this lease as hereafter may be duly adopted
as the fiscal year for real estate tax purposes of the City of New York.
(iii) The term "Operating Expenses" shall mean the total of
all the costs and expenses incurred or borne by Landlord in connection with the
operation and maintenance of the Unit, and the services provided tenants
therein, including all expenses incurred as a result of Landlord's compliance
with any of its obligations hereunder. Operating Expenses shall include, without
being limited thereto, the following: (1) salaries, wages, medical, surgical and
general welfare benefits (including group life insurance) and pension payments
of employees of Landlord or the managing agent for the Unit engaged in the
operation and maintenance of the Unit, or if no managing agent is employed by
Landlord, a sum in lieu thereof which is equal to the higher of (x) four (4%)
percent of gross rents from the Unit or (y) such compensation as is then charged
by firms providing management (exclusive of leasing) services to owners of first
class office buildings in mid-town Manhattan, (ii) payroll taxes, workmen's
compensation, uniforms and dry cleaning for the employees referred to in
subdivision (i), (iii) the rest of all charges for steam, heat, ventilation,
air-conditioning and water (including water and sewer rentals) furnished to the
Unit, (including the common areas thereof), together with any taxes on any such
utilities, (iv) the cost of all charges for rent, casualty, war risk (if
obtainable from the United States government), liability and other types of
insurance, (v) the cost of all building and cleaning supplies and charges for
telephone for the Unit and cleaning of the Unit, including common areas, (vi)
the cost of all charges for cleaning and service contracts for any areas of the
Unit, (vii) the cost of Unit electric current (for the purposes of this clause
(vii), the cost of Unit electric current shall be deemed to mean the cost of all
electricity purchased, including any taxes thereon or fuel or other adjustments
in connection therewith, for use in the Unit other than that which is furnished
to the demised space of other tenants in the Unit; the parties agree that fifty
(50%) percent of the Unit's payment to the public utility for the purchase of
electricity shall be deemed to be payment for Unit electric current); (viii) the
cost relating to the elevators and escalators; (ix) the cost relating to
protection and security; (x) the cost relating to lobby decorations and interior
and exterior landscape maintenance; (xi) repairs, replacements and improvements
performed after the Base Year which are appropriate for the continued operation
of the Unit as a first class office building (at at least the same quality level
as exists as of the date of this lease); (xii) painting of non-tenanted areas;
(xiii) professional and consulting fees (including legal fees incurred in
connection with the enforcement of the obligations of the Board of Managers to
repair and maintain the common elements of the Building), (xiv) association fees
or dues; (xv) common charges and assessments payable by Landlord to the Board of
Managers pursuant to the Declaration and (xvi) the cost of capital expenditures
made to the Unit by reason of the laws and requirements of any public
authorities or the requirements of insurance bodies which is incurred after the
Base Year. The term "Operating Expenses", as used and defined under this Section
36(a)(iii), shall not, however,
- 2 -
<PAGE> 15
include the following items: (1) interest on and amortization of any mortgages
encumbering the Unit or the Building or the parcel of land upon which it is
constructed (the "Land"); (2) the cost of tenant improvements made for new
tenant(s) of the Unit; (3) brokerage commissions; (4) financing or refinancing
costs; (5) Taxes; (6) salaries and fringe benefits for officers, employees and
executives above the grade of building manager; (7) legal or brokerage fees
incurred in connection with the transfer or disposition of any ownership
interest in the Unit or in leasing any portion of the Unit; and (8) other fees
incurred for financial advice which is not in connection with the operation,
maintenance or management of the Unit.
If Landlord shall purchase any item of capital equipment or make any
capital expenditure designed to result in savings or reductions in Operating
Expenses, then the cost thereof shall be included in Operating Expenses. The
costs of capital equipment or capital expenditures are so to be included in
Operating Expenses for the Operating Year in which the costs are incurred and
subsequent Operating Years, on a straight line basis, to the extent that such
items are amortized over such period of time as reasonably can be estimated as
the time in which such savings or reductions in Operating Expenses are expected
to equal Landlord's costs for such capital equipment or capital expenditure,
with an interest factor equal to the Interest Rate at the time of Landlord's
having incurred said costs. If Landlord shall lease any such item of capital
equipment designed to result in savings or reductions in Operating Expenses,
then the rentals and other costs paid or incurred in connection with such
leasing shall be included in Operating Expenses for the Operating Year in which
they were incurred.
If during all or part of the Base Year or any Operating Year, Landlord
shall not furnish any particular item(s) of work or service (which would
constitute an Operating Expense hereunder) to portions of the Unit (including
without limitation the demised premises) due to the fact that such portions are
not occupied or leased, or because such item of work or service is not required
or desired by the tenant (including without limitation Tenant) or such portion,
or such tenant is itself obtaining and providing such item of work of service,
or for any other reasons, then, for the purposes of computing the additional
rent payable hereunder pursuant to Section 36(d) hereof, the amount of the
expenses for such item(s) for such period shall be deemed to be increased by an
amount equal to the additional operating and maintenance expenses which would
reasonably have been incurred during such period by Landlord if it had at its
own expense furnished such item(s) of work or services to such portions of the
Unit.
(iv) The term "Tenant's Proportionate Share of Increase" shall mean
Tenant's Operating Proportionate Share multiplied by the increase in Operating
Expenses for an Operating Year over Operating Expenses for the Base Year.
(v) The term "Tenant's Projected Share of Increase" shall mean Tenant's
Proportionate Share of Increase for the prior Operating Year and the reasonably
estimated increase in costs for the current Operating Year divided by twelve
(12) and payable monthly by Tenant to Landlord as additional rent. If, however,
Landlord shall furnish any such estimate for an Operating Year subsequent to
the commencement thereof, then (a) until the first day of the month following
the month in which such estimate is furnished to Tenant, Tenant shall pay to
Landlord on the first day of each month an amount equal to the monthly sum
payable by Tenant to Landlord hereunder in respect of the last month of the
preceding Operating Year, (b) promptly after such estimate is furnished to
Tenant, Landlord shall give notice to Tenant stating whether the installments
of Tenant's Projected Share of Increase previously made for such Operating Year
were greater or less than the installments of Tenant's Projected Share of
Increase to be made for such Operating Year in accordance with such estimate,
and (i) if there shall be a deficiency, Tenant shall pay the amount thereof
within ten (10) days after demand therefor, or (ii) if there shall have been an
overpayment, Landlord shall promptly either refund to Tenant the amount thereof
or permit Tenant to credit the amount thereof against subsequent payments under
this Article 36, and (c) on the first day of the month following the month in
which such estimate is furnished to Tenant, and monthly thereafter throughout
the remainder of such Operating Year, Tenant shall pay to Landlord an amount
equal to Tenant's Projected Share of Increase as shown on such estimate
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(vi) The term "Escalation Statement" shall mean a statement
setting forth the amount payable by Tenant for a specified Tax Year or
Operating Year (as the case may be) pursuant to this Article 36.
(b) (i) Tenant shall pay as additional rent for each Tax Year a sum
(hereinafter referred to as "Tenant's Tax Payment") equal to Tenant's Tax
Proportionate Share of the amount by which the Taxes for such Tax Year exceed
the Tax Base. Any such adjustment payable by reason of the provisions of this
Section 36(b)(i) shall be payable within fifteen (15) days after Landlord shall
furnish to Tenant an Escalation Statement with respect to Taxes for any Tax
Year. In order to insure that amounts sufficient for the payment of Taxes to
the taxing authority or as escrow payments to Landlord's mortgagee are
available when Landlord is required to make such payments, Tenant's Tax Payment
as set forth in Landlord's Escalation Statement may be reasonably estimated by
Landlord, subject to subsequent adjustment.
(ii) If the real state tax fiscal year of The City of New York
shall be changed during the term of this lease, any Taxes for such fiscal year,
a part of which is included within a particular Tax Year and a part of which is
not so included, shall be apportioned on the basis of the number of days in such
fiscal year included in the particular Tax Year for the purpose of making the
computations under this Section 36(b).
(iii) If Landlord shall receive a refund of Taxes for any Tax Year,
Landlord shall permit Tenant to credit against subsequent payments under this
Section 36(b) Tenant's Tax Proportionate Share of the refund but not to exceed
Tenant's Tax Payment paid for such Tax Year. In the event that this lease shall
have expired prior to the utilization or absorption of such credit, any
remaining balance shall be paid to Tenant.
(iv) If the Tax Base is reduced as a result of a certorian
proceeding or otherwise, Landlord shall adjust the amount of each Tenant's Tax
Payment previously made, and Tenant shall pay the amount of said adjustment
within thirty (30) days after demand setting forth the amount of said
adjustment.
(c) Tenant shall pay to Landlord upon demand, as additional rent, any
occupancy tax or rent tax now in effect or hereafter enacted, if payable by
Landlord in the first instance or hereafter required to be paid by Landlord.
(d) (i) After the expiration of the Base Year and any Operating
Year, Landlord shall furnish Tenant an Escalation Statement setting forth
Tenant's Proportionate Share of Increase, with respect to the Operating
Expenses incurred for such Base Year or Operating Year. Within thirty (30) days
after receipt of such Escalation Statement for any Operating Year, Tenant shall
pay Tenant's Proportionate Share of Increase to Landlord as additional rent.
(ii) Commencing with the first Operating Year for which Landlord
shall be entitled to receive Tenant's Proportionate Share of Increase, Tenant
shall pay to Landlord as additional rent for the then Operating Year, Tenant's
Projected Share of Increase. If the Escalation Statement furnished by Landlord
to Tenant pursuant to Section 36(d)(i) above at the end of the then Operating
Year shall indicate that Tenant's Projected Share of Increase exceeded Tenant's
Proportionate Share of Increase, Landlord shall forthwith either (i) pay the
amount of excess directly to Tenant concurrently with the notice or (ii) permit
Tenant to credit the amount of such excess against the subsequent payments of
rent due hereunder; if such statement furnished by Landlord to Tenant hereunder
shall indicate that Tenant's Proportionate Share of Increase exceeded Tenant's
Projected Share of Increase for the then Operating Year, Tenant shall forthwith
pay the amount of such excess to Landlord.
(e) Landlord agrees to grant Tenant's accountant reasonable access to
Landlord's books and records for the purpose of verifying Operations Expenses
incurred by Landlord. In connection with any such examination of Landlord's
books and records, Tenant agrees to treat, and to instruct its employees,
accountants and agents to treat, all information as confidential and not
disclose it to any other person and to confirm and, if requested, cause its
employees,
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accountants and agent to confirm such agreement in a separate written agreement
if requested by Landlord.
(f) In the event that the commencement date of the term of this lease
shall be other than the first day of a Tax Year or an Operating Year or the date
of the expiration or other termination of this lease shall be a day other than
the last day of a Tax Year or an Operating Year, then, in such event, in
applying the provisions of this Article 36 with respect to any Tax Year or
Operating Year in which such event shall have occurred, appropriate adjustments
shall be made to reflect the occurrence of such event on a basis consistent with
the principles underlying the provisions of this Article 36 taking into
consideration the portion of such Tax Year or Operating Year which shall have
elapsed after the term hereof commences in the case of the commencement date,
and prior to the date of such expiration or termination in the case of the
expiration date or other termination.
(g) Payments shall be made pursuant to this Article 36 notwithstanding the
fact that an Escalation Statement is furnished to Tenant after the expiration of
the term of this lease.
(h) In no event shall the fixed rent ever be reduced by operation of this
Article 36 and the rights and obligations of Landlord and Tenant under the
provisions of this Article 36 with respect to any additional rent shall survive
the termination of this lease.
(i) Landlord's failure to render an Escalation Statement with respect to
any Tax Year or Operating Year, respectively, shall not prejudice Landlord's
right to thereafter render an Escalation Statement with respect thereto or with
respect to any subsequent Tax Year or Operating Year Tenant's obligation to pay
escalation for any Tax or Operating Year during the term of this lease shall
survive the expiration or earlier termination of this lease.
(j) Each Escalation Statement shall be conclusive and binding upon Tenant
unless within 90 days after receipt of such statement Tenant shall notify
Landlord that it disputes the correctness of such statement, specifying the
particular respects in which such statement is claimed to be incorrect. Pending
the determination of such dispute, Tenant shall pay additional rent in
accordance with the statement that Tenant is disputing, without prejudice to
Tenant's position. If the dispute shall be determined in Tenant's favor,
Landlord shall forthwith pay to Tenant the amount of Tenant's overpayment
resulting from compliance with Landlord's statement.
37. Electricity
(a) Landlord shall furnish to Tenant the electric energy which Tenant
requires in the demised premises on a "rent inclusion" basis, through the
presently installed electrical facilities for Tenant's reasonable use in the
demised premises for lighting, light office equipment and the usual small
business machines, including Xerox or other copying machines. Subject to the
following provisions of this Article 37, there shall be no charge to Tenant
therefor by way of measuring the same on any meter or otherwise, electric
current being included as an additional service in the fixed rent payable
hereunder. Landlord shall not in anywise be liable or responsible to Tenant for
any loss or damage or expense which Tenant may sustain or incur if either the
quantity or character of electric service is changed or is no longer available
or suitable for Tenant's requirements.
(b) (i) Tenant acknowledges and agrees (A) that the fixed rent
hereinabove set forth in this lease includes the Electricity Rent Inclusion
Factor to compensate Landlord for the electrical wiring and other installations
necessary for, and for its obtaining and redistribution of, electric current as
an additional service; and (B) that said Electricity Rent Inclusion Factor
(hereinafter called "ERIF"), which shall be subject to periodic adjustments as
herein provided, has been partially based upon Tenant's estimated connected
electrical load and hours of use thereof for ordinary lighting and light office
equipment, during ordinary business hours. The "Electricity Rent Inclusion
Factor" shall mean the amount determined by applying the estimated connected
electrical load and usage thereof in the demised premises (as the same
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may hereafter from time to time be determined by Landlord's electrical
consultant as hereinafter provided) to Landlord's Cost Rate. As used herein,
the term "Landlord's Cost Rate" shall mean an amount equal to Landlord's
actual average cost of purchasing electricity from the public utility servicing
the Unit during the billing period in question, which Landlord and Tenant agree
shall be determined by dividing the total dollar amount billed by the public
utility servicing the Unit (averaged separately for KWs and KWHRs) for the
relevant billing period by the total number of KWs and KWHRs consumed by the
Unit for such billing period. Landlord's Cost Rate shall also include (i) any
tax imposed on Landlord's receipt from the sale or resale of electric energy or
gas to Tenant by any federal, state or municipal authority, (ii) any reasonable
meter company charges, and (iii) all other taxes, fuel adjustment charges and
other charges and expenses to which Landlord is subject. If Landlord's Cost
Rate shall have been, or shall be, increased subsequent to such date (whether
such increase occurs prior to or during the term of this lease), by change in
Landlord's electric rates, charges, fuel adjustment, or service
classifications, or by taxes or charges of any kind imposed thereon, or for any
other such reason, then the aforesaid ERIF portion of the fixed rent shall be
increased in the same percentage as the increase in Landlord's Cost Rate and
the fixed rent shall be increased accordingly.
(ii) Any such percentage increase in Landlord's Cost Rate due to
change in Landlord's electric rates, charges, etc., shall be computed by the
application of the average consumption (energy and demand) of electricity for
the entire Unit for the twelve (12) full months immediately prior to the rate
change, other change in cost, or any changed methods of or rules on billing for
same, on a consistent basis to the new rate and/or service classifications and
to the immediately prior existing rate and/or service classifications. If the
average consumption of electricity for the entire Unit for said prior twelve
(12) full months cannot reasonably be applied and used with respect to changed
methods of or rules on billing, then the percentage increase shall be computed
by the use of the average consumption (energy and demand) for the entire Unit
for the first three (3) months under such changed methods of or rules on
billing, projected to a full twelve (12) months, and that same consumption, so
projected, shall be applied to the rate and/or service classifications which
existed immediately prior to the changed methods of or rules on billing. The
parties acknowledge that they understand that it is anticipated that existing
electric rates, charges, etc., may be changed by virtue of time-of-day rates or
other methods of billing, and that the foregoing reference to changes in
methods of or rules on billing is intended to include any such change. The
parties agree that a reputable, independent electrical consultant, selected by
Landlord ("Landlord's electrical consultant") shall determine the percentage
for the changes in the ERIF based on changes in Landlord's electric rates,
charges, etc.
(c) (i) The parties agree that Landlord's electrical consultant may from
time to time but (unless Landlord has reason to believe that Tenant's
electrical consumption has increased so that the ERIF no longer represents an
accurate reflection of Tenant's usage and/or demand) in no event more than one
(1) time during each year of the term of this lease, make surveys in the
demised premises covering the electrical equipment and fixtures and use of
current therein, and the connected electrical load and usage portion of the
ERIF shall be changed in accordance with such survey, and the ERIF
automatically redetermined, accordingly, by Landlord's electrical consultant.
The fixed rent shall be appropriately adjusted effective as of the date of any
such change in connected load and usage, as disclosed by said survey. In no
event, is the originally specified ERIF portion of the fixed rent (as adjusted
by any electricity cost increases of Landlord after the date set forth in
Section 37(b)(i) hereof) to be reduced. The cost of any such survey shall be
borne equally by Landlord and Tenant.
(ii) The determination of change in the ERIF by Landlord's consultant
shall be binding and conclusive on Landlord and on Tenant from and after the
delivery of copies of such determination to Landlord and Tenant, unless within
ninety (90) days after the delivery of such copies, Tenant disputes such
determination. If Tenant disputes the determination, it shall, at its own
expense, obtain from a reputable, independent electrical consultant its own
survey of Tenant's electrical lighting and power load and hours of use thereof,
and a determination of such change in the ERIF in accordance with the
provisions of this Article 37. Tenants's consultant and Landlord's consultant
then shall seek to agree on a finding of such determination of such change in
the ERIF. If they cannot agree, they shall choose a third
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reputable electrical consultant whose cost shall be shared equally by Landlord
and Tenant, to make a similar survey, and the determination of such ERIF change
by such third electrical consultant shall be controlling. (If they cannot agree
on such third consultant, within ten (10) days, then either party may apply to
the Supreme Court in the County of New York for the appointment of such third
consultant.) However, pending such determination, Tenant shall pay to Landlord
the amount of ERIF as determined by Landlord's independent electrical consulting
firm, provided, however, if the amount of ERIF determined as aforesaid is
different from that determined by Landlord's electrical consulting firm, then
Landlord and Tenant shall make adjustment for any deficiency owed by Tenant or
overage paid by Tenant pursuant to the decision of Landlord's electrical
consulting firm.
(d) Landlord reserves the right to discontinue furnishing electric
energy to Tenant at any time upon sixty (60) days' written notice to Tenant, and
from and after the effective date of such termination, Landlord shall no longer
be obligated to furnish Tenant with electric energy, provided, however, that
such termination date may be extended for a time reasonably necessary for Tenant
to make arrangements to obtain electric service directly from the public utility
company servicing the Building. If Landlord exercises such right of termination,
this lease shall remain unaffected thereby and shall continue in full force and
effect, and thereafter Tenant shall diligently arrange to obtain electric
service directly from the public utility company servicing the Building, and may
utilize the then existing electric feeders, risers and wiring serving the
demised premises to the extent available and safely capable of being used for
such purpose and only to the extent of Tenant's then authorized connected load.
Landlord shall be obligated to pay no part of any cost required for Tenant's
direct electric service. Commencing with the date when Tenant receives such
direct service, and as long as Tenant shall continue to receive such service,
the fixed rent payable under this lease shall be reduced to what the fixed rent
would then have been but for the adjustments under this Article 37 and the
original ERIF payable by Tenant included in the fixed rent as set forth in
Article 35 hereof.
(e) Tenant agrees not to connect any additional electrical equipment
of any type to the Building electric distribution system, other than lamps,
typewriters and other small office machines which consume comparable amounts of
electricity, without the Landlord's prior written consent, which consent shall
not be unreasonably withheld. Any additional risers, feeders, or other equipment
proper or necessary to supply Tenant's electrical requirements, upon written
request of Tenant, will be installed by Landlord, at the sole cost and expense
of Tenant, if, in Landlord's sole judgment, the same are necessary and will not
case permanent damage or injury to the Building or the Unit of the demised
premises or cause or create a dangerous or hazardous condition or entail
excessive or unreasonable alterations, repair or expense or interfere with or
disturb other tenants or occupants.
(f) In no event shall the fixed rent under this lease be reduced
below the fixed rent specified herein by virtue of this Article 37 except as
provided in Section(d)
(g) Landlord shall have the option at any time upon 10 days prior
written notice to Tenant to discontinue supplying electric energy to Tenant in
accordance with the provisions of this Article 37, and elect instead to furnish
electric energy to Tenant on a submetered basis in accordance with Schedule C
annexed hereto and made a part hereof. In the event that Landlord shall exercise
the option contained in this Section 37(g), the fixed rent set forth herein
shall be reduced in the manner described in Section 37(b) hereof.
(h) Landlord represents that there are available in and to the
demised premises up to six (6) watts per usable square foot comprising the
demised premises for Tenant's lighting and connected load, which capacity is
exclusive of the electricity required to operate the Building central heating,
ventilation and air conditioning systems serving the demised premises.
38. Heat and Air-Conditioning
(a) Any use of the demised premises, or any part thereof, or
rearrangement of partitioning in a manner that interferes with normal operation
of the heat and air-conditioning
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<PAGE> 20
systems (hereinafter called the systems) servicing the same, may require
changes in such systems. Such changes, so occasioned, shall be made by Tenant,
at its expense, subject to Landlord's prior written approval of such changes,
which approval may be withheld for any reason. Tenant shall not make any
change, alteration, addition or substitution to the air-conditioning system
without Landlord's prior written approval, which may be withheld for any reason.
(b) Landlord shall maintain and operate the heating system
and shall, subject to the design specifications of the heating system
and to energy conservation requirements of, and voluntary energy
conservation programs sponsored by, governmental authorities, furnish
heat (hereinafter called "Heat Service") to the demised premises in
accordance with the specifications annexed hereto as Schedule J, when
and as required by law, during regular hours (that is, between the hours
of 8:00 A.M. and 6:00 P.M.) of business days (which term is used herein
to mean all days except Saturday, Sunday and those days that are
observed by the State or Federal government as legal holidays and those
days designated as holidays by the applicable building service union
employees' contract) during the heating season.
(c) Air conditioning (hereinafter referred to as "A/C
Service") shall be supplied to the demised premises in accordance with
the specifications annexed hereto as Schedule J, subject to the design
specifications of the systems and to energy conservation requirements
of, and voluntary energy conservation programs sponsored by,
governmental authorities, during regular hours (that is, between the
hours of 8:00 A.M. and 6:00 P.M.) of business days (which term is used
herein to mean all days except Saturdays, Sundays, those days that are
observed by the State or Federal government as legal holidays and those
days designated as holidays by the applicable building service union
employees' contract) between the dates of May 1 and October 1, when, in
the judgment of Landlord, it may be required for the comfortable
occupancy of the demised premises. Notwithstanding anything herein to
the contrary, Landlord shall not be responsible if the normal operation
of the Building or Unit air-cooling system shall fail to provide cooled
air at reasonable temperatures, pressures or degrees of humidity, or any
reasonable volumes or velocities in any parts of the demised premises by
reason of (i) human occupancy factors and any machinery or equipment
installed by or on behalf of Tenant or any person claiming through or
under Tenant that have an electrical load in excess of the average
electrical load for the Building or Unit air-cooling system as designed,
or (ii) any rearrangement of partitioning or other alterations made or
performed by or on behalf of Tenant or any person claiming through or
under Tenant. Tenant agrees to keep and cause to be kept closed all of
the windows in the demised premises whenever the air-cooling system is
in operation and agrees to lower and close the blinds when necessary
because of the sun's position whenever the air-cooling system is in
operation. Tenant at all times agrees to cooperate fully with Landlord
and to abide by the regulations and requirements which Landlord may
prescribe for the proper functioning and protection of the air-cooling
system.
(d) If Tenant shall require Heat Service or A/C Service
during hours other than regular hours or on days other than business
days (hereinafter collectively called "After Hours HVAC Service"),
provided that Tenant is not then in default of any of the terms,
covenants or conditions of this lease, Landlord shall furnish such After
Hours HVAC Service upon reasonable advance notice from Tenant, and
Tenant shall pay, on demand, for such After Hours HVAC Service at the
following rates (hereinafter called the "After Hours HVAC Charges")
(i) for the first one hundred (100) hours of After
Hours HVAC Service used by Tenant during each successive
twelve-month period (an "Anniversary Year") commencing on the
Commencement Date in which occurs any part of the term of this
lease, at no cost to Tenant; and
(ii) for any usage by Tenant of After Hours HVAC
Service beyond one hundred (100) hours during any Anniversary
Year, at a rate of one hundred ($100) dollars per hour.
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39. SUBORDINATION:
(a) In the event of any act or omission of Landlord that would give Tenant
the right, immediately or after lapse of a period of time, to cancel or
terminate this lease, or to claim a partial or total eviction, Tenant shall not
exercise such right (i) until it has given written notice of such act or
omission to the holder of each superior mortgage and the lessor of each superior
lease whose name and address shall previously have been furnished to Tenant in
writing and (ii) unless such act or omission shall be one that is not capable of
being remedied by Landlord or such holder or lessor within a reasonable period
of time, until a reasonable period for remedying such act or omission shall have
elapsed following the giving of such notice and following the time when such
holder or lessor shall have become entitled under such superior mortgage or
superior lease, as the case may be, to remedy the same (which reasonable period
shall in no event be less than the period to which Landlord would be entitled
under this lease or otherwise, after similar notice, to effect such remedy),
provided that such holder or lessor shall give Tenant written notice of its
intention to remedy such act or omission and shall, with due diligence, commence
and continue to do so.
(b) If the lessor of a superior lease or the holder of a superior mortgage
shall succeed to the rights of Landlord under this lease, whether through
possession or foreclosure action or delivery of a new lease or deed, then, at
the request of the party so succeeding to Landlord's rights (herein sometimes
called the successor landlord) and upon such successor landlord's written
agreement to accept Tenant's attornment, Tenant shall attorn to and recognize
such successor landlord as Tenant's landlord under the lease, and shall promptly
execute and deliver any instrument that such successor landlord may reasonably
request to evidence such attornment. Upon such attornment, this lease shall
continue in full force and effect as, or as if it were, a direct lease between
the successor landlord and Tenant, upon all of the terms, conditions and
covenants as are set forth in the lease and shall be applicable after such
attornment, except that the successor landlord shall not
(i) be liable for any previous act or omission of Landlord
under this lease,
(ii) be subject to any offset, not expressly provided for in
this lease, that shall have theretofore accrued to Tenant against Landlord, or
(iii) be bound by any previous modification of this lease, not
expressly provided for in this lease, or by any previous prepayment of more than
one month's fixed rent or any additional rent then due, unless such modification
or prepayment shall have been expressly approved in writing by the lessor of the
superior lease or the holder of the superior mortgage through, or by reason of
which, the successor landlord shall have succeeded to the rights of Landlord
under this lease.
(c) Landlord shall use reasonable efforts to obtain from the existing
mortgagee on the Unit a "so-called" non-disturbance agreement substantially in
the form annexed hereto as Schedule F (the "Non-Disturbance Agreement"). If
Landlord shall not have obtained from the existing mortgagee executed copies of
such Non-Disturbance Agreement within thirty (30) days after the execution and
delivery of this lease, then Tenant shall have the right, upon notice to
Landlord given within five (5) business days after the expiration of such
thirty (30) day period, to terminate this lease. If Tenant shall exercise such
termination option, then this lease shall terminate of the fifth (5th) business
day after Tenant shall have given such notice of such termination to Landlord
unless Landlord shall deliver such Non-Disturbance Agreement on or prior to
such fifth (5th) business day. If this lease shall be terminated in accordance
with the foregoing, then neither party shall have any further obligation to the
other and Landlord shall return to Tenant any prepaid rent and security
previously submitted to Landlord.
(d) With respect to any future mortgages and leases affecting the Unit,
the provisions of Article 7 hereof and the subordination of this lease to such
future mortgages and future leases shall be conditioned upon the execution and
delivery by and between Tenant and any such mortgagee or lessor of a
Non-Disturbance Agreement on the standard form employed by such mortgagee or
lessor. Tenant agrees to execute such agreements and return same to Landlord
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within twenty (20) days after Landlord's written request therefor. If Tenant
shall fail to execute, acknowledge and return any such agreement within such
twenty (20) day period, then Landlord may send a notice to Tenant indicating
that, as of the tenth (10th) day following such second notice, (x) the
provisions of Article 7 shall apply, and (y) this lease shall be subordinate to
such future mortgages or future leases, as the case may be, pursuant to the
terms and conditions of such Non-Disturbance Agreement, and Tenant shall be
deemed to have executed and delivered such agreement to the lessor or mortgagee
requesting such execution, notwithstanding the fact that Tenant has not, in
fact, executed and delivered such Agreement. If Tenant shall fail to execute,
acknowledge and return any such Agreement within such ten (10) day period then
the provisions (x) and (y) of the foregoing sentence shall apply.
40. Intentionally Omitted
41. Preparation of Demised Premises:
Tenant has examined the demised premises and agrees to accept the
same in their condition and state of repair existing as of the Commencement Date
and understands and agrees that Landlord shall not be required to perform any
work, supply any materials or incur any expense to prepare the demised premises
for Tenant's occupancy except that, Landlord shall, at Landlord's expense (i)
demolish the existing tenant improvements in the fourteenth (14th) floor portion
of the demised premises to the extent set forth on the plan (herein referred to
as the "Work Plan"), which plan shall be submitted by Tenant to Landlord on or
before January 24, 1997, (ii) provide hook-up to Building's Class "E" system
including fire alarm system, speakers, strobes and lights, and (iii) deliver the
demised premises to Tenant in "broom-clean" condition.
42. Limitation on Liability
Tenant shall look only to Landlord's estate and interest in the
Unit and, where expressly so provided in this lease, to offset against the
rents payable under this lease, for the satisfaction of Tenant's remedies or
for the collection of a judgment (or other judicial process) requiring the
payment of money by Landlord in the event of any default or liability by
Landlord hereunder, and no other property or assets of Landlord and no property
of any officer, employee, director, shareholder, partner or principal of
Landlord shall be subject to levy; execution or other enforcement procedure for
the satisfaction of Tenant's remedies under or with respect to this lease, the
relationship of Landlord and Tenant hereunder or Tenant's use or occupancy of
the demised premises.
43. Miscellaneous
(a) If any of the provisions of this lease, or the application
thereof to any person or circumstances, shall, to any extent, be invalid or
unenforceable, the remainder of this lease, or the application of such
provision or provisions to persons or circumstances other than those as to whom
or which it is held invalid or unenforceable, shall not be affected thereby,
and every provision of this lease shall be valid and enforceable to the fullest
extent permitted by law.
(b) This lease shall be governed in all respects by the laws of the
State of New York.
(c) If, in connection with obtaining financing for the Unit, a bank,
insurance company or other lending institution shall request reasonable
modifications in this lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder or materially
adversely affect the leasehold interest hereby created.
(d) Without incurring any liability to Tenant, Landlord may permit
access to the demised premises and open the same, whether or not Tenant shall
be present, upon demand of
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any receiver, trustee, assignee for the benefit of creditors, sheriff, marshal
or court officer entitled to, or reasonably purporting to be entitled to, such
access for the purpose of taking possession of, or removing, Tenant's property
or for any other lawful purpose (but this provision and any action by Landlord
hereunder shall not be deemed a recognition by Landlord that the person or
official making such demand has any right or interest in or to this lease, or
in or to the demised premises), or upon demand of any representative of the
fire, police, building, sanitation or other department of the city, state or
federal governments.
(e) Tenant shall not be entitled to exercise any right of termination or
other option granted to it by this lease (if any) at any time when Tenant is in
default in the performance or observance of any of the covenants, terms,
provisions or conditions on its part to be performed or observed under this
lease.
(f) Tenant shall not place or permit to be placed any vending machines in
the demised premises, except with the prior written consent of Landlord in each
instance, provided Tenant may install such vending machines if the use thereof
is confined to Tenant's employees.
(g) Neither Tenant nor any corporation or other entity controlling,
controlled by or under common control with Tenant shall occupy any space in the
Unit (by assignment, sublease or otherwise) other than the demised premises,
except with the prior written consent of Landlord in each instance.
(h) Tenant agrees that its sole remedies in cases where Landlord's
reasonableness in exercising its judgment or withholding its consent or
approval is applicable pursuant to a specific provision of this lease, or any
rider or separate agreement relating to this lease, if any, shall be those in
the nature of an injunction, declaratory judgment, or specific performance, the
rights to money damages or other remedies being hereby specifically waived.
(i) The Article headings of this lease are for convenience only and are
not to be given any effect whatsoever in construing this lease.
(j) This lease shall not be binding upon Landlord unless and until it is
signed by Landlord and a fully executed copy thereof is delivered to Tenant.
(k) The Schedules annexed to this lease shall be deemed part of this
lease with the same force and effect as if such Schedules were numbered
Articles of this lease.
(l) If the rent hereunder shall commence on any day other than the first
day of a calendar month, the rent for such calendar month shall be prorated.
(m) Tenant agrees that Tenant will not at any time during said term,
either directly or indirectly, use any contractors and/or labor and/or
materials if the use of such contracts and/or labor and/or materials would or
will create any difficulty with other contractors and/or labor engaged by
Tenant or Landlord or others in the maintenance and/or operation of the Unit or
any part thereof.
(n) Tenant shall not place any signage on the entrance to the demised
premises other than the Building Standard signage to be furnished by Landlord
to Tenant at Tenant's cost and expense. Landlord shall not unreasonably
withhold its consent to any specifications proposed by Tenant with request to
such signage. The listing of any name other than that of Tenant, whether on the
doors of the demised premises, on the Unit directory, if any, or otherwise,
shall not operate to vest any right or interest in this lease or in the demised
premises, nor shall it be deemed to be the consent of Landlord to any
assignment or transfer of this lease, to any sublease of the demised premises,
or to the use or occupancy thereof by others.
(o) The terms "Owner" and "Landlord", whenever used in this lease
(including, without limitation, in Article 31), shall have the same meaning.
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<PAGE> 24
(p) If Landlord or Landlord's managing or rental agent accepts from Tenant
one or more keys to the demised premises in order to assist Tenant in showing
the demised premises for subletting or other disposition or for the performance
of work therein for Tenant or for any other purpose, the acceptance of such key
or keys shall not constitute an acceptance of a surrender of the demised
premises nor a waiver of any of Landlord's rights or Tenant's obligations under
this lease, including, without limitation, the provisions relating to assignment
and subletting and the condition of the demised premises.
(q) If the demised premises shall at any time during the term of this
lease become infested with vermin, Tenant, at Tenant's expense, shall cause the
same to be exterminated from time to time to the satisfaction of Landlord and
shall employ such exterminators and such exterminating company or companies as
shall be approved by Landlord.
(r) If Tenant is a corporation or partnership, each individual executing
this lease on behalf of Tenant hereby represents and warrants that Tenant is a
duly formed and validly existing entity qualified to do business in the State of
New York and that Tenant has full right and authority to execute and deliver
this lease and that each person signing on behalf of Tenant is authorized to do
so.
(s) In the event of conflict between the provisions of this rider and the
provisions of the printed form to which this rider is annexed, the provisions of
this rider shall govern.
(t) Except where context dictates otherwise, the term "Building" as used
in the printed form to which this rider is annexed shall be deemed to mean the
Unit.
44. Insurance
(a) Tenant covenants and agrees to provide on or before the commencement
of the term of this lease and to keep in force during the term hereof for the
benefit of Landlord, the Board of Managers and Tenant a comprehensive general
liability insurance policy protecting Landlord and Tenant against any liability
whatsoever, occasioned by any occurrence on or about the demised premises or any
appurtenances thereto. Such policy is to be written by good and solvent
insurance companies permitted to do business in the State of New York, and
otherwise satisfactory to Landlord, and shall be in such limits as Landlord and
the Board of Managers may reasonably require and as of the date of this lease
Landlord and the Board of Managers reasonably require a combined single limit of
liability thereunder of not less than the amount of Two Million ($2,000,000)
Dollars per occurrence for bodily or personal injury (including death) or
property damage or such greater amount as Landlord and the Board of Managers may
from time to time require. Such insurance may be carried under a blanket policy
covering the demised premises and other locations of Tenant, if any. Prior to
the time such insurance is first required to be carried by Tenant and
thereafter, at least fifteen (15) days prior to the effective date of such
policy, Tenant agrees to deliver to Landlord and the Board of Managers either a
duplicate original of the aforesaid policy or a certificate evidencing such
insurance. Said certificate shall contain an endorsement that such insurance may
not be cancelled without the issuing insurance company endeavoring to give
thirty (30) days' notice to Landlord and the Board of Managers, by mail, which
notice shall contain the policy number and the names of the insured and
certificate holder. Tenant's failure to provide and keep in force the
aforementioned insurance shall be regarded as a material default hereunder
entitling Landlord to exercise any or all of the remedies as provided in this
lease in the event of Tenant's default.
(b) (i) Landlord agrees that, if obtainable at no additional cost, it
will include in its fire insurance policies appropriate clauses pursuant to
which the insurance companies (y) waive all right of subrogation against Tenant
with respect to losses payable under such policies and/or (z) agree that such
policies shall not be invalidated should the insured waive in writing prior to a
loss any or all right of recovery against any party for losses covered by such
policies. But should any additional premiums be exacted for any such clause or
clauses, Landlord shall be released from the obligation hereby imposed unless
Tenant shall agree to pay such additional premium.
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<PAGE> 25
(ii) Tenant agrees to include, if obtainable at no additional
cost, in its fire insurance policy or policies on its furniture, furnishings,
fixtures and other property removable by Tenant under the provisions of this
lease appropriate clauses pursuant to which the insurance company or companies
(y) waive the right of subrogation against Landlord and/or any tenant of space
in the Building with respect to losses payable under such policy or policies
and/or (z) agree that such policy or policies shall not be invalidated should
the insured waive in writing prior to a loss any or all right of recovery
against any party for losses covered by such policy or policies. But should any
additional premium be exacted for any such clause or clauses, Tenant shall be
released from the obligation hereby imposed unless Landlord or the other tenants
shall agree to pay such additional premium.
(iii) Provided that Landlord's right of full recovery under its
policy or policies aforesaid is not adversely affected or prejudiced thereby,
Landlord hereby waives any and all right of recovery which it might otherwise
have against Tenant, its servants, agents and employees, for loss or damage
occurring to the Unit and the fixtures, appurtenances and equipment therein, to
the extent the same is covered by Landlord's insurance, notwithstanding that
such loss or damage may result from the negligence or fault of Tenant, its
servants, agents or employees. Provided that Tenant's right of full recovery
under its aforesaid policy or policies is not adversely affected or prejudiced
thereby, Tenant hereby waives any and all right of recovery which it might
otherwise have against Landlord, its servants, and employees, and against every
other tenant in the Unit who shall have executed a similar waiver as set forth
in this Section 44(b)(iii) for loss or damage to, Tenant's furniture,
furnishings, fixtures and other property removable by Tenant under the
provisions hereof to the extent that same is covered by Tenant's insurance,
notwithstanding that such loss or damage may result from the negligence or fault
of Landlord, its servants, agents or employees, or such other tenant and the
servants, agents or employees thereof.
(iv) Landlord and Tenant hereby agree to advise the other
promptly if the clauses to be included in their respective insurance policies
pursuant to subdivisions (i) and (ii) hereof cannot be obtained. Landlord and
Tenant hereby also agree to notify the other promptly of any cancellation or
change of the terms of any such policy which would affect such clauses.
45. Change of Condition
Landlord shall not be liable for any change of condition in the demised
premises caused by the compliance with any present or future laws, rules,
orders, ordinances, requirements, or regulations of any Federal, State, County
or Municipal authority or government, including any change required by law for
off-street parking or similar legislation, or by revocation by any such
authority or authorities of any permit or license heretofore granted, or by
construction or operation of any public or quasi-public work, or by the erection
of any building or buildings upon any adjacent property, or by change of
environment. Landlord shall not be liable for interference with or loss of light
or other incorporeal hereditaments caused by anybody other than Landlord, or
caused by or for the City or any governmental or quasi-governmental agency or
authority in connection with the construction of any public or quasi-public
work.
46. Brokerage
Tenant covenants, represents and warrants that Tenant has had no dealings
or communications with any broker or agent in connection with the consummation
of this lease other than the Broker (as defined in Article 35 hereof), and
tenant covenants and agrees to pay, hold harmless and indemnify Landlord from
and against any and all cost, expense (including reasonable attorneys' fees) or
liability for any compensation, commissions or charges claimed by any broker or
agent other than the Broker with respect to this lease or the negotiation
thereof
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<PAGE> 26
47. Estoppel Certificate:
Tenant agrees, at any time and from time to time, as requested by
Landlord, upon not less than ten (10) days prior notice, to execute and deliver
to Landlord a statement certifying that this lease is unmodified and in full
force and effect (or if there have been modifications that the same is in full
force as modified and stating the modifications), certifying the dates to which
the fixed rent and additional rent have been paid, and stating whether or not,
to the best knowledge of Tenant, Landlord is in default in performance of any of
its obligations under this lease, and, if so, specifying each such default of
which Tenant may have knowledge, it being intended that any such statement
delivered pursuant hereto may be relied upon by others with whom Landlord may be
dealing.
48. Late Payment Charge:
If Tenant shall make any payment of fixed rent, additional rent or other
charges more than ten (10) days after the same is due and payable Tenant shall
pay (i) a late payment charge of four (4%) percent of the defaulted amount and
(ii) interest thereon at a rate equal to the lower of the Interest Rate or the
highest rate permitted by law. Such amounts shall be payable as additional rent
hereunder.
49. Addendum to Article 17:
This lease and the term and estate hereby granted are subject to the
following further limitation. Whenever tenant shall default in the payment of
any installment of fixed rent, or in the payment of any additional rent or any
other charge payable by Tenant to Landlord, on any day upon which the same ought
to be paid, and such default shall continue for five (5) days after Landlord
shall have given Tenant a notice specifying such default, then in any such case
Landlord may give to Tenant a notice of intention to end the term of this lease
at the expiration of three (3) days from the date of the service of such notice
of intention, and upon the expiration of said three (3) day notice period this
lease and the term and estate hereby granted, whether or not the term shall
theretofore have commenced, shall terminate with the same effect as if that day
were set forth herein for the expiration of the term hereof, but Tenant shall
remain liable for damages as provided in Article 18.
50. Arbitration:
(a) Either party may request arbitration of any matter in dispute
wherein arbitration is expressly provided in this lease as the appropriate
remedy. The arbitration shall be conducted, to the extent consistent with this
Article 50, in accordance with the then prevailing rules of the American
Arbitration Association (or any organization successor thereto) in the City and
County of New York. The arbitrator(s) shall (i) be disinterested person(s)
having at least 10 years of experience in the County of New York in a calling
connected with the dispute, and (ii) have the right to retain and consult
experts and competent authorities skilled in the matters under arbitration. In
rendering any decision or award hereunder, the arbitrator(s) shall not add to,
subtract from or otherwise modify the provisions of this lease.
(b) The fees and expenses of the arbitrator(s) and all other expenses
(not including the attorneys fees, witness fees and similar expenses of the
parties) of the arbitration shall be borne by the parties equally.
51. Addendum to Article 3:
Supplementing the provisions of Article 3 of the printed portion of this
lease Tenant agrees that with respect to the performance by Tenant of any
alterations, additions, improvements or installations to the demised premises
costing in excess of $5,000 Tenant shall
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pay to Landlord, as additional rent hereunder, promptly upon being billed
thereof, a sum equal to the actual out-of-pocket costs incurred by Landlord for
field supervision and coordination in connection with such alterations,
additions, improvements or installations. Tenant shall, in addition, reimburse
Landlord for any reasonable costs incurred by Landlord for review of Tenant's
plans by Landlord's architect and/or engineer. If Landlord is performing any
work pursuant to any provision of this lease to prepare or improve the demised
premises for Tenant's occupancy, Tenant shall reimburse Landlord for any costs
Landlord incurs for filing fees and permits required in connection therewith,
including the fees of any consultant engaged by Landlord for such purposes.
52. Intentionally Omitted
53. Commencement of Term
(a) (i) The term of this lease shall commence on a date (herein
referred to as the "Commencement Date"), which shall be the later of (i) the
earlier of (A) the date the demised premises are ready for occupancy (as
defined in paragraph (b) hereof), of (B) the date Tenant or anyone claiming
under or through Tenant first occupies the demised premises for the performance
of "Tenant's Work" (as hereinafter defined) or the conduct of its business, and
(ii) February 1, 1997, and shall end on the last day of the month preceding the
month in which occurs the expiration of sixteen (16) years and four (4) months
following the Commencement Date (such date on which the term of the lease
expires is herein referred to as the "Expiration Date") or until such term
shall sooner cease and terminate as herein provided.
(ii) Landlord shall, in accordance with the foregoing, fix the
Commencement Date and shall notify Tenant of the date so fixed. When the
Commencement Date has so been determined, at Landlord's request, Tenant shall
within ten (10) days after such request, execute a written agreement
confirming such date as the Commencement Date. Any failure of Tenant to execute
such written agreement shall not affect the validity of the Commencement Date
as fixed and determined by Landlord as aforesaid.
(b) The demised premises shall be deemed ready for occupancy on the
date that the work described in clause (i) and (iii) of Article 41 to be
performed by Landlord in the demised premises (hereinafter called "Landlord's
Pre-Commencement Work") shall have been substantially completed; and it shall
be so deemed notwithstanding the fact that minor or insubstantial details of
demolition remain to be performed, the non-completion of which do not
materially interfere with Tenant's use of the demised premises.
(c) If the occurrence of the conditions set forth in Section (b) hereof
and thereby the making of the demised premises ready for occupancy shall be
delayed due to any act or omission of Tenant or any of its employees, agents
or contractors (hereinafter called a "Tenant Delay"), including, without
limitation, Tenant's failure to deliver the Work Plan to Landlord within the
20-day period described in Article 41 hereof, the demised premises shall be
deemed ready for occupancy on the date when they would have been ready but for
such delay.
(d) If and when Tenant shall take actual possession of the demised
premises, it shall be conclusively presumed that Landlord has performed
Landlord's Pre-Commencement Work satisfactorily as of the date of such taking
of possession, unless within ten (10) days after such date, Tenant shall give
Landlord notice specifying the respects in which the same was not so performed
or completed.
(e) Landlord shall commence Landlord's Pre-Commencement Work promptly
following the date hereof, and, subject to delay by reason of a condition
described in Article 27 hereof or a Tenant Delay, and provided that Landlord
shall not be required to employ contractors or labor at overtime or other
premium-pay rates or to incur other overtime costs or expenses, shall endeavor
to have Landlord's Pre-Commencement Work substantially completed on or before
February 28, 1997.
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54. Addendum to Article 29:
Tenant covenants and agrees that Tenant shall pay to Landlord on
demand the costs incurred by Landlord for (a) extra cleaning work in the
demised premises required because of (i) misuse or neglect on the part of Tenant
or its employees or visitors, (ii) use of portions of the demised premises for
preparation, serving or consumption of food or beverages, date processing or
reproducing operations, private lavatories or toilets or other special purposes
requiring greater or more difficult cleaning work than office areas, (iii)
unusual quantity of interior glass surfaces, (iv) non-building standard
materials or finishes installed by Tenant or at its request, and (b) removal
from the demised premises and the Building of so much of any refuse and rubbish
of Tenant as shall exceed that ordinarily accumulated daily in the routine of
business office occupancy.
55. Rental Payments:
(a) All payments other than fixed rent to be made by Tenant pursuant to
this lease shall be deemed additional rent and, in the event of any non-payment
thereof, Landlord shall have all rights and remedies provided for herein or by
law for non-payment of rent.
(b) All payments of fixed rent and additional rent to be made by Tenant
pursuant to this lease shall be made by checks drawn upon a New York City bank
which is a member of the New York Clearing House Association or any successor
thereto or upon a commercial bank in a major city having a population of one
million or more, or upon another commercial bank approved by Landlord. As of
the date hereof, Landlord approves Tenant's use of Mellon Bank, N.A. for
purposes of payments by Tenant of fixed rent and additional rent hereunder. If
during any twelve (12) month period during the term of this lease, two or more
checks tendered by Tenant for any payment due shall be dishonored by the payor
bank, Landlord may at any time thereafter require that all future payments of
rent by Tenant shall be made by certified or official bank checks.
(c) If Landlord receives from Tenant any payment less than the sum of
the fixed rent and additional rent then due and owing pursuant to this lease,
Tenant hereby waives its right, if any, to designate the items to which such
payment shall be applied and agrees that Landlord in its sole discretion may
apply such payment in whole or in part to any fixed rent, any additional rent
or to any combination thereof then due and payable hereunder.
(d) Unless Landlord shall otherwise expressly agree in writing,
acceptance of fixed rent or additional rent from anyone other than Tenant shall
not relieve Tenant of any of its obligations under this lease, including the
obligation to pay fixed rent and additional rent, and Landlord shall have the
right at any time, upon notice to Tenant, to require Tenant to pay the fixed
rent and additional rent payable hereunder directly to Landlord. Furthermore,
such acceptance of fixed rent or additional rent shall not be deemed to
constitute Landlord's consent to an assignment of this lease or a subletting or
other occupancy of the demised premises by anyone other than Tenant, nor a
waiver of any of Landlord's rights or Tenant's obligations under this lease.
(e) Landlord's failure to timely bill all or any portion of any amount
payable pursuant to this lease for any period during the term of this lease
shall neither constitute a waiver of Landlord's right to ultimately collect
such amount or to bill Tenant at any subsequent time retroactively for the
entire amount so unbilled, which previously unbilled amount shall be payable
within thirty (30) days after being so billed. Supplementing Article 28, any
bills or statements for fixed rent or additional rent shall be deemed
sufficiently given or rendered if sent by regular mail, postage prepaid
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<PAGE> 29
56. Holdover:
(a) In the event Tenant shall hold over after the expiration of the term
of this lease, the parties hereby agree that Tenant's occupancy of the demised
premises after the expiration of the term of this lease shall be upon all of the
terms set forth in this lease, except Tenant shall pay as rent for the holdover
period an amount equal to the higher of (A) an amount equal to one and one-half
(1 1/2) times the sum of (1) the pro rata fixed rent payable by Tenant during
the last year of the term of this lease and (2) all monthly installments of
additional rent payable by Tenant pursuant to the terms of this lease that would
have been billable monthly by Landlord had the term of this lease not expired;
or (B) an amount equal to the then-market rental value for the demised premises
as shall be established by Landlord giving notice to Tenant of Landlord's good
faith estimate of such market rental value. Landlord's rights under this Article
56 shall not preclude it from invoking any other remedy allowed under Article 18
of this lease or at law or in equity. Nothing herein contained shall be deemed
to permit Tenant to retain possession of the demised premises after the
expiration of the term of the lease.
(b) If Tenant shall hold over or remain in possession of any portion of
the demised premises beyond the expiration of the term of this lease,
notwithstanding the acceptance of any rent paid by Tenant pursuant to subsection
56(a) hereof, Tenant shall be subject not only to summary proceeding and all
damages related thereto, but also to any damages arising from lost opportunities
(and/or new leases) by Landlord to re-let the demised premises (or any part
thereof). All damages to Landlord by reason of such holding over by Tenant may
be the subject of a separate action and need not be asserted by Landlord in any
summary proceedings against Tenant.
(c) The provisions of this Article 56 shall survive the expiration of the
term of this lease.
57. Fixed Rent:
(a) Tenant shall pay to Landlord a fixed rent (herein referred to as
"fixed rent") as follows:
(i) EIGHT HUNDRED SIXTEEN THOUSAND FIVE HUNDRED FIVE and 50/100
($816,505.50) DOLLARS per year during the period commencing on the Commencement
Date and ending on the last day of the third (3) month following the month in
which occurs the sixth (6th) anniversary of the Commencement Date.
(ii) EIGHT HUNDRED SIXTY SEVEN THOUSAND ONE HUNDRED FORTY-ONE and
50/100 ($867,141.50) DOLLARS per year during the period commencing on the first
day of the fourth (4th) month following the month in which occurs the sixth
(6th) anniversary of the Commencement Date and ending on the last day of the
third (3rd) month following the month in which occurs the eleventh (11th)
anniversary of the Commencement Date, and
(iii) NINE HUNDRED FORTY THREE THOUSAND NINETY-FIVE and 50/100
($943,095.50) DOLLARS per year during the period commencing on the first day of
the fourth (4th) month following the month in which occurs the eleventh (11th)
anniversary of the Commencement Date and ending on the Expiration Date.
(b) Notwithstanding the provisions of Section 57(a) hereof, provided that
Tenant is not then in default of any of the terms, conditions or covenants of
this lease, the fixed rent payable by Tenant shall be partially abated as
follows: (x) during the sixteen (16) month period commencing on the Commencement
Date (the "First Abatement Period"), so that the fixed rent payable by Tenant
during the First Abatement Period shall be at the rate of $4,747.13 per month,
which amount represents the monthly installment of the ERIF (as such term is
defined in Article 37 hereof) and is subject to adjustment as is provided in
Article 37, and (y) during the four (4) month period beginning on the day
immediately following the expiration of the First Abatement
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Period (the "Second Abatement Period"), so that the fixed rent which would
otherwise be payable by Tenant during the Second Abatement Period shall be
reduced by $10,892.50 per month.
58. Restrictions upon Use:
It is expressly understood that no portion of the demised
premises shall be used as, or for (i) a bank, trust company, savings bank,
industrial bank, savings and loan association or personal loan bank (or any
branch office or public accommodation office of any of the foregoing), or (ii)
a public stenographer or typist, barber shop, beauty shop, beauty parlor or
shop, telephone or telegraph agency, telephone or secretarial service,
messenger service, travel or tourist agency, employment agency, public
restaurant or bar, commercial document reproduction or offset printing service,
public vending machines, retail, wholesale or discount shop for sale of
merchandise (i.e., sale to the general public of merchandise stored in or
delivered from the demised premises), retail service shop, labor union, school
or classroom, governmental or quasi-governmental bureau, department or agency,
including an autonomous governmental corporation, or a company engaged in the
business of renting office or desk space. Nothing contained in this Article 58
or elsewhere in this lease shall prevent Tenant from using the demised premises
for the sale and showing of shoes (as permitted under Article 2 hereof),
provided that (i) Tenant shall conduct same in accordance with the provisions
of Article 65 hereof, (ii) Tenant shall not conduct such sales on an
off-the-street basis, and (iii) Tenant shall not use, or suffer or permit
anyone to use, the demised premises for any purpose that would (x) increase
traffic to and from the Unit or the Building to a level greater than customary
for ordinary general, executive and showroom use or (y) compromise, in
Landlord's reasonable judgment, any sign-in or other security arrangements
which Landlord may from time to time adopt.
59. Sprinkler System:
If there now is or shall be installed in the Unit or the
Building a "sprinkler system," and such system or any of its appliances shall
be damaged or injured or not in proper working order by reason of any act or
omission of Tenant, Tenant's agents, servants, employees, licensees or
visitors, Tenant shall forthwith restore the same to good working condition at
its own expense, and if the New York Board of Fire Underwriters or the New York
Fire Insurance Rating Organization or any bureau, department or official of the
state or city government, shall require or recommend that any changes,
modifications, alterations or additional sprinkler heads or other equipment be
made or supplied by reason of Tenant's business, or the location of the
partitions, trade fixtures, or other contents of the demised premises, Tenant
shall, at Tenant's expense, promptly make and supply such changes,
modifications, alterations, additional sprinkler heads or other equipment. To
the best of Landlord's knowledge, the sprinkler system serving the demised
premises is in working order.
60. Condominium:
(a) Pursuant to a Declaration of Condominium (the "Declaration")
covering the Building dated December 7, 1987 and recorded April 26, 1988 on
Reel 1394, Page 453 in the Office of the Register of the City of New York, the
demised premises constitutes a portion of the Commercial Condominium Unit of
the CitySpire Condominium (the "Condominium"), consisting of portions of the
subcellar, cellar, ground floor and floors two (2) through twenty-four (24) of
the condominium building known as 156 West 56th Street, New York, New York (the
"Building") and of an interest in the common elements of the Building
appurtenant to the Unit. Tenant acknowledges that its right to use and occupy
the demised premises is subject and subordinate in all respects to the
provisions of the Declaration and the by-laws adopted by the Condominium (the
"By-laws") and to such other rules and regulations as the Board of Managers may
from time to time promulgate (the "Condominium Rules and Regulations"),
including without limitation, the rules and regulations attached hereto as
Schedule E. Landlord agrees to
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<PAGE> 31
notify Tenant of any changes made by the Board of Managers to the Condominium
Rules and Regulations reasonable promptly after Landlord receives notice
thereof. Failure of Tenant to comply with the provisions of the Declaration or
the By-laws or the Condominium Rules and Regulations shall constitute a breach
of this lease. This lease grants Tenant a leasehold estate in the demised
premises for the term specified herein together with a non-exclusive right
during the term of this lease to use, and permit its invitees, employees and
agents to use, in common with others, the common areas of the Unit and Building
(excluding the common areas of the Residential Section (as defined in the
Declaration) and common walkways necessary for access to the Unit, and, if the
portion of the demised premises on any floor includes less than the entire
floor, the common toilets, corridors and elevator lobby on such floor, subject
at all times to the provisions of the Declaration and By-laws and the
Condominium Rules and Regulations Tenant shall indemnify, defend, and hold
harmless Landlord from and against any claims or damages, direct or indirect,
incurred by Landlord as a result of the non-compliance by any of the aforesaid
persons with the provisions of the Declaration or By-laws or the Condominium
Rules and Regulations.
(b) Tenant acknowledges that the remaining portion of the Building (other
than the balance of the Unit and other than the Garage Condominium Unit) is
used as a first-class, high-quality residential condominium. Tenant's use of
the demised premises shall, at all times, be in keeping with the residential
nature of the Building and shall not cause any annoyance or disturbance to the
residents thereof.
(c) To the extent that the obligations set forth in this lease on the
part of Landlord to be performed, including without limitation any obligations
with respect to services and the maintenance, repair and restoration of the
Building and Building systems, are, in accordance with the provisions of the
Declaration and By-laws, in fact the obligations of the Condominium regime.
Landlord shall not be responsible for the performance of any such obligations
and Tenant agrees to look solely to the Condominium regime for the performance
of such obligations. Landlord shall in no event be liable to Tenant nor shall
the obligations of Tenant hereunder be impaired or the performance thereof
excused because of any failure or delay on the Condominium regime's part in
performing such obligations. If however Landlord concurs with Tenant that there
is a default in the performance of any such obligation, Landlord shall make a
reasonable effort to obtain compliance with any such obligation by the
Condominium regime.
61. Addendum to Article 34:
(a) In lieu of the cash security deposit provided for in Article 34
hereof, Tenant may at any time after the Commencement Date (provided that
Tenant shall not then be in default beyond any applicable notice and grace
periods with respect to any of the terms, provisions, covenants and conditions
of this lease) deliver to Landlord, and shall thereafter, except as otherwise
provided herein, maintain in effect at all times during the term hereof, an
irrevocable letter of credit, substantially in the form annexed hereto as
Schedule G, in the amount of the security required pursuant to this lease
issued by a banking corporation satisfactory to Landlord and having its
principal place of business or having a duly licensed branch or agency in the
State of New York. Such letter of credit shall have an expiration date no
earlier than the first anniversary of the date of issuance thereof and shall be
automatically renewable from year to year unless terminated by the issuer
thereof by notice to Landlord given not less than 45 days prior to the
expiration thereof. Except as otherwise provided herein, Tenant shall,
throughout the term of this lease, deliver to Landlord, in the event of the
termination of any such letter of credit, replacement letters of credit in lieu
thereof (each such letter of credit and such extensions or replacements
thereof, as the case may be, is hereinafter referred to as a "Security Letter")
no later than 45 days prior to the expiration date of the preceding Security
Letter. The term of each such Security Letter shall be not less than one year
and shall be automatically renewable from year to year as aforesaid. If Tenant
shall fail to obtain any replacement of a Security Letter within the time
limits set forth in this Section 61(a), Landlord may draw down the full amount
of the existing Security Letter and retain the same as security hereunder.
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<PAGE> 32
(b) In the event Tenant defaults, after notice and the expiration of any
applicable cure periods, in respect to any of the terms, provisions, covenants
and conditions of this lease, including, but not limited to, the payment of
fixed rent and additional rent, Landlord may use, apply or retain the whole or
any part of the security so deposited to the extent required for the payment of
any fixed rent and additional rent or any other sum as to which Tenant is in
default or for any sum which Landlord may expend or may be required to expend by
reason of Tenant's default in respect of any of the terms, provisions,
covenants, and conditions of this lease, including but not limited to, any
damages or deficiency accrued before or after summary proceedings or other
re-entry by Landlord. To insure that Landlord may utilize the security
represented by the Security Letter in the manner, for the purpose, and to the
extent provided in this Article 61, each Security Letter shall provide that the
full amount thereof may be drawn down by Landlord upon the presentation to the
issuing bank of Landlord's draft drawn on the issuing bank with a signed
statement which shall contain the following sentence "Tenant is in default,
after notice and the expiration of any applicable cure periods, of its
obligations under the Lease referenced in the attached letter of credit."
Landlord shall have no obligation (i) to provide any statement or memorandum to
the issuing bank other than as set forth in the preceding sentence or (ii) to
provide evidence to the issuing bank or to Tenant of the truthfulness of such
statement.
(c) In the event that Tenant defaults in respect of any of the terms,
provisions, covenants and conditions of this lease and Landlord utilizes all or
any part of the security represented by the Security Letter but does not
terminate this lease as provided in Article 17 or 49 hereof, Landlord may, in
addition to exercising its rights as provided in Section 61(b) hereof, retain
the unapplied and unused balance of the principal amount of the Security Letter
as security for the faithful performance and observance by Tenant thereafter of
the terms, provisions, and conditions of this lease, and may use, apply, or
retain the whole or any part of said balance to the extent required for payment
of fixed rent, additional rent, or any other sum as to which Tenant is in
default or for any sum which Landlord may expend or be required to expend by
reason of Tenant's default in respect of any of the terms, provisions, covenants
and conditions of this lease. In the event Landlord applies or retains any
portion or all of the security delivered hereunder, Tenant shall forthwith
restore the amount so applied or retained so that at all times the amount
deposited shall be not less than the security required by Article 34.
(d) In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the lease and
after delivery of entire possession of the demised premises to Landlord. In the
event of a sale of the Building or leasing of the Building, Landlord shall have
the right to transfer any interest it may have in the Security Letter to the
vendee or lessee and Landlord shall thereupon be released by Tenant from all
liability for the return of such Security Letter, provided such vendee or lessee
assumes any responsibilities of Landlord with respect to such Security Letter,
and Tenant agrees to look solely to the new landlord for the return of said
Security Letter, and it is agreed that the provisions hereof shall apply to
every transfer or assignment made of the Security Letter to a new landlord.
Tenant further covenants that it will not assign or encumber or attempt to
assign or encumber the monies deposited herein as security and that neither
Landlord nor its successors or assigns shall be bound by any such assignment,
encumbrance, attempted assignment or attempted encumbrance. In the event of a
sale or lease of the Building Landlord shall have the right to require Tenant to
deliver a replacement Security Letter naming the new landlord as beneficiary
and, if Tenant shall fail to timely deliver the same, to draw down the existing
Security Letter and retain the proceeds as security hereunder until a
replacement Security Letter is delivered.
62. Partnership Tenant:
If Tenant is a partnership (or is comprised of two (2) or more persons,
individually and as co-partners of a partnership) or if Tenant's interest in
this lease shall be assigned to a partnership (or to two (2) or more persons,
individually and as co-partners of a partnership) pursuant to Article 11 or
Schedule D hereof (any such partnership and such persons are referred to in this
Article 62 as "Partnership Tenant"), the following provisions of this Article 62
shall apply to such Partnership Tenant:
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<PAGE> 33
(a) the liability of each of the parties comprising Partnership Tenant
shall be joint and several, and
(b) each of the parties comprising Partnership Tenant hereby consents in
advance to, and agrees to be bound by, any written instrument which may
hereafter be executed, changing, modifying or discharging this lease, in whole
or in part, or surrendering all or any part of the demised premises to Landlord,
and by notices, demands, requests or other communications which may hereafter be
given, by Partnership Tenant or any of the parties comprising Partnership
Tenant, and
(c) any bills, statements, notices, demands, requests or other
communications given or rendered to Partnership Tenant or to any of the parties
comprising Partnership Tenant shall be deemed given or rendered to Partnership
Tenant and to all such parties and shall be binding upon Partnership Tenant and
all such parties, and
(d) if Partnership Tenant shall admit new partners, all of such new
partners shall by their admission to Partnership Tenant, be deemed to have
assumed performance of all of the terms, covenants and conditions of this lease
on Tenant's part to be observed and performed, and
(e) Partnership Tenant shall give prompt notice to Landlord of the
admission of any such new partners, and upon demand of Landlord, shall cause
each such new partner to execute and deliver to Landlord an agreement in form
satisfactory to Landlord, wherein each such new partner shall assume performance
of all of the terms, covenants and conditions of this lease on Tenant's part to
be observed and performed (but neither Landlord's failure to request any such
agreement nor the failure of any such new partner to execute or deliver any such
agreement to Landlord shall vitiate the provisions of subdivision (d) of this
Section)
63. Layout and Finish:
(a) Tenant hereby covenants and agrees that Tenant will, at Tenant's own
cost and expense, and in a good and workmanlike manner, make and complete the
work and installations in and to the demised premises set forth below in such
manner so that the demised premises will be tasteful and dignified executive,
general and sales offices and showroom facility.
(b) Tenant, at Tenant's expense, shall prepare a final plan or final set
of plans and specifications (which said final plan or final set of plans, as the
case may be, and specifications are hereinafter called the "final plan") which
shall contain complete information and dimensions necessary for the construction
and finishing of the demised premises. The final plan shall be submitted to
Landlord for Landlord's written approval. Landlord shall not be deemed
unreasonable in withholding its consent to the extent that the final plan
prepared by Tenant pursuant hereto involves the performance of work or the
installation in the demised premises of materials or equipment which do not
equal or exceed the standard of quality typically adopted by landlords of
first-class office buildings in midtown Manhattan.
(c) In accordance with the final plan, Tenant, at Tenant's expense, will
make and complete in and to the demised premises (hereinafter sometimes called
the "Work Area") the work and installations (hereinafter called "Tenant's Work")
specified in the final plan. Tenant agrees that Tenant's Work will be performed
with the least possible disturbance to the occupants of other parts of the
Building and to the structural and mechanical parts of the Building and Tenant
will, at its own cost and expense leave all structural and mechanical parts of
the Building which shall or may be affected by Tenant's Work in good and
workmanlike operating condition. Tenant, in performing Tenant's Work will, at
its own cost and expense, promptly comply with all laws, rules and regulations
of all public authorities having jurisdiction in the Building with reference to
Tenant's Work. Tenant shall not do or fail to do any act which shall or may
render the Building of which the demised premises are a part, liable to any
mechanic's lien or other lien and if any such lien or liens be filed against the
Building of which the demised premises are a part, or against Tenant's Work, or
any part thereof, Tenant will, at Tenant's own cost and expense, promptly remove
the same of record within thirty (30) days after the filing of such lien or
liens, or in default thereof, Landlord may cause any such lien or liens to be
removed of record
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<PAGE> 34
by payment of bond or otherwise, as Landlord may elect, and Tenant will
reimburse Landlord for all costs and expenses incidental to the removal of any
such lien or liens incurred by Landlord. Tenant shall indemnify and save
harmless Landlord of and from all claims, counsel fees, loss, damage and
expenses whatsoever by reason of any liens, charges or payments of any kind
whatsoever that may be incurred or become chargeable against Landlord or the
Building of which the demised premises are a part, or Tenant's Work or any part
thereof, by reason of any work done or to be done or materials furnished or to
be furnished to or upon the demised premises in connection with Tenant's Work.
Tenant hereby covenants and agrees to indemnify and save harmless Landlord of
and from all claims, counsel fees, loss, damage and expenses whatsoever by
reason of any injury or damage, howsoever caused, to any person or property
occurring prior to the completion of Tenant's Work or occurring after such
completion, as a result of anything done or omitted in connection therewith or
arising out of any fine, penalty or imposition or out of any other matter or
thing connected with any work done or to be done or materials furnished or to be
furnished in connection with Tenant's Work. At any and all times during the
progress of Tenant's Work, Landlord shall be entitled to have a representative
or representatives on the site to inspect Tenant's Work and such representative
or representatives shall have free and unrestricted access to any and every part
of the demised premises. Tenant shall advise Landlord in writing of Tenant's
general contractor and subcontractors who are to do Tenant's Work, and such
general contractor and subcontractors shall be subject to Landlord's prior
written approval; such contractor and subcontractors shall be subject to
Landlord's prior written approval; such contractors shall, to the extent
permitted by law, use employees for Tenant's Work who will work harmoniously
with other employees on the job. As of the date hereof, Landlord hereby approves
the contractors and consultants set forth on the list annexed hereto as Exhibit
K for the performance of Tenant's Work. Furthermore, at such time as Tenant
solicits bids for the performance of Tenant's Work, Tenant shall afford Vanguard
Construction Company, Inc. (hereinafter called "Landlord's Designated
Contractor") the opportunity to bid thereon. Nothing contained in the preceding
sentence shall be deemed to obligate Tenant to utilize Landlord's Designated
Contractor for the performance of Tenant's Work.
(d) Tenant shall at Tenant's sole cost and expense file all necessary
architectural plans and obtain all necessary approvals and permits in connection
with Tenant's Work being performed by it pursuant to this Article 63.
(e) The following conditions shall also apply to Tenant's Work:
(i) all Tenant's Work shall be of material, manufacture, design,
capacity and color at least equal to the standard typically adopted by
landlords of first-class office buildings on midtown Manhattan;
(ii) Tenant, at Tenant's expense shall (i) file all required
architectual, mechanical and electrical drawings and obtain all necessary
permits, and (ii) furnish and perform all engineering and engineering drawings
in connection with Tenant's Work. Tenant shall obtain Landlord's approval of
the drawings referred to in (i) and (ii) hereof, which approval shall not be
unreasonably withheld or delayed;
(iii) all of Tenant's Work shall be performed by Tenant in accordance
with all of the rules and regulations adopted by the Building for the
performance of alterations;
(iv) Tenant shall use only an engineer approved by Landlord with
respect to the preparation of Tenant's engineering drawings for Tenant's Work;
and
(v) All of the provisions of Article 3 and 51 hereof shall apply to
Tenant's performance of Tenant's Work.
(f) Landlord shall, at Tenant's written request, cooperate in all
reasonable respects with Tenant in the performance by Tenant of Tenant's Work
in preparing the demised premises for Tenant's occupancy and Landlord shall
instruct its employees and contractors to render such assistance and to
cooperate with Tenant's employees, representatives and contractors provided
that to the extent that Landlord shall incur any expense in so cooperating or
in rendering such assistance. Tenant shall reimburse Landlord for such expense
as additional rent hereunder.
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<PAGE> 35
(g) Landlord shall allow Tenant a credit in the amount of $1,027,720.00
hereinafter called the "Work Credit", which credit shall be solely applied
against the cost and expense of the actual construction to be performed by
Tenant in connection with the Tenant's Work, provided that a portion of the
Work Credit not to exceed $102,772.00 may be applied by Tenant against the cost
and expense of the architectural, engineering and filing fees and permits
incurred by Tenant in connection with the preparation of plans with respect to
Tenant's Work and the filing thereof with the Department of Buildings of the
City of New York. In the event that the cost and expense of the actual
construction included in Tenant's Work shall exceed the amount of the Work
Credit. Tenant shall be entirely responsible for such excess. In the event that
the cost and expense of the actual construction included in Tenant's Work shall
be less than the Work Credit. Tenant shall be permitted to credit the amount of
any excess against the monthly installments of fixed rent next becoming due
hereunder. The Work Credit shall be payable by Landlord to Tenant promptly as
Tenant's Work progresses and upon receipt by Landlord of paid invoices from
contractors and suppliers in an amount not exceeding the Work Credit but in no
event shall the same be payable more often than once every thirty (30) days.
(h) At any and all times during the progress of Tenant's Work,
representatives of Landlord shall have the right of access to the demised
premises and inspection thereof and shall have the right to withhold all or any
portion of the Work Credit as shall equal the cost of correcting any portions of
Tenant's Work which shall not have been performed in accordance with the final
plan and in an manner which equals or exceeds the standard of quality
typically adopted by landlords of first-class office buildings in midtown
Manhattan.
(i) In connection with the payment of any installment of the Work Credit,
Tenant shall promptly after the completion of the portion of Tenant's Work for
which payment is requested and prior to the payment of such portion of the
Work Credit, furnish to Landlord a certificate signed by Tenant's architect
certifying that such portion of Tenant's Work has been completed in accordance
with Tenant's approved final plan, and a statement of the contractor or
contractors performing such portion of Tenant's Work, acknowledging payment by
Tenant for such portion of Tenant's Work and releasing Tenant from all further
liability for payment in connection therewith.
(j) In addition, Tenant shall, prior to the payment of the final
installment of the Work Credit, furnish to Landlord a general release from the
contractors performing Tenant's Work releasing Landlord and Tenant from all
further liability with respect to Tenant's Work, and all Building Department
sign-offs, inspection certification the "as built" plans and any permits
required to be issued by any governmental entities having jurisdiction
thereover.
(k) It is understood that of the services to be furnished by Landlord
referred to in Article 29 hereof, Landlord shall not furnish any cleaning
services until Tenant commences occupancy of the demised premises for the
conduct of its business. Tenant shall be responsible for removal of Tenant's
refuse and rubbish during the period that Tenant's Work is in progress in the
demused premises.
64. Additional Space Option:
(a) For purposes of this lease, the "Additional Space" shall mean the
remaining portion of the fourteenth (14th) floor of the Building known as Suite
1404 (hereinafter called the "Additional Space") as shown cross-hatched on the
plan annexed hereto as Schedule H.
(b) Provided that Tenant is not then in default of any of the terms,
provisions and conditions of this lease on Tenant's part to be performed either
as of the "Inclusion Date" or as of the date of the giving of the "Additional
Space Notice" (as such terms are hereinafter defined). Tenant shall have the
option to include the entire Additional Space within the demised premises as of
August 1, 2000 (such effective date for the inclusion of the Additional Space
in the demised premises pursuant to this Article 64 is hereinafter referred to
as the "Inclusion Date"), upon the terms and subject to the conditions of this
lease (including without limitation the provisions of Article 36 and the base
year factors set forth in Article 35 hereof) and to such additional terms and
conditions as are hereinafter set forth. Such option shall be
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<PAGE> 36
exercised by a written notice (hereinafter called the "Additional Space Notice")
from Tenant to Landlord, given on or prior to January 31, 2000. In the event
Tenant shall timely give the Additional Space Notice to Landlord, the Additional
Space shall be added to and included in the demised premises effective as of the
Inclusion Date. Promptly following the Inclusion Date, at the request of
Landlord, Landlord and Tenant shall enter into a supplementary agreement with
respect thereto, but their failure to do so shall not affect any of the rights
and obligations of the parties hereunder.
(c) In the event that Tenant shall timely exercise its option with
respect to the Additional Space in accordance with the provisions of subsection
64(b) hereof, then in such event, effective as of the Inclusion Date:
(i) the fixed rent payable by Tenant hereunder shall be increased on
account of the inclusion of the Additional Space by an amount equal to: (x) One
Hundred Nine Thousand Sixty-Nine and 50/100 ($109,069.50) Dollars per annum
during the period described in clause (i) of Section 57(a) hereof, (y) One
Hundred Fifteen Thousand Eight Hundred Thirty-Three and 50/100 ($115,833.50)
Dollars per annum during the period described in clause (ii) of Section 57(a)
hereof, and (z) One Hundred Twenty-Five Thousand Nine Hundred Seventy-Nine and
50/100 ($125,979.50) Dollars per annum during the period described in clause
(iii) of Section 57(a) hereof;
(ii) Tenant's Operating Proportionate Share, as defined in Section
35(d) hereof, shall be increased by 1.11 (1.11%) percent with respect to the
Additional Space;
(iii) Tenant's Tax Proportionate Share, as defined in Section 35(e)
hereof, shall be increased by 1.04 (1.04%) percent with respect to the
Additional Space; and
(iv) The security required to be maintained pursuant to Article 34
hereof shall be increased by the sum of $29,592.50.
(d) Notwithstanding the provisions of Section 64(c)(i) above, the fixed
rent payable by Tenant with respect to the Additional Space shall be partially
abated during the six (6) month period (hereinafter called the "Additional Space
Abatement Period") commencing on the Inclusion Date and ending on the day
preceding the sixth (6th) month anniversary of the Inclusion Date, so that
during the Additional Space Abatement Period, the additional fixed rent payable
by Tenant pursuant to this Article 64 shall be at the rate of $634.13 per month,
which amount represents the monthly installment of the ERIF (as such term is
defined in Article 37 hereof) attributable to the Additional Space, and is
subject to adjustment as set forth therein.
(e) Tenant shall accept the Additional Space in its condition and state
of repair existing as of the Inclusion Date, and Tenant understands and agrees
that Landlord shall not be required to perform any work, supply any materials
or incur any expense to prepare the Additional Space for Tenant's occupancy.
(f) If Tenant does not timely send the Additional Space Notice pursuant
to the provisions of this Article 64 (time being of the essence with respect to
the giving of such notice), then this Article 64 shall have no further force
and effect and shall be deemed deleted from this lease, and Tenant shall have
forever waived and relinquished its right to the Additional Space and Landlord
shall at any and all times thereafter be entitled to lease the Additional Space
to others at such rental and upon such terms and conditions as Landlord in its
sole discretion may desire.
(g) The provisions of this Article 64 shall be effective only if on the
Inclusion Date, the named Tenant herein shall be in actual occupancy of eighty
(80%) percent of the demised premises, provided that such occupancy requirement
may be waived by Landlord in its sole discretion.
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<PAGE> 1
EXHIBIT 10.19
[ALLEN & COMPANY INCORPORATED LETTERHEAD]
September 8, 1997
Confidential
2Way Media, Inc.
1632 Fifth Street
Santa Monica, CA 90401
Attn: Mr. Robert Roback
Mr. Dave Goldberg
Gentlemen:
We are pleased to confirm our mutual understanding concerning the
retention by 2Way Media, Inc. (collectively with its subsidiaries and
affiliates, the "Company" or "2Way") of Allen & Company Incorporated ("Allen")
to act as the Company's exclusive financial advisor on the terms set forth
herein. It is understood that the Company's main contact at Allen & Company
shall be Stanley S. Shuman.
2Way and Allen agree that:
1. 2Way hereby engages Allen as its exclusive financial advisor, whereby
Allen shall, upon the Company's request:
a. Review with members of senior management the Company's financial
plans, strategic plans and business alternatives;
b. Advise the Company with respect to financing alternatives
involving equity, debt and combinations thereof;
c. Advise the Company with respect to acquisitions, joint ventures
and strategic alliances which appear to us to provide
opportunities for the Company or which you independently
determine to pursue
As compensation for services described in paragraph 1 above, the
Company shall issue to Allen, upon execution of this Agreement,
warrants to purchase that number of shares of the Company's common
stock (the "Warrants") representing 7% of the outstanding common stock
of the Company on a fully-diluted basis. The Warrants
<PAGE> 2
2Way Media, Inc.
September 8, 1997
Page 2
shall be adjusted to take account of newly issued common stock which is
expected to be issued in connection with the private placement which the
company has discussed with Allen. The Warrants shall be exercisable at any
time up to the fifth anniversary of the date of issuance at an exercise
price of $0.25 per share. The terms and provisions of the Warrants are set
forth in Exhibit A attached hereto.
In connection with each completed Transaction (as hereinafter defined)
whereby Allen acts as financial advisor to the Company, the Company will pay
Allen an additional fee to be mutually agreed upon, such fee to be
consistent with the market practice for such financial advisory service as
provided by nationally-recognized investment banking firms.
"Transaction" as used herein shall mean any acquisition, investment,
business combination, merger, sale of stock or assets, joint venture,
recapitalization, or any similar financial transaction or event not in the
ordinary course of trade or business, involving the Company and a
third-party.
With respect to any debt or equity underwriting or private placement, the
Company shall offer a right of first refusal to Allen to act as its
exclusive financial advisor in connection therewith and will pay Allen an
additional fee to be mutually agreed upon, such fee to be consistent with
the market practice for such services as provided by nationally-recognized
investment banking firms.
3. In addition to any fees described above, whether or not any Transaction is
consummated, the Company shall reimburse Allen, upon request from time to
time, for all reasonable out-of-pocket expenses incurred in connection with
our engagement hereunder, including fees and disbursements of our counsel
(including those incurred in representing Allen in the preparation,
negotiation and execution of this engagement letter).
4. The initial term of this engagement shall be for a period of three years
from the date hereof and may be extended as the parties shall mutually
agree, subject to the establishment of arrangements for additional
compensation and other appropriate terms for such extension.
Notwithstanding termination of this engagement or completion of any
assignment hereunder, however, Allen shall be entitled to the payment of a
fee for any Transaction as established pursuant to paragraph 2 hereof,
whether or not such Transaction relates to an entity introduced or
identified by Allen, if such Transaction is consummated, or if any agreement
or arrangement respecting such Transaction is made, prior to the expiration
of the term or the termination of this engagement. Allen shall also be
entitled to the payment of such fee if after the date of expiration or
termination, but prior to the first anniversary of such date, the Company or
any of its securityholders or affiliates consummates or reaches an agreement
or arrangement with respect to a Transaction with any entity identified by
or introduced to the Company through Allen or with which Allen had contact
on behalf of the Company
<PAGE> 3
2Way Media, Inc.
September 8, 1997
Page 3
Any termination of this engagement pursuant to this paragraph 4
shall otherwise be without liability or continuing obligation for
either party, except for fees or other compensation earned or
expenses incurred by Allen up to the date of termination, or fees
which may be earned after such date as provided above. Furthermore,
the provisions of paragraph 7 hereof relating to indemnification and
contribution shall remain operative and in full force and effect,
notwithstanding the termination of this engagement or the completion
of any or all assignments hereunder.
5. Prior to any press release or other public disclosure relating to
our services hereunder, the Company and Allen shall confer and reach
an agreement upon the contents of any such disclosure.
Notwithstanding the foregoing, except as required by any applicable
law, rule or regulation, no party shall make any public announcement
regarding this engagement or our relationship with the Company
hereunder without the prior consent of the other party.
6. The Company shall provide Allen all information material to its
business and operations as well as any other relevant information
which Allen reasonably requests in connection with the performance
of its services hereunder. The Company understands that Allen may,
in coordination with the Company, be providing such information to
prospective purchasers or investors and other appropriate parties,
but that Allen shall not in any respect be responsible for the
accuracy or completeness of any and all such information. In
addition, the Company acknowledges that, in rendering its services
hereunder, Allen will be using and relying on information available
from public sources and other sources deemed reliable by Allen,
without independent verification by Allen. Allen does not assume
responsibility for the accuracy or completeness of any such
information.
7. The Company agrees that in the event Allen or any of Allen's
officers, employees, agents, affiliates or controlling persons, if
any (each of the foregoing, including Allen, an "Indemnified
Person"), become involved in any capacity (whether or not as a
party) in any action, claim, proceeding or investigation (including
any securityholder action or claim or any action brought by or in
the right of the Company) related to or arising out of our
engagement, including any related services already performed and any
modifications or future additions to such engagement, the Company
will promptly upon demand advance to such Indemnified Person, or
reimburse each such Indemnified Person for, its legal and other
expenses (including the cost of any investigation and preparation)
as and when they are to be incurred, or are incurred, in connection
therewith.
In addition, the Company will indemnify and hold harmless each
Indemnified Person from and against, and no Indemnified Person shall
have any liability (whether direct or indirect, in contract or tort
or otherwise) to the Company or its securityholders or creditors
for, any losses, claims, damages, liabilities or expenses
(including, without limitation, attorney's fees and expenses)
related to or arising out of our engagement, any services provided
thereunder or any transactions or proposed transactions related
<PAGE> 4
2Way Media, Inc.
September 8, 1997
Page 4
thereto, including any related services already performed and any
modifications or future additions to such engagement, whether or not
any pending or threatened action, claim proceeding or investigation
giving rise to such losses, claims, damages, liabilities or expenses
is initiated or brought by or on behalf of the Company and whether or
not in connection with any action, claim, proceeding or investigation
in which the Company or any Indemnified Person is a party, except to
the extent that any such loss, claim, damage, liability or expense is
found by a court of competent jurisdiction in a judgment that has
become final in that it is no longer subject to appeal or review to
have resulted directly and primarily from such Indemnified Person's
bad faith or gross negligence.
If for any reason the foregoing indemnification is held
unenforceable, then the Company shall contribute to the loss, claim,
damage, liability or expense for which such indemnification is held
unenforceable in such proportion as is appropriate to reflect the
relative benefits received, or sought to be received, by the Company
and its securityholders on the one hand and the party entitled to
contribution on the other hand in the matters contemplated by this
engagement, as well as the relative fault of the Company and such
party with respect to such loss, claim, damage, liability or expense
and any other relevant equitable considerations. The Company agrees
that, to the extent permitted by applicable law, in no event shall
the Indemnified Persons be responsible for or be required to
contribute amounts which in the aggregate exceed the fees, if any,
actually paid to Allen for such financial advisory services.
The Company's reimbursement, indemnity and contribution obligations
under this letter shall be in addition to any liability which the
Company may otherwise have and shall not be limited by any rights
Allen or any other Indemnified Person may otherwise have. The Company
agrees that, without Allen's prior written consent, which will not be
unreasonably withheld, the Company will not settle; compromise or
consent to the entry of any judgment in any pending or threatened
claim, action, proceeding or investigation in respect of which
indemnification or contribution could be sought hereunder (whether or
not Allen or any other Indemnified Person is an actual or potential
party to such claim, action, proceeding or investigation), unless such
settlement, compromise or consent includes an unconditional release
of each Indemnified Person from all liability arising out of such
claim, action, proceeding or investigation.
The provisions of this Paragraph 7 shall remain in effect
indefinitely, notwithstanding the completion of this assignment, the
expiration of the term hereof or any other termination of this
engagement.
8. No waiver, amendment or other modification of this agreement shall be
effective unless in writing and signed by each party to be bound
hereby. This agreement, and any claim related directly or indirectly
to this agreement, shall be governed by, and construed in accordance
with, the laws of the State of New York applicable to agreements
executed and to be fully performed therein. The parties hereby
irrevocably and unconditionally submit (to the extent permitted by
law) to the
<PAGE> 5
2Way Media, Inc.
September 8, 1997
Page 5
nonexclusive jurisdiction of the courts of the State of New York
located in the City and County of New York and the United States
District Court for the Southern District of New York for any legal
action or proceeding arising out of this agreement or Allen's
engagement hereunder, and each of the parties hereby irrevocably
consents to service of process in any such action or proceeding by
certified or registered mail at the address for such party set forth
above. Allen and the Company (on the Company's own behalf and, to the
extent permitted by applicable law, on behalf of its stockholders and
creditors) waive all right to trial by jury in any action, proceeding
or counterclaim (whether based upon contract, tort or otherwise)
related to or arising out of our engagement. The obligations of this
agreement shall be binding upon and shall inure to the benefit of the
parties hereto, the Indemnified Persons hereunder and any of their
successors, assigns, heirs and personal representatives.
Please confirm that the foregoing is in accordance with your understanding
of the terms of our engagement by signing and returning to us the enclosed
duplicate of this letter, which shall thereupon constitute a binding agreement
between us.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ STANLEY S. SHUMAN
-------------------------------
Stanley S. Shuman
Executive Vice President
Accepted and agreed to
as of the date first above written:
2WAY MEDIA, INC.
By: /s/ ROBERT D. ROBACK
-------------------------------
Date: 9/10/97
-----------------------------
<PAGE> 1
EXHIBIT 10.20
[ALLEN & COMPANY INCORPORATED LETTERHEAD]
September 8, 1997
Confidential
2Way Media, Inc.
1632 Fifth Street
Santa Monica, CA 90401
Attn: Mr. Robert Roback
Mr. Dave Goldberg
Gentlemen:
Reference is hereby made to that certain Financial Advisory Services
Letter Agreement, dated September 8, 1997, by and between 2Way Media, Inc. (the
"Company") and Allen & Company Incorporated (the "Letter Agreement"), pursuant
to which the Company has engaged Allen & Company Incorporated ("Allen") to act
as its exclusive financial advisor on the terms set forth therein.
This letter shall confirm the agreement of the appointment by the Company
of Allen, and the agreement of Allen to act, as its exclusive financial advisor
in connection with the Company's offering of its Series D Preferred Stock (the
"Offering"). In connection therewith, Allen hereby agrees to assist the Company
in identifying qualified subscribers for the Offering on a "best efforts" basis.
The Offering shall constitute a "Transaction" under the Letter Agreement
and all terms and provisions of the Letter Agreement are incorporated herein
with regard to the Offering.
In connection with the Offering, the Company shall pay to Allen, at the
closing of the Offering, a fee equal to 3% of the gross proceeds raised in the
Offering (exclusive of gross proceeds raised in the Offering through the
purchase of Series D Preferred Stock by currently existing shareholders of the
Company and exclusive of proceeds raised by the conversion by Digital Ventures
Limited of its currently outstanding bridge loan, pursuant to its terms), and
shall reimburse Allen for its out-of-
<PAGE> 2
2Way Media, Inc.
September 8, 1997
Page 2
pocket expenses as provided in Paragraph 3 of the Letter Agreement.
The terms and conditions of the engagement of Allen hereunder with respect
to the Offering shall be more fully set out in a placement agency agreement to
be executed by Allen and the Company prior to the consummation of the Offering.
We look forward to working together on this matter.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ STANLEY S. SHUMAN
-------------------------------
Name: Stanley S. Shuman
Title: Exec VP
Accepted and Agreed to as of
the date first above written:
2WAY MEDIA, INC.
By: /s/ ROBERT D. ROBACK
-----------------------------
Name: Robert D. Roback
Title: President
<PAGE> 1
EXHIBIT 10.21
CONFIDENTIAL
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of April 10, 1995 (the "Effective
Date"), between Jeffrey M. Mickeal (the "Executive"), and 2Way Media, Inc. (the
"Company").
WITNESSETH THAT:
WHEREAS, the parties desire to enter into this Agreement pertaining to the
Executive's employment by the Company;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth below, it is hereby covenanted and agreed by the Executive and the
Company as follows:
1. Term. Subject to the terms and conditions of this Agreement, the
Company hereby agrees to employ the Executive as Chief Financial Officer of the
Company during the Agreement Term (as defined below) and the Executive hereby
agrees to remain in the employ of the Company and, in such capacity, to provide
services during the Agreement Term in accordance with this Agreement. The
"Agreement Term" shall be the period beginning on the Effective Date and ending
on the first anniversary thereof; provided, however, that unless one party
gives written notice to the contrary to the other party at least 60 days in
advance of the last day of the Agreement Term, the Agreement Term shall be
automatically extended for 12-month periods.
2. Duties. The Executive agrees that, during the Agreement Term, while
he is employed by the Company, he will devote his full time, energies and
talents to serving as the Chief Financial Officer of the Company and shall be
the principal accounting and financial officer of the Company. The Executive
shall: (a) have charge of and be responsible for the maintenance of adequate
books of account for the Company; (b) have charge and custody of all funds and
securities of the Company, and be responsible therefor and for the receipt and
disbursement thereof; and (c) perform the duties incident to the Office of
Chief Financial Officer and such other duties as may from time to time be
prescribed by the Board of Directors, Chief Executive Officer or President. The
Executive will report directly to the Company's Chief Executive Officer and
President. The Executive shall perform all duties assigned to him faithfully
and efficiently, subject to the directions of the Chief Executive Officer and
President of the Company. Notwithstanding the foregoing provisions of this
Section 2, the Executive may devote reasonable time to performing consulting
services for entities other than the Company to the extent that such activities
do not, in the reasonable judgment of the Board of Directors (the "Board"),
inhibit or prohibit the performance of the Executive's duties or obligations
under this Agreement or conflict in any material way with the business of the
Company.
<PAGE> 2
3. Compensation. Subject to the terms and conditions of this Agreement,
during the Agreement Term while he is employed by the Company, the Company
shall compensate the Executive for his services as follows:
(a) The Executive shall receive an annual salary (the "Base Salary")
of $80,000.00. The Executive's Base Salary shall be payable in
substantially equal monthly or more frequent installments, in
accordance with the regular payroll practices of the Company.
(b) The Executive's cash compensation package shall be reviewed
annually by the Board beginning with the first anniversary of the
Effective Date.
(c) The Executive shall be eligible to participate in employee
benefit plans maintained from time to time by the Company on
terms and conditions that are substantially similar to those
that apply to other management employees of the Company, as in
effect from time to time, including any long-term disability or
dental programs that may be established by the Company in its
sole discretion.
(d) The Executive will be provided with parking, similar to that
provided to the Company's other senior executives, at the
Company's office at the Company's expense.
(e) The Executive shall be reimbursed, on terms and conditions that
are substantially similar to those that apply to other
management employees of the Company, for reasonable expenses for
entertainment, travel (local and out of town), meals, lodging
and similar items actually incurred by him in the promotion of
the Company's business.
(f) The Executive shall be entitled to paid vacations in accordance
with the Company's policy in effect from time to time for
similarly situated employees; provided, however, that in no
event shall the Executive be entitled to less than three weeks'
vacation for any calendar year.
(g) The President of the Company will recommend to the Board that
the Executive be awarded, as soon as practicable after the
Effective Date, incentive stock options to purchase 260 shares
of common stock of the Company under the terms of the 2Way
Media, Inc. 1994 Stock Option Plan (the "Stock Option Plan")
which options shall have an
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<PAGE> 3
exercise price equal to the fair market value on the date of grant,
will vest monthly over a five year period beginning 90 days after the
Effective Date (with 3 months' vesting to occur on such 90th day),
subject to the terms of the Stock Option Plan and the option agreement
evidencing the grant of such options. The Executive shall continue to
be eligible for future awards under the Stock Option Plan in
accordance with its terms.
4. Rights Upon Termination. The Executive's employment with the Company
may be terminated during the Agreement Term by the Company or the Executive for
any reason upon no less than two weeks' notice (the date on which such
termination of employment, if any, occurs being referred to herein as the
Executive's "Termination Date"); provided, however, that any termination by the
Company on account of Cause (as defined in paragraph 4(b)) shall be effective
upon notice to the Executive and shall not be subject to any advance notice
requirement. In the event of any such termination, the Executive's right to
benefits and payments under this Agreement for periods after his Termination
Date shall be determined in accordance with the following provisions of this
Section 4:
(a) If the Executive's Termination Date occurs during the Agreement Term
for any reason, the Executive shall be entitled to the following
payments and benefits, in addition to any payments or benefits to
which the Employee may be entitled under the specific terms of any
employee benefit plans or arrangements or the following provisions of
this Section 4 (other than this paragraph 4(a)):
(i) his accrued but unpaid Base Salary for the period ending with
his Termination Date;
(ii) his earned but unpaid bonuses, if any, for the period ending
with his Termination Date;
(iii) payment for accrued but unpaid vacation days, determined as of
his Termination Date in accordance with the Company's policy as
in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date but in no event more than 60 days
thereafter.
(b) If the Executive's Termination Date occurs during the
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<PAGE> 4
Agreement Term on account of (i) Cause (as defined below), (ii) the
Executive's death, (iii) the Executive's disability (as defined
below), (iv) voluntary resignation (including notice by the Executive
to the Company in accordance with Section 1 that the Agreement Term
will not be extended past the last day of the then current 12-month
period), or (v) the mutual agreement of the Executive and the
Company, then, except as otherwise expressly provided in this
Agreement or as agreed in writing between the Executive and the
Company, the Company shall have no obligation to make payments or
provide benefits under this Agreement for periods after the
Executive's Termination Date. For purposes of this Agreement, "Cause"
shall be determined by the Board in good faith and shall mean (1) the
willful and continued failure by the Executive to substantially
perform his duties for the Company; (2) the willful engaging by the
Executive in conduct which is demonstrably and materially injurious
to the Company, monetarily or otherwise; (3) an illegal or negligent
action of the Executive which substantially and adversely affects the
Company; or (4) the violation by the Executive of the provisions of
Section 5 or 6 of this Agreement. For purposes of this Agreement, the
term "disability" shall mean the inability of the Executive, with
reasonable accommodation, to continue to perform his duties under
this Agreement on a full-time basis as a result of mental or physical
illness, sickness or injury for a period of 90 days within any
12-month period, as determined in the sole reasonable discretion of
the Board after receipt of an opinion by a physician selected by the
Executive. The Executive shall be entitled to payment of his Base
Salary for any period of disability, up to a maximum of 90 days
within any 12-month period.
(c) If, in accordance with Section 1, the Company gives notice to the
Employee that the Agreement Term will not be extended past the last
day of the then current 12-month period, then, in addition to the
benefits and payments to be provided pursuant to paragraph 4(a), the
Executive shall be entitled to receive from the Company for the
period commencing on the last day of the then current 12-month period
and ending on the earliest of (i) the date which is three months
after the last day of the then current 12-month period, (ii) the
first day on which the Employee violates the provisions of Section 5
or 6, or (iii) the date of the Employee's death, the Base Salary
described in paragraph 3(a), as in effect on the last day of the then
current 12-month period,
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<PAGE> 5
payable in accordance with paragraph 3(a).
(d) If the Executive's Termination Date occurs during the Agreement Term and
is on account of the Executive's termination of employment by the Company
for reasons other than Cause (and is not on account of any reason
described in paragraph 4(b) or does not occur under circumstances to which
paragraph 4(c) applies) and after the date which is 90 days after the
Effective Date, then in addition to the benefits and payments to be
provided pursuant to paragraph 4(a), the Executive shall be entitled to
receive from the Company for the period commencing on his Termination Date
and ending on the earlier of (i) the date which is five months after his
Termination Date, (ii) the first date on which the Executive violates the
provisions of Section 5 or 6, or (iii) the date of the Executive's death,
the Base Salary described in paragraph 3(a), as in effect on his
Termination Date, payable in accordance with paragraph 3(a).
(e) Notwithstanding any other provision of this Agreement, the Executive's
Termination Date shall be deemed to be on account of termination by the
Company for reasons other than Cause if his employment is terminated by
the Company within six months of a Change in Control and, upon such
termination of employment, the Executive shall be entitled to benefits, if
any, pursuant to paragraph (d). For purposes of this Agreement, a "Change
in Control" shall be deemed to occur on the earliest to occur of the
following events (i) the shareholders of the Company (determined as of the
Effective Date) cease to own, either directly or indirectly, at least 50%
of the voting power of all outstanding common stock of the Company, or
(ii) the election to the Board of directors constituting a majority of the
number of directors in office unless such directors are individuals who
were directors on the Effective Date or were recommended for election by
the Board as comprised on the Effective Date. Once a Change in Control has
occurred for purposes of this Agreement, no future events which would
otherwise constitute a Change in Control shall entitle the Executive to
benefits pursuant this paragraph (e).
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<PAGE> 6
5. Confidentiality. The Executive hereby agrees that:
(a) Except as may be required by law or the lawful order of a court or
agency of competent jurisdiction or as expressly consented to or
authorized by the Company, he will not, directly or indirectly,
disclose, or use for his own benefit or for the benefit of any other
person or entity (other than the Company) any secret or confidential
information, customer lists, supplier information or any other
information pertaining to the Company or the business, financial
affairs or products of the Company which is not public.
(b) Upon his Termination Date, he will promptly return to the Company any
and all records, documents, physical property, information or other
materials relating to the business of the Company obtained by him
during his course of employment with the Company.
Nothing in the foregoing provisions of this Section 5 shall be construed so as
to prevent the Executive from using in connection with employment for himself
or an employer other than the Company knowledge that he possessed prior to his
employment with the Company.
6. Noncompetition. The Executive hereby agrees that, except as
expressly permitted by Section 2:
(a) During the Agreement Term he will not, directly or indirectly, own an
interest in, operate, join, control, or participate in, or be
connected as an officer, employee, agent, independent contractor,
partner, shareholder, or principal of any corporation, partnership,
proprietorship, firm, association, person, or other entity producing,
designing, providing, soliciting orders for, selling, distributing,
or marketing products, goods, equipment,or services that directly or
indirectly compete with the Company's product or the Company's
business.
(b) For one year following his Termination Date, he will not undertake any
employment or activity competitive with the Company's business of
publishing an interactive CD-ROM music magazine in which the loyal and
complete fulfillment of the duties of the competitive employment or
activity would call on him to reveal, to make judgments on, or
otherwise to use any confidential business information or trade
secrets of the Company's business to which he had access during the
course of his employment with the Company.
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<PAGE> 7
The foregoing provisions of this Section 6 shall not apply if the Company ceases
to exist other than by reason of merger, sale of stock, sale of assets,
reorganization or other corporate transaction or if the Company ceases to
publish an interactive CD-ROM music magazine.
7. Equitable Remedies. The Executive acknowledges that the Company
would be irreparably injured by a violation of Section 5 or 6 and he agrees that
the Company, in addition to any other remedies available to it for a breach or
threatened breach of such Sections, shall be entitled to a preliminary
injunction, temporary restraining order or other equivalent relied, restraining
the Executive from any actual or threatened breach of either Section 5 or 6. If
a bond is required to be posted in order for the Company to secure an injunction
or other equitable remedy, the parties agree that said bond need not be more
than a nominal sum.
8. Withholding. All compensation payable under this Agreement shall
be subject to applicable withholding taxes and other employment taxes as
required with respect to compensation paid by an employer to an employee.
9. Nonalienation. The Executive's interests under this Agreement are
not subject to the claims of his creditors and may not otherwise be voluntarily
or involuntarily assigned, alienated or encumbered.
10. Amendment. This Agreement may by amended or cancelled only by
mutual written agreement of the parties hereto without the consent of any other
person. So long as the Executive lives, no person, other than the parties
hereto, shall have any rights under or interest in this Agreement or the subject
matter hereof.
11. Applicable Law. The provisions of this Agrement shall be construed
in accordance with the laws of the state of California.
12. Severability. The invalidity or unenforceability of any provision
of this Agreement will not affect the validity or enforeceability of any other
provision of this Agreement, and this Agreement will be construed as if such
invalid ore unenforceable provision were omitted (but only to the extent that
such provision cannot be appropriately reformed or modified).
13. Waiver of Breach. No waiver by any party hereto of a breach of any
provision of this Agreement by any other party, or of compliance with any
condition or provision of this Agreement to be performed by such other party,
will operate or be construed as
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<PAGE> 8
a waiver of any subsequent breach by such other party or any similar or
dissimilar provisions and conditions at the same or any subsequent time. The
failure of any party hereto to take any action by reason of such breach will
not deprive such party of the right to take actions at any time while such
breach continues.
14. Successors. This Agreement shall be binding upon and insure to the
benefit of the Executive, the Company and the Company's successors and assigns,
including, without limitation, any corporation into which the Company is merged
and any other person or entity acquiring or succeeding to, whether by merger,
consolidation, purchase of assets or otherwise, all or substantially all of the
Company's assets and business.
15. Notices. Notices and all other communications provided for in this
Agreement shall be in writing and shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid, or
sent by facsimile or prepaid overnight courier to the parties at the addresses
set forth below (or such other addresses as shall be specified by the parties
by like notice). Such notices, demands, claims and other communications shall
be deemed given:
(a) in case of delivery by overnight service with guaranteed next day
delivery, the next day or the date designated for delivery;
(b) in the case of certified or registered U.S. mail, five days after
deposit in the U.S. mail; or
(c) in the case of facsimile, the date upon which the transmitting party
received confirmation of receipt by facsimile, telephone or otherwise;
provided, however, that in no event shall any such communications be deemed to
be given later than the date they are actually received. Communications that
are to be delivered by the U.S. mail or by overnight service are to be
available to the addresses set forth below:
to the Company:
2Way Media, Inc.
1632 5th Street
Suite 330
Santa Monica, California 90401
Attention: President
to the Executive:
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<PAGE> 9
Jeffrey M. Mickeal
2181 North El Molino
Altadena, California 91001
16. Arbitration of All Disputes. Any controversy or claim arising out of
or relating to this Agreement (or the breach of this Agreement), including
whether Cause exists, shall be settled by final, binding and non-appealable
arbitration in Los Angeles, California by three arbitrators. Except as
otherwise provided in this Section 16, the arbitration shall be conducted in
accordance with the rules of the American Arbitration Association (the
"Association") then in effect. One of the arbitrators shall be appointed by the
Company, one shall be appointed by the Executive, and the third shall be
appointed by the first two arbitrators. If the first two arbitrators cannot
agree on the third arbitrator within 30 days of the appointment of the second
arbitrator, then the third arbitrator shall be appointed by the Association.
This Section 16 shall not be construed to limit the Company's right to obtain
relief under Section 7 with respect to any matter or controversy subject to
Section 7 and, pending a final determination by the arbitrator with respect to
any such matter or controversy, the Company shall be entitled to obtain any
such relief by direct application to a court of law, without being required to
first arbitrate such matter or controversy.
17. Costs of Enforcement. If it becomes necessary for either party to
retain legal counsel or incur other costs or expenses in connection with either
enforcing or defending against any allegations of breach of this Agreement by
the other party, the prevailing party shall be entitled to recover from the
other party costs, expenses and reasonable attorneys' fees incurred by the
prevailing party in connection with such enforcement or defense.
18. Entire Agreement. Except as otherwise noted herein or in any
separation agreement subsequently entered into by the Executive and the
Company, this Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes all prior and
contemporaneous agreements, if any, between the parties relating to the subject
matter hereof. The enforceability of this Agreement shall not cease or
otherwise be adversely affected by the termination of the Executive's
employment with the Company.
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<PAGE> 10
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the day and year first above written.
/s/ JEFFREY M. MICKEAL
-------------------------------
Executive
2Way Media, Inc.
By /s/ ROBERT D. ROBACK
-------------------------------
Its President
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<PAGE> 1
EXHIBIT 10.22
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT is entered into as of March 24, 1999,
between Launch Media, Inc., a Delaware corporation (the "BUYER"), SW Networks
Inc., a New York corporation (the "STOCKHOLDER"), SW Holdings Inc., a Delaware
corporation (the "COMPANY"), and Sony Music Entertainment Inc., a Delaware
corporation ("SMEI"; the Stockholder, the Company and SMEI are each referred to
hereinafter individually as a "SONY PARTY" and collectively as the "SONY
PARTIES").
BACKGROUND
WHEREAS, the Stockholder was a general partner of and the successor to
the business of SW Networks, a New York general partnership (the "PARTNERSHIP");
WHEREAS, by Assignment and Assumption Agreement in the form annexed
hereto as Exhibit A (the "ASSIGNMENT"), immediately prior to the Closing (as
defined herein), the Stockholder shall transfer to the Company all of its
business and assets, except for those listed on Schedule A to the Assignment;
WHEREAS, upon execution and delivery of the Assignment, the Company
shall be the successor to the Stockholder's and Partnership's business of
producing entertainment and news features regarding the entertainment industry
for radio broadcast and internet syndication (the "BUSINESS");
WHEREAS, the Stockholder owns all of the issued and outstanding shares
of capital stock (the "COMPANY SHARES") of the Company; and
WHEREAS, the Buyer desires to purchase from the Stockholder, and the
Stockholder desires to sell to the Buyer, all of the Company Shares on the terms
and subject to the conditions set forth in this Agreement.
NOW THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. In addition to terms defined elsewhere in this
Agreement, the following terms when used in this Agreement shall have the
meanings indicated below:
"AFFILIATE" shall mean (a) with respect to the Buyer, any Person that
controls, is controlled by, or is under common control with, the Buyer and (b)
with respect to a Sony Party, any Person that is controlled by such Sony Party.
"AGGREGATE LOSSES" shall have the meaning set forth in Section 7.3.
[*] = 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.
1
<PAGE> 2
"AGREEMENT" shall mean this Stock Purchase Agreement together with all
exhibits and schedules referred to herein.
"ASSIGNMENT" shall have the meaning set forth in the Background to this
Agreement.
"BUSINESS" shall have the meaning set forth in the Background to this
Agreement.
"BUYER" shall have the meaning set forth in the preamble to this
Agreement.
"BUYER COMMON STOCK" shall have the meaning set forth in Section 2.2.
"BUYER INDEMNIFIED PARTIES" shall have the meaning set forth in Section
7.1.
"BUYER MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
the results of operations, financial condition, business or assets of the Buyer,
taken as a whole.
"BUYER RECIPIENT" shall have the meaning set forth in Section 8.2.
"BUYER SHARES" shall have the meaning set forth in Section 2.2.
"CLOSING" and "CLOSING DATE" shall have the meanings set forth in
Section 2.1.
"COMPANY" shall have the meaning set forth in the Background to this
Agreement.
"COMPANY CONTRACTS" shall have the meaning set forth in Section 3.12.
"COMPANY INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 7.1.
"COMPANY MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
on the results of operations, financial condition, Business or assets of the
Stockholder and the Company, taken as a whole.
"COMPANY SHARES" shall have the meaning set forth in the Background to
this Agreement.
"CONTENT" shall have the meaning set forth in Section 3.13.
"DISCOUNTED SHARE PRICE" shall have the meaning set forth in Section
2.2.
"EMPLOYEES" shall have the meaning set forth in Section 3.17.
"GAAP" shall mean generally accepted accounting principles in the United
States as in effect on the date hereof, consistently applied.
"GOVERNMENTAL ENTITY" shall have the meaning set forth in Section 3.5.
"INTELLECTUAL PROPERTY RIGHTS" shall have the meaning set forth in
Section 3.13.
2
<PAGE> 3
"IPO" shall have the meaning set forth in Section 2.2.
"LICENSED INTELLECTUAL PROPERTY" shall have the meaning set forth in
Section 3.13.
"MUSIC VIDEO LICENSE AGREEMENT" shall mean the Music Video License
Agreement, substantially in the form of Exhibit C hereto, between SMEI and the
Buyer dated as of the Closing Date.
"OFFERING PRICE" shall have the meaning set forth in Section 2.2.
"PARTNERSHIP" shall have the meaning set forth in the Background to this
Agreement.
"PERSON" shall mean any natural person, corporation, unincorporated
organization, partnership, association, limited liability company, joint stock
company, joint venture, trust or government, or any agency or political
subdivision of any government, or any other entity.
"PURCHASE PRICE" shall have the meaning set forth in Section 2.2.
"REGISTRATION RIGHTS AMENDMENT" shall have the meaning set forth in
Section 5.5.
"REGISTRATION STATEMENT" shall have the meaning set forth in Section
2.2.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall have the meaning set forth in Section 2.2.
"SMEI" shall have the meaning set forth in the preamble to this
Agreement.
"SONY INDEMNIFIED PARTIES" shall have the meaning set forth in Section
7.2.
"SONY PARTY" and "SONY PARTIES" shall have the meanings set forth in the
preamble to this Agreement.
"SONY RECIPIENT" shall have the meaning set forth in Section 8.2.
"SPONSORSHIP AND CONTENT LICENSE AGREEMENT" shall mean the Sponsorship
and Content License Agreement, substantially in the form of Exhibit B hereto,
among SMEI, the Company and the Buyer dated as of the Closing Date.
"STOCKHOLDER" shall have the meaning set forth in the preamble to this
Agreement.
"TAX" or "TAXES" shall mean all material income, gross receipts, sales,
stock transfer, excise, bulk transfer, use, employment, franchise, profits,
property or other taxes, fees, stamp taxes and duties, assessments, levies or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority with
respect thereto.
"TRANSACTION DOCUMENTS" shall have the meaning set forth in Section 3.2.
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ARTICLE II
CLOSING; SALE OF COMPANY SHARES; CONSIDERATION
2.1 CLOSING. Subject to the terms and conditions of this Agreement, the
consummation of the sale and purchase and the transfers and deliveries to be
made pursuant to this Agreement (the "CLOSING") shall take place, subject to the
prior or simultaneous fulfillment or waiver of each of the conditions set forth
in Articles V and VI hereof, at 10:00 a.m. on the date on which the closing of
the IPO occurs (the "CLOSING DATE").
2.2 SALE OF COMPANY SHARES; CONSIDERATION. On the terms and subject to
the conditions set forth herein, the Stockholder shall sell to the Buyer, and
the Buyer shall purchase from the Stockholder, the Company Shares. In
consideration of the sale of the Company Shares, the Buyer shall pay to the
Stockholder the purchase price of $12,000,000 (the "PURCHASE"). On the Closing
Date, the Buyer shall pay the Purchase Price by issuing and delivering to the
Stockholder (or its designee) such number of shares (the "BUYER SHARES") of
common stock ("BUYER COMMON STOCK") of the Buyer that in the aggregate have a
value of Twelve Million Dollars ($12,000,000), with each such Buyer Share valued
at a price per share equal to the Discounted Share Price. The "DISCOUNTED SHARE
PRICE" shall be a price per share of Buyer Common Stock equal to 80% of the
offering price (the "OFFERING PRICE") per share of Buyer Common Stock in the
initial public offering (the "IPO") of shares of Buyer Common Stock that will be
offered pursuant to the Prospectus included as part of the Buyer's Registration
Statement on Form SB-2 (the "REGISTRATION STATEMENT") filed with the SEC under
the Securities Act of 1933, as amended (the "SECURITIES ACT") on February 16,
1999, as such Registration Statement may be amended hereafter.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SONY PARTIES
In order to induce the Buyer to enter into this Agreement and to
consummate the transactions contemplated hereby, as of the date hereof and as of
the Closing Date, the Sony Parties, jointly and severally, make the
representations and warranties set forth below to the Buyer.
3.1 ORGANIZATION. 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 right, power and authority to (i) own or lease and
operate its properties and assets, (ii) conduct its business as presently
conducted, and (iii) engage in and consummate the transactions contemplated
hereby. The Stockholder is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York. The Stockholder has all
requisite right, power and authority to (i) own or lease and operate its
properties and assets, (ii) conduct its business as presently conducted, and
(iii) engage in and consummate the transactions contemplated hereby.
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3.2 AUTHORIZATION; ENFORCEABILITY. The Sony Parties have all requisite
right, power and authority to enter into this Agreement, the Content License
Agreement, the Music Video License Agreement and the Registration Rights
Amendment (collectively, the "TRANSACTION DOCUMENTS"), and to perform their
obligations hereunder and thereunder. The Transaction Documents and all other
documents to be executed and delivered by the applicable Sony Parties pursuant
to this Agreement have been duly authorized, executed and delivered and
constitute, and upon execution will constitute, the legal, valid and binding
obligations of such Sony Parties, as applicable, enforceable in accordance with
their respective terms, except to the extent that their enforcement is limited
by bankruptcy, insolvency, reorganization or other laws relating to or affecting
the enforcement of creditors' rights generally and by general principles of
equity.
3.3 NO VIOLATION OR CONFLICT. The execution, delivery and performance of
this Agreement by the Sony Parties and of the Content License Agreement, the
Music Video License Agreement and the Registration Rights Amendment by SMEI and
the consummation by the Sony Parties of the transactions contemplated hereby and
thereby: (a) do not violate or conflict in any material respect with any
provision of law or regulation, or any writ, order, judgment or decree of any
court or governmental or regulatory authority, or any provision of the
certificate of incorporation or Bylaws of any of the Sony Parties or any
license, franchise or permit to which the Company is a party or by which the
Company is bound; and (b) except as set forth on Schedule 3.3, do not, with or
without the passage of time or the giving of notice, result in the breach of, or
constitute a default, cause the termination, cancellation or acceleration of
performance or require any consent under, or result in the creation of any lien,
charge or encumbrance upon the Company pursuant to any material instrument or
agreement to which a Sony Party is a party or by which a Sony Party may be bound
or affected.
3.4 CAPITALIZATION. The authorized capital stock of the Company consists
of 1,000 shares of common stock, par value $.01 per share, of which 100 shares
will be issued, outstanding and owned of record and beneficially by the
Stockholder as of the Closing Date. At the Closing, the Company Shares will be
duly authorized for issuance and validly issued, fully paid and nonassessable,
free and clear of all liens, security interests, pledges, charges, encumbrances
and restrictions. At the Closing, none of the Company Shares will have been
issued in violation of, or will be subject to, any preemptive or subscription
rights. There are no outstanding warrants, options or rights of any kind to
acquire any shares of any class of capital stock of the Company, nor are there
outstanding any rights, securities, obligations or other instruments convertible
into any such shares of the Company, nor are there any obligations to issue any
such warrants, options, rights or convertible instruments.
3.5 CONSENTS AND APPROVALS. Except as set forth on Schedule 3.5 hereto,
no consent, approval, waiver or authorization of, or registration, qualification
or filing with or notice to any federal, state or local governmental or
regulatory authority ("GOVERNMENTAL ENTITY"), or any other Person, is required
to be made by any Sony Party in connection with the execution, delivery or
performance of this Agreement by the Sony Parties and/or the consummation by the
Sony Parties of the transactions contemplated hereby.
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3.6 BROKERS. The Sony Parties have not employed any financial advisor,
broker or finder and have not incurred and will not incur any broker's,
finder's, investment banking or similar fees, commissions or expenses, in
connection with the origination, negotiation or execution of this Agreement or
any of the other Transaction Documents.
3.7 COMPLIANCE WITH LAWS. The Stockholder and the Company (i) have
conducted the Business in compliance with all federal, state, local and foreign
laws, ordinances, regulations, judgments, rulings, orders and other requirements
applicable to the Stockholder or the Company, except where noncompliance would
not have a Company Material Adverse Effect and (ii) have not received any
written notices of violation with respect to any statute, law, or regulation
applicable to the ownership or operation of their businesses, 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, except where any such violation would not
have a Company Material Adverse Effect.
3.8 LITIGATION. Except as set forth on Schedule 3.8 hereto, there is no
litigation, action, complaint, claim or suit, judicial or administrative action,
audit, proceeding or governmental investigation pending or, to the best of the
knowledge of the Sony Parties, threatened, against any Sony Party that would, if
adversely determined, have a Company Material Adverse Effect, or that questions
the validity of this Agreement, any other Transaction Document or any action
taken or to be taken hereunder or thereunder, or that would have a material
adverse effect on the ability of the Sony Parties to perform their obligations
under this Agreement or any other Transaction Document. No Sony Party is in
default under any judgment, order or decree of any court, administrative agency,
commission or other governmental authority or instrumentality, which default
would have a Company Material Adverse Effect.
3.9 FINANCIAL STATEMENTS. The Sony Parties have delivered to the Buyer
true and correct copies of the balance sheets of the Stockholder and the
Partnership as of March 31 for the fiscal year 1998, and for the nine month
period ended December 31, 1998, and the results of its operations and cash flows
and shareholders' equity, including the notes thereto, for the fiscal year ended
March 31, 1998 and for the nine month period ended December 31, 1998, in each
case accompanied by the audit report of PricewaterhouseCoopers, LLP. The
unaudited balance sheet of the Stockholder as of February 28, 1999, and related
income statement and statement of cash flows as of and for the eleven months
ended February 28, 1999, have been delivered to the Buyer. The financial
statements referred to in this Section 3.9 (including the related notes, where
applicable) fairly present the results of operations and financial position of
the Stockholder for the respective fiscal periods or as of the respective dates
therein set forth; and each of such statements (including the related notes,
where applicable) has been prepared in accordance with GAAP consistently applied
during the periods involved, except as indicated in the notes thereto.
3.10 ABSENCE OF CERTAIN CHANGES. Except as contemplated herein or set
forth in Schedule 3.10, since February 28, 1999, no event, circumstance or
condition has occurred or has failed to occur that has caused, or is reasonably
likely to cause, individually or in the aggregate, a Company Material Adverse
Effect, and since February 28, 1999, the Stockholder and the
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Company has carried on the Business in the ordinary course consistent with past
practice (excluding the execution of this Agreement and related matters).
3.11 NO OTHER BUSINESS, ASSETS OR LIABILITIES. The Company was formed on
January 21, 1999. Since its formation, the Company has conducted no other
business other than the Business. The Company has no assets or liabilities other
than those assigned by the Stockholder and assumed by the Company pursuant to
the Assignment.
3.12 CONTRACTS. Set forth on Schedule 3.12 hereto is a list of all
material contracts, leases, commitments or understandings to which the
Stockholder (as of the date hereof and up to the execution and delivery of the
Assignment) or the Company (from the execution and delivery of the Assignment
and through the Closing Date) is a party, or by which the Stockholder or the
Company, as applicable, is bound, whether written or oral. All such contracts,
commitments or understandings are collectively referred to as the "COMPANY
CONTRACTS". The Stockholder and the Company have performed in all material
respects the obligations required to be performed by them under each of the
Company Contracts. Except as indicated on Schedule 3.12: (i) the Company
Contracts are in full force and effect and there are no defaults (or events
which, with notice or lapse of time or both, would constitute a default) by the
Stockholder or the Company, or, to the knowledge of the Sony Parties, by any
other party to any such Company Contract, except where the same would not have a
Company Material Adverse Effect, (ii) no consent of any third party is required
thereunder to consummate the transactions contemplated by this Agreement, and
(iii) except where the same would not have a Company Material Adverse Effect, no
party to any such Company Contract has given written notice that it intends to
cancel, withdraw, modify or amend such Company Contract.
3.13 INTELLECTUAL PROPERTY.
(a) Each of the Company and Stockholder owns or licenses all
patents, trademarks, trade names, service marks, copyrights and mask works, and
any applications for and registrations of such patents, trademarks, trade names,
service marks, copyrights and mask works, and all processes, formulae, methods,
schematics, technology, know-how, computer software programs or applications and
tangible or intangible proprietary information or materials that are material to
the conduct of the business of the Company and the Stockholder, respectively, as
currently conducted (all of which are referred to as the "INTELLECTUAL PROPERTY
RIGHTS").
(b) Schedule 3.13 contains an accurate and complete description
of (i) all patents and patent applications and all trademarks, trade names,
service marks and copyrights which have been registered, included in the
Intellectual Property Rights, including the jurisdictions in which each such
Intellectual Property Right has been issued or registered or in which any such
application for such issuance and registration has been filed, (ii) all material
licenses, sublicenses, distribution agreements and other agreements to which the
Company is a party and pursuant to which any Person is granted rights with
respect to any Intellectual Property Rights or has the right to reproduce,
market or exploit any materials or products of Company or the Stockholder (the
"CONTENT") or any adaptation, translation or derivative work based on any
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Content or any portion thereof, (iii) all material licenses, sublicenses and
other agreements to which the Company or the Stockholder is a party and pursuant
to which the Company or the Stockholder is authorized to use any third party
technology, trade secret, know-how, process, patent, trademark or copyright,
including software ("LICENSED INTELLECTUAL PROPERTY"), except for "shrink wrap"
software for which no royalties are currently owed or in the future may be owed,
(iv) all joint development agreements to which the Company or the Stockholder is
a party, and (v) all agreements with Governmental Entities or other third
parties to which the Company or the Stockholder is a party, pursuant to which
the Company or the Stockholder has obtained funding for research and development
activities.
(c) Each of the Company and the Stockholder is not, nor will it
be as a result of the execution and delivery of the Transaction Documents or the
performance of its respective obligations under the Transaction Documents, in
breach of any license, sublicense or other agreement relating to the
Intellectual Property Rights or Licensed Intellectual Property, except such
breach that would not cause a Company Material Adverse Effect.
(d) Each of the Company and the Stockholder within the past 12
months (i) has not received written notice that it has been sued in any suit,
action or proceeding that 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 written communications alleging that
the Company or the Stockholder 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) does not have actual
knowledge (without having made any investigation) that the marketing, licensing
or sale of any Content or the provision of services in the course of the
Company's and the Stockholder's business, respectively, infringes any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
any third party, and (iv) has not received any written notice of any claim
challenging or questioning the validity or effectiveness of any license or
agreement relating to any Intellectual Property Rights or Licensed Intellectual
Property.
(e) All designs, drawings, specifications, source code, object
code, documentation incorporating, embodying or reflecting any Content at any
stage of its development or created in the course of providing services to
customers of each of the Company and the Stockholder were written, developed and
created solely and exclusively by employees of the Company or the Stockholder
without the assistance of any third party or were created by third parties who
assigned ownership of their rights with respect thereto to the Company or the
Stockholder, except for such failures which, individually or in the aggregate,
would not have a Company Material Adverse Effect.
3.14 REAL PROPERTY. The Company does not own any real property.
3.15 PERSONAL PROPERTY. All of the Company's material personal property
is in operating condition, ordinary wear and tear excepted. The Company owns its
personal property free and clear of all mortgages, liens and encumbrances,
except such encumbrances and liens that
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arise (i) under the Company Contracts listed on Schedule 3.12, or (ii) in the
ordinary course of business and that would not cause a Company Material Adverse
Effect.
3.16 EMPLOYEE BENEFIT PLANS. The Company has no employee benefit plans
(as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended) ("ERISA"). The Company does not now, or has it ever,
maintained, established, sponsored, participated in, or contributed to, any
pension plan within the meaning of Section 3(2) of ERISA which is subject to
Title IV of ERISA or Section 412 of the Internal Revenue Code of 1986, as
amended. At no time has the Company contributed to or been requested to
contribute to any multiemployer plan as defined in Section 3(37) of ERISA.
3.17 EMPLOYEES. As of the date hereof, the employees (the "EMPLOYEES")
and consultants of the Stockholder, their positions and salaries are listed on
Schedule 3.17. As of the Closing Date, each of the Employees shall become an
employee of the Company, except for any Employees whose employment with the Sony
Parties shall have terminated prior to the Closing Date. If any Employee's
employment shall terminate prior to the Closing Date, the Sony Parties shall
give the Buyer written notice thereof on or prior to the Closing Date.
3.18 TAXES. The Company has prepared and filed on a timely basis with
all appropriate Federal, state, local and foreign governmental authorities all
material returns in respect of Taxes it is required to file. All of the
Company's Taxes required to have been paid on or prior to the date hereof have
been paid in full. The Company has withheld from each payment made to any of its
present or former employees, officers, directors or other party all amounts
required by law to be withheld and has, where required, remitted such amounts
within the applicable periods to the appropriate governmental authorities.
Except as set forth in Schedule 3.18, there are no assessments against the
Company with respect to Taxes that have been issued and are outstanding. The
Company is not a party to, or bound by, nor does it have any obligation under
any Tax sharing or Tax indemnification agreement, provision or arrangement,
whether formal or informal. Except as set forth on Schedule 3.18, there is no
Tax deficiency outstanding or assessed or, to the best of the Company's
knowledge, proposed against the Company that is not reflected as a liability on
the balance sheets provided to the Buyer nor has the Company executed any
agreements or waivers extending any statute of limitations on or extending the
period for the assessment or collection of any Tax.
3.19 INVESTMENT REPRESENTATIONS. The Stockholder represents that (a) all
of the Buyer Shares will be acquired for its account and not with a view towards
distribution thereof; (b) it understands that the Buyer Shares will be
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Buyer in a transaction not
involving a public offering and that under such laws and applicable regulations
the Buyer Shares may be resold without registration under the Securities Act
only in certain limited circumstances; (c) it has had an opportunity to ask
questions and receive answers from the Buyer regarding the terms and conditions
of the Buyer Shares and the operations and prospects of the Buyer; (d) it is an
"accredited investor" as such term is defined in Regulation D promulgated under
the Securities Act; and (e) it understands that the certificates representing
the Buyer Shares may bear
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legends to the effect that the Buyer Shares may not be transferred except upon
compliance with the registration requirements of the Securities Act or an
exemption therefrom.
3.20 MISREPRESENTATION. No representation or warranty by the Company or
the Stockholder contained in the Transaction Documents, and no certificate or
schedule furnished or to be furnished by or on behalf of the Company or the
Stockholder pursuant to the Transaction Documents, 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.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
In order to induce the Sony Parties to enter into this Agreement and to
consummate the transactions contemplated hereby, as of the date hereof and as of
the Closing Date, the Buyer makes the representations and warranties set forth
below to the Sony Parties.
4.1 ORGANIZATION. The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The Buyer
has all requisite right, power and authority to (i) own or lease and operate its
properties and assets, (ii) conduct its business as presently conducted, and
(iii) engage in and consummate the transactions contemplated hereby.
4.2 AUTHORIZATION; ENFORCEABILITY. The Buyer has all requisite right,
power and authority to enter into the Transaction Documents and to perform its
obligations hereunder and thereunder. The Transaction Documents and all other
documents to be executed and delivered by the Buyer pursuant to this Agreement,
have been duly authorized, executed and delivered and constitute, and upon
execution, will constitute, the legal, valid and binding obligations of the
Buyer, enforceable in accordance with their respective terms, except to the
extent that their enforcement is limited by bankruptcy, insolvency,
reorganization or other laws relating to or affecting the enforcement of
creditors' rights generally and by general principles of equity.
4.3 NO VIOLATION OR CONFLICT. The execution, delivery and performance of
the Transaction Documents by the Buyer and the consummation by the Buyer of the
transactions contemplated hereby (including, without limitation, the issuance
and delivery of the Buyer Shares) and thereby: (a) do not violate or conflict in
any material respect with any provision of law or regulation, or any writ,
order, judgment or decree of any court or governmental or regulatory authority,
or any provision of the Buyer's Certificate of Incorporation or Bylaws, each as
currently in effect, or any license, franchise or permit to which the Buyer is a
party or by which it is bound; and (b) except as set forth on Schedule 4.3, do
not, with or without the passage of time or the giving of notice, result in the
breach of, or constitute a default, cause the termination, cancellation or
acceleration of performance, or require any consent under, or result in the
creation of any lien, charge or encumbrance upon any property or assets of the
Buyer pursuant to any material instrument or agreement to which the Buyer is a
party or by which the Buyer or any of its properties may be bound or affected.
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4.4 CAPITALIZATION. As of the date hereof, the authorized capital stock
of the Buyer is as set forth in the Registration Statement and there are no
other series or classes of capital stock of the Buyer authorized or issued and
outstanding nor are any shares of the Buyer's capital stock held in treasury. At
the Closing, the Buyer Shares will be duly authorized for issuance and validly
issued, fully paid and nonassessable, free and clear of all liens, security
interests, pledges, charges, encumbrances and restrictions. At the Closing, none
of the Buyer Shares will have been issued in violation of, or will be subject
to, any preemptive or subscription rights. Except as set forth in the
Registration Statement, there are no outstanding warrants, options or rights of
any kind to acquire any shares of any class of capital stock of the Buyer, nor
are there outstanding any rights, securities, obligations or other instruments
convertible into any such shares of the Buyer, nor are there any obligations to
issue any such warrants, options, rights or convertible instruments. All prior
sales of the Buyer's securities have been made in compliance with or under an
exemption from the registration requirements of the Securities Act and
applicable state securities laws, and no shareholders of the Buyer have any
rescission rights with respect to any securities of the Buyer.
4.5 CONSENTS AND APPROVALS. Except as set forth on Schedule 4.5 hereto,
no consent, approval, waiver or authorization of, or registration, qualification
or filing with or notice to any Governmental Entity, or any other Person, is
required to be made by the Buyer in connection with the execution, delivery or
performance of this Agreement and the other Transaction Documents by the Buyer
and/or the consummation by the Buyer of the transactions contemplated hereby or
thereby.
4.6 BROKERS. The Buyer has not employed any financial advisor, broker or
finder and has not incurred and will not incur any broker's, finder's,
investment banking or similar fees, commissions or expenses, in connection with
the origination, negotiation or execution of this Agreement or any other
Transaction Document.
4.7 REGISTRATION STATEMENT; DISCLOSURE. The financial statements
(including the related notes, where applicable) contained in the Registration
Statement fairly present the results of the operations and the financial
position of the Buyer for the respective fiscal periods or as of the respective
dates therein set forth and each of such statements (including the related
notes, where applicable) has been prepared in accordance with GAAP consistently
applied during the periods involved, except as indicated in the notes thereto.
The Registration Statement complies with the requirements of the Securities Act
and the rules and regulations of the SEC promulgated thereunder and does not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not misleading.
ARTICLE V
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
All obligations of the Buyer under this Agreement are subject to the
fulfillment of each of the following conditions, any or all of which may be
waived in whole or in part by the Buyer, in its sole discretion:
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5.1 SONY PARTIES' PERFORMANCE. The Sony Parties shall have performed and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed or complied with by them and the Sony
Parties' representations and warranties shall be true in all material respects
as of the Closing Date as if made on the Closing Date.
5.2 DELIVERIES BY STOCKHOLDER AND COMPANY. The Sony Parties shall have
delivered to the Buyer:
(a) Stock certificates representing the Company Shares in a form
suitable for transfer to the Buyer, together with stock powers executed by the
Stockholder;
(b) The stock books, stock ledgers, minute books and corporate
seals of the Company;
(c) Written resignations of all officers and directors of the
Company;
(d) Certified resolutions of the Boards of Directors of the
Stockholder and the Company, authorizing the execution and performance of this
Agreement and all actions to be taken by the Stockholder and the Company under
this Agreement;
(e) A certificate of an officer of the Company that the condition
set forth in Section 5.1 has been fulfilled; and
(f) A certified copy of the Assignment, duly executed by the
parties thereto.
5.3 OPINION OF COUNSEL. The Buyer shall have received an opinion of
counsel to SMEI and the Stockholder substantially in the form of Exhibit D
hereto.
5.4 CONSENTS. The Sony Parties shall have delivered to the Buyer the
consents of third parties to the transactions hereby contemplated set forth on
Schedule 5.4.
5.5 REGISTRATION RIGHTS AMENDMENT. SMEI shall have executed and
delivered to the Buyer an Amendment to the Second Amended and Restated Investors
Rights Agreement (the "REGISTRATION RIGHTS AMENDMENT"), substantially in the
form of Exhibit E hereto, in connection with the Buyer Shares delivered
hereunder.
5.6 SPONSORSHIP AND CONTENT LICENSE AGREEMENT. SMEI shall have delivered
to the Buyer the Sponsorship and Content License Agreement, duly executed by
SMEI.
5.7 MUSIC VIDEO LICENSE AGREEMENT. SMEI shall have delivered to the
Buyer the Music Video License Agreement, duly executed by SMEI.
5.8 SMEI INVESTMENT. SMEI shall have made the investment contemplated by
Section 8.8.
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5.9 IPO CLOSING. The Registration Statement shall have been declared
effective by the SEC, the shares of Buyer Common Stock to be offered in the IPO
shall have been priced by the underwriters selling such shares, and the closing
of the purchase and sale of the shares of Buyer Common Stock offered in the IPO
shall have been consummated.
ARTICLE VI
CONDITIONS PRECEDENT TO SONY PARTIES' OBLIGATIONS
All obligations of the Sony Parties under this Agreement are subject to
the fulfillment of each of the following conditions, any or all of which may be
waived in whole or in part by the Sony Parties, in their sole discretion:
6.1 BUYER'S PERFORMANCE. The Buyer shall have performed and complied in
all material respects with all covenants, agreements and conditions required by
this Agreement to be performed or complied with by it and the Buyer's
representations and warranties shall be true in all material respects as of the
Closing Date as if made on the Closing Date.
6.2 DELIVERIES BY BUYER. The Buyer shall have delivered to the Sony
Parties:
(a) Stock certificates representing the Buyer Shares, with the
number of Buyer Shares determined in accordance with Section 2.2, registered in
the name of SMEI or its designee;
(b) Certified resolutions of the Board of Directors of the Buyer,
authorizing the execution and performance of this Agreement and all actions to
be taken by the Buyer under this Agreement; and
(c) A certificate of an officer of the Buyer that the condition
set forth in Section 6.1 has been fulfilled.
6.3 OPINION OF COUNSEL. SMEI and the Stockholder shall have received an
opinion of counsel for the Buyer substantially in the form of Exhibit F hereto.
6.4 CONSENTS. The Buyer shall have delivered to SMEI and the Stockholder
the consents of third parties to the transactions hereby contemplated set forth
on Schedule 6.5.
6.5 REGISTRATION RIGHTS AMENDMENT. The Buyer shall have executed and
delivered to SMEI the Registration Rights Amendment.
6.6 SPONSORSHIP AND CONTENT LICENSE AGREEMENT. The Buyer and the Company
shall have delivered to SMEI and the Stockholder the Sponsorship and Content
License Agreement, duly executed by the Buyer and the Company.
6.7 MUSIC VIDEO LICENSE AGREEMENT. The Buyer shall have delivered to
SMEI the Music Video License Agreement, duly executed by the Buyer.
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6.8 IPO CLOSING. The Registration Statement shall have been declared
effective by the SEC, the shares of Buyer Common Stock to be offered in the IPO
shall have been priced by the underwriters selling such shares, and the closing
of the purchase and sale of the shares of Buyer Common Stock offered in the IPO
shall have been consummated.
6.9 LISTING. The Buyer shall have filed a listing application to list on
NASDAQ the shares of Buyer Common Stock being sold in the IPO and the Buyer
Shares, and such listing application shall have been approved.
6.10 MINIMUM IPO PROCEEDS. The proceeds to the Buyer from the IPO shall
be no less than $20,000,000.
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNITY BY SMEI AND THE STOCKHOLDER. SMEI and the Stockholder,
jointly and severally, agree to indemnify and hold harmless the Buyer and its
affiliates, officers, directors, employees and agents (collectively, the "BUYER
INDEMNIFIED PARTIES"), and following the Closing, the Company and its
affiliates, officers, directors, employees and agents (collectively, the
"COMPANY INDEMNIFIED PARTIES"), from and against, and to reimburse the Buyer
with respect to, any and all loss, damage, liability, claims, cost and expense,
including reasonable attorneys' and accountants' fees, incurred by the Buyer
Indemnified Parties or the Company Indemnified Parties by reason of or arising
out of or in connection with (i) the breach of any representation or warranty
contained in Article III hereof, or any certificate delivered by the Sony
Parties to the Buyer under this Agreement or (ii) the failure of the Sony
Parties to perform any agreement required by this Agreement to be performed by
them. The Buyer agrees to give prompt notice to SMEI and the Stockholder of the
allegation by any third party of the existence of any liability, obligation,
contract, other commitment or state of facts referred to in this Section 7.1.
SMEI and the Stockholder shall be entitled to control the contest, defense,
settlement or compromise of any such claim (including engagement of counsel in
connection therewith), at their own cost and expense, including the cost and
expense of attorneys' fees in connection with such contest, defense, settlement
or compromise and the Buyer shall have the right to participate in the contest,
defense, settlement or compromise of any such claim at its own cost and expense,
including the cost and expense of attorneys' fees in connection with such
participation; provided, however, that, SMEI and the Stockholder shall not
settle or compromise any such claim without the prior written consent of the
Buyer, which consent shall not be unreasonably withheld, provided that such
consent shall not be required in the event that the settlement or compromise
includes an unconditional and complete release of the Company Indemnified
Parties and Buyer Indemnified Parties.
7.2 INDEMNITY BY THE BUYER. The Buyer agrees to indemnify and hold
harmless SMEI and the Stockholder, and their respective affiliates, officers,
directors, employees and agents (collectively, the "SONY INDEMNIFIED PARTIES"),
from and against, and to reimburse the Sony Indemnified Parties on demand with
respect to, any and all loss, damage, liability, claims,
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cost and expense, including reasonable attorneys' and accountants' fees,
incurred by the Sony Indemnified Parties by reason of or arising out of or in
connection with (i) the breach of any representation or warranty contained in
Article IV hereof or in any certificate or other document delivered to the SMEI
and the Stockholder pursuant to the provisions of this Agreement, (ii) the
failure of the Buyer to perform any agreement required by this Agreement to be
performed by it, (iii) the termination of employment of any Employee on or after
the Closing Date or (iv) any liability, obligation or expense arising out of or
in connection with any action, suit, claim, charge, complaint, proceeding or
investigation to the extent arising out of or in connection with the business or
operations of the Company or the Buyer, on or after the Closing Date. SMEI and
the Stockholder agree to give prompt notice to the Buyer of the allegation by
any third party of the existence of any liability, obligation, contract, other
commitment or state of facts referred to in this Section 7.2. The Buyer shall be
entitled to control the contest, defense, settlement or compromise of any such
claim (including the engagement of counsel in connection therewith), at its own
cost and expense, including the cost and expense of attorneys' fees in
connection with such contest, defense, settlement or compromise and SMEI and the
Stockholder shall have the right to participate in the contest, defense,
settlement or compromise of any such claim at their own cost and expense,
including the cost and expense of attorneys' fees in connection with such
participation; provided, however, that, the Buyer shall not settle or compromise
any such claim without the prior written consent of SMEI and the Stockholder,
which consent shall not be unreasonably withheld, provided that such consent
shall not be required in the event that the settlement or compromise includes an
unconditional and complete release of the Sony Indemnified Parties.
7.3 LIMITATIONS ON INDEMNIFICATION. Neither the Buyer Indemnified
Parties and the Company Indemnified Parties, on the one hand, nor the Sony
Indemnified Parties, on the other hand, shall be entitled to be indemnified
pursuant to clause (i) of Section 7.1 hereof, or pursuant to clause (i) of
Section 7.2 hereof (as the case may be) unless, until and to the extent that the
aggregate of all losses, damages, liabilities, costs and expenses of any kind
(other than those referred to in the proviso to this sentence) incurred by the
Buyer Indemnified Parties and the Company Indemnified Parties, or the Sony
Indemnified Parties, as the case may be ("AGGREGATE LOSSES"), exceeds $250,000;
provided that, notwithstanding the foregoing, the Sony Indemnified Parties shall
be entitled to be indemnified on a dollar-for-dollar basis from and against all
losses, damages, liabilities, costs and expenses arising out of or in connection
with the breach by the Buyer of Section 4.6, and the Buyer Indemnified Parties
shall be entitled to be indemnified on a dollar-for-dollar basis from and
against all losses, damages, liabilities, costs and expenses arising out of or
in connection with the breach by SMEI or the Stockholder of Section 3.6 hereof
and in no event shall the liability of SMEI and the Stockholder, on the one
hand, or the Buyer, on the other hand, for all Aggregate Losses hereunder exceed
the Purchase Price. Claims made for indemnification hereunder for a breach of a
representation or a warranty must be made prior to the first anniversary of the
Closing Date. SMEI and the Stockholder shall have the right to pay any of their
indemnification obligations hereunder (other than for direct, out-of-pocket
third-party costs and expenses incurred in connection with third-party claims,
and amounts actually paid to third parties in settlements entered into in
accordance herewith or pursuant to a final judgment not subject to appeal) by
delivering Buyer Shares to the Buyer, which Buyer Shares shall be valued, for
purposes of this Section 7.3, at a price per share equal to the Offering Price.
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ARTICLE VIII
FURTHER AGREEMENTS
8.1 ACCESS TO INFORMATION. The Sony Parties will afford to the Buyer,
through their officers, attorneys, accountants and authorized representatives,
reasonable access to the offices, properties, books and records of the
Stockholder and the Company on reasonable notice during normal business hours in
order to permit the Buyer to make such investigation of the business, properties
and operations of the Stockholder and the Company as the Buyer may deem
necessary or desirable. The Buyer will conduct its due diligence investigation
in a manner which will not interfere with the ongoing business of the
Stockholder and the Company, and the Buyer will coordinate communications with
the Stockholder's employees through representatives of the Sony Parties and will
use its best efforts to maintain the confidentiality of the transaction
contemplated hereby with respect to the Stockholder's employees. The Buyer will
afford the Sony Parties, through its officers, attorneys, accountants and
authorized representatives, reasonable access to the offices, properties, books
and records of the Buyer on reasonable notice during normal business hours in
order to permit the Sony Parties to make such investigation of the business,
properties and operations of the Buyer as the Sony Parties may deem necessary or
desirable.
8.2 CONFIDENTIALITY; PUBLICITY. The parties acknowledge that they
continue to be subject to the confidentiality agreement dated February 2, 1999,
which continues in full force and effect. In addition to their obligations
thereunder, the parties agree as follows:
(a) The Sony Parties agree to, and shall cause their respective
directors, officers, employees and agents (each a "SONY RECIPIENT") to, maintain
in confidence the terms of this Agreement and all information furnished to them
in connection with or relating to this Agreement or the business and affairs of
the Buyer. The preceding sentence shall not apply to information that (i)
becomes generally available to the public other than as a result of disclosure
by such Sony Recipient contrary to this Agreement, (ii) was available to such
Sony Recipient on a non-confidential basis prior to the disclosure to such Sony
Recipient by the Buyer, (iii) becomes available to such Sony Recipient on a
non-confidential basis from a source other than the Buyer, unless such Sony
Recipient knows that such source is bound by a confidentiality agreement or is
otherwise prohibited from transmitting the information to such Sony Recipient by
a contractual obligation, (iv) is independently developed by such Sony Recipient
without reference to confidential information received from the Buyer, or (v) is
required to be disclosed by law or legal process.
(b) The Buyer agrees to, and shall cause its directors, officers,
employees and agents (each a "BUYER RECIPIENT") to, maintain in confidence the
terms of this Agreement and all information furnished to them in connection with
or relating to this Agreement or the business and affairs of the Stockholder and
the Company. The preceding sentence shall not apply to information that (i)
becomes generally available to the public other than as a result of disclosure
by such Buyer Recipient contrary to this Agreement, (ii) was available to such
Buyer Recipient on a non-confidential basis prior to the disclosure to such
Buyer Recipient by the Sony Parties,
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(iii) becomes available to such Buyer Recipient on a non-confidential basis from
a source other than the Sony Parties, unless such Buyer Recipient knows that
such source is bound by a confidentiality agreement or is otherwise prohibited
from transmitting the information to such Buyer Recipient by a contractual
obligation, (iv) is independently developed by such Buyer Recipient without
reference to confidential information received from the Sony Parties, or (v) is
required to be disclosed by law or legal process.
(c) Neither the Buyer nor the Sony Parties, nor any Buyer
Recipient or Sony Recipient, will issue any press release or make any other
public announcement relating to the transactions contemplated by this Agreement
or the terms thereof without the written prior consent of the other party,
provided that any party may make any disclosure required to be made by it under
applicable law if it determines in good faith that it is required to do so and
gives prior notice to the other party, provided further that the Buyer will
provide SMEI with a reasonable opportunity to review and comment on the
disclosure in the Registration Statement regarding this Agreement and the
transactions contemplated hereunder. The Buyer agrees that it will not make any
disclosure regarding the transaction to any employees of the Stockholder without
the prior written consent of the Sony Parties.
8.3 CONDUCT OF BUSINESS. From and after the date hereof and prior to the
Closing Date, SMEI shall cause the Stockholder and the Company to conduct the
Business in the ordinary course thereof, consistent with past practices, except
as may be reasonably necessary or desirable to effectuate the transactions
contemplated hereby.
8.4 NAMES. Except as explicitly provided in the Music Video License
Agreement, from and after the Closing Date, neither the Company, the Buyer nor
any of their affiliates shall use the names "Sony," "Sony Music" or any other
logo, trademark, trade name, assumed name or service mark of any Sony Party or
any of their affiliates or labels, or any logo, trademark, trade name, assumed
name, service mark or other name derived from or confusingly similar to any such
name.
8.5 TRANSITION SERVICES. During the 90-day period following the Closing
Date, SMEI shall continue to provide those services listed on Schedule 8.5 that
it had provided to the Stockholder and the Company prior to the Closing Date.
The Buyer agrees to reimburse SMEI on a monthly basis for all of such services
in accordance with the terms set forth in Schedule 8.5.
8.6 EMPLOYEE SEVERANCE. The Buyer agrees that the Company shall be
solely liable, the Buyer shall cause the Company to pay, and SMEI and the
Stockholder shall have no liability for, amounts owed, for severance or
otherwise, to any Employees that are terminated on or after the Closing Date.
8.7 LISTING OF BUYER SHARES. Prior to Closing, the Buyer shall include
the Buyer Shares in its application to list on NASDAQ the shares of Buyer Common
Stock to be sold in the IPO. The Buyer shall use its best efforts to cause such
listing application to be approved as soon as possible after filing.
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8.8 SMEI'S PURCHASE OF IPO SHARES. Prior to the Closing Date, upon
effectiveness of the IPO, SMEI or its designee shall purchase shares of Buyer
Common Stock from the underwriters in the IPO that in the aggregate have a value
of $1,000,000, valued at the Offering Price. The Buyer agrees to cause such
shares to be made available for purchase by SMEI or its designee at the Offering
Price.
8.9 DIVIDEND OF BUYER SHARES BY STOCKHOLDER TO SMEI. Within 30 days
after the Closing, the Stockholder shall declare and pay a dividend to SMEI
consisting of all of its rights, title and interest in the Buyer Shares which
were issued to the Stockholder by the Buyer pursuant to Section 2.2 of this
Agreement.
8.10 REDUCTION OF BUYER SHARES. Notwithstanding anything contained in
this Agreement, in the event that the issuance and delivery of the Buyer Shares
to the Stockholder on the Closing Date pursuant to Section 2.2 would result in
the Stockholder owning 15% or more of the outstanding voting securities of the
Buyer, the Buyer shall pay the Purchase Price by (i) issuing and delivering such
number of shares of Buyer Common Stock to the Stockholder that will result in
the Stockholder owning 14.9% of the outstanding voting securities of the Buyer
and (ii) issuing and delivering to the Stockholder an option, exercisable upon
or after expiration or termination of the Hart-Scott-Rodino Act waiting period
referred to in the next sentence, to acquire for an aggregate exercise price of
$.01 such number of shares of Buyer Common Stock equal to (a) the number of
Buyer Shares that would have been issued and delivered to the Stockholder on the
Closing Date but for this Section 8.10, minus (b) the number of shares of Buyer
Common Stock that are issued and delivered to the Stockholder on the Closing
Date. If the number of shares of Buyer Common Stock to be issued and delivered
on the Closing Date to the Stockholder is adjusted pursuant to this Section
8.10, then the Buyer and the Stockholder agree that following the Closing Date,
each will promptly file a notification and report relating to the Stockholder's
acquisition of 15% or more of the outstanding voting securities of the Buyer
with the Federal Trade Commission and the Department of Justice in accordance
with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HART-SCOTT-RODINO Act"), will seek early termination of the waiting period
under the Hart-Scott-Rodino Act and will promptly furnish any additional
information requested under the Hart-Scott-Rodino Act.
ARTICLE IX
TERMINATION
9.1 RIGHT TO TERMINATE. This Agreement and the transactions contemplated
hereby may be terminated at any time prior to the Closing:
(a) by the mutual written consent of the Buyer and the Sony
Parties;
(b) by the Buyer, upon written notice to the Sony Parties, if the
Sony Parties have not fulfilled one or more of the conditions specified in
Article V at the time at which the Closing would otherwise occur or if
satisfaction of such a condition is or becomes impossible, provided that at the
time of such notice Buyer has complied in all material respects with its
obligations under this Agreement;
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(c) by the Sony Parties, upon written notice to the Buyer, if the
Buyer has not fulfilled one or more of the conditions specified in Article VI at
the time at which the Closing would otherwise occur or if satisfaction of such a
condition is or becomes impossible, provided that at the time of such notice the
Sony Parties have complied in all material respects with their obligations under
this Agreement; or
(d) by written notice sent by either the Buyer or the Sony
Parties after May 31, 1999, if the Closing shall not have occurred by 11:59 p.m.
on May 31, 1999; provided that the party seeking termination is not the cause of
the failure to close.
9.2 EFFECT OF TERMINATION. In the event of a termination of this
Agreement pursuant to Section 9.1, all further obligations of the parties under
this Agreement except for the obligations under Section 8.2 shall terminate, no
party shall have any right under this Agreement against any other party except
as set forth in this Section 9.2, and each party shall bear its own costs and
expenses; provided, however, that termination under Section 9.1 shall not
relieve any party of liability for any failure to perform or comply with this
Agreement prior to the date of termination, or constitute a waiver of any claim
with respect thereto.
ARTICLE X
MISCELLANEOUS
10.1 NOTICES. Any notice, request, demand or other communication
required or permitted under this Agreement shall be in writing and shall be
delivered personally or sent by certified mail, return receipt requested,
postage prepaid, or sent by prepaid overnight courier to the parties at the
addresses set forth below their names below (or at such other addresses as shall
be specified by the parties by like notice).
If to the Sony Parties:
c/o Sony Music Entertainment Inc.
550 Madison Avenue
New York, New York 10022
Attention: General Counsel
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022-2585
Attention: Lisa Weiss, Esq.
If to the Buyer:
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Launch Media, Inc.
2700 Pennsylvania Avenue
Santa Monica, CA 90404
Attention: President
With a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: James M. Koshland
Such notices, demands, claims and other communications shall be deemed
given when actually received or (a) in the case of delivery by overnight service
with guaranteed next day delivery, the next day or the day designated for
delivery or (b) in the case of certified U.S. mail, five days after deposit in
the U.S. mail.
10.2 SURVIVAL. All statements, certifications, indemnifications,
representations and warranties made hereby by the parties to this Agreement, and
their respective covenants, agreements and obligations to be performed pursuant
to the terms hereof, shall survive the Closing Date and the representations and
warranties made hereby by the parties shall terminate on the first anniversary
of the Closing Date.
10.3 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules to
this Agreement, the Registration Rights Amendment, the Content License
Agreement, the Music Video License Agreement and the Confidentiality Agreement
previously signed by the Buyer and SMEI contain every obligation and
understanding between the parties relating to the subject matter hereof and
merge all prior discussions, negotiations and agreements, if any, between them,
and none of the parties shall be bound by any representations, warranties,
covenants, or other understandings, other than as expressly provided or referred
to herein.
10.4 ASSIGNMENT. This Agreement may not be assigned by any party without
the written consent of the other party, except that this Agreement be assigned
by any party hereto to an Affiliate, provided that the assigning party shall
remain jointly and severally liable with such Affiliate for its obligations
hereunder. Subject to the preceding sentence, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
10.5 WAIVER AND AMENDMENT. Any representation, warranty, covenant, term
or condition of this Agreement which may legally be waived, may be waived, or
the time of performance thereof extended, at any time by the party hereto
entitled to the benefit thereof, and any term, condition or covenant hereof may
be amended by the parties hereto at any time. Any such waiver, extension or
amendment shall be evidenced by an instrument in writing executed on behalf of
the appropriate party by a person who has been authorized by such party to
execute
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waivers, extensions or amendments on its behalf. No waiver by any party hereto,
whether express or implied, of its rights under any provision of this Agreement
shall constitute a waiver of such party's rights under such provisions at any
other time or a waiver of such party's rights under any other provision of this
Agreement. No failure by any party hereto to take any action against any breach
of this Agreement or default by another party shall constitute a waiver of the
former party's right to enforce any provision of this Agreement or to take
action against such breach or default or any subsequent breach or default by
such other party.
10.6 BOOKS AND RECORDS. From and after the Closing, Buyer shall, and
shall cause the Company to, provide SMEI and the Stockholder with such
information as may be reasonably requested for all periods prior to the Closing
Date to enable SMEI and the Stockholder to prepare tax returns and financial and
other reports and SMEI and the Stockholder shall, on reasonable notice to the
Company and the Buyer, have access during usual business hours to the books and
records included in the assets of the Company for all periods prior to the
Closing Date and may make copies and extracts from such books and records, for
all reasonable business and tax purposes. The Buyer agrees to cause the Company
to retain its books and records for all periods prior to the Closing Date for at
least ten (10) years after the Closing Date.
10.7 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any Person
other than the parties hereto and their respective successors and permitted
assigns, any rights or remedies under or by reason of this Agreement.
10.8 SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall be declared invalid, void or unenforceable,
the remainder of the provisions of this Agreement shall remain in full force and
effect, and such invalid, void or unenforceable provision shall be interpreted
as closely as possible to the manner in which it was written.
10.9 EXPENSES. Each party agrees to pay, without right of reimbursement
from the other party, the costs incurred by it incident to the performance of
its obligations under this Agreement and the consummation of the transactions
contemplated hereby, including, without limitation, costs incident to the
preparation of this Agreement, and the fees and disbursements of counsel,
accountants and consultants employed by such party in connection herewith.
10.10 HEADINGS. Article titles and headings to sections herein are
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement. The schedules and
exhibits referred to herein shall be construed with and as an integral part of
this Agreement to the same extent as if they were set forth verbatim herein. The
specification of any dollar amount in the representations or warranties
contained in this Agreement or the inclusion of any specific item in any
schedules hereto is not intended to imply that such amounts, or higher or lower
amounts, or the items so included or other items, are or are not material, and
neither party shall use the fact of the setting of such amounts or the inclusion
of any such item in any dispute or controversy between the parties as to whether
any obligation, item or matter not described herein or included in a schedule is
or is not material for purposes of this Agreement.
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10.11 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.
10.12 GOVERNING LAW; JURISDICTION. This Agreement has been entered into
and shall be construed and enforced in accordance with the laws of the State of
New York without reference to the choice of law principles thereof. The Buyer
agrees that any action, proceeding or claim it commences against any Sony Party
pursuant to this Agreement shall be brought in either the courts of the State of
New York, sitting in New York County, or the courts of the United States for the
Southern District of New York. The Company agrees that any action, proceeding or
claim it commences against SMEI or the Stockholder pursuant to this Agreement
shall be brought in either the courts of the State of New York, sitting in New
York County, or the courts of the United States for the Southern District of New
York. Each of the Stockholder and SMEI agrees that any action, proceeding or
claim it commences against the Buyer or the Company pursuant to this Agreement
shall be brought in either the courts of the State of California, sitting in Los
Angeles County, or the courts of the United States for the Southern District of
California.
10.13 FURTHER ASSURANCES. From time to time following the Closing, SMEI
and the Stockholder shall execute and deliver, or cause to be executed and
delivered, to the Buyer such other instruments of conveyance and transfer as the
Buyer may reasonably request or as may be otherwise necessary to more
effectively convey and transfer to, and vest in, the Buyer and to put the Buyer
in possession of, any part of the Company Shares. From time to time following
the Closing, the Buyer shall execute and deliver, or cause to be executed and
delivered, to SMEI and the Stockholder such other instruments of conveyance and
transfer as SMEI or the Stockholder may reasonably request or as may be
otherwise necessary to more effectively convey and transfer to, and vest in, the
Stockholder or its designee and to put the Stockholder or its designee in
possession of, any part of the Buyer Shares.
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IN WITNESS WHEREOF, the parties hereto have each executed and delivered
this Agreement as of the day and year first above written.
LAUNCH MEDIA, INC.
By: /s/ ROBERT D. ROBACK
-------------------------------------
Title: President
----------------------------------
SW NETWORKS INC.
By: /s/ RON URBAN
-------------------------------------
Title: VP
----------------------------------
SW HOLDINGS INC.
By: /s/ RON URBAN
-------------------------------------
Title: Secretary
----------------------------------
SONY MUSIC ENTERTAINMENT INC.
By: /s/ KEVIN M. KELLEHER
-------------------------------------
Title: SVP & CFO
----------------------------------
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EXHIBIT A
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of ____________,
1999, between SW NETWORKS INC., a New York corporation ("Transferor"), and SW
HOLDINGS INC., a Delaware corporation ("Transferee").
In consideration of 100 shares of common stock, par value $.01
per share, of Transferee received by Transferor and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. The Transferor hereby assigns, transfers and conveys to the
Transferee, its successors and assigns, and Transferee does hereby accept, all
of the Transferor's right, title and interest in and to the business and assets
of the Transferor (the "SW Assets"), excluding only those assets and liabilities
set forth on Schedule A annexed hereto (the "Excluded Assets and Liabilities").
Transferee hereby assumes and agrees to pay, perform and discharge all of the
Transferor's liabilities and obligations arising out of or relating to the SW
Assets, including, without limitation, Transferor's liabilities and obligations
under all contracts, agreements and other arrangements included as part of the
SW Assets, oral or written (the "Assumed Liabilities"), excluding only those
liabilities, obligations, contracts, agreements and other arrangements set forth
on Schedule A hereto. Transferor has retained, and is not transferring hereby,
the Excluded Assets and Liabilities, and Transferee is not assuming any
liabilities or obligations of Transferor other than the Assumed Liabilities.
2. Each party hereby covenants and agrees that, at the reasonable
request of the other party, and at the requesting party's cost and expense, it
shall execute and deliver such further instruments and take such further actions
as may be reasonably necessary or appropriate in order to more effectively
effectuate the transfer of the SW Assets and assumption of the Assumed
Liabilities contemplated herein.
3. To the extent that the assignment of any SW Asset pursuant to
Section 1 hereof shall require the consent of any party, including, without
limitation, any Federal, state or local government entity, this Assignment and
Assumption Agreement shall not constitute an assignment of such SW Asset. Each
of Transferor and Transferee agrees that it will use its commercially reasonable
efforts to obtain the consent of all parties whose consent is required for the
transfer of any SW Asset to Transferee. If such consent is not obtained,
Transferor will cooperate with Transferee in any reasonable arrangement designed
to provide Transferee with the benefit under any such SW Asset.
4. TRANSFEROR DOES NOT MAKE, AND SHALL NOT BE DEEMED TO HAVE MADE
HEREIN, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE,
VALUE, CONDITION, MERCHANTABILITY OR FITNESS FOR USE OF ANY OF THE SW ASSETS, OR
ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT THERETO. TRANSFEROR SHALL HAVE NO LIABILITY OF ANY KIND TO TRANSFEREE
FROM
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OR ARISING OUT OF THIS ASSIGNMENT AND ASSUMPTION AGREEMENT, AND TRANSFEREE SHALL
NEITHER HAVE NOR ASSERT ANY RIGHTS WHATSOEVER HEREUNDER.
5. This Assignment and Assumption Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the parties have caused this Assignment and
Assumption Agreement to be executed as of the date first written above.
SW NETWORKS INC., as transferor
By: _____________________________________
ACCEPTED AND AGREED:
SW HOLDINGS INC.,
as transferee
By: _____________________________
Name:
Title:
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SCHEDULE A - EXCLUDED ASSETS AND LIABILITIES
1. All accounts receivable of Transferor at ______________, 1999, including
for any accounts not yet billed but that arise from services provided
through and including _______________, 1999.
2. All accounts payable of Transferor at _____________, 1999.
3. All liabilities and obligations associated with the following pending
actions:
a. Mantel v. SW Networks, Inc. and Sony Corporation of America, Inc.,
in Supreme Court, New York County, against SW Networks and the
Company.
b. Conover v. SW Networks, in Supreme Court, New York County.
4. Any cash and cash equivalents or rights thereto.
5. All rights and obligations under any Agreements between SW Networks and
On Radio Inc. (formerly Electric Village, Inc.) (as such agreements have
been amended or modified), including, without limitation, the following
agreements:
Common Stock and Warrant Purchase Agreement, dated as of April 1, 1998
Electric Village, Inc. Common Stock Purchase Warrant No 1, dated as of
April 1, 1998
Electric Village, Inc. Common Stock Purchase Warrant No 2, dated as of
April 1, 1998
Registration Rights Agreement, dated as of April 1, 1998
Agreement dated as of April 1, 1998 among SW Networks, Sony Music
Entertainment Inc. and Electric Village, Inc.
6. Any rights whatsoever in and to the domain name: classicemail.com
7. Assets and properties of every kind and description not used solely in
Transferor's business, including, without limitation, (i) assets and
properties relating to both Sony Music Entertainment Inc.'s ("Sony
Music") other businesses and the business of Transferor being
transferred hereby (the "SW Business") used in connection with providing
internal staff services (e.g., telecommunications, payroll, mail,
banking, treasury, legal, human resources, employee benefits, insurance,
tax and purchasing), (ii) books of account, files, papers and records
containing information relating to both Sony Music's other businesses
and the SW Business which are not reasonably susceptible of separation
so as to contain information relevant only to the SW Business, and (iii)
assets and properties, wherever located, leased to Sony Music or any
affiliate thereof other than Transferor.
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8. All liabilities for income taxes.
9. Liabilities for sales and use taxes payable to the State of New York,
plus any potential penalties and interest thereon.
4
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EXHIBIT B
SPONSORSHIP AND CONTENT LICENSE AGREEMENT
THIS SPONSORSHIP AND CONTENT LICENSE AGREEMENT ("Agreement") is made and entered
into as of this _____ day of March, 1999 (the "Effective Date") among LAUNCH
MEDIA, INC., ("Launch") a _______________corporation with offices at 2700
Pennsylvania Avenue, Santa Monica, California 90404, SW Holdings Inc., a
Delaware corporation, with offices at 1370 Avenue of the Americas, New York, New
York 10019 (the "Company") and SONY MUSIC, A GROUP OF SONY MUSIC ENTERTAINMENT
INC. ("Sony Music"), a Delaware corporation, with offices at 550 Madison Avenue,
New York, NY 10022.
WHEREAS, Launch, SW Networks Inc., a Delaware corporation (the "Stockholder")
and Sony Music have simultaneously entered into a separate stock purchase
agreement (the "Purchase Agreement") under which Launch acquired all of the
capital stock of the Company, formerly an indirect subsidiary of Sony Music and
the successor to the business formerly operated by SW Networks, a New York
general partnership (the "Partnership") and the Stockholder, the former general
partner of the Partnership and sole stockholder of the Company (such business
being referred to as the "SW Networks Business"); and
WHEREAS, Launch and Sony Music have further agreed that, subject to the terms
and conditions of this Agreement, the Company will license Sony Music the
Content (as defined) utilized in the conduct of the SW Networks Business.
THEREFORE, IN CONSIDERATION of the mutual promises and understandings set forth
in this Agreement, the parties hereby agree as follows:
1. GRANT OF LICENSE
1.1.1 Subject to the terms and conditions of this Agreement, the Company
grants to Sony Music a limited, worldwide, non-exclusive and
non-transferable license to reproduce, publish, display, perform,
distribute and transmit: (a) all currently existing SW Networks Business
materials and content which has been transferred and/or assigned to the
Company immediately prior to execution of the Purchase Agreement and
which has been made available to the radio station affiliates of the SW
Networks Business, and (b) all materials and content (including access
to artists, actors and celebrities, satellite tours etc.) relating to
the SW Networks Business produced by the Company or by Launch, its
affiliates or third parties (including any and all text and audio files
produced) primarily for use by the Company or in the SW Networks
Business, which is made available by the Company, Launch or its
affiliates to the radio station affiliates of the SW Networks Business,
after the Effective Date (such materials and content described in the
foregoing clauses (a) and (b) being referred to collectively as
"Content"), for use only on Sony Web Sites (as hereinafter defined),
Sony Operated Sites (as hereinafter defined) and related customized
consumer delivery services, including, without limitation, other
electronic delivery options such as e-mail delivery or any other
electronic delivery service now known or hereafter developed.
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1.1.2 As used herein, the "WebSite" means any specific or unique
physical or logical address on the publicly available network of
computer networks commonly referred to as the Internet, including,
without limitation, that portion of the Internet known as the "World
Wide Web" (generally referred to as a "uniform resource locator" or
"URL").
1.1.3 As used herein, a "Sony Web Site" means a Web Site which is
controlled by a Sony Music Entity (as hereinafter defined).
1.1.4 As used herein, a "Sony Operated Site" means a Web Site which is
operated or managed, in whole or in part, but not controlled, by a Sony
Music Entity (as hereinafter defined).
1.1.5 As used herein, "Sony Music Entities" means Sony Music, Sony
Music's direct and indirect parent companies and subsidiaries and any
affiliate of the foregoing (including, without limitation, The Columbia
House Company, Total E, Sony Pictures Entertainment Inc., Sony Online
Entertainment Inc. and Sony Electronics Inc.).
1.1.6 The rights licensed hereunder shall include the right to
reproduce, publish, display, perform, distribute and transmit all
archived Content described in clause (a) of Section 1.1.1 as well as the
right to store and archive all Content delivered hereunder and to
reproduce, publish, display, perform, distribute and transmit such
archived Content for use described in Section 1.1.1 in perpetuity.
1.1.7 Notwithstanding any provision in this Agreement to the contrary,
in the event that Sony Music acquires an entity which is a party to an
agreement with Launch or the Company in respect of the Content, such
agreement shall govern the use of such Content by such entity only until
the sooner to occur of (a) the date of termination of such agreement and
(b) that date that is one year after the date of acquisition of such
entity.
2. DELIVERY OF CONTENT
2.1 The Company shall deliver Content to Sony Music [*] that such Content is
delivered by the Company to any Web Site based service and [*] that such content
is delivered by the Company to any of the radio station affiliates or other
customers of the SW Networks Business, in the format described in Schedule A
hereto.
3. OWNERSHIP AND TREATMENT OF CONTENT
3.1 Sony Music shall place attribution to Launch and/or the Company on the
Sony Web Sites [*] including appropriate copyright, service mark and trademark
or other proprietary rights notices. The parties acknowledge that all
copyrights, logos, trademarks, service marks, symbols and corporate and brand
identifiers (collectively, "Marks") of each party, and all good will associated
therewith, shall remain the exclusive property of such party and the other will
take no
[*] = 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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action that infringes, abridges, jeopardizes, undermines or reduces the value
of, or in any way dilutes the other's ownership or other rights in and to its
Marks.
2.2 Sony Music shall be entitled to promote the Content and the Sony Web
Sites and, in so doing, may use Launch's, the Company's and the SW Networks name
as well as the names and information provided to Sony Music by Launch and/or the
Company relating to authors and contributors to the Content, in each case solely
for promotional purposes but not as an endorsement of any product or service.
4. LICENSE FEES
4.1 In consideration for the license granted to Sony Music pursuant to this
Agreement, Sony Music shall pay the Company the sum of Fifty Thousand Dollars
($50,000) quarterly on each of April 15, July 15, October 15 and January 15,
during the Term.
4.2 In the event that Sony Music elects to use the Content on Sony Operated
Sites, Sony Music and Launch will negotiate in good faith an appropriate
increase in the license fee payable to Launch pursuant to Section 4.1 hereof, or
such other appropriate compensation as the parties shall agree, for such use.
5. PURCHASE OF ADVERTISING/PROMOTION
5.1 Sony Music shall purchase (or caused to be purchased, as provided below)
advertising or promotional/sponsorship spots, as determined by Sony Music, on
Web Sites or other media properties operated by Launch or its affiliates as
determined by Sony Music in a minimum aggregate amount of (a) $800,000 during
the first year of the Term, and (b) $1,300,000 during the second year of the
Term and each Additional Term in effect. Payment of Sony Music's commitment
under this Section 5.1 shall be made in equal quarterly installments, provided
that Launch shall be obligated (subject to exclusivity commitments discussed
below) to satisfy any request for the purchase of advertising or
promotional/sponsorship spots for the requested dates, times and targets (such
as category or search term targets) if Sony Music gives Launch notice of such
request not less than thirty days prior to the first date of intended display of
such requested advertising or sponsorship/promotion. [*]. Any portion of Sony
Music's commitment under this Section 5.1 may be used by Sony Music toward the
payment of customer acquisition fees and otherwise as the parties may agree. All
purchases of advertising and promotional spots,
[*] = 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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and all payments of customer acquisition fees, by any entity which Sony Music
controls, is under common control with, or has an equity interest in, or by any
strategic alliance, joint venture or co-marketing relationship in which any of
the foregoing entities participates (including, without limitation, The Columbia
House Company, Total E, Sony Pictures Entertainment Inc., Sony Online
Entertainment Inc. and Sony Electronics Inc.) shall be credited toward Sony
Music's commitment hereunder, provided that Launch shall not be required to sell
advertising to any such entity if such sale would violate any exclusive
advertiser or sponsor agreements Launch may have with third parties. Launch will
promptly notify Sony Music of all such exclusive agreements and, in the event
that any such exclusive arrangements have a material adverse effect on the
ability of Sony Music to meet its purchase commitment hereunder, Launch and Sony
Music shall negotiate in good faith an appropriate reduction of the amount of
such commitment. Notwithstanding the foregoing, Sony Music shall not receive
credit hereunder for any advertising purchased by Sony Computer Entertainment
Inc. for the Sony Playstation(TM) product or any advertising purchased by Sony
Electronics Inc. for display in Launch's CD-ROM products and shall only receive
credit for [*] of any advertising purchased by Sony Electronics Inc. for display
in on-line media properties operated by Launch. In the event that Sony Music and
any of the foregoing entities purchase advertising or promotional spots or pay
customer acquisition fees in any period in an amount which, in the aggregate, is
greater than Sony Music's commitment under this Section 5.1 for such period, the
amount of such payments in excess of such commitment for such period shall be
credited on a "dollar-for-dollar" basis to Sony Music's commitment under this
Section 5.1 for the immediately succeeding periods. If Sony Music (together with
the foregoing entities) has not placed advertising or promotion/sponsorship in
an amount equal to the payments made by it in any annual period, the unused
portion of such payments up to the aggregate price of all requested advertising
or promotion/sponsorship which Launch did not provide during the applicable year
shall be credited to purchases of advertising or promotional/sponsorship spots
in succeeding periods, until fully utilized.
6. WARRANTIES
6.1 Each party represents and warrants to the other that: (i) it has the right
to enter into and perform its obligations under this Agreement and (ii) neither
the execution or delivery of this Agreement nor performance of its obligations
hereunder violates or infringes on the rights of any other party or any
applicable laws or regulations.
6.2 Launch and the Company jointly and severally represent and warrant that the
Company shall own, or shall have a license, which includes the right to grant
sublicenses, with respect to, all right, title and interest in and to the
Content created after the date hereof, including, without limitation, all rights
under the laws of patent, copyright, trademark, trade secret or any other
intellectual property right.
6.3 [*]
[*] = 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.
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6.4 [*]
6.5 Launch will at all times indemnify and hold Sony Music harmless from and
against any and all claims, damages, liabilities, costs and expenses (including
legal expenses and counsel fees) arising out of any breach by Launch of any
representation, warranty or agreement made by Launch herein. Launch will
reimburse Sony Music on demand for any payment made at any time after the date
hereof in respect of any liability or claim in respect of which Sony Music is
entitled to be indemnified. Launch's indemnification obligation hereunder shall
be limited to the aggregate amounts paid to Launch hereunder.
6.6 EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER PARTY MAKES ANY
REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED WITH RESPECT TO
THE CONTENT OR SONY WEB SITES, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY, NONINFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE.
6.7 IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL,
EXEMPLARY, MULTIPLE, SPECIAL OR INDIRECT DAMAGES (INCLUDING BUT NOT LIMITED TO
LOST BUSINESS PROFITS) WITH RESPECT TO THIS AGREEMENT, EVEN IF SUCH PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF THE SAME.
7. TERM AND TERMINATION
7.1 The initial term of this Agreement (the "Initial Term") will commence as of
the Effective Date and continue for a period of two (2) years from the Effective
Date, unless earlier terminated as permitted under the terms of this Agreement.
After the Initial Term, this Agreement shall continue in effect for up to three
(3) additional, separate one year terms (each, an "Additional Term") at the sole
option of Sony Music to be exercised by written notice delivered to the Company
prior to the expiration of the Initial Term or an Additional Term, as
applicable. The license fee for each Additional Term shall be the same as the
license fee set forth in Section 4.01 hereof. The Initial Term and any
Additional Terms in effect constitute the "Term" of this Agreement.
7.2 If either party materially breaches any provision of this Agreement, the
other party may (reserving cumulatively all rights and remedies under this
Agreement and the Purchase Agreement, at law and in equity) terminate this
Agreement on not less than 30 days' written notice; provided, however, that this
Agreement shall not terminate if the party in breach has cured the breach of
which it has been notified, prior to the expiration of the notice period.
[*] = 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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8. GENERAL
(a) Independent Contractors. The parties hereunder are acting as independent
contractors and neither party has any authority to make commitments, enter
into contracts, bind or otherwise obligate the other in any manner. This
Agreement is not intended and does not confer rights or remedies on third
parties, nor does it create an agency, partnership, joint venture, fiduciary
relationship or any other form of legal association other than arm's length
contracting parties.
(b) Advertising and Publicity. Except as provided in Article 3 above, no party
shall use the name or Marks of any other party, its products or services in
any advertising, publicity releases, marketing or otherwise, without prior
written approval of such other party.
(c) Entire Agreement. This Agreement, including Schedule A hereto, together with
the Purchase Agreement and the other agreements annexed thereto as Exhibits
contain every obligation and understanding between the parties relating to
the subject matter hereof and merge all prior discussions, negotiations and
agreements, if any, between them, and none of the parties shall be bound by
any representations, warranties, covenants, or other understandings, other
than as expressly provided or referred to herein.
(d) Waiver and Amendment. Any representation, warranty, covenant, term or
condition of this Agreement which may legally be waived, may be waived, or
the time of performance thereof extended, at any time by the party hereto
entitled to the benefit thereof, and any term, condition or covenant hereof
may be amended by the parties hereto at any time. Any such waiver, extension
or amendment shall be evidenced by an instrument in writing executed on
behalf of the appropriate party by a person who has been authorized by such
party to execute waivers, extensions or amendments on its behalf. No waiver
by any party hereto, whether express or implied, of its rights under any
provision of this Agreement shall constitute a waiver of such party's rights
under such provisions at any other time or a waiver of such party's rights
under any other provision of this Agreement. No failure by any party hereto
to take any action against any breach of this Agreement or default by
another party shall constitute a waiver of the former party's right to
enforce any provision of this Agreement or to take action against such
breach or default or any subsequent breach or default by such other party.
(e) Assignment. Except for assignments by Sony Music to Sony Music Entities, no
party may assign this Agreement or any of its rights and/or obligations
hereunder, without the prior written consent of the other parties, and any
such purported assignment shall be void.
(f) No Third Party Beneficiary. Nothing expressed or implied in this Agreement
is intended, or shall be construed, to confer upon or give any person or
entity other than the parties hereto and their respective successors and
permitted assigns, any rights or remedies under or by reason of this
Agreement.
(g) Severability. In the event that any one or more of the provisions contained
in this Agreement shall be declared invalid, void or unenforceable, the
remainder of the provisions of this
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Agreement shall remain in full force and effect, and such invalid, void or
unenforceable provision shall be interpreted as closely as possible to the
manner in which it was written.
(h) Headings. Articles titles and headings to sections herein are inserted for
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement. Schedule A referred
to herein shall be construed with and as an integral part of this Agreement
to the same extent as if it was set forth verbatim herein.
(i) 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.
(j) Notices. Notices shall be delivered in the manner specified in Section 10.1
of the Purchase Agreement.
(k) Governing Law. This Agreement has been entered into and shall be construed
and enforced in accordance with the laws of the State of New York without
reference to the choice of law principles thereof. Launch agrees that any
action, proceeding or claim it commences against Sony Music pursuant to this
Agreement shall be brought either in the courts of the State of New York,
sitting in New York County, or the courts of the United States for the
Southern District of New York. Sony Music agrees that any action, proceeding
or claim it commences against the Company or Launch pursuant to this
Agreement shall be brought either in the courts of the State of California,
sitting in Los Angeles County, or the courts of the United States for the
Southern District of California. Service of process in any such action or
proceeding brought against a party may be made by registered mail addressed
to such party at the address set forth in Section 10.1 of the Purchase
Agreement.
LAUNCH MEDIA INC. SONY MUSIC, A GROUP OF SONY MUSIC
ENTERTAINMENT INC.
By: _____________________________ By: _________________________________
Name: ___________________________ Name: _______________________________
[Type or Print} [Type or Print]
Title: __________________________ Title: ______________________________
Date: ___________________________ Date: _______________________________
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SW HOLDINGS INC.
By: ____________________________________
Name: __________________________________
[Type or Print]
Title: _________________________________
Date: __________________________________
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EXHIBIT C
MUSIC VIDEO LICENSE
Agreement made as of _______________, 1999 between LAUNCH MEDIA,, INC.,
a _______________ corporation, with offices at 2700 Pennsylvania Avenue, Santa
Monica, California 90404 (hereinafter "Launch" or "you") and Sony Music, a Group
of Sony Music Entertainment Inc., a Delaware corporation, with offices at 550
Madison Avenue, New York, New York 10022-3211 (hereinafter "Sony").
WHEREAS, Launch, SW Networks Inc., a Delaware corporation and Sony have
simultaneously entered into a separate stock purchase agreement (the "Purchase
Agreement") under which Launch acquired all of the capital stock of SW Holdings
Inc., formerly an indirect subsidiary of Sony and the successor to the business
formerly operated by SW Networks, a New York general partnership and SW Networks
Inc., a Delaware corporation and the former general partner of SW Networks and
sole stockholder of SW Holdings Inc.;
WHEREAS, Launch is, among other things, in the business of exhibiting
music videos via the Internet;
WHEREAS, Sony owns and/or controls various Music Videos embodying
Recordings produced in the United States and recorded in the English language by
various Sony recording artists (each, a "Sony Artist"), and the intellectual
property rights therein; and
WHEREAS, Launch desires to obtain from Sony and Sony desires to grant to
Launch a limited, non-exclusive license, pursuant to the terms hereof, to
exhibit certain Music Videos as part of a single genre-specific,
non-interactive, non-subscription music video webcasting service to be offered
as part of the service accessible solely over the World Wide Web on one Web Site
located at either the URL www.musicvideos.com or the URL www.launch.com and as
further described in Exhibit A attached hereto (the "Service").
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows;
1. TERM AND TERRITORY
1.01. The term of this license agreement ("Term") will begin as of the
date hereof and will continue, unless sooner terminated pursuant to Article 9,
for a period ending on the sooner to occur of (i) the date that is twelve months
after the date on which you exhibit the first Music Video licensed hereunder on
the Service, and (ii) the date which is thirteen months after the date hereof.
1.02. The territory of the License (as defined in Section 2.01 below) is
the World ("Territory"). Notwithstanding the foregoing, you shall not market the
Service in any manner directed to, or designed to attract, visitors to the
Service from countries outside of the United
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States. You shall use your commercially reasonable efforts to prevent other Web
Sites outside of the United States from creating hypertext links from such Web
Sites to the Service.
2. GRANT OF RIGHTS; MUSIC VIDEOS; UPLOAD RESTRICTIONS AND PROCEDURES
2.01. Only in respect of the rights Sony owns or controls in and to the
Music Videos, and subject to all of the terms and conditions of this Agreement,
including, without limitation Exhibit A attached hereto, Sony grants to you a
non-exclusive, limited license, without the right to sublicense, during the Term
and throughout the Territory (but only to the extent of Sony's rights) to
perform, display publicly and, solely to the extent necessary to accomplish the
foregoing, reproduce on its own servers, the Music Videos released by Sony from
and after the date hereof, delivered to you by Sony pursuant to Section 2.02,
solely for purposes of exhibiting such Music Videos on the Service to viewers of
the Service (the "License"). For the avoidance of doubt, you shall not be
entitled to exhibit such Music Videos to any Person other than viewers of the
Service, and solely in the manner prescribed in this Agreement. You shall not be
permitted to use the Music Videos for any other programming, or for any form of
advertising, including, without limitation advertising of the Service or any
other Web Site, or for any other purposes. The License shall only be valid with
respect to the Service, which may only exhibit music videos in a
non-downloadable manner, via "streaming" technology, in a non-interactive,
linear, pre-programmed rotation as further described in Exhibit A.
2.02. From time to time Sony shall deliver to you analogue format copies
of the promotional Music Videos that it makes generally available to other third
parties for exhibition (each delivery, a "Delivery") only at such times as Sony
makes such Music Videos generally available to such other third parties for such
exhibition, provided that, without incurring any liability to you in respect of
such non-delivery, Sony shall have no obligation to deliver to you any Music
Video if Sony has a good faith concern that that the representations and
warranties made by Sony in Section 7.01 may not be true with respect to such
Music Video. Launch shall reimburse Sony for all cost of copying and delivering
such Music Videos contained in each Delivery promptly following such Delivery.
Notwithstanding any provision in this Agreement to the contrary, Sony shall be
free to enter into exclusive arrangements with other music video exhibitors,
whether or not Internet-based, with respect to any Music Video and shall also be
free to exhibit any Music Video exclusively via Web Sites owned or controlled by
Sony or managed or operated, in whole or in part, by Sony. [*].
2.03. [*]
2.04. [*]
[*] = 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> 38
agreement shall continue to govern the license of such music videos to such
acquired entity for the term thereof.
2.05. [*]
3. OTHER LIMITATION OF RIGHTS
3.01. (a) The License is limited to the use of the Music Videos solely
in the manner set forth in Article 2 above, this Article 3 and in accordance
with Exhibit A. Any and all other rights in connection with the Music Videos are
specifically reserved by Sony. Nothing herein shall be construed as permitting
you to (i) [*], or (ii) otherwise exploit the Music Videos, except as expressly
set forth herein. Nothing herein shall be construed as permitting you to strip
the audio portion of any Music Video from the video portion thereof, which, for
the avoidance of doubt, is expressly prohibited. This License shall be
immediately terminated in the event that viewers of content delivered via
"streaming" technology have the capacity to download such content.
(b) [*]. Launch hereby covenants and agrees that, in all such
circumstances, the Music Videos shall only be exhibited on the Service, and
shall not be exhibited on a Web Site owned or operated by any such third party.
[*].
(c) You covenant and agree that, except as expressly set forth herein
(i) the Music Videos will not be edited, modified or otherwise altered, (ii) you
will not include the Music Videos in computer files other than those computer
files created for use as part of the Service, and (iii) you shall be solely
responsible for any and all costs, fees, expenses or other charges in connection
with the uses of the Music Videos permitted hereunder and the maintenance of the
Music Videos and computer files embodying Music Videos (including, without
limitation, any
[*] = 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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royalties, taxes, re-use payments or other third party fees that may be required
in connection with your use of the Music Videos, pursuant to paragraph 3.03 or
otherwise).
(d) Notwithstanding anything to the contrary in this Agreement, in the
event that Sony receives a notice from a third party asserting any challenge to
Sony's rights with respect to the exhibition of any Music Video on the Service,
or if Sony at any time has a good faith concern that that the representations
and warranties made by Sony in Section 7.01 may not be true with respect to such
Music Video, Sony shall have the right, without incurring any liability to you,
at any time, to exclude such Music Video from the Music Videos licensed
hereunder, provided that Sony furnishes you with notice of Sony's election to
exclude any such Music Video. Without limiting the foregoing, you agree that you
shall, immediately following Sony's demand to remove the designated Music Videos
but in no event later than two (2) business days from the date of such demand
remove from the Service any Music Videos referenced in Sony's demand. You shall
promptly notify Sony in writing of your compliance with the terms of this
subparagraph 3.01 (c), which notice shall be accompanied by all copies of such
Music Videos then in your possession. [*].
3.02. You will not sublicense, assign or convey in any manner any rights
under this Agreement, including, but not limited to, the right to use the Music
Videos in conjunction with the Service.
3.03. As conditions precedent to the exercise by you of any rights
granted to you hereunder, you shall be solely responsible for obtaining any and
all applicable consents, licenses and permissions from Persons other than Sony
which are necessary for your uses of the Music Videos in connection with the
Service (e.g., currently effective performance and mechanical copyright licenses
for use of the musical compositions embodied in the Music Videos), and, if
applicable, you shall become a party to the American Federation of Musicians
(AFM) and American Federation of Television and Radio Artists (AFTRA) collective
bargaining agreements covering the creation and exploitation of the Service, and
any other applicable collective bargaining agreements, and you shall fully
comply with the terms and conditions of all such agreements. Your failure to so
obtain any such applicable consents, permissions or licenses or to become a
signatory to any applicable collective bargaining agreement in respect of any of
the Music Videos shall result in the License being void with respect to all the
Music Videos so affected and you specifically agree that you shall have no right
to use such Music Videos.
3.04. (a) You shall include on the Service simultaneously with the
exhibiting of each Music Video: (i) The title of the musical composition
embodied in the Music Video concerned and the name of the Sony Artist performing
such composition and the name of the Sony record label for whom such Sony Artist
records, (ii) the appropriate copyright (P) and (c) notices applicable to each
of the Music Videos used on the Service, in close juxtaposition to the title(s)
of the Recordings concerned, and (iii) the legend: "WARNING: All rights
reserved. Unauthorized duplication is a violation of applicable laws." The items
prescribed in clauses
[*] = 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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(i) and (ii) will be included on the Service in an easily legible manner and in
the same size, prominence and type style, as similar items relating to the
underlying musical compositions and Recordings licensed to you by third parties.
3.05. You will place hypertext links in proximity to Music Videos
simultaneously with the exhibition of such Music Videos on the Service linking
the Service to a page or pages selected by Sony within the "sonymusic.com" Web
Site or such other Sony promotional Web Site of Sony's selection.
3.06. You shall use your best efforts to prevent any third party from
hypertext linking to the Service in any manner which results in the Service
appearing within a "frame" on such third party Web Site.
3.07. As between you and Sony, the Music Videos, all performances
embodied thereon, and all copyrights and other rights in and to the Music Videos
are the sole property of Sony and shall remain the sole and exclusive property
of Sony. You warrant, represent and agree that you will not, directly or
indirectly, sell or otherwise dispose of, pledge, mortgage or in any way
encumber the Music Videos or any other related materials licensed to or created
by you with respect thereto.
3.08. [*]. Sony shall have the right to reject any specific proposed
use by you of any particular element of the Music Videos in its sole and
reasonable discretion. Sony shall not be deemed unreasonable in rejecting any
proposed use of the Music Videos which Sony deems patently offensive or
denigrating to Sony and/or any Sony Artist or which, in the judgment of its
attorneys, might subject Sony, any Sony Artist or any of Sony's licensees to
unfavorable regulatory action, violate any law, infringe the rights of any
Person, or subject Sony, any Sony Artist or any of Sony's licensees to liability
for any reason.
3.09. Upon termination of the License, or at the termination or
expiration of the Term, or if any Music Videos cease for any reason to be
subject to the License, all rights herein granted to you to include the Music
Videos concerned on the Service shall forthwith terminate. You shall thereafter
have no right to include such Music Videos on the Service. You shall immediately
cease to use any computer files embodying or constituting Music Videos, and
shall promptly thereafter furnish Sony with a sworn affidavit confirming that
you have returned or destroyed all copies of such materials.
3.10. Except as expressly provided for herein, you may not use the Music
Videos for any original programming, products or marketing campaigns of any type
or nature, including but not limited to use in any games or trivia contests, nor
may you exploit the Music Videos in any commercial on-line services, interactive
on-line services, interactive television, telephone, cable or other technology
or format, or in any other medium, whether now known or hereafter created,
provided, that it shall not be a breach hereof if viewers can access the Service
on the World Wide Web by means of broadband Internet Service Providers such as
cable, DSL or satellite Internet access services.
[*] = 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> 41
4. FEES, ADDITIONAL CONSIDERATION
4.01. [*]
4.02. [*]
5. TRADEMARKS, TRADE NAMES, NAMES, LIKENESSES. CREDITS AND MARKETING
LIMITATIONS
5.01. You may advertise the Music Videos in connection with the Service
only under such trade names or marks as are owned by or licensed to you. You
agree that you will not use Sony's trademarks or logotypes, or Sony's name,
directly or indirectly, except as provided in Section 3.04 above and Section
5.02 below, in conjunction with the License granted herein.
5.02. You agree to comply with all formalities necessary to ensure the
full protection of Sony's or its licensor's copyrights in the Music Videos and
Sony's trademarks.
5.03. You shall deliver to Sony sample copies and any other copies
requested by Sony of artworks, packaging, containers, labels, printed programs,
advertising copy and promotional material in connection with the Service, and
lists of artists, musical compositions and record companies used as part of the
Service. You agree, with respect to Sony Artists whose performances are embodied
on Music Videos, that the credits for such artist on the Service, and the artist
credits in any advertising for the Service, shall appear in the same size,
prominence and type style as the size, prominence, and type style used in
connection with credits and advertising for other artists whose work is embodied
on the Service.
5.04. If you become aware of any unauthorized manufacture, advertising,
distribution, lease or sale by any third party of the Music Videos, you shall
immediately notify Sony thereof and shall cooperate with Sony (at Sony's sole
expense) in the event that Sony commences any action or proceeding against such
third party.
6. PAYMENTS AND ACCOUNTINGS, MOST FAVORED NATION, NON-DISCLOSURE
6.01. You shall, within thirty (30) days following the end of each
calendar quarter, pay Sony the License Fee, and all other monies, accrued in
such calendar quarter. All payments shall be accompanied by a quarterly
accounting statement signed by you, setting forth a description and calculation
of the applicable payments in detail sufficient to support the calculations of
the amounts paid (including a "playlist" of music video exhibited and a
statement of gross revenues for the pertinent accounting period). Such
description shall include, without limitation, the
6
[*] = 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> 42
source and amount of any License income for the quarter concerned and the Music
Videos concerned. Sony shall be entitled, from time to time, but no more
frequently than once during any six month period, to audit your records, and the
records of any of your subsidiaries, affiliates and licensees, relating to
amounts owed to Sony, at Sony's own expense, upon fifteen (15) days' prior
written notice to you.
6.02. [*]
6.03. Neither party to this Agreement will disclose to third parties any
of the Agreement's terms, except as required by law or by the party's certified
public accountant. Without limiting the preceding sentence, neither party shall
not issue any press release (or otherwise make any public statement or
announcement or distribute to any third party any materials) relating to the
substance of this Agreement without the other party's prior written consent,
provided that any party may make any disclosure required to be made by it under
applicable law if it determines in good faith that it is required to do so and
gives prior notice to the other party; provided further that you will provide
Sony with a reasonable opportunity to review and comment on any disclosure in
any of your filings under the United States securities laws regarding this
Agreement and the transactions contemplated hereunder and, if you are required
to file this Agreement under applicable securities laws, you will use best
efforts to obtain confidential treatment for those portions of this Agreement
that Sony designates.
7. ADDITIONAL REPRESENTATIONS, WARRANTIES AND INDEMNITIES
7.01. Sony represents and warrants that:
(a) It has the right and power to enter into and fully perform the
Agreement and to make the commitments it makes herein.
(b) [*].
(c) [*]
(d) Sony is a corporation duly organized and in good standing under the
laws of the state of Delaware.
7.02. You warrant and represent that:
7
[*] = 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> 43
(a) You have the right and power to enter into and fully perform this
Agreement and to make the commitments you make herein, and have obtained or will
obtain all necessary licenses, permissions and consents.
(b) Sony shall not be subject to any costs, fees or other charges
(including, without limitation, any royalties) in respect of the creation or
exhibition of any Music Videos or in respect of the Service.
(c) You own, and will own at all times during the Term, all right, title
and interest in and to the Service, and all copyrights and other rights therein
(other than the underlying rights in the content included therein), throughout
the Territory, free and clear of any and all claims or encumbrances whatsoever.
The Service, and the operation and use thereof for the purposes described
herein, do not, and at no time shall during the Term, violate any law
(including, without limitation, any federal law or regulation) or infringe upon
or violate the rights of any person or entity.
(d) The Service currently complies, and shall at all times during the
Term comply, with the description of the Service set forth in Exhibit A.
(e) You have obtained from third parties all licenses and other rights
necessary in order to create and operate the Service as contemplated therein and
shall make all necessary payments required in connection with the exhibition of
the Music Videos hereunder.
(f) You are a corporation duly organized and in good standing under the
laws of the state of Delaware.
7.03. You will at all times indemnify and hold harmless the Sony Parties
and any licensor of a Sony Party from and against any and all claims, damages,
liabilities, costs and expenses (including legal expenses and counsel fees)
arising out of (a) your or any other Person's use (including but not limited to
unauthorized use or duplication), in connection with the Service, of any Music
Videos; or (b) any breach or alleged breach by you of any representation,
warranty or agreement made by you herein, including, without limitation, your
representation, warranty and agreement to secure and pay for all third-party
licenses, permissions and consents. You will reimburse the Sony Parties and/or
their licensors on demand for any payment made at any time after the date hereof
in respect of any liability or claim in respect of which a Sony Party or its
licensors are entitled to be indemnified. Pending the resolution of any claim in
respect of which the Sony Parties are entitled to be indemnified under this
Agreement, the applicable Sony Party may withhold monies due to you under any
other agreement between a Sony Party and you, or any of your affiliates, in an
amount not exceeding your potential liability to a Sony Party hereunder.
7.04. Sony will at all times indemnify and hold you harmless from and
against any and all claims, damages, liabilities, costs and expenses (including
legal expenses and counsel fees) arising out of any breach by Sony of any
representation, warranty or agreement made by Sony herein. Sony will reimburse
you on demand for any payment made at any time after the date hereof in respect
of any liability or claim in respect of which you are entitled to be
indemnified.
8
<PAGE> 44
Sony's indemnification obligation hereunder shall be limited to the aggregate
amount of the License Fees paid to Sony hereunder.
8. DEFINITIONS
8.01. [*]
8.02. [*]
8.03. [*]
8.04. [*]
8.05. "Music Video" - English language Recordings of Sony Artists
produced in the United States coupled with visual images by means of film,
videotape or other audiovisual media designed to be used in conjunction with an
apparatus that causes a visual image to be seen on a television screen or
computer monitor and released by Sony from and after the date hereof.
8.06. "Person" - any natural person, legal entity, or other organized
group of persons or entities. (All pronouns, whether personal or impersonal,
which refer to Persons include natural persons and other Persons.)
8.07. [*]
8.08. "Recordings" - every recording of sound, whether or not coupled
with a visual image, by any method and on any substance or material, or in any
other form or format, whether now or hereafter known, which is used or useful in
the recording, production and/or manufacture of Records or for any other
commercial exploitation.
9
[*] = 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> 45
8.09. "Records" - all forms of reproductions, transmissions or
communications of Recordings now or hereafter known, manufactured, distributed,
transmitted or communicated primarily for home use, school use, juke box use or
use in means of transportation, including, without limitations, Records
embodying or reproducing sound alone and audiovisual Records. A "Phonographic
Record" is a Record as embodied by the manufacturer and/or distributor in a
physical, non-interactive Record configuration (e.g., vinyl LP's, cassettes,
compact discs, videocassettes) prior to its distribution to the consumer, as
opposed to the transmission or communication of a Record to the consumer prior
to being embodied in a physical Record configuration, whether or not it may at
some point be embodied in a physical Record configuration, by the consumer or
under the consumer's direction or control.
8.10. "Web Site" - any specific or unique physical or logical address on
that portion of the publicly available network of computer networks commonly
referred to as the Internet known as the "World Wide Web" (generally referred to
as a `uniform resource locator' or `URL').
9. DEFAULT
9.01. (a) If you fail to timely make payments and render statements to
Sony, and/or to make payments to third parties which is not cured within ten
(10) days after written notice thereof; or
(b) In the event of any breach or alleged breach by you or any of your
representations, warranties or obligations hereunder, or in the event that you
fail to fulfill any of your obligations hereunder which is not cured within
thirty (30) days after written notice thereof; or
(c) In the event of your dissolution or the liquidation of your assets,
or the filing of a petition in bankruptcy or insolvency or for an arrangement or
reorganization by, for or against you, or in the event of the appointment of a
receiver or a trustee for all or a portion of your property, or in the event
that you shall make an assignment for the benefit of creditors or become
bankrupt or insolvent;
then, you shall be deemed in material breach and default hereof and, in
addition to such other rights and remedies which Sony has at law or otherwise
under this Agreement, (i) in the event of any occurrence described in Section
9.01(c), this Agreement, the License and the Term shall immediately terminate
and (ii) in the event of any occurrence described in either Section 9.01 (a) or
9.01(b), Sony may, upon notice to you, immediately terminate this Agreement, the
License and the Term.
10. Video-on-Demand License Negotiation.
10.01. [*]
10
[*] = 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> 46
11. DISCLAIMER OF WARRANTIES
11.01. EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER PARTY MAKES ANY
REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED WITH RESPECT TO
THE MUSIC VIDEOS, OR THE SERVICE, RESPECTIVELY, INCLUDING, WITHOUT LIMITATION,
ANY WARRANTY OF MERCHANTABILITY, NON-INFRINGEMENT OR FITNESS FOR A PARTICULAR
PURPOSE.
11.02. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL,
CONSEQUENTIAL, EXEMPLARY, MULTIPLE, SPECIAL OR INDIRECT DAMAGES IN CONNECTION
WITH THIS AGREEMENT (INCLUDING BUT NOT LIMITED TO LOST BUSINESS PROFITS) EVEN IF
SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF THE SAME.
12. NOTICES
12.01. Notices shall be delivered in the manner specified in Section
10.1 of the Purchase Agreement.
13. MISCELLANEOUS
13.01. This Agreement and Exhibit A attached hereto, together with the
Purchase Agreement and other agreements annexed thereto as Exhibits contains
every obligation and understanding between the parties relating to the subject
matter hereof and merge all prior discussions, negotiations and agreements, if
any, between them, and none of the parties shall be bound by any
representations, warranties, covenants, or other understandings, other than as
expressly provided or referred to herein (including as provided in Section
13.06).
13.02. Any representation, warranty, covenant, term or condition of this
Agreement which may legally be waived, may be waived, or the time of performance
thereof extended, at any time by the party hereto entitled to the benefit
thereof, and any term, condition or covenant hereof may be amended by the
parties hereto at any time. Any such waiver, extension or amendment shall be
evidenced by an instrument in writing executed on behalf of the appropriate
party by a person who has been authorized by such party to execute waivers,
extensions or amendments on its behalf. No waiver by any party hereto, whether
express or implied, of its rights under any provision of this Agreement shall
constitute a waiver of such party's rights under such provisions at any other
time or a waiver of such party's rights under any other provision of this
Agreement. No failure by any party hereto to take any action against any breach
of this Agreement or default by another party shall constitute a waiver of the
former party's right to enforce any provision of this Agreement or to take
action against such breach or default or any subsequent breach or default by
such other party.
13.03. Nothing expressed or implied in this Agreement is intended, or
shall be construed, to confer upon or give any Person other than the parties
hereto and their respective successors and permitted assigns, any rights or
remedies under or by reason of this Agreement.
11
<PAGE> 47
13.04. In the event that any one or more of the provisions contained in
this Agreement shall be declared invalid, void or unenforceable, the remainder
of the provisions of this Agreement shall remain in full force and effect, and
such invalid, void or unenforceable provision shall be interpreted as closely as
possible to the manner in which it was written.
13.05. Articles, titles and headings to sections herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement. Exhibit A referred to herein
shall be construed with and as an integral part of this Agreement to the same
extent as if it was set forth verbatim herein.
13.06. Those provisions of any applicable collective bargaining
agreement between Sony and any labor organization which are required, by the
terms of such agreement, to be included in this Agreement shall be deemed
incorporated herein.
13.07. You may not assign any of your rights under this Agreement. Sony
may not assign its rights under this Agreement in whole or in part without your
consent except to an affiliate thereof.
13.08. If Sony breaches any of its obligations hereunder, you shall
permit Sony a reasonable time to remedy such breach, and you shall not be
entitled to recover damages or terminate the Term by reason of such breach until
such reasonable time has passed.
13.09. 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.
13.10. This Agreement has been entered into and shall be construed and
enforced in accordance with the laws of the State of New York without reference
to the choice of law principles thereof. You agree that any action, proceeding
or claim you commence against Sony pursuant to this Agreement shall be brought
in the courts of either the State of New York, sitting in New York County, or
the courts of the United States for the Southern District of New York. Sony
agrees that any action, proceeding or claim it commences against you pursuant to
this Agreement shall be brought in either the courts of the State of California,
sitting in Los Angeles County, or the courts of the United States for the
Southern District of California. Service of process in any such action or
proceeding brought against a party may be made by registered mail, addressed to
such party at the address set forth in Section 10.1 of the Purchase Agreement.
12
<PAGE> 48
13.11. This license agreement shall not become effective until executed
by all proposed parties hereto.
SONY MUSIC, a Group of SONY MUSIC
ENTERTAINMENT INC.
By: _____________________________________
LAUNCH MEDIA, INC.
By: _____________________________________
Title:
ACKNOWLEDGED AND AGREED WITH
RESPECT TO SECTION 1.02 ONLY:
SONY MUSIC INTERNATIONAL, a Group of
SONY MUSIC ENTERTAINMENT INC.
By: ________________________________
13
<PAGE> 49
EXHIBIT A
The Service shall be, and the License shall only be valid with respect
to, a single non-interactive, free, non-subscription service, which may include
genre-specific channels (i.e. pop, alternative rock, R&B, hip-hop, rock,
country, etc.), owned and operated by Launch solely as part of the Service
accessible only over the Worldwide Web on a singe Web Site located either at the
URL www.musicvideos.com or the URL www.launch.com (or a single successor site
thereto), whereby music videos are exhibited via "streaming technology" only to
viewers from such Web Site within the Territory as part of a linear,
pre-programmed rotation without any capability to exhibit music videos to such
viewers "on demand" or to allow viewers to download such music videos.
The Service shall have the following attributes:
1. NON-INTERACTIVE. The Service must be "non-interactive". To qualify as
"non-interactive", the Service cannot, directly or indirectly:
(a) transmit a program specifically created for the recipient (e.g.,
"narrow-casting" or "personalization");
(b) transmit a particular music video selected by or on behalf of a
recipient (e.g., "video-on-demand"); or
(c) include "fast-forward", "re-wind", "pause" or "stop" features.
2. PERFORMANCE COMPLEMENT. Programming on a particular channel in any
consecutive 3-hour period which exceeds any of the following limitations (the
"performance complement") is prohibited. (The transmitting entity is further
prohibited from circumventing the performance complement by automatically or
intentionally causing the switching from one program channel to another.)
(a) music videos (whether licensed by Sony or a third party) embodying
more than 3 tracks from a particular album, or more than 2 such tracks in
succession; or
(b) music videos embodying more than 4 tracks by the same recording
artist (whether such artist is a Sony Artist or a third party recording artist)
compilation/boxed set, or more than 3 such tracks in succession.
3. ROTATION.
Each channel of the Service shall have a play rotation of no less than
50 music videos. No Music Video may be exhibited on any channel of the Service
more than one time in any three-hour period.
14
<PAGE> 50
4. PROHIBITION AGAINST PUBLISHED PLAY-LISTS AND PRE-ANNOUNCING
The transmitting entity cannot, directly or indirectly, publish (or
induce or facilitate publication through affiliated entities or other third
parties) an advance program schedule, nor can it "pre-announce" the titles of
specific music videos. In addition, a music video by a particular artist cannot
be pre-announced for broadcast at a specific time (e.g., "Tune into Mariah Carey
@ 4:10 p.m."), although the names of featured recording artists may be used for
illustrative purposes. The Service shall be permitted to pre-announce up to 2
particular artists (of Sony and/or third parties) in a single announcement and
to make up to 3 such announcements within a 1-hour time period, provided the
announcement does not communicate the particular time in which the artist's
recordings will be played.
5. RESTRICTIONS ON PROGRAM FORMATS. The following restrictions apply in
respect of the types of programming available for the Service:
(a) CONTINUOUS "LOOPED" PROGRAMS. A continuous "looped" program must be
at least 3 hours in duration.
(b) ARCHIVED PROGRAMS. An archived program must be at least 5 hours in
duration and cannot be made available for a period exceeding 2 weeks.
(c) REPEAT PROGRAMS. Programs (other than a "looped" or archived
program) which are performed at scheduled times cannot be repeated more than 3
times within the 2-week period following the program's initial broadcast. An
additional 2-week period for repeating the program is permitted after 1 month
has elapsed since the expiration of the initial 2-week broadcast run.
6. SIMULTANEOUS IDENTIFICATION OF SONG, ALBUM AND ARTIST
The Service shall be required to identify the song title, album title
and featured recording artist of each music video during its transmission (but
not before - see par. 4 above) as a means of promoting the music video
concerned.
7. PREVENTION OF UNAUTHORIZED COPYING AND DOWNLOADS
The Service cannot take affirmative steps to enable, cause or induce the
recipient to make a copy of the music video being exhibited and must take
reasonable steps (to the extent within its control) to ensure that the recipient
cannot make an illegal digital copy of the transmission.
8. PREVENTION AGAINST "SCANNING" AND "INTELLIGENT AGENT"
The Service must cooperate (to the extent feasible without the
imposition of substantial burdens or costs) to prevent its transmissions from
being "scanned" by the recipient
15
<PAGE> 51
or a third party in such manner that would enable the recipient to select a
particular music video on demand (effectively converting the format into an
interactive service).
9. COMPLIANCE WITH INDUSTRY COPYRIGHT PROTECTION MEASURES
The Service must accommodate and cannot interfere with copyright
protection measures (e.g., watermarking and copyright flags) adopted by the
record industry to protect against piracy.
16
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
--------------------
<TABLE>
<CAPTION>
JURISDICTION
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
Launch Networks, Inc. Delaware
SW Networks Inc. New York
</TABLE>
<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 our report dated February 5, 1999 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 Hills, California
March 29, 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
March 29, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement, on Form SB-2 of our
report dated March 12, 1999 on our audit of the financial statements of SW
Networks, Inc. as of December, 31 1998 and March 31, 1998 and for the nine
months ended December 31, 1998 and the year ended March 31, 1998. We also
consent to the reference to our Firm under the heading "Experts" in the
Prospectus.
/s/ PricewaterhouseCoopers LLP
-----------------------------
New York, New York
March 29, 1999
<TABLE> <S> <C>
<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
<PP&E> 3,154,862
<DEPRECIATION> 567,650
<TOTAL-ASSETS> 13,164,002
<CURRENT-LIABILITIES> 3,644,545
<BONDS> 0
36,706,546
0
<COMMON> 935
<OTHER-SE> (27,827,232)
<TOTAL-LIABILITY-AND-EQUITY> 13,164,002
<SALES> 1,725,998
<TOTAL-REVENUES> 5,014,161
<CGS> 3,185,319
<TOTAL-COSTS> 18,818,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,932
<INCOME-PRETAX> (13,415,165)
<INCOME-TAX> 3,596
<INCOME-CONTINUING> (13,418,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,418,761)
<EPS-PRIMARY> (16.36)
<EPS-DILUTED> (16.36)
</TABLE>
