<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1999
REGISTRATION NO. 333-76121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DVD EXPRESS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5735 95-4603442
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) No.)
</TABLE>
--------------------------
7083 HOLLYWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90028
(323) 465-1183
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------------------
MICHAEL J. DUBELKO
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
DVD EXPRESS, INC.
7083 HOLLYWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90028
(323) 465-1183
(Name, Address, Including Zip Code and Telephone Number, Including Area Code, of
Agent for Service)
--------------------------
COPIES TO:
SCOTT W. ALDERTON, ESQ. BRUCE R. HALLETT, ESQ.
SCOTT D. GALER, ESQ. ALLEN Z. SUSSMAN, ESQ.
JENNIFERLYNN GREGA, ESQ. SEAN M. PENCE, ESQ.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP BROBECK, PHLEGER & HARRISON, LLP
2029 CENTURY PARK EAST 38 TECHNOLOGY DRIVE
LOS ANGELES, CALIFORNIA 90067 IRVINE, CALIFORNIA 92618
(310) 728-3200 (949) 790-6300
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered in this form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
Common Stock, $.0001 par value................................. $56,925,000 $15.825
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee, in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) $15,985 previously paid by registrant in connection with the filing of the
Registration Statement on April 12, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 23, 1999
PROSPECTUS
4,500,000 SHARES
[LOGO]
COMMON STOCK
------------------
This is our initial public offering, and we are offering 4,500,000 shares of
common stock. We anticipate that the initial public offering price will be
between $10.00 and $12.00 per share. We have applied to list the common stock on
the Nasdaq National Market under the symbol "DVDS."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF FACTORS THAT YOU
SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING SOLD WITH THIS
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price................................................... $ $
Underwriting Discounts and Commissions.................................. $ $
Proceeds to DVD EXPRESS................................................. $ $
</TABLE>
The underwriters have reserved up to 337,500 shares of common stock being
sold by DVD EXPRESS for sale at the initial public offering price to directors,
officers, employees and friends of DVD EXPRESS.
The underwriters may purchase up to an additional 675,000 shares from DVD
EXPRESS at the public offering price, less underwriting discounts, solely to
cover over allotments.
ING BARING FURMAN SELZ LLC
FRIEDMAN BILLINGS RAMSEY
NEEDHAM & COMPANY, INC.
------------------------
THIS PROSPECTUS IS DATED , 1999.
<PAGE>
THE OUTSIDE GATEFOLD PAGE INCLUDES:
THE FOLLOWING TEXT IS ACROSS THE TOP OF THE PAGE:
This is the future of family entertainment.
THE FOLLOWING PICTURES AND TEXT ARE IN A CIRCULAR LAYOUT IN THE CENTER OF
THE PAGE:
<TABLE>
<S> <C>
[A picture of Mother] [A picture of Father]
WITH THE FOLLOWING TEXT BELOW THE PICTURE: WITH THE FOLLOWING TEXT BELOW THE PICTURE:
Software Movies
A better 30-minute meal with the DVD-Rom Dad's a hit with
"Ultimate DVD Cookbook." "You've Got Mail."
[A picture of a dog]
WITH THE FOLLOWING TEXT BELOW THE PICTURE:
Even Scooter has a new best friend!
[A picture of Daughter] [A picture of Son]
WITH THE FOLLOWING TEXT BELOW THE PICTURE: WITH THE FOLLOWING TEXT BELOW THE PICTURE:
Music Games
First homework for Leslie, then Mariah Carey. David's got straight A's and
As good as live on DVD. the record on "Riven." A 90s dude.
</TABLE>
THE FOLLOWING TEXT IS AT THE BOTTOM OF THE PAGE:
THE ULTIMATE DVD COOKBOOK -C-1998 BETTER HOMES AND GARDENS -C-1998 M2K;
YOU'VE GOT MAIL -C-1998 WARNER HOME VIDEO; RIVEN: THE SEQUEL TO MYST
DVD-ROM -C-1998 RED ORB ENTERTAINMENT; MARIAH CAREY -C-1999 SONY MUSIC
THE TWO-PAGE INSIDE GATEFOLD INCLUDES:
THE FOLLOWING TEXT IS ACROSS THE TOP OF THE GATEFOLD:
DVD: The New Consumer Standard For Entertaiment.
[Two-page screen shot of the dvdexpress.com and dvd.com home pages]
WITH THE FOLLOWING TEXT BELOW THE DVDEXPRESS.COM HOME PAGE:
WWW.DVDEXPRESS.COM
The DVD Superstore That Delivers!-TM-
AND THE FOLLOWING TEXT BELOW THE DVD.COM HOME PAGE:
WWW.DVD.COM
The DVD Destination.-TM-
THE FOLLOWING TEXT IS PRESENTED IN BULLET POINTS DOWN THE LEFT EDGE OF THE
GATEFOLD NEXT TO THE DVDEXPRESS.COM SCREEN SHOT:
- SELECTION: Select from thousands of in-stock movies, as well as games,
software, music and studio merchandise items, all at discount prices.
Nearly every title available in the DVD format.
- CUSTOMER SERVICE: Comprehensive sales support via email and toll-free
telephone service seven-days-a-week. Real-time inventory status on each
product page and order tracking.
- AFFINITY: Stay informed with a twice monthly email, featuring new releases
and special offers. Contests and promotions are offered weekly. Track
future purchases using the DVD EXPRESS wish list feature.
- CUSTOMER REVIEWS: Find ratings, recommendations, and reviews by DVD
EXPRESS customers.
- PRE-ORDER: Pre-order titles up to two months in advance and receive the
movie on the same day it is available in stores.
- INFORMATION: Get reviews, recommendatioins, news and facts about new and
existing titles and products. View over 700 streaming movie trailers.
- QUICK CHECKOUT: Purchase with one click of the mouse using EXPRESS
Checkout. Store personal preferences, credit card and shipping information
in a secure environment.
- RAPID DELIVERY: Inventory is managed so that order shipment usually occurs
the same day that orders are placed, including weekends. Orders are shipped
directly from the DVD EXPRESS warehouse for fast delivery.
THE FOLLOWING TEXT IS PRESENTED IN BULLET POINTS DOWN THE RIGHT EDGE OF THE
GATEFOLD NEXT TO THE DVD.COM SCREEN SHOT:
- CONTENT: A magazine-style supersite delivering news and features about
digital entertainment with convenient links to DVD product.
- TECHNICAL SUPPORT: DOC DVD, a DVD specialist, personally responds to DVD
related questions via email the same day.
- COMMUNITY: Weekly consumer polls provide valuable feedback for the DVD
industry. Results are shared directly with all major studios, tying them
directly to DVD consumers.
- INDUSTRY EXPERTS: The people who make movies and DVDs take consumers
inside the DVD movie process.
- NEWS: Daily news on DVD title announcements, movie production, and hot
digital trends.
- RESOURCES: Features on home theater components, the latest DVD technology
and a DVD dictionary.
- ENTERTAINMENT: Digital fun with email postcards, reviews and interviews
with celebrities.
THE INSIDE BACK COVER INCLUDES:
THE FOLLOWING LOGO AND TEXT IS CENTERED ON THE PAGE:
[DVD EXPRESS Logo]
DVD EXPRESS-Registered Trademark-
high speed entertainment-TM-
www.dvdexpress.com
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS: (i) REFLECTS
THE AUTOMATIC CONVERSION OF OUR OUTSTANDING SERIES A CONVERTIBLE PREFERRED STOCK
INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING; (ii) REFLECTS OUR
REINCORPORATION IN DELAWARE AND A 3-FOR-2 STOCK SPLIT OF OUR COMMON STOCK UPON
THE CLOSING OF THIS OFFERING; AND (iii) ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
OUR COMPANY
We are a Web-based retailer of movies and videos in the digital versatile
disc format, commonly known as DVD. We operate our online store at
www.dvdexpress.com and offer interesting and informative content and community
features through our Web site at www.dvd.com. Our two Web sites are linked to
provide customers the ability to easily move between the sites. Our customers
benefit from our extensive product selection and availability, convenient
shopping experience, helpful customer service, competitive prices, informative
content and community. Our management's entertainment background, our
relationships with major and independent studios and our Hollywood location
provide a unique value to our customers. To enhance our brand recognition and
increase traffic to our online store, we have entered into strategic marketing
agreements with America Online, Infoseek Corporation (Go.com) and AltaVista as
well as other promotional agreements with several computer hardware and Internet
companies.
We maintain an inventory of nearly every title available in the DVD format
in our warehouse. Through our online store, we offer customers the convenience
and flexibility of shopping 24 hours a day, seven days a week. We ship our
products directly from our warehouse to the customer, usually on the same day
orders are received.
OUR MARKET OPPORTUNITY
We believe that we are well positioned to take advantage of the continued
growth of online shopping, the rapid adoption of the DVD format, the attractive
demographics of online consumers and the likelihood of DVD owners to shop
online. We believe that DVD will eventually become the standard format for home
video, music, games and software.
We also believe that many consumers find the video shopping experience,
especially at traditional retail outlets, to be time consuming and frustrating
due to inconvenient store hours, location and layout, as well as limited product
selection and inadequate customer service.
Our online store provides consumers with an enjoyable shopping experience
which offers a compelling alternative to traditional video retailing. The key
components of our solution include:
- A PREMIERE INTERNET ADDRESS
- EXTENSIVE PRODUCT SELECTION AND AVAILABILITY
- RAPID DELIVERY
- CONVENIENT SHOPPING EXPERIENCE
- INFORMATIVE CONTENT AND COMMUNITY
- COMMITMENT TO CUSTOMER SERVICE
- ADDITIONAL SERVICES
3
<PAGE>
OUR STRATEGY
Our goal is to enhance our position as a leading online retailer of DVDs and
related entertainment products and services. Our strategy includes the following
elements:
- BUILD BRAND RECOGNITION
- DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THE MAJOR STUDIOS
- ESTABLISH OPERATIONS IN INTERNATIONAL MARKETS
- PURSUE WAYS TO INCREASE OUR REVENUES
- CONTINUOUSLY IMPROVE OUR CUSTOMERS' EXPERIENCE
THE OFFERING
The following information assumes that the underwriters do not exercise
their over-allotment option. The share numbers below exclude the following
options and warrants that will increase the shares outstanding if and when they
are exercised and further dilute your investment:
- 2,250,000 shares of common stock available for issuance under our stock
incentive plan, of which 1,124,250 shares were underlying outstanding
options as of the date of this prospectus at a weighted average exercise
price of $4.38 per share;
- 300,000 shares of common stock underlying options granted to Joan Abend,
Vice President of Operations, at an exercise price of $.0667 per share;
and
- 1,384,006 shares of common stock underlying a warrant granted to America
Online at an exercise price of $5.60 per share.
<TABLE>
<S> <C>
Common stock offered........................ 4,500,000 shares
Total shares outstanding after this
offering.................................. 22,206,427 shares
Use of proceeds............................. Expand marketing activities, payments to
America Online, fund international expansion,
repay credit lines, expand infrastructure and
for other general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol...... DVDS
</TABLE>
CONTROL BY OUR FOUNDER
Upon completion of this offering, our founder, Michael Dubelko, will
beneficially own approximately 67.1% of our outstanding shares of common stock
and will have the ability to control matters requiring the vote of the
stockholders.
CORPORATE INFORMATION
We were incorporated in California in 1996 and will be reincorporated in
Delaware upon the closing of this offering. Our executive offices are located at
7083 Hollywood Boulevard, Los Angeles, California 90028, and our telephone
number is (323) 465-1183. Information on our Web sites does not constitute part
of this prospectus.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data is derived from our financial
statements and related notes appearing elsewhere in this prospectus. You should
read the following summary financial data in conjunction with those financial
statements and notes.
Our operating expenses included sales and marketing expenses of $97,000 in
1997, $2.9 million in 1998, $127,000 for the three months ended March 31, 1998
and $3.2 million for the three months ended March 31, 1999. In addition, in 1998
and in the three months ended March 31, 1999, our operating expenses included
America Online warrant amortization expense of $1.2 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The pro forma statement of operations data reflects the termination of our S
corporation status and the impact of the automatic conversion of the Series A
Convertible Preferred Stock into common stock effective upon the closing of the
initial public offering as if the conversion had occurred on January 4, 1999,
the date of original issuance.
<TABLE>
<CAPTION>
OCTOBER 18
(INCEPTION)
TO YEARS ENDED THREE MONTHS ENDED
DECEMBER DECEMBER 31, MARCH 31,
31, -------------------- ----------------------
1996 1997 1998 1998 1999
----------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ -- $ 1,269 $ 16,907 $ 1,645 $ 11,229
Cost of revenues................ -- 1,046 15,086 1,365 10,381
----------- --------- --------- ---------- ----------
Gross profit.................... -- 223 1,821 280 848
Operating expenses.............. 17 415 6,311 291 6,132
----------- --------- --------- ---------- ----------
Operating loss.................. (17) (192) (4,490) (11) (5,284)
Interest income (expense),
net........................... -- -- (74) -- 10
----------- --------- --------- ---------- ----------
Net loss........................ $ (17) $ (192) $ (4,564) $ (11) $ (5,274)
----------- --------- --------- ---------- ----------
----------- --------- --------- ---------- ----------
Loss before pro forma provision
for income taxes.............. $ (17) $ (192) $ (4,564) $ (11) $ (5,274)
Pro forma provision for income
taxes (unaudited)............. -- -- -- -- --
----------- --------- --------- ---------- ----------
Pro forma net loss
(unaudited)................... $ (17) $ (192) $ (4,564) $ (11) $ (5,274)
----------- --------- --------- ---------- ----------
----------- --------- --------- ---------- ----------
Basic and diluted loss per
common share.................. $ (0.00) $ (0.01) $ (0.30) $ (0.00) $ (0.35)
Weighted average shares
outstanding................... 15,000,000 15,000,000 15,000,000 15,000,000 15,114,000
Basic and diluted pro forma loss
per common share
(unaudited)................... $ (0.00) $ (0.01) $ (0.30) $ (0.00) $ (0.30)
Pro forma weighted average
shares outstanding
(unaudited)................... 15,000,000 15,000,000 15,000,000 15,000,000 17,599,713
</TABLE>
5
<PAGE>
The as adjusted column contained in the following balance sheet data table
reflects:
- the increase in stockholders' equity to reflect the receipt by us of the
net proceeds of this offering of 4,500,000 shares of common stock, which
are estimated to be $45.4 million;
- the automatic conversion of the 1,714,285 shares of Series A Preferred
Stock into 2,571,427 shares of common stock (post 3-for-2 stock split)
which has no impact of total stockholders' equity;
- the payment of additional prepaid advertising of $7 million to America
Online under our marketing agreement; and
- the repayment of $3 million outstanding under our credit lines which
reduces total debt to zero.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 4,933 $ 40,318
Working capital........................................................................... 9,632 55,017
Total assets.............................................................................. 25,536 67,921
Total debt................................................................................ 3,000 --
Total stockholders' equity................................................................ 18,425 63,810
</TABLE>
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. AS A RESULT,
THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR
PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
OUR PROSPECTS ARE DIFFICULT TO FORECAST BECAUSE WE HAVE ONLY BEEN OPERATING OUR
BUSINESS SINCE APRIL 1997. IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC
MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY
DECLINE SIGNIFICANTLY.
We began selling DVD products in April 1997 and, accordingly, we have a very
limited operating history. You must consider our prospects in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in the new and rapidly
evolving online commerce market. These risks include, but are not limited to,
the inability to respond promptly to changes in a rapidly evolving and
unpredictable business environment and the inability to manage growth. To
address these risks, we must, among other things:
- expand our customer base;
- successfully implement our business and marketing strategies;
- continue to develop and upgrade our Web sites and transaction-processing
systems;
- provide superior customer service and order processing;
- respond to competitive developments; and
- attract and retain qualified personnel.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
To date, we have not been profitable and aggregate losses from inception
through March 31, 1999 are $10 million. During 1998, we incurred net losses of
$4.5 million and for the three months ended March 31, 1999, we incurred losses
of $5.3 million. We intend to invest heavily in marketing and promotion, Web
site development and technology and the development of our administrative
organization. As a result, we expect to incur substantial operating losses for
the foreseeable future at rates significantly above current levels. Because our
gross margin is relatively low, achieving profitability depends upon our ability
to generate and sustain substantially higher revenues. We expect to use a
portion of the net proceeds from this offering to fund operating losses. If the
net proceeds from this offering, together with cash generated by operations,
cannot sufficiently fund future operating losses, we may be required to raise
additional funds. Additional financing may not be available in amounts or on
terms acceptable to us, if at all.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND ARE UNPREDICTABLE. IF WE FAIL TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE SIGNIFICANTLY.
Our limited operating history makes it difficult to forecast accurately our
revenues, operating expenses and operating results. As a result, we may be
unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. We may also be unable to increase our spending and
expand our operations in a timely manner to meet customer demand should it
exceed our expectations.
7
<PAGE>
Our future operating results may fluctuate significantly due to a variety of
factors, many of which are outside of our control. These factors include, but
are not limited to:
- our ability to retain existing customers, attract new customers and
maintain customer satisfaction;
- the introduction of new or enhanced Web pages, services, products and
strategic alliances by us and our competitors;
- price competition or higher wholesale prices;
- the timing and popularity of future DVD releases and our access to those
releases;
- our ability to manage inventory levels;
- fluctuations in the amount of consumer spending on DVDs and related
products;
- decreases in the number of visitors to our Web sites or our inability to
convert visitors to our Web sites into customers;
- the termination of existing, or failure to develop new, strategic
marketing relationships through which we receive exposure to traffic on
third-party Web sites;
- increases in the cost of online or offline advertising;
- our ability to attract new personnel in a timely and effective manner or
retain existing personnel;
- unexpected increases in shipping costs or delivery times;
- government regulations related to use of the Internet for commerce;
- our ability to maintain, upgrade and develop our Web sites, transaction
processing systems or network infrastructure;
- technical difficulties, system downtime or Internet brownouts;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations and infrastructure;
- the timing of promotions and sales programs; and
- general economic conditions and economic conditions specific to the
Internet and the DVD industry.
As a result of the factors listed above, our quarterly or annual results of
operations in future periods may not meet the expectations of securities
analysts or investors. This could result in a decline in the value of our common
stock.
BECAUSE OUR BUSINESS WILL PROBABLY BE AFFECTED BY SEASONAL BUYING PATTERNS, OUR
QUARTERLY OPERATING RESULTS WILL FLUCTUATE AND OUR SHARE PRICE MAY BE
ADVERSELY AFFECTED.
We believe that our revenues will be affected by seasonal consumer buying
patterns. Sales in the traditional video industry are highest in the fourth
quarter of each calendar year. To date, our limited operating history and rapid
growth make it difficult for us to determine what effect, if any, seasonality
has on our business. Shifts in seasonal sales cycles may occur due to changes in
the economy or other factors affecting the market for our products. These shifts
could cause our quarterly or annual results of operations in future periods to
fall below the expectations of securities analysts or investors. This could
result in a decline in the value of our common stock.
8
<PAGE>
IF WE DO NOT MAINTAIN ADEQUATE SYSTEMS CAPACITY TO SERVICE OUR CUSTOMERS, WE
COULD LOSE CUSTOMERS AND OUR REVENUES COULD BE REDUCED.
A key element of our strategy is to generate higher volumes of traffic on
our Web sites. Our reputation and ability to attract, retain and serve our
customers hinge upon the reliable performance of our Web sites, network
infrastructure and transaction-processing systems. Interruptions in these
systems could make our Web sites unavailable and hinder our ability to fill
orders, thereby reducing the volume of products we can sell. These interruptions
could also diminish the overall attractiveness of our product and service
offerings to existing and potential customers. If we experience a substantial
increase in traffic volume on our Web sites or in the number of orders placed by
customers, we will need to expand and upgrade our network infrastructure,
technology and transaction-processing systems by adding additional hardware and
software. We may not be able to project the rate of increase in traffic or order
volume on our Web sites. If we do not or are unable to make these improvements
on a timely basis, we may encounter:
- unanticipated system disruptions;
- slower response times;
- a decline in the quality of our customer service;
- reduced accuracy and/or speed of order fulfillment; and
- delays in reporting accurate financial information.
WE RELY ON PANDESIC LLC TO DEVELOP AND SERVICE THE COMMERCE SYSTEMS THAT OPERATE
OUR BUSINESS. OUR OPERATIONS COULD BE IMPAIRED IF THIS RELATIONSHIP IS
TERMINATED.
We depend on Pandesic LLC to develop and service our commerce systems,
including the software and hardware that operates our transaction-processing
systems. Our current agreement with Pandesic runs through May 2000. If Pandesic
terminates the agreement early or if the agreement is not renewed, we would be
forced to either enter into a relationship with another third-party provider or
undertake to develop and service our commerce systems internally. In either
event, we would have to incur additional expenses to convert our commerce
systems. Also, the new commerce system could be more expensive to maintain than
our current system and may not function as well.
WE FACE THE RISK OF SYSTEM FAILURES AND WE DO NOT MAINTAIN REDUNDANT FACILITIES.
THE OCCURRENCE OF A SYSTEM FAILURE COULD DAMAGE OUR REPUTATION AND IMPAIR OUR
OPERATING RESULTS.
Our ability to receive and process orders successfully and provide
high-quality customer service depends on the efficient and uninterrupted
operation of our computer and communications systems. Our systems and operations
are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, earthquake and similar events. Our systems are also
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We operate our business from and warehouse all of our inventory at
a single location. This facility may also be damaged by fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. We do not
presently have redundant systems or a formal disaster recovery plan and do not
carry sufficient business interruption insurance to compensate us for losses
that may occur.
IF WE ARE NO LONGER ABLE TO PURCHASE PRODUCTS DIRECTLY FROM MAJOR STUDIOS, OUR
GROSS PROFIT COULD BE REDUCED.
A key element of our strategy involves purchasing inventory directly from
major and independent studios. This allows us to buy product at lower prices
than can be obtained through distributors. We also rely on studios for joint
promotions and we believe our relationships with them may allow us to
9
<PAGE>
develop additional revenue sources. We do not have any long-term supply
agreements. If we are unable to maintain our relationships with the studios, we
would have to purchase our product from distributors and our profit margins
would be reduced.
BECAUSE OF THE RELATIVELY LOW COST OF LAUNCHING A WEB SITE AND THE LIMITED
BARRIERS TO ENTRY, COMPETITION IN THE ONLINE COMMERCE MARKET IS INTENSE. IF WE
ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS THAT
ENTER THE ONLINE COMMERCE MARKET, OUR REVENUES AND OPERATING RESULTS COULD BE
IMPAIRED.
The online commerce market is new, rapidly evolving and intensely
competitive, and we expect that competition could further intensify in the
future. Barriers to entry are limited, and current and new competitors can
launch Web sites at a relatively low cost. In addition, the broader retail video
industry is intensely competitive. We currently compete with a variety of online
vendors who specialize in DVDs and videos, as well as those who also sell books,
music and other entertainment products. We also compete with specialty video
retailers, mass merchandisers, consumer electronic stores, and non-store
retailers including mail-order video clubs. Many of these traditional retailers
also support or may introduce dedicated Web sites that compete directly with
ours. As the DVD rental market matures, we may also face increased competition
from DVD rental stores. New technologies and the expansion of existing
technologies may increase the competitive pressures on us. For example,
applications that rank specific titles from a variety of Web sites based on
price may channel customers to online retailers that compete with us.
We believe that the primary competitive factors in the online market are:
- brand recognition;
- product selection;
- ease of use;
- site content;
- speed of delivery;
- customer service; and
- price.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us. Our competitors have
and may continue to utilize aggressive pricing or inventory availability
practices and devote substantially more resources to Web site and systems
development than us. Increased competition may result in reduced operating
margins, loss of market share and diminished brand recognition.
We may not be able to compete successfully against current and future
competitors. Further, as a strategic response to changes in the competitive
environment, we may from time to time make pricing, service, marketing decisions
or acquisitions that could have a material adverse effect on our business,
prospects, financial condition and results of operations.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH OR EXPANSION, OUR OPERATING RESULTS AND
ABILITY TO SUSTAIN GROWTH COULD BE IMPAIRED.
We have expanded rapidly since we commenced operations in April 1997. We
anticipate that further expansion of our operations will be required to address
any significant growth in our customer base and to take advantage of our market
opportunities. During 1998, we grew from seven to 72
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employees. As of March 31, 1999, we had 90 employees and several key members of
management have only recently joined us. We may choose to expand our operations
by:
- developing new Web sites;
- promoting new or complementary products or sales formats;
- expanding the breadth and depth of products and services offered; or
- expanding our market presence through relationships with third parties.
Any future expansion, internally or through acquisitions, may place
significant demands on our managerial, operational, administrative and financial
resources. Furthermore, any new business or product line we launch that is not
favorably received by our consumers could damage our reputation, brand name or
results of operations. Our future performance and profitability will depend in
part on our ability to recruit, motivate and retain qualified personnel and on
the implementation of enhancements to our operational and financial systems. We
cannot be certain that our systems, procedures or controls will be adequate to
support our expanding operations or that management will be able to respond
effectively to any growth in our business.
OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND
OUR WAREHOUSE AND ORDER PROCESSING CAPABILITIES.
We must increase the size of our warehouse and order processing operations
in order to accommodate increases in the total number of DVD titles available
for sale and any significant increase in the volume of customer orders. Our
current warehouse operations are not adequate to accommodate significant
increases in the number of DVD titles or in customer demand. We will have to
relocate some of our operations within the next twelve months, and we have
recently commenced a search for suitable locations. We may also be required to
automate order processing tasks that are currently performed manually. All of
these factors could adversely affect our business, prospects, financial
condition and results of operations.
OUR GROWTH AND OPERATING RESULTS WILL BE IMPAIRED IF THE INTERNET AND ONLINE
COMMERCE DO NOT CONTINUE TO GROW.
Our growth and operating results depend in part on widespread consumer
acceptance and use of the Internet as a way to buy products. This consumer
practice is at an early stage of development, and demand and continued market
acceptance is uncertain. We cannot predict the number of consumers that will be
willing to shift their purchasing habits from traditional to online retailers.
The Internet may not become a viable commercial marketplace due to
inadequate development of network infrastructure and enabling technologies that
address consumer concerns about:
- network performance;
- security;
- reliability;
- speed of access;
- ease of use; and
- bandwidth availability.
In addition, the Internet's viability as a commercial marketplace could be
adversely affected by increased government regulation. Changes in or
insufficient availability of telecommunications or other services to support the
Internet also could result in slower response times and adversely affect general
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<PAGE>
usage of the Internet. Also, negative publicity and consumer concern about the
security of transactions conducted on the Internet and the privacy of users may
also inhibit the growth of commerce on the Internet.
IF DVD TECHNOLOGY DOES NOT BECOME WIDELY ACCEPTED OR BECOMES OBSOLETE, OUR
REVENUES COULD BE REDUCED.
Consumers may not accept DVD technology on a widespread basis, or acceptance
may be delayed, due to:
- a reluctance by studios or others to release titles in the DVD format;
- consumer confusion because of competing DVD formats, including DIVX;
- potentially high switching costs from VHS to DVD; and
- the availability of pay-per-view and other forms of online transmission as
an alternative to DVD.
The foregoing factors could result in delays in the acceptance of DVD
technology. Also, the electronic online delivery of information, through
distribution media including the Internet, satellites or cable television,
competes with DVD technology. Recent and continuing developments in broadband
online data delivery have led to speculation regarding the decreasing viability
of physical media including DVD products. If DVD technology does not become
widely accepted or becomes obsolete, our revenues could be reduced and our
operating results could be impaired.
IF WE DO NOT RESPOND TO TECHNOLOGICAL CHANGE OUR SERVICES COULD BECOME OBSOLETE
AND WE COULD LOSE CUSTOMERS.
To remain competitive, we must continue to enhance and improve the
responsiveness, reliability, functionality and features of our online store. The
Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices. These developments could
render our Web sites and proprietary technology and systems obsolete. Our growth
and operating results will depend, in part, on our ability to:
- enhance our existing services;
- develop new features, services and technology that address the
increasingly sophisticated and varied needs of prospective customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
Also, new technologies may make our existing features and services obsolete.
We believe that our growth and operating results will depend in part on our
ability to deliver products and services which meet changing technology and
customer needs.
OUR GROWTH AND OPERATING RESULTS DEPEND ON KEY PERSONNEL AND OUR ABILITY TO HIRE
ADDITIONAL PERSONNEL.
We depend substantially on the continued services and performance of our
senior management and other key employees, particularly Michael Dubelko, our
Chairman, Chief Executive Officer and President, and Andrew Crist, our Chief
Financial Officer. The loss of any of these officers or key employees could
disrupt our business. Both Mr. Dubelko's and Mr. Crist's employment agreements
are terminable at their discretion. In addition, we cannot be certain that the
key person life insurance that we maintain on Mr. Dubelko will adequately
compensate us for the loss of his services. Our future
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success also depends on our ability to identify, attract, hire, train, retain
and motivate other highly skilled technical, managerial, editorial,
merchandising, marketing and customer service personnel. Competition for
qualified personnel is intense, and we may not be able to successfully attract,
assimilate or retain sufficiently qualified personnel.
IF OUR ONLINE COMMERCE SECURITY MEASURES FAIL TO PROTECT CONSUMER INFORMATION,
OUR REPUTATION AND BRAND COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.
In the online commerce business, consumer confidence largely depends upon
the privacy of their activities and the secured transmission of confidential
information over public networks. To secure transmission of our customers'
confidential information, including their credit card numbers, we rely on
licensed encryption and authentication technology. However, our current security
measures may not be adequate. Advances in computer capabilities, new discoveries
in the field of cryptology or other developments may interfere with the methods
we use to secure customer transactions. Should someone circumvent our security
measures, he could misappropriate proprietary information and cause
interruptions in our operations. Security breaches could expose us to lawsuits
for failing to secure confidential customer information. As a result, we may be
required to expend a significant amount of money and other resources to protect
against security breaches or to alleviate any problems they may cause.
IF OUR STRATEGIC MARKETING ALLIANCES AND ONLINE AND TRADITIONAL ADVERTISING ARE
UNSUCCESSFUL, WE MAY BE UNABLE TO INCREASE OUR CUSTOMER BASE AND BRAND NAME
RECOGNITION.
We rely on strategic alliances and online and traditional advertising to
attract customers to our Web sites. We have entered into strategic marketing
agreements with America Online Inc., One Zero Media, Inc. (AltaVista) and
Infoseek Corporation (Go.com). Our ability to generate higher revenues will
largely depend on increased traffic and purchases through these agreements and
similar agreements we may enter into in the future. However, these marketing
agreements may not generate a sufficient number of new customers or revenues to
justify their costs. We cannot be sure that we will be able to renew or expand
successful advertising programs or our strategic alliances beyond their initial
terms or at acceptable terms. In addition, we commit substantial resources to
promoting our brand name through online, print and radio advertising campaigns.
However, we cannot be certain that these methods of advertising will
successfully attract additional customers to our Web sites.
IF WE ARE UNABLE TO PROTECT OUR DOMAIN NAMES, OUR REPUTATION AND BRAND COULD BE
IMPAIRED AND WE COULD LOSE CUSTOMERS.
We currently hold various domain names relating to our brand, including
DVDEXPRESS.COM and DVD.COM. The acquisition and maintenance of domain names
generally are regulated by governmental agencies and their designees. The
regulation of domain names in the United States and in foreign countries may
change in the near future. Governing bodies may establish additional top-level
domains, appoint additional domain name registrars or modify the requirements
for holding domain names. As a result, we may be unable to acquire or maintain
relevant domain names in all countries in which we conduct business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring domain names that are similar to,
infringe upon or otherwise decrease the value of our trademarks and other
proprietary rights.
IF WE ARE UNABLE TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS, OUR
REPUTATION AND BRAND COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.
We regard our trademarks, trade secrets and similar intellectual property as
critical to our business. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or
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license agreements with employees, customers, partners and others to protect our
proprietary rights. We have pursued the registration of our trademarks in the
United States and internationally and have applied for the registration of
trademarks and service marks which are important to our business. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country where our products and service are made available
online. We cannot be certain that we have taken adequate steps to protect our
proprietary rights, especially in countries where the laws may not protect our
rights as fully as in the United States. In addition, third parties may infringe
upon or misappropriate our proprietary rights, and we could be required to incur
significant expenses in preserving them.
INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY AND RESULT IN THE LOSS
OF SIGNIFICANT RIGHTS.
Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notice of claims of infringement of
proprietary rights, and we expect to receive other notices in the future. We
cannot predict whether third parties will assert claims of infringement against
us, or whether any past or future assertions or prosecutions will adversely
affect our business. If we are forced to defend against any infringement or
unfair competition claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation and diversion of
technical and management personnel. As a result of these disputes, we may have
to develop non-infringing property or enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on acceptable terms, if at all.
OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND
OUR INTERNATIONAL SALES.
A significant component of our business strategy is to expand our
international sales. Although we currently sell products to international
customers from within the United States, we intend to establish a physical
presence in Europe and possibly other international markets in the future.
Conducting business in foreign countries involves inherent risks, including, but
not limited to:
- unexpected changes in regulatory requirements;
- export restrictions;
- tariffs and other trade barriers;
- difficulties in protecting intellectual property rights;
- difficulties in staffing and managing foreign operations;
- problems collecting accounts receivable;
- longer payment cycles;
- political instability;
- fluctuations in currency exchange rates; and
- potentially adverse tax consequences.
One or more of the foregoing factors could hinder our plans to expand our
international operations.
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OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED IF WE ARE UNABLE TO MEET OUR
FUTURE CAPITAL REQUIREMENTS.
Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to satisfy
our anticipated needs for working capital, capital expenditures and business
expansion for approximately the next 18 months. After that time, we may need
additional capital. Alternatively, we may need to raise additional funds sooner
in order to fund more rapid expansion, to develop new or enhanced services and
to respond to competitive pressures. If we raise additional funds by issuing
equity or convertible debt securities, the percentage ownership of our
stockholders will be diluted. Furthermore, any new securities could have rights,
preferences and privileges senior to those of our common stock.
We currently do not have any commitments for additional financing. We cannot
be certain that additional financing will be available when and to the extent
required or that, if available, it will be on acceptable terms. If adequate
funds are not available on acceptable terms, we may not be able to fund our
expansion, develop or enhance our products or services or respond to competitive
pressures.
WE MAY NOT BE ABLE TO SELL PRODUCTS HELD IN INVENTORY IF CONSUMER PREFERENCES
CHANGE.
The market for DVDs is impacted by rapidly changing trends in consumer
tastes. It is critical to our success that we accurately predict these trends
and stock sufficient amounts of popular titles and other products on a timely
basis and not overstock unpopular titles. Our failure to sufficiently stock
popular titles would adversely affect our operating results. The demand for
titles can change between the time we order products and the date we receive
them. In the event that one or more titles do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
would adversely affect our business. We believe that this risk will increase if
we enter new product categories due to our lack of experience in purchasing
products for these categories. In addition, to the extent that demand for our
products increases over time, we may be forced to increase inventory levels. Any
increase in our inventory levels would subject us to additional inventory risks.
BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR OUR
RESULTS OF OPERATIONS.
It is possible that a number of laws and regulations may be adopted
concerning the Internet, relating to:
- user privacy;
- pricing;
- content;
- copyrights;
- distribution; and
- characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or expansion of the Internet. A decline in the growth of the Internet
could decrease demand for our products and services and increase our cost of
doing business. Moreover, the applicability of existing laws to the Internet is
uncertain with regard to many issues including property ownership, intellectual
property, export of encryption technology, sales tax, libel and personal
privacy. Our business, financial condition and results of operations could be
seriously harmed by any new legislation or regulation of these types. The
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could also harm our
business.
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WE COULD FACE LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE
INTERNET.
We may be considered a publisher or distributor of both our own and
third-party content, and people may download or copy material from our Web sites
and distribute it to others. As a result, individuals may bring claims against
us for defamation, negligence, copyright or trademark infringement, invasion of
privacy and publicity, unfair competition or other theories based on the nature
and content of this material. For example, claims could be made against us if
material deemed inappropriate for viewing by young children could be accessed
through our Web sites. Our general liability insurance may not cover claims of
this type or may not adequately cover the costs we could incur in defending
potential claims. Further, our insurance may not fully indemnify us for all
liability that may be imposed. Our business, financial condition and operating
results could suffer if costs resulting from these claims are not covered by our
insurance or exceed our policy limits.
WE MAY BE LIABLE FOR SALES AND OTHER TAXES.
We currently collect sales or other similar taxes on the shipment of goods
only in the State of California. Tax authorities in many states are reviewing
the appropriate tax treatment of Internet and catalogue retail companies. Any
resulting state tax regulations could subject us to the assessment of sales and
income taxes in other states. Since our service is available over the Internet
in multiple states and in foreign countries, these jurisdictions may require us
to qualify to do business. If we fail to qualify in a jurisdiction that requires
us to do so, we could face expenditures for taxes and penalties.
THE RIGHTS OF OUR STOCKHOLDERS COULD BE ADVERSELY AFFECTED BECAUSE WE ARE
CONTROLLED BY MICHAEL DUBELKO, OUR FOUNDER.
Upon completion of this offering, our founder, Michael Dubelko, will
beneficially own approximately 67.1% of the outstanding shares of our common
stock. As a result, Michael Dubelko will have the ability to control matters
requiring the vote of the stockholders, including the election of our directors
and most of our corporate actions. His control could delay, defer or prevent
others from initiating a potential merger, takeover or other change in our
control, even if these events would benefit our stockholders and us. This could
adversely affect the voting and other rights of our other stockholders, and
could depress the market price of our common stock.
IF THE SOFTWARE, HARDWARE, COMPUTER TECHNOLOGY AND OTHER SYSTEMS AND SERVICES
THAT WE USE ARE NOT YEAR 2000 COMPLIANT, OUR OPERATING RESULTS, BRAND AND
REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities.
We use software, hardware, computer technology and other services that we
developed and or purchased from third-party vendors that may fail due to the
Year 2000 issue. We are dependent on financial institutions to process our
customers' credit card payments. We are also dependent on telecommunications
vendors to maintain our network and the United States Postal Service, Federal
Express and other third-party carriers to deliver orders to customers.
If Year 2000 issues prevent our customers from accessing the Internet,
accessing our Web sites, processing orders through our third party provided
systems or using their credit cards, or if we are unable to purchase product
from our suppliers or deliver product to our customers, our operations may be
materially adversely affected. We cannot currently predict how the Year 2000
issue will affect our
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computer systems, suppliers and shippers, including the United States Postal
Service and Federal Express, or the extent to which we would be vulnerable to
the failure to remedy any Year 2000 issues on a timely basis. Also, we cannot be
certain that our customers' credit card vendors and those organizations
responsible for maintaining and providing Internet access will rectify their
Year 2000 issues. Moreover, the costs related to Year 2000 compliance could be
significant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000."
WE HAVE BROAD DISCRETION AS TO USE OF PROCEEDS AND MAY NOT USE THE PROCEEDS
EFFECTIVELY.
We estimate the net proceeds of this offering to be approximately $45.4
million. We expect to use the net proceeds to expand marketing activities,
satisfy contractual obligations with America Online, fund international
expansion, repay credit lines, expand our infrastructure and for working
capital. However, we may change the allocation of these proceeds in response to
economic or industry developments or changes. Accordingly, our management will
have broad discretion in applying the net proceeds of this offering. See "Use of
Proceeds."
NO PRIOR PUBLIC MARKET EXISTS FOR OUR COMMON STOCK AND NO ACTIVE TRADING MARKET
MAY DEVELOP.
Prior to this offering, there has been no public market for our common
stock. We cannot be sure that an active trading market for the common stock will
develop or continue as a result of this offering.
STOCK PRICES OF INTERNET-RELATED COMPANIES HAVE FLUCTUATED WIDELY IN RECENT
MONTHS AND THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE,
WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
The trading price of our common stock is likely to be volatile and could
fluctuate widely in response to factors including the following, some of which
are beyond our control:
- variations in our operating results;
- announcements of technological innovations or new services by us or our
competitors;
- changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- changes in operating and stock price performance of other Internet and
online companies similar to us;
- conditions or trends in the Internet industry;
- additions or departures of key personnel; and
- future sales of our common stock.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance may adversely affect the price
of our common stock. In particular, following initial public offerings, the
market prices for stocks of Internet and technology-related companies often
reach levels that bear no established relationship to the operating performance
of these companies. These market prices are generally not sustainable and could
vary widely. The market prices of the securities of Internet-related and online
companies have been especially volatile. If our common stock trades to high
levels following this offering, it could eventually experience a significant
decline.
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OUR OFFERING PRICE DOES NOT NECESSARILY RELATE TO ANY ESTABLISHED CRITERIA OF
VALUE, SO OUR STOCK MAY TRADE AT MARKET PRICES BELOW THE OFFERING PRICE.
Through negotiations with the underwriters, we determined the public
offering price of the shares of our common stock. This price does not
necessarily relate to our book value, assets, past operating results, financial
condition or other established criteria of value. As a result, the shares being
offered may trade at market prices below the initial public offering price.
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET MAY CAUSE
OUR STOCK PRICE TO FALL.
Sales of substantial amounts of our common stock in the public market after
this offering could adversely affect the prevailing market price of our common
stock. Upon completion of this offering, we will have 22,206,427 shares of
common stock outstanding. The shares sold in this offering will be freely
tradable under the Securities Act unless purchased or held by our "affiliates,"
as that term is defined in Rule 144 under the Securities Act. As part of this
offering, our executive officers, directors and stockholders have agreed with
the underwriters that they will not offer or sell any shares of common stock for
a period of 180 days after the date of this prospectus without the prior written
consent of ING Baring Furman Selz LLC. ING Baring Furman Selz LLC may, in its
sole discretion, at any time and without notice, release all or any portion of
the shares of common stock under these agreements. Sales of substantial amounts
of common stock in the public market, or the perception that sales could occur,
could adversely affect the prevailing market price for the common stock and
could impair our ability to raise capital through a public offering of equity
securities.
PROVISIONS IN OUR CHARTER DOCUMENTS COULD DETER TAKEOVER EFFORTS WHICH COULD
DEPRESS OUR STOCK PRICE.
Provisions of our Certificate of Incorporation, Bylaws and Delaware law
could make it more difficult for a third-party to acquire us, even if doing so
would be beneficial to our stockholders. See "Description of Capital
Stock--Anti-Takeover Effects."
MINORITY STOCKHOLDERS MAY NOT BE ABLE TO ELECT ANY OF OUR DIRECTORS WHICH COULD
DETER A TAKEOVER EVEN IF BENEFICIAL TO OUR STOCKHOLDERS.
Our Certificate of Incorporation does not provide for cumulative voting. As
a result, it is more difficult for minority stockholders to obtain
representation on our Board of Directors, which may deter takeover attempts.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address:
- trends in online commerce, Internet usage and adoption of DVD technology;
- our strategies;
- use of proceeds;
- Year 2000; and
- our financial condition or results of operations.
These forward-looking statements may be found in "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus. In some cases you can identify forward-looking statements by
terminology including "believes," "anticipates," "expects," "estimates," "may,"
"will," "should," "could," "plans," "predicts," "potential," "continue" or
similar terms.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. The forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results to be materially different from any future results expressed or implied
by the forward-looking statements. These factors include those listed under
"Risk Factors" and elsewhere in this prospectus. We undertake no duty to update
any of the forward-looking statements after the date of this prospectus, even if
new information becomes available or other events occur in the future. All
forward-looking statements contained in this prospectus are expressly qualified
in their entirety by this cautionary notice.
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TERMINATION OF S CORPORATION STATUS
From the time of our founding until December 31, 1998 we elected to be taxed
as a Subchapter S corporation. A Subchapter S corporation, unlike a Subchapter C
corporation, is taxed like a partnership, with the owners being taxed instead of
the business entity. As a result, our sole shareholder during this period,
Michael Dubelko, was liable for all federal and substantially all state taxes
levied on our earnings.
We terminated this election effective on January 1, 1999. No adjustment was
necessary to reflect income tax expense in our pro forma statements of
operations because we had not generated any taxable income. Further, no
adjustment was necessary to our net deferred income tax assets because their
realization was uncertain and we had valued them at zero.
We agreed with Mr. Dubelko that if any adjustment is made to our taxable
income for any period prior to January 1, 1999 that increases his tax liability,
we will reimburse him to the extent our tax liability is decreased. If an
adjustment during that period increases our tax liability, he will reimburse us
to the extent his tax liability is decreased. These reimbursements to Mr.
Dubelko must also compensate him for any taxes due as a result of our
reimbursement to him.
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USE OF PROCEEDS
We estimate the net proceeds from this offering to be approximately $45.4
million, or $52.3 million if the underwriters' exercise their over-allotment
option in full, assuming an initial public offering price of $11.00 per share
and after deducting the underwriting discounts and commissions and estimated
offering expenses.
We expect to use these net proceeds as follows:
<TABLE>
<S> <C>
Expand marketing activities........................................... $21.5 million
Pay amounts due to America Online..................................... 7.0 million
Fund international expansion.......................................... 5.0 million
Pay amounts due to other marketing partners........................... 3.5 million
Repay credit lines with Wells Fargo Bank.............................. 3.0 million
Expand infrastructure and other general corporate purposes............ 5.4 million
------------
$45.4 million
------------
------------
</TABLE>
Until the proceeds are used, we intend to invest the net proceeds in
interest-bearing investment grade instruments, certificates of deposit or direct
or guaranteed obligations of U.S. governmental agencies.
As noted above, we expect to use $3 million of the net proceeds to repay two
credit lines with Wells Fargo Bank, National Association. The $2 million line
bears interest at .25% below prime rate and expires on November 1, 1999. The $1
million line bears interest at .75% above the prime rate and expires on
September 1, 1999. The prime rate was 7.75% at March 31, 1999. These credit
lines were used for general corporate purposes. Michael Dubelko has personally
guaranteed the repayment of both credit lines.
Other than with respect to payments to America Online and Wells Fargo Bank,
we intend to maintain flexibility in our use of the remaining proceeds of this
offering. The amounts actually expended for each use are at our discretion and
may vary significantly depending upon a number of factors, including the
progress of our marketing programs, capital spending requirements and
developments in the DVD market and Internet commerce. Accordingly, we reserve
the right to reallocate the proceeds of this offering as we deem appropriate.
From time to time, in the ordinary course of business, we evaluate possible
acquisitions of, or investments in, businesses, products and technologies that
are complementary to our business. A portion of the net proceeds may be used to
fund acquisitions or investments. We currently have no arrangements, agreements
or understandings and are not engaged in active negotiations with respect to any
acquisitions or investments.
DIVIDEND POLICY
To date, we have not declared or paid any dividends on our common stock. We
do not intend to declare or pay dividends on our common stock in the foreseeable
future, but rather to retain any earnings to finance the growth of our business.
Any future determination to pay dividends will be at the discretion of our Board
of Directors and will depend on our results of operations, financial condition,
contractual and legal restrictions and other factors it deems relevant.
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CAPITALIZATION
The following table shows our capitalization as of March 31, 1999. Our
capitalization is presented on an actual basis and on an as adjusted basis to
reflect the receipt and application by us of the net proceeds of this offering,
which are estimated to be $45.4 million, as detailed in "Use of Proceeds," and
to give effect to the automatic conversion of the 1,714,285 shares of Series A
Convertible Preferred Stock into 2,571,427 shares of common stock upon the
closing of this offering, after giving effect to a 3-for-2 stock split. The
number of issued and outstanding shares in the following table excludes the
following options and warrants that could result in further dilution to new
investors:
- 2,250,000 shares of common stock available for issuance under our stock
incentive plan, of which 1,124,250 shares were subject to outstanding
options as of the date of this prospectus at a weighted average exercise
price of $4.38 per share;
- 300,000 shares of common stock underlying options granted to an employee
at an exercise price of $.0667 per share; and
- 1,384,006 shares of common stock underlying a warrant granted to America
Online at an exercise price of $5.60 per share.
As a result of our change from an S corporation, the accumulated deficit for
accounting purposes includes only losses since January 1, 1999.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion...................................................... $ -- $ --
Stockholders' equity:
Preferred Stock, $.0001 par value; 10,000,000 shares authorized;
1,714,285 issued and outstanding; no shares issued and outstanding
on an as adjusted basis............................................................... -- --
Common Stock, $.0001 par value; 50,000,000 shares authorized;
15,135,000 shares issued and outstanding; 22,206,427 shares outstanding
on an as adjusted basis............................................................... 2 2
Additional paid-in capital.............................................................. 23,697 69,082
Accumulated deficit..................................................................... (5,274) (5,274)
--------- -----------
Total stockholders' equity................................................................ 18,425 63,810
--------- -----------
Total capitalization.................................................................. $ 18,425 $ 63,810
--------- -----------
--------- -----------
</TABLE>
22
<PAGE>
DILUTION
Purchasers of the common stock in this offering will experience an immediate
and substantial dilution in the pro forma net tangible book value of the common
stock from the initial public offering price. The pro forma net tangible book
value of the common stock as of March 31, 1999, was $18.2 million or $1.03 per
share. Pro forma net tangible book value per share is equal to our total assets
less intangible assets, less total liabilities, divided by the number of shares
of common stock outstanding, after giving effect to the automatic conversion of
the 1,714,285 shares of Series A Convertible Preferred Stock into 2,571,427
shares of common stock upon the closing of this offering, after giving effect
for a 3-for-2 stock split. After giving effect to the sale of 4,500,000 shares
of common stock in this offering at an assumed initial public offering price of
$11.00 per share and the receipt and application of the net proceeds as detailed
in "Use of Proceeds," our pro forma net tangible book value as of March 31, 1999
would have been $63.6 million or $2.87 per share. This represents an immediate
increase in net tangible book value of $1.84 per share to our current
stockholders and an immediate and substantial dilution of $8.13 per share to new
stockholders purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................................... $ 11.00
Pro forma net tangible book value as of March 31, 1999.................... $ 1.03
Increase attributable to new stockholders................................. 1.84
---------
Pro forma net tangible book value as of March 31, 1999 after this
offering.................................................................. 2.87
---------
Dilution to new stockholders................................................ $ 8.13
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999,
the differences between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by the existing
stockholders and the new stockholders purchasing shares of common stock in this
offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. 17,706,427 79.7% $ 14,130,000 22.2% $ 0.80
New stockholders...................................... 4,500,000 20.3 49,500,000 77.8 $ 11.00
------------ ----- ------------- -----
22,206,427 100.0% $ 63,630,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The above tables and calculations assume no exercise of outstanding options
or warrants. At the date of this prospectus, 1,124,250 shares of common stock
were underlying outstanding options under our stock incentive plan at a weighted
average exercise price of $4.38 per share, up to 300,000 shares could be
purchased under an option granted to an employee at an exercise price of $.0667
per share and up to 1,384,006 shares of common stock could be purchased upon
exercise of the warrant granted to America Online. To the extent options or
warrants are exercised, there will be further dilution to new investors.
23
<PAGE>
SELECTED FINANCIAL DATA
The following table shows selected financial data of our business for the
periods indicated. The statement of operations data shown below with respect to
the period ended December 31, 1996, the years ended December 31, 1997 and 1998
(audited), the three months ended March 31, 1998 and 1999 (unaudited) and the
balance sheet data as of December 31, 1996, 1997 and 1998 (audited) and March
31, 1999 (unaudited) are derived from our financial statements and the related
notes appearing elsewhere in this prospectus. The following data should be read
in conjunction with our financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 18
(INCEPTION) YEARS ENDED THREE MONTHS ENDED
TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ -- $ 1,269 $ 16,907 $ 1,645 $ 11,229
Cost of revenues......................... -- 1,046 15,086 1,365 10,381
------------ ------------ ------------ ------------ ------------
Gross profit............................. -- 223 1,821 280 848
Operating expenses(1).................... 17 415 6,311 291 6,132
------------ ------------ ------------ ------------ ------------
Operating loss........................... (17) (192) (4,490) (11) (5,284)
Interest income (expense), net........... -- -- (74) -- 10
------------ ------------ ------------ ------------ ------------
Net loss................................. $ (17) $ (192) $ (4,564) $ (11) $ (5,274)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Loss before pro forma provision
for income taxes....................... $ (17) $ (192) $ (4,564) $ (11) $ (5,274)
Pro forma provision for income
taxes (unaudited)(2)................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Pro forma net loss (unaudited)(2)........ $ (17) $ (192) $ (4,564) $ (11) $ (5,274)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic and diluted loss per
common share(3)........................ $ (0.00) $ (0.01) $ (0.30) $ (0.00) $ (0.35)
Weighted average shares
outstanding............................ 15,000,000 15,000,000 15,000,000 15,000,000 15,114,000
Basic and diluted pro forma loss
per common share (unaudited)(3)........ $ (0.00) $ (0.01) $ (0.30) $ (0.00) $ (0.30)
Pro forma weighted average shares
outstanding (unaudited)................ 15,000,000 15,000,000 15,000,000 15,000,000 17,599,713
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1999
------------------------------- ---------------------------
1996 1997 1998 ACTUAL AS ADJUSTED(4)
--------- --------- --------- ----------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 13 $ -- $ 905 $ 4,933 $ 40,318
Working capital.................................... 13 157 2,244 9,632 55,017
Total assets....................................... 13 310 19,489 25,536 67,921
Total debt......................................... -- -- 4,300 3,000 --
Total stockholders' equity......................... 13 191 11,823 18,425 63,810
</TABLE>
- ------------------------------
(1) Operating expenses included sales and marketing expenses (excluding America
Online warrant amortization expense) of $97,000 in 1997, $2.9 million in
1998, $127,000 for the three months ended March 31, 1998 and $3.2 million
for the three months ended March 31, 1999. In addition, we had America
Online warrant amortization expenses of $1.2 million in 1998 and $1.2
million for the three months ended March 31, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) We have been exempt from payment of federal income taxes and have paid state
income taxes at a reduced rate as a result of our S corporation election. As
of January 1, 1999, our S corporation status terminated. Pro forma statement
of income data reflect the income tax expense that would have been recorded
had we not been exempt from paying taxes under the S corporation election.
This pro forma expense would be zero as a result of our operating losses.
There are no additional deferred taxes based upon the increase in the
effective tax rate from our S corporation status to C corporation status to
be recorded as all net deferred tax assets have been fully offset by a
valuation allowance as their realizability is uncertain. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and notes 2 and 8 to the financial statements.
(3) See notes to financial statements for an explanation of the calculation and
presentation of earnings (loss) per common share.
(4) As adjusted to reflect (i) the increase in stockholders' equity to reflect
the receipt by us of the net proceeds of this offering from the sale of
4,500,000 shares of common stock, which are estimated to be $45.4 million;
(ii) the automatic conversion of the 1,714,285 shares of Series A Preferred
Stock into 2,571,427 shares of common stock (post 3-for-2 stock split) which
has no impact on total stockholders' equity; (iii) the payment of additional
prepaid advertising of $7 million to America Online under our marketing
agreement; and (iv) the repayment of $3 million outstanding under our credit
lines which reduces total debt to zero.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND THE RELATED
NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We commenced our online activities in April 1997 and have since grown
rapidly. Our revenues were $11.2 million in the first quarter of 1999, up from
$1.6 million in the first quarter of 1998. We had revenues of $16.9 million in
1998 compared to $1.3 million in 1997.
Because of the early stage of our operations, we believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as an indication of our future performance. We report
our results on an accrual basis and recognize revenue when we ship products to
our customers. Our revenues are received primarily from customer credit card
payments within three days of our shipments and concurrent billings.
We incurred net losses of $5.3 million for the first quarter of 1999, $4.6
million for the year ended December 31, 1998, $192,000 for the year ended
December 31, 1997 and $17,000 for the period ended December 31, 1996. At
December 31, 1998, we had an accumulated deficit of $4.8 million. As a result of
our change from an S corporation, the accumulated deficit for accounting
purposes includes only losses since January 1, 1999. These losses and
accumulated deficit resulted from a lack of substantial revenues, advertising
costs, the costs of the significant infrastructure and other costs incurred for
the development and initial rollout of our Web sites. Because of our aggressive
expansion plans, we expect to incur significant operating losses for the
foreseeable future. Although we have experienced revenue growth in recent
periods, this growth may not be sustainable and these recent periods should not
be considered indicative of future performance. We may never achieve significant
revenues or profitability, or if we achieve significant revenues, they may not
be sustained.
RESULTS OF OPERATIONS
QUARTERLY RESULTS.
The following tables show unaudited statement of operations data, in dollars
and as a percentage of revenues, for the last five quarters. They have been
prepared on the same basis as our annual information and, in our opinion,
include all adjustments necessary to present fairly the information for the
quarters presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
1998 1999
------------------------------------------------------- ------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 1,645 $ 2,623 $ 3,730 $ 8,909 $ 11,229
Cost of revenues........................ 1,365 2,297 3,309 8,115 10,381
------------ ------------ ------------ ------------- ------------
Gross profit............................ 280 326 421 794 848
Operating expenses:
Operating and development............. 102 225 298 684 1,177
Sales and marketing................... 127 205 433 2,146 3,246
AOL warrant amortization.............. -- -- -- 1,249 1,249
General and administrative............ 62 167 187 426 460
------------ ------------ ------------ ------------- ------------
Operating loss.......................... (11) (271) (497) (3,711) (5,284)
Interest income (expense), net.......... -- -- (16) (58) 10
------------ ------------ ------------ ------------- ------------
Net loss................................ $ (11) $ (271) $ (513) $ (3,769) $ (5,274)
------------ ------------ ------------ ------------- ------------
------------ ------------ ------------ ------------- ------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
1998 1999
---------------------------------------------------------- -------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 83.0 87.6 88.7 91.1 92.5
----- ----- ----- ----- -----
Gross profit.................... 17.0 12.4 11.3 8.9 7.5
Operating expenses:
Operating and development..... 6.2 8.6 8.0 7.7 10.5
Sales and marketing........... 7.7 7.8 11.6 24.1 28.9
AOL warrant amortization...... -- -- -- 14.0 11.1
General and administrative.... 3.8 6.3 5.1 4.8 4.1
----- ----- ----- ----- -----
Operating loss.................. (0.7) (10.3) (13.4) (41.7) (47.1)
Interest income (expense),
net........................... -- -- (0.4) (0.6) 0.1
----- ----- ----- ----- -----
Net loss........................ (0.7)% (10.3 )% (13.8 )% (42.3 )% (47.0 )%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
REVENUES. Revenues for the first quarter of 1999 totaled $11.2 million
compared to $1.6 million for the first quarter of 1998. Revenues consist of the
selling price of DVD Video, DVD-ROM and other merchandise, net of sales
discounts, as well as shipping and handling charges. Revenues increased
approximately $9.6 million as a result of significant growth in our customer
base.
COST OF REVENUES AND GROSS PROFITS. Cost of revenues for the first quarter
of 1999 totaled $10.4 million compared to $1.4 million for the first quarter of
1998. Cost of revenues increased significantly as a result of our increase in
revenues. Cost of revenues consisted of the cost of merchandise, packaging and
shipping.
Over the last 12 months, some of our competitors have advertised and sold
DVDs at prices we believe to be at or below their cost. We believe more
discounting activity occurred during the first quarter of 1999 than during any
previous period. Our gross profit margins, as a percentage of revenues, declined
to 7.5% for the first quarter of 1999 from 17.0% for the first quarter of 1998.
We believe our competitors' discounting activities may decline as their or other
online retailers' margins are negatively impacted by their practices. Also,
during the first quarter of 1999, 44% of our cash purchases of DVDs were made
directly from studios. We expect this percentage to increase further as we
continue to expand our studio direct purchasing efforts. There can be no
assurance, however, that our gross profit margin will not continue to decline
for the foreseeable future.
OPERATING AND DEVELOPMENT EXPENSES: Operating and development expenses
totaled $1.2 million for the first quarter of 1999 compared to $0.1 million for
the first quarter of 1998 due to the growth of our business. Operating expenses
consisted primarily of the costs of purchasing, inventory management, order
processing and customer service, including related payroll, insurance and
depreciation expenses. Development expenses consisted primarily of the costs of
software acquisition and development, technical infrastructure, graphic design,
editorial and Web site content and related payroll. The increase resulted
primarily from additional website development costs of $492,000 and increased
payroll costs of $479,000. We anticipate that operating and development expenses
will increase in absolute dollars as we expand our customer base and product
offering, but gradually decline as a percentage of revenues.
SALES AND MARKETING EXPENSES: Sales and marketing expenses totaled $3.2
million for the first quarter of 1999 compared to $0.1 million for the first
quarter of 1998 due to the growth of our business as we expanded our efforts to
attract more customers and increase brand awareness. Sales and marketing
expenses consisted primarily of advertising and promotional expenses, bank and
other related transaction fees and payroll associated with personnel involved in
our advertising, marketing and public
27
<PAGE>
relations efforts. The increase resulted primarily from additional advertising
expenses of $1.7 million and bank and other related transaction fees of
$230,000. During the second half of 1998, we entered into three strategic
marketing agreements with America Online, One Zero Media (AltaVista) and
Infoseek Corporation (Go.com). Payments made under these agreements and the fair
value of other equity consideration are capitalized and amortized over the
expected useful life based upon the term of the agreement or the number of
impressions delivered by each company. We anticipate that sales and marketing
expenses will continue to increase as we expand our online and traditional
marketing programs.
AMERICA ONLINE WARRANT AMORTIZATION EXPENSE: The strategic marketing
agreement with America Online includes a warrant to purchase up to 1,384,006
shares of common stock. The value of the America Online warrant is being
amortized over the three-year term of the marketing agreement beginning on
October 1, 1998. Related amortization expense totaled $1.2 million for the first
quarter of 1999 compared to zero for the first quarter of 1998, because the
underlying America Online strategic marketing agreement was not effective until
the fourth quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expenses
totaled $460,000 for the first quarter of 1999 compared to $62,000 for the first
quarter of 1998 due to the growth of our business. General and administrative
expenses consisted of executive management, accounting and administrative
personnel, facilities and other overhead costs. The increase resulted primarily
from additional payroll costs of $91,000, professional fees of $85,000, rent of
$71,000 and other overhead costs of $71,000. We anticipate that general and
administrative expenses will increase in absolute dollars as we expand our
executive management team and general staff but gradually decline as a
percentage of revenue. In addition, we believe we will incur additional costs
related to our growth and operation as a public company.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 totaled $16.9 million compared to $1.3 million
for 1997. Revenues increased approximately $14.0 million as a result of
significant growth in our customer base and increased approximately $1.6 million
due to three additional months of offering our products for sale online in 1998.
COST OF REVENUES AND GROSS PROFITS. Cost of revenues for 1998 totaled $15.1
million compared to $1.0 million for 1997. Cost of revenues increased
significantly as a result of the large increase in revenues.
Our gross profit margins, as a percentage of revenues, declined to 10.8% for
1998 from 17.6% for 1997. This decline resulted from our short-term tactical
decision to match some competitors' prices on certain products. We believe our
competitors' discounting activities may decline as their or other online
retailers' margins are negatively impacted by these practices. Also, during
1998, approximately 30% of our cash purchases of DVDs were made directly from
studios. We expect this percentage to further increase as we expand our studio
direct purchasing efforts. There can be no assurance that our gross profit
margins will not continue to decline for the foreseeable future.
OPERATING AND DEVELOPMENT EXPENSES. Operating and development expenses
totaled $1.3 million for 1998 compared to $177,000 for 1997 primarily reflecting
additional payroll costs of $792,000 and web site development costs of $214,000
due to the growth of our business.
SALES AND MARKETING EXPENSES. Sales and marketing expenses totaled $2.9
million for 1998 compared to $97,000 for 1997. Sales and marketing expenses
increased significantly as we expanded our efforts to attract more customers and
increase brand awareness, primarily reflecting additional advertising expenses
of $1.1 million and bank and other related transaction fees of $440,000. We
28
<PAGE>
anticipate that sales and marketing expenses will continue to increase as we
expand our online and traditional marketing programs. See "Business--Our
Strategy."
AMERICA ONLINE WARRANT AMORTIZATION EXPENSE. America Online warrant
amortization expense totaled $1.2 million for 1998 compared to zero for 1997.
This increase is due to the fact that we did not begin amortizing the value of
the America Online warrant until October 1, 1998, the date the underlying
strategic marketing agreement became effective.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $842,000 for 1998 compared to $141,000 for 1997. The increase resulted
primarily from additional professional fees of $315,000, rent of $140,000 and
other overhead costs of $73,000. Through December 31, 1998, no salary had been
paid to Michael Dubelko, our Chairman, Chief Executive Officer and President.
The value of his services of $50,000 per year has been reflected as both
contributed capital and salary expense for the years ended December 31, 1997 and
1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM OCTOBER 18 TO DECEMBER
31, 1996
We began operations on October 18, 1996, but did not offer products for sale
on our Web sites until April 1997. Accordingly, during the period from October
18 to December 31, 1996 we had less than three months of operations and no
revenues. We incurred $17,000 in general and administrative expenses related to
startup and corporate formation. Further comparison between 1996 and 1997 is not
meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $3.6 million was used for operating activities for 1998 and
$290,000 in 1997, primarily as a result of net losses generated during those
periods. Cash used in operations during 1998 included aggregate payments of $2.9
million under marketing agreements and increases in inventories of $1.6 million,
offset by an increase in payables of $3.0 million. Net cash of $6.3 million was
used for operating activities in the three months ended March 31, 1999,
primarily as a result of net losses of $5.3 million generated in the period.
Cash used in operations during the period also included an increase of $1.9
million in prepaid advertising, an increase of $666,000 in inventory offset in
part by an increase in payables of $744,000.
During the second half of 1998, we entered into three-year strategic
marketing agreements with America Online and One Zero Media (AltaVista) and a
two-year strategic marketing agreement with Infoseek Corporation (Go.com). These
agreements require aggregate payments of up to $26.9 million over the terms of
the agreements, of which $2.9 million was paid in 1998. See "Business--Strategic
Marketing Agreements." During the three months ended March 31, 1999 we made
payments of $3.2 million under these agreements.
Cash of $696,000 was used in investing activities for purchases of fixed
assets in 1998 and $42,000 in 1997. Cash of $201,000 was used in investing
activities for purchases of intangible domain names assets in 1998. During the
three months ended March 31, 1999, we used cash of $284,000 for purchases of
fixed assets.
Net cash provided by financing activities, consisting of capital
contributions, stockholder loans and advances on lines of credit, totaled $5.5
million for 1998 and $320,000 in 1997.
Before January 1999, we have funded our operations and capital expenditures
primarily through capital contributions and loans from our founder, Michael
Dubelko, as well as bank credit lines that Mr. Dubelko has guaranteed. At
December 31, 1998, we had a cash balance of $905,000. We have two credit lines
totaling $3 million with Wells Fargo Bank, N.A., which were fully utilized as of
December 31, 1998. The $2 million line bears interest at .25% below prime rate
(7.5% at March 31, 1999) and expires on November 1, 1999. The $1 million line
bears interest at .75% above the prime
29
<PAGE>
rate (8.5% at March 31, 1999) and expires on September 1, 1999. We plan to use a
portion of the proceeds of this offering to repay these lines. In addition, at
December 31, 1998, we owed Michael Dubelko $1.3 million as a result of loans he
made during 1998. These loans bore interest at 8.5% and were repaid in full
during the three months ended March 31, 1999.
During January 1999, we sold 1,714,285 shares of Series A Convertible
Preferred Stock to private investors for net proceeds of $11.2 million. The
1,714,285 shares of Series A Convertible Preferred Stock will convert into
2,571,427 shares of common stock upon the closing of this offering. In an
unrelated transaction, we sold 135,000 shares of common stock to three directors
for net proceeds of $630,000. A portion of the proceeds from these sales were
used to pay back the loans made by Michael Dubelko described in the preceding
paragraph and to pay amounts due under our marketing agreement with America
Online.
Although we expect negative cash flow from operations for the foreseeable
future as we continue to develop and market our operations, we believe that the
proceeds of this offering, together with our cash on hand will be sufficient to
finance our planned operations and capital expenditures for the next 18 months,
including a planned move to larger warehouse facilities, anticipated inventory
increases and increased selling, general and administrative expenses.
SEASONALITY
The demand for DVDs, like many other consumer products, will likely be
highest in the fourth quarter, concurrent with the holiday gift purchasing
season. Although our growth has mitigated the seasonal effects in our historic
quarterly results, in the future we expect that our fourth quarter will
generally be the strongest. See "Risk Factors."
YEAR 2000
Many existing computer systems and software are coded to accept only two
digit entries in the date code field and cannot distinguish 21st century dates
from 20th century dates. If not corrected, there could be system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced to comply with these "Year 2000" requirements.
OUR STATE OF READINESS. We are assessing the impact that the Year 2000
problem may have on our operations and we have identified the following two
areas of our business that may be affected:
FACILITY AND OPERATIONAL SYSTEMS. We have internally developed the
software for our Web sites that customers use to shop in our online store.
Since we developed our Web store software within the last 14 months, we
believe we constructed these systems around the Year 2000 problem and have
not conducted any formal assessment of this software. Our remaining
information technology systems include our purchased third-party hardware
and software, and the systems and software hosted by Pandesic LLC. Our Year
2000 assessment for these information technology systems is discussed below.
In addition to our information technology, our non-information
technology systems, including our heating and air conditioning, security
systems and other systems with embedded technology are vulnerable to Year
2000 risks. To date, we have not conducted, and do not intend to conduct,
any formal assessment of our non-information technology systems. We believe
that any problems with these systems resulting from Year 2000 failures will
be insignificant and can be repaired without a material delay in our
business.
30
<PAGE>
THIRD-PARTY SUPPLIERS. We depend on Pandesic LLC to service our
commerce systems, including the hardware and software that operate our
transaction-processing systems. We have received a Year 2000 readiness
disclosure statement from Pandesic LLC indicating the Year 2000 compliance
of their systems. We intend to rely on Pandesic LLC's Year 2000 readiness
disclosure statement and we do not intend to conduct any further assessment
of their systems and software. Pandesic LLC is obligated to maintain and
correct errors that cause a material loss in function in the servers and
software used to operate our business. As a result, we believe Pandesic LLC
will repair any Year 2000 problems in their systems and software. We have
not developed any plans in the event Pandesic LLC's systems are not Year
2000 compliant or become inoperable due to Year 2000 problems.
We use other third-party hardware and software that may or may not be
Year 2000 compliant. Consequently, our ability to address Year 2000 issues
is, to a large extent, dependent upon the Year 2000 readiness of these third
parties' hardware and software products. To date, we have not initiated
communication with these third parties to assess their Year 2000 compliance.
However, we plan to contact these suppliers to validate that their products
are Year 2000 compliant. We intend to complete our assessment of their
compliance by the end of July 1999. We currently do not have any back-up
systems in place in the event our third party hardware and software becomes
inoperable. If our current hardware and software products are not Year 2000
compliant by the end of July 1999, we intend to pursue other third party
solutions that are Year 2000 compliant.
We also depend on our distributors and major and independent studios to
provide the merchandise we sell in our online store. To date, we have not
initiated communications with these parties; however, we intend to commence
communications with all of our distributors and major and independent
studios to determine the extent to which we are vulnerable to those third
parties' Year 2000 issues. We intend to obtain Year 2000 readiness
disclosure statements from each of these distributors and studios by the end
of July 1999 to confirm that their systems are Year 2000 compliant. We
expect to resolve any significant Year 2000 issues with our distributors and
studios; however, in the event they do not achieve Year 2000 compliance, we
may have to seek alternative product suppliers.
We depend on the Year 2000 compliance of Wells Fargo, our credit card
processing agent, and CyberCash, our payment service provider. We also rely
on the United States Postal Service and Federal Express to ship our
products. Although we have not initiated formal communications with these
parties, we intend to obtain Year 2000 readiness disclosure statements from
each of these parties to verify the Year 2000 compliance of their systems.
We currently do not have any back-up systems in place in the event these
third-party systems become inoperable. However, we expect to complete our
assessment of these third-party systems by the end of July 1999, and we will
locate alternative sources to handle our outsourced systems if our
third-party suppliers do not become Year 2000 compliant.
COSTS OF ADDRESSING OUR YEAR 2000 ISSUES. We do not expect the cost of
addressing our Year 2000 issues to be material to our financial condition and
results of operations. To date, we have incurred less than $10,000 in connection
with identifying and evaluating Year 2000 compliance issues. These expenses have
generally related to the operational costs associated with time spent by our
employees in the evaluation process of Year 2000 compliance in general. We
anticipate that our costs will continue to include employee expenses, and we do
not estimate total future expenditures to exceed $25,000. However, if these
costs are substantially higher than we anticipate, it could have a material
adverse effect on our business.
RISKS ASSOCIATED WITH OUR YEAR 2000 ISSUES. If Year 2000 issues prevent our
customers from accessing the Internet, accessing our Web sites, processing
orders through our third-party provided systems or using their credit cards, or
if we are unable to purchase product from our suppliers or deliver product to
our
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customers, our operations may be materially adversely affected. We cannot
currently predict the extent to which the Year 2000 issue will affect our
computer systems, suppliers and shippers, including the United States Postal
Service and Federal Express, or the extent to which we would be vulnerable to
the failure to remedy any Year 2000 issues on a timely basis. Also, we cannot be
certain that our customers' credit card vendors and those organizations
responsible for maintaining and providing Internet access will rectify their
Year 2000 issues. Any failure of our third-party equipment, facility and
operational systems, third-party suppliers or shippers to operate properly could
cause, among other things:
- a decrease in our sales;
- an increase in our allocation of resources to address Year 2000 problems
without additional revenue commensurate with our dedication of resources;
and
- an increase in litigation costs relating to losses suffered by our
customers due to Year 2000 problems.
OUR CONTINGENCY PLANS. To date, we have not identified any of our
information technology systems or non-information technology systems as needing
remediation or replacement. However, we have identified our worst case scenario
as the interruption of our business resulting from Year 2000 failure of our
third-party systems to process our transactions, and the failure of our credit
card processing agent and payment service provider to process our orders. We
have not developed a contingency plan, but we expect to complete this plan by
the end of August 1999. Without a worst case scenario plan in place, we may be
unable to effectively respond to Year 2000 problems in a timely manner.
Furthermore, if we complete our contingency plan, we cannot be certain that the
plan would be adequate to meet our needs or that the plan would be successful.
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BUSINESS
OUR COMPANY
We are a Web-based retailer of movies and videos in the digital versatile
disc format, commonly known as DVD. We operate our online store at
www.dvdexpress.com and offer interesting and informative content and community
features through our Web site at www.dvd.com.
MARKET OVERVIEW
THE PROJECTIONS DISCUSSED IN THIS MARKET OVERVIEW SECTION ARE INDUSTRY
PROJECTIONS, AND ANY GROWTH RATES DISCUSSED ARE INDUSTRY GROWTH RATES AND MAY
NOT REFLECT OUR GROWTH RATES OVER THE SAME PERIOD.
ONLINE COMMERCE. The Internet is an increasingly significant global medium
for communications, content and commerce. International Data Corporation
estimates that the number of Web users worldwide grew to approximately 142
million by the end of 1998 and will grow to approximately 399 million by 2002.
We believe that growth in Internet usage has been fueled by a number of factors:
- the large and growing installed base of personal computers in the
workplace and homes;
- advances in the performance and speed of personal computers and modems;
- improvements in network infrastructure, security and bandwidth;
- easier and cheaper access to the Internet; and
- increased awareness of the Internet among businesses and consumers.
The increasing functionality, accessibility and overall usage of the
Internet and online services have made them an attractive commercial medium. The
Internet and other online services are evolving into a unique sales and
marketing channel, similar to retail stores, mail-order catalogs and television
shopping. Online retailers can interact directly with customers by frequently
adjusting their featured selections, editorial insights, shopping interfaces,
pricing and visual presentations. Online retailers can also easily obtain
demographic and behavioral data about customers, increasing opportunities for
targeted direct marketing and personalized services. We believe that the minimal
cost to publish on the Web, the ability to reach and serve a large and global
group of customers electronically from a central location, and the potential for
personalized low-cost customer interaction all provide additional economic
benefits for online retailers. According to International Data Corporation, the
number of Web buyers worldwide is estimated to increase from 30.8 million in
1998 to 133.9 million in 2002, which represents a compounded annual growth rate
of 44%.
An increasingly broad base of products is being sold successfully online,
including computers, travel services, brokerage services, automobiles, music,
videos and books. International Data Corporation estimates that the total value
of goods and services purchased worldwide over the Web grew from $296 million in
1995 to $50.4 billion in 1998, and will increase to $733.6 billion in 2002.
Unlike traditional retail channels, online retailers do not have the costs of
managing and maintaining a significant retail store infrastructure or the
continuous printing and mailing costs of catalog marketing. Because of these
advantages, we believe that online retailers have the potential to build large,
global customer bases quickly and cost effectively and to achieve superior
economic returns over the long term. Even though online retailers have
advantages over traditional retail channels, online retailers face a number of
challenges, including intense competition, timely product distribution and rapid
technological changes. See "Risk Factors."
HOME VIDEO BUSINESS. According to Paul Kagan Associates, the U.S. market
for both VHS and DVD videos combined will increase from $8.9 billion in 1998 to
$11.1 billion in 2002, which represents a compounded annual growth rate of 5.7%.
During those years, Paul Kagan Associates expects DVD video sales to increase
from $268 million in 1998 to $2.9 billion in 2002. Paul Kagan Associates expects
VHS sales to decrease from $8.6 billion in 1998 to $8.2 billion in 2002. Since
the introduction of the VCR over twenty years ago, renting and purchasing
pre-recorded home videos has become a
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mainstream form of entertainment. The emergence of the pre-recorded video
business has created a large and growing market for the thousands of older and
historic films. Each new generation represents potential new audiences for these
older motion pictures. We believe that substantial growth opportunities exist in
the retail online pre-recorded home video industry. We also believe that the
DVD-Video format will eventually replace the VHS format in the video market.
THE DVD FORMAT. DVD technology is similar in functionality to CD-ROM and
CD-Audio technology; however, a DVD, which is the same size as a CD, is able to
store substantially more data than a CD. A typical DVD can hold a 135-minute
motion picture with up to eight different spoken language tracks, thirty-two
foreign language subtitles and six-channel, digital-surround sound. Added
features, including the movie's soundtrack, director's notes, story-based games
and other CD-ROM applications are also possible with the higher storage capacity
afforded with DVDs. As a result, we believe the DVD format will be the first
medium to embrace and allow for cross-promotion between video, audio and
software products.
We believe DVDs will initially compete most directly with sales and rentals
of pre-recorded videotapes. DVD players have become more affordable and are
currently available from several manufacturers at retail prices generally
ranging from $250 to $1,000. Forrester Research reports that by the end of 1999,
less than three years since its launch, 4.3 million DVD players will be
installed in North American households, far outpacing the debut of both the CD
player and VCR in their first years. Paul Kagan Associates estimates that the
installed base of DVD players in U.S. households will increase from 1.1 million
in 1998 to 12.0 million in 2002, which represents a compounded annual growth
rate of 82%. We believe that as the installed base of DVD players increases, the
demand for DVD-Video titles will also increase. Currently, over 3,000 motion
picture titles are available on the DVD format and we expect that number to grow
rapidly as the format gains popularity. Paul Kagan Associates also estimates
that DVD-Video discs sold in the United States will increase from 13.4 million
discs in 1998 to approximately 159.6 million discs in 2002, which represents a
compounded annual growth rate of 86%. Paul Kagan Associates also estimates that
annual U.S. DVD-Video sales will be $661 million in 1999, $1.3 billion in 2000
and $2.9 billion in 2002. International Data Corporation predicts approximately
16.0 million DVD-ROM drives will be installed in personal computers in the
United States during 2000, up from an estimated 8.3 million DVD-ROM drives to be
installed in 1999. According to Paul Kagan Associates, during the same period
the number of VHS tapes sold in the United States is estimated to decrease from
609.2 million in 1998 to 556.5 million in 2002.
While DVDs are initially expected to serve as substitutes for video tapes,
they are also expected to eventually replace CD-Audio and CD-ROM. We anticipate
that the market for DVDs will eventually exceed that of CD-ROM and CD-Audio.
Microsoft's Windows 98 operating system supports DVD, and Intel Corporation has
started shipping a new DVD-compatible product. International Data Corporation
predicts that DVD-ROM drives sold for United States households will increase
from 2.9 million in 1998 to 27.3 million in 2002, which represents a compound
annual growth rate of 75%.
Another important advantage of the DVD format, which we believe will
accelerate its market penetration, is its backwards compatibility. DVD players
and DVD-ROM drives are designed to read CD-Audio and CD-ROMs, which we expect to
increase consumers' acceptance of this new technology. Unlike the introduction
of CDs, consumers will be able to acquire the new DVD technology without making
their music collections obsolete because DVD players will also be capable of
playing CD-Audio. We believe these factors will contribute to the DVD format
becoming the standard medium for home video, music, games and software
distribution.
TRADITIONAL VIDEO RETAIL INDUSTRY. We believe that traditional store-based
retailers face a number of challenges in providing a satisfying shopping
experience for consumers of video products. We believe these same challenges
apply to the sale of DVDs:
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- The amount of physical space available in the store limits the number of
titles and the amount of product inventory that a traditional store-based
retailer can carry in any one store. As a result, many traditional
store-based retailers focus their product selection on the most popular
products that produce the highest inventory turns, thereby further
limiting consumer selection.
- Store configuration constraints limit merchandising flexibility. As a
result, traditional retailers generally display products by category,
including action, comedy or drama, and cannot easily modify or reconfigure
these merchandising strategies.
- Traditional store-based retailers must open new stores to serve additional
geographic areas, resulting in significant investments in inventory, real
estate and the hiring and training of store personnel.
- Traditional store-based retailers face challenges in hiring, training and
retaining knowledgeable sales staff, thereby limiting the level of
customer service available to consumers.
In addition, we believe that many consumers find the video shopping
experience, especially at traditional mass market retail outlets, to be
time-consuming and frustrating due to factors including inconvenient store
hours, location and layout, as well as limited product selection and inadequate
customer service.
OUR MARKET OPPORTUNITY
Our online store provides consumers with an enjoyable shopping experience
which offers a compelling alternative to traditional video retailing. We believe
our focus on the DVD format and commitment to customer service, along with the
informational content and community on our Web sites, enable us to address the
needs and desires of our customers. The key components of our solution include:
PREMIERE INTERNET ADDRESS. We were an early entrant in the online DVD
market and acquired the exclusive rights to the Internet address www.dvd.com
which provides high visibility and easy access to our Web sites.
EXTENSIVE PRODUCT SELECTION AND AVAILABILITY. We offer and expect to
continue to offer nearly every title available in the DVD format. In addition,
we sell video and DVD-ROM games and accessories.
RAPID DELIVERY. We manage our inventory so that order shipment usually
occurs the same day orders are received, including weekends.
CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with an
easy-to-use shopping interface that is available 24 hours a day, seven days a
week from the convenience of a customer's home or office. Our online store
enables us to deliver a broad selection of titles to customers in locations that
do not have easy access to physical stores. We also make the shopping experience
convenient by categorizing our DVDs by movie genre. Our search technology makes
it easy for consumers to locate products efficiently based on pre-selected
criteria, including title, actor or other key words.
CONTENT AND COMMUNITY. Our Web sites educate and entertain visitors and
provide an interactive community for DVD enthusiasts. We offer reviews,
recommendations, news and information about new and existing titles and
products, answers to frequently asked questions and the opportunity to preview
over 700 movie previews. Our editorial staff maintains and updates our Web sites
daily to provide our visitors a comprehensive source of information, interaction
and commerce.
COMMITMENT TO CUSTOMER SERVICE. We provide comprehensive sales support via
e-mail and toll-free telephone service during extended hours. Once an order is
placed, a customer can view the status of his or her order on our Web site or
contact a customer service representative.
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ADDITIONAL SERVICES. Through our online store, we offer real-time inventory
status, order tracking and the ability to order titles up to two months in
advance of their release. In addition, our technology platform enables us to
provide specific recommendations based upon our customers' preferences.
OUR STRATEGY
Our goal is to enhance our position as a leading online retailer of DVDs and
related entertainment products and services. Our strategy includes the following
elements:
BUILD BRAND RECOGNITION. We intend to become a primary destination for
consumers of DVDs. We attempt to target purchasers of DVD products through our
Web sites, advertising and promotional activities. We use offline and online
marketing strategies to maximize customer awareness and enhance our brand
recognition:
- STRATEGIC MARKETING RELATIONSHIPS, ONLINE ADVERTISING AND PROMOTIONAL
ARRANGEMENTS. We have strategic marketing arrangements with America
Online, One Zero Media (AltaVista) and Infoseek Corporation (Go.com). We
also advertise regularly on sites including Yahoo!, AOL, AltaVista,
HotBot, Excite, Lycos, Go.com, MSN.com and VideoSeeker and have
promotional arrangements with Gateway, Toshiba, Compaq, Microsoft and NBC
Mutlimedia.
- OFFLINE ADVERTISING. We use offline advertising to promote both our brand
name and specific merchandising opportunities. Our advertising campaigns
utilize traditional print and radio media. We regularly advertise in
publications which serve our customers' demographic profile, including THE
WALL STREET JOURNAL and entertainment related publications including
ENTERTAINMENT WEEKLY, PREMIERE, MOVIELINE and HOME THEATER. We also
periodically run advertising campaigns in major radio markets, including
New York, Los Angeles and Chicago.
- DIRECT ONLINE MARKETING. In order to drive traffic and repeat purchases,
we deliver special offers, promotions and information to customers who
visit our Web sites or who elect to receive semimonthly e-mail messages.
DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THE MAJOR STUDIOS. During
the three months ended March 31, 1999, we purchased approximately 44% of our
inventory directly from major and independent studios. We are able to buy
product from the studios at lower prices than are generally available from
distributors. Since we believe many of our competitors are not able to do so, we
believe we enjoy a cost advantage over them. Also, we regularly create
product-specific promotions, contests and giveaways funded by the studios. We do
not have any long-term supply agreement with any of the studios.
ESTABLISH OPERATIONS IN INTERNATIONAL MARKETS. We have taken several
definitive steps to establish distribution, marketing and service centers in
Europe and other international markets where we believe we can benefit from the
growth of the DVD format. An international physical presence should reduce our
overseas shipping costs and allow us to respond quickly to customer inquiries.
We anticipate opening a distribution, marketing and service center in Europe
later this year.
PURSUE WAYS TO INCREASE REVENUES. We are planning to offer complementary
products to our customers, including music and an expanded selection of games,
as well as the sale and auction of entertainment themed clothing and
memorabilia. In addition, we are also considering selling advertising and other
related services to interested parties. We believe these opportunities will
present additional revenue opportunities.
CONTINUOUSLY IMPROVE CUSTOMER EXPERIENCE. We promote customer loyalty and
build repeat purchase relationships with our customers by enhancing our service,
content and community offerings. Specifically, we are dedicated to customer
service, developing personalization features and programs,
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upgrading our user interface and increasing the automation and efficiency of our
supply chain and order processing activities.
OUR WEB SITES
We provide customers and other visitors with a compelling online experience
by combining commerce, content and community on our Web sites. Multiple links
provide for easy access between our online store (www.dvdexpress.com) and the
content and community driven Web site (www.dvd.com).
DVDEXPRESS.COM. We designed our online store to be intuitive and easy to
use, while providing a substantial amount of user features that enhance the
shopping experience. Consumers shopping on our Web site can, in addition to
ordering products, conduct targeted searches, view recommended products,
participate in promotions and check their order status. The following highlights
some of the key features of our online store:
- BROWSING. Our DVD EXPRESS online store offers visitors a variety of
highlighted subject areas and special features arranged in a simple,
easy-to-use layout intended to enhance product search and selection.
Customers can browse by category, including action, drama and comedy, or
use a keyword search in order to locate a specific title. Also, customers
can execute more sophisticated searches based on numerous pre-selected
criteria, including names of actors or directors, languages, price range,
year of release and video or audio format including Dolby Digital.
- PRODUCT INFORMATION. One of the unique advantages of an Internet retail
store is the ability to interweave product information and editorial
content. At our online store, customers can find detailed product
information, including reviews and recommendations of related titles and
view over 700 movie previews.
- ORDERING. We have designed our ordering system based on comments from our
customers. A customer simply clicks on the "order" button to add products
to his virtual shopping cart. A customer can add and subtract products
from his shopping cart as he browses in our store prior to making a final
purchase decision. During a shopping session at DVD EXPRESS, a customer
can click on a title and determine, in real-time, whether the item is in
stock at our warehouse. A customer can then put the item in his personal
shopping cart for immediate shipping, or if out of stock, to be shipped
upon availability. When the customer is ready to complete an order, he
simply proceeds to the checkout page, enters his name, shipping and
billing information, selects a shipping and payment method and completes
the transaction. If requested, we keep the customer's information in our
database, which facilitates repeat purchases by eliminating the need for
the customer to resubmit information on future orders.
- PAYING. Customers generally use a credit card or debit card which is
authorized during the checkout process and charged when the item is
shipped to the customer. Our online store uses an encryption technology
that works with the most common Internet browsers to prevent unauthorized
parties from reading information sent by our customers. Our system
automatically confirms receipt of each order via e-mail within minutes and
notifies the customer when we ship the order, which is usually on the same
day.
- GETTING HELP. From every page of our online store, a customer can click on
a "customer service" button to go to our customer service area. The
customer service area of our online store contains extensive information
for first-time and repeat visitors. In this area, we assist customers in
searching for, shopping for, ordering and returning our products. In
addition, we provide customers with information on our policies, answer
their most frequently asked questions and enable them to send us
suggestions via e-mail. Furthermore, our customer service representatives
are available to answer questions about products and the shopping process
during extended
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hours via our toll-free number, which is displayed in the customer service
area of our online store.
We provide an extensive selection of DVD titles that would be economically
impractical to stock in a traditional store. Unlike traditional store-based
retail formats, our online store provides us significant flexibility with regard
to the organization and presentation of our product selection without having to
alter the layout of a physical store.
To encourage purchases, we feature various rotating promotions and
continuously update our online recommendations. We also actively create and
maintain pages that are artistically designed to highlight titles. We believe
this strategy provides us with an excellent opportunity to promote impulse
purchases by customers.
DVD.com. We operate an information and entertainment Web site located at
www.dvd.com which is linked to our online store. This site educates and
entertains consumers and provides an interactive community for DVD enthusiasts.
Where specific movies are discussed or otherwise presented, we provide a link to
our online store so that the title can be easily reviewed and purchased. Our
site is maintained and updated regularly by our editorial staff to provide our
users with a comprehensive source of information and interaction, and is
organized into the following five distinct areas:
- SCOOP. Features the latest DVD news, reviews of the newest DVD releases
and original feature stories on digital entertainment trends. Scoop also
contains message boards where users can share information.
- LEARN. Displays features on home theater components, the latest
information on DVD technology, reasons why DVD is a superior format to VHS
or laserdisc and a "DVDictionary," which provides understandable
explanations of technical terms.
- FIX. Introduces DVD enthusiasts to "Doc DVD," a DVD specialist in hardware
functionality, software and player/disc compatibility issues. Doc DVD
personally responds to any DVD-related questions via e-mail, usually
within 24 hours. Doc DVD's answers to frequently asked questions about DVD
technology are also available on our Web site.
- SCHMOOZE. Takes users inside the DVD movie process. Each month, an
acclaimed director or filmmaker talks about technology's effect on the
industry. Schmooze also goes behind-the-scenes with the production teams
at various studios to get an insider's look at the film-making process.
- PLAY. Features product reviews and other information on personal digital
products, as well as articles and celebrity interviews, digital postcards
and DVD-specific reviews, which differentiate DVD movies from other
formats.
We believe that we are providing a valuable service to existing and
potential customers by making it quick and easy for visitors to become more
acquainted with new technologies and the benefits and features of the DVD
format.
SALES AND MARKETING
Our target market is DVD owners and online shoppers. Forrester Research
estimates that 47% of DVD owners have an online connection at home, 58% of these
consumers research products online and 40% shop online. In addition, Forrester
Research estimates that in 1998 U.S. households earning more than $50,000 a year
accounted for 74% of U.S. online spending, and that in 2003 this group will
account for 66% of U.S. online revenues. In addition, we believe there is a
large demand for DVDs internationally. For a geographic breakdown of our
revenues, see note 2 to the notes to our financial statements.
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We believe that our company will enjoy growth fueled by the rapid adoption
of the DVD format, the growth and acceptance of Internet commerce and the
attractive demographics of online consumers and DVD owners. The fundamental
elements of our sales and marketing strategy are as follows:
- build brand recognition;
- increase consumer traffic to our Web sites;
- add new customers and convert visitors into buyers; and
- build customer loyalty.
Like many other Internet retailers, we advertise on major search and
directory providers, as well as movie-specific sites. We have purchased
advertising on well-recognized search engines for the keyword "DVD." We believe
that this targeting strategy is more cost-effective than other methods of
advertising on the Internet. We regularly advertise on sites including Yahoo!,
AOL, AltaVista, HotBot, Excite, Lycos, Go.com, MSN.com and VideoSeeker. Except
for the strategic marketing agreements and promotional arrangements mentioned
below, we do not have any written advertising agreements with the companies that
operate these sites.
In addition to Internet-specific marketing and advertising, we also conduct
campaigns utilizing traditional print, outdoor and radio advertising. We
regularly advertise in publications which serve our customers' demographic
profile, including THE WALL STREET JOURNAL, and entertainment related
publications including ENTERTAINMENT WEEKLY, PREMIERE, MOVIELINE and HOME
THEATER. We also periodically advertise in several major radio markets,
including New York, Los Angeles and Chicago. We do not have any long term
advertising agreement with any publication or radio station.
We also currently have promotional arrangements with several other
companies, including Cowabunga Enterprises Inc., a wholly-owned subsidiary of
Gateway Inc., Toshiba America Consumer Products, Inc., Compaq Computer
Corporation, Microsoft Corporation and NBC Multimedia, Inc. These arrangements
are designed to promote our products as well as the other companies products.
Generally, these arrangements are non-exclusive and are for terms of one to two
years and may be renewed upon the consent of us and the other company.
Generally, we pay these companies based on sales generated from the arrangement.
As of the date of the prospectus, we have paid an aggregate of approximately
$102,000 under these arrangements.
In addition, in order to increase our exposure on the Internet and directly
generate sales, we are in the process of implementing an affiliate program.
Under this program, a person or entity with a web site may post our logos,
banners, or links on its web site and be compensated on all purchases made by
customers who enter our site through these links. We have received expressions
of interest from over 200 sites and expect the program to formally launch within
the next 30 to 60 days. These sites are in no way affiliated with DVD EXPRESS
and we will merely be linked with the sites.
We began selling DVDs shortly after the commercial introduction of the first
DVD players. As of May 1999, we had over 180,000 registered users in our e-mail
database to whom we regularly send information regarding new releases,
promotions and contests. We use this database to stimulate interest in new
releases and to keep the DVD EXPRESS brand name in the minds of customers. Since
we consider early adopters among the most active consumers in a product class,
we believe our database is a strategic asset for the growth of our business.
STRATEGIC MARKETING RELATIONSHIPS
We currently have the following strategic marketing agreements in place:
AMERICA ONLINE. In August 1998, we entered into a non-exclusive agreement
with America Online Inc. under which America Online will provide us with
promotions throughout the America
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Online service on AOL and America Online's Digital City. Specifically, during
the term of the agreement, America Online has agreed to provide us with
promotional placements and banner advertisements on various shopping and
entertainment areas of AOL. Furthermore, America Online has committed that its
users will access the online areas promoting DVD EXPRESS a specified number of
times. The initial term of the agreement ends in October 2001 and may be renewed
by America Online for additional one year terms. As part of our commitment to
the strategic relationship, we are required to provide a top quality,
comprehensive offering of DVD related products and related content. We also
provide promotions and special offers to America Online members and to users of
AOL. We have guaranteed payments during the term to America Online of $15
million, and may be obligated to make further payments if our quarterly revenues
attributable to America Online member traffic exceed specified amounts. We have
paid $5 million of the guaranteed payments to America Online through March 31,
1999 and upon completion of this offering we are going to pay an additional $7
million of the guaranteed payments to America Online. If we breach our
obligations under this Agreement, America Online may either reduce the
promotional support provided to us or terminate this agreement. America Online
may also terminate this agreement upon 30 days notice if a company offering
online services acquires control of DVD EXPRESS or if there is a change of
control of America Online. On August 1, 1999, America Online will have an
additional right to terminate this agreement upon 30 days notice. If America
Online exercises this right, we will not be obligated to make further payments
to them under the agreement. However, this right expires upon completion of this
offering. We have also granted to America Online a warrant to purchase up to
1,384,086 shares of our common stock. See "Description of Capital
Stock--Warrants."
ONE ZERO MEDIA (ALTAVISTA). In September 1998, we entered into an agreement
with One Zero Media, Inc. One Zero Media is the exclusive producer and
aggregating partner for the "Entertainment Zone," the entertainment content area
within the "AltaVista" Web site. Under this agreement, we have been appointed as
the sole provider of the Entertainment Zone's DVD Store Area. The agreement also
contemplates promotional efforts on our behalf in both the Entertainment Zone
and on the Wild Wild Web syndicated television show. During the three-year term
of the agreement we are obligated to pay One Zero Media $6.6 million. Payments
are due in part based on the number of impressions provided by One Zero Media.
The agreement automatically renews unless we decide to terminate the agreement.
However, One Zero Media may terminate this agreement if we breach any of our
obligations, including our obligation to provide a fully operational DVD Store
Area.
INFOSEEK CORPORATION (GO.com). In October 1998, we entered into a
distribution agreement with Infoseek Corporation, commonly known as Go.com, an
information search and navigation service. Under this agreement, Go.com will
feature us on a semi-exclusive basis in its Entertainment Channel and various
other areas throughout the service. Go.com has agreed not to promote our
competitors that are named in the agreement. During the 24-month term of the
agreement, we are obligated to pay Infoseek a minimum of $5.3 million plus a
percentage of our revenues attributable to Go.com member traffic. Under this
agreement, we are obligated to provide DVD related content and services to
Go.com and have provided a non-exclusive, worldwide license to allow Go.com to
exploit such content throughout its services and sites. Go.com may terminate
this agreement if we do not meet performance standards relating to the
availability and functionality of the content and services we provide or if we
breach the agreement. Also, either party may terminate the agreement without
cause upon 60 days prior written notice to the other party. This agreement may
be extended for additional one year terms upon the mutual agreement of us and
Go.com.
SUPPLY ARRANGEMENTS; STUDIO RELATIONSHIPS
We purchase a substantial portion of our inventory directly from major and
independent studios. In addition, we receive cooperative advertising and market
development funds from several studios. To date, we have awarded premiums
including T-shirts and movie memorabilia to our customers. In the
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<PAGE>
future, we intend to use these funds to help pay for print and online
advertising. We do not have long-term written supply agreements with any studio
or other supplier. The following table shows the breakdown of our historic
purchases from our suppliers.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- --------------------
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary distributors:
Valley Media, Inc.................................................... 0% 34% 3% 31%
Image Entertainment.................................................. 40% 19% 48% 11%
Norwalk Distributors, Inc............................................ 17% 14% 29% 11%
--------- --------- --------- ---------
Subtotal........................................................... 57% 67% 80% 53%
Studios................................................................ 13% 29% 13% 44%
Other sources.......................................................... 30% 4% 7% 3%
--------- --------- --------- ---------
Total.............................................................. 100% 100% 100% 100%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
PRODUCT DISTRIBUTION
We ship customer orders from our approximately 8,000 square foot warehouse
located in Hollywood, California. We currently stock over 3,000 different DVD
titles. Orders are communicated from our Web site to our warehouse through an
order processing system that controls the pick, pack and ship processes. This
system also provides our Web site with data on inventory activity and status,
which enables it to display individual product availability. Orders are usually
shipped on the same day they are received. Customers can select to have their
order shipped via Federal Express or the United States Postal Service. Shipping
costs are paid by the customer. We feel our rapid delivery contributes
substantially to the satisfaction of our customers.
CUSTOMER SERVICE
We believe that superior customer service and support is critical to
retaining and expanding our customer base. We provide timely and accurate
responses to both telephone and e-mail inquiries. Our customer service
representatives are available from 8:00 am until 6:00 pm, Pacific Time, seven
days a week. During 1999, we expect to increase the number of hours that we
provide telephone support. We currently have 20 full time customer service
representatives. Our customer service team is responsible for handling general
customer inquiries, answering customer questions about the ordering process,
investigating the status of orders, shipments and payments, as well as
processing customer orders. Our customer service representatives are a valuable
source of feedback regarding customer satisfaction. We use BizRate, an online
market research company, to compile customer comments on their experiences.
BizRate provides monthly reports that enable us to make improvements in response
to our customers' comments. Our online store site also contains a customer
service page that outlines store policies and provides answers to frequently
asked questions.
TECHNOLOGY
Since May 1998, we have been using an electronic commerce system owned by
Pandesic LLC to operate our Web site and process orders. Pandesic has licensed
its E-Business solutions software to us on a non-exclusive basis through May
2000. Pandesic, a joint venture between Intel and SAP AG, provides this system
and related computer hardware, management services and support. As one of
Pandesic's first customers, we have entered into an agreement by which, in
addition to receiving discounts on our fees owed to Pandesic, we assist Pandesic
in the development of new software features to enhance their system and provide
them with marketing support. In addition, Pandesic provides us
41
<PAGE>
with marketing support and has agreed not to offer its services to any of our
direct competitors for which sales of DVDs account for more than 30% of these
direct competitors' revenues. Under the agreement, Pandesic has agreed to
provide maintenance and support for the licensed software and to provide us with
upgrades to the software. As of the date of this prospectus, we have paid
approximately $410,000 under this agreement. The fees payable to Pandesic are
based on a percentage of our revenues. The agreement with Pandesic expires in
May 2000. The agreement may be extended for successive one-year terms unless
either party notifies the other party of its intent not to renew at least 90
days prior to the end of the term. Pandesic may also immediately terminate the
agreement if we breach any term of the software license or attempt to assign the
agreement.
With this system, customers have the ability to access their account
information, track their orders, preorder products, cancel and change orders and
receive credit card approvals online. They can also check the exact availability
of every product we display at our online store. Customers can elect to hold
orders until all items are available or generate multiple shipments as items
become available. Orders and invoices are automatically confirmed by e-mail as
they are processed.
We continue to extend and enhance the online features of our Web sites
through a combination of internal software development and the licensing of
third-party software, including that provided by Pandesic. We are focusing our
development efforts on features that appeal to our customers, including online
movie previews and customized product recommendations.
Our systems have been designed by Pandesic to reduce downtime in the event
of outages or catastrophic occurrences. Our system hardware is hosted at their
facility in Folsom, California which provides redundant communications lines and
emergency power backup.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive, and we expect that competition will further intensify in the
future. Barriers to entry are not extensive, and current and new competitors can
launch new sites at a relatively low cost. In addition, the broader retail video
industry is intensely competitive. We currently compete with a variety of online
vendors who specialize in DVDs and videos, as well as those who also sell books,
music and other entertainment products. We also compete with traditional
retailers, including specialty video retailers, mass merchandisers, department
and consumer electronics stores, as well as non-store retailers such as
mail-order video clubs. Many of these traditional retailers also support
dedicated Web sites that compete with us directly.
We believe that the principal competitive factors in the online market are
brand recognition, product selection, scope of services, ease of use, site
content, customer service and price. We believe that we compete favorably with
respect to brand recognition, product selection, scope of services, ease of use,
site content and customer service. We also believe that our prices are
reasonably competitive. Many of our current and potential competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Some
of our competitors have adopted, and may continue to adopt, aggressive pricing
or inventory availability policies and devote substantial resources to Web site
and systems development. Increased competition may reduce our operating margins,
market share and brand recognition.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or video, music, game and software
suppliers as the use of the Internet and other online services increases.
42
<PAGE>
Our competitors may also be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than us. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet. Some of our competitors, including Best
Buy, Musicland, Blockbuster, Wherehouse Entertainment, Hollywood Entertainment
and Tower Records, have significantly greater experience in selling video,
music, game or software products.
Our online competitors are particularly able to use the Internet as a
marketing medium to reach significant numbers of potential customers. Finally,
new technologies and the expansion of existing technologies, such as price
comparison programs, may increase competition.
INTELLECTUAL PROPERTY
We regard our trademarks, particularly "DVD EXPRESS," trade secrets and
similar intellectual property as critical to our success, and we rely on
trademark and trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have registered our "DVD EXPRESS" trademark in the United
States and have applied for the registration of our "DVD EXPRESS" trademark
internationally. Effective trademark and trade secret protection may not be
available in every country where our products and service are available online.
DVD EXPRESS is our registered trademark. All other trademarks or services marks
used in this prospectus are the property of their respective holders.
EMPLOYEES
As of March 31, 1999, we had 90 full-time employees. We vary the number of
part-time and temporary employees to respond to fluctuating market demand for
our products. Our employees are not covered by a collective bargaining
agreement. We consider our relationships with our employees to be good.
PROPERTIES
Our executive offices, sales and marketing operations and warehouse are
located at 7083 Hollywood Boulevard, Los Angeles, California 90028, where we
lease approximately 18,800 square feet of space. The current monthly rental due
under this lease is approximately $30,600. A portion of the lease expires in
April 2001 with the remainder expiring in October 2003. We expect that we will
outgrow our current facilities and will have to relocate our distribution center
within the next 12 months. We currently are conducting a search for suitable
locations. We believe that suitable additional or alternative space will be
available on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not involved in any pending, nor are we aware of any threatened,
legal proceedings which we believe could reasonably be expected to have a
material adverse effect on our business, operating results or financial
condition.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table presents information with respect to the directors and
executive officers of DVD EXPRESS as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- --------------------------------------------------
<S> <C> <C>
Chairman of the Board, Chief Executive Officer and
Michael J. Dubelko........ 46 President
Chief Financial Officer, Chief Operating Officer
Andrew T. Crist........... 43 and Secretary
Joan A. Abend............. 40 Vice President of Operations
Alison I. Johns........... 38 Vice President and Executive Editor
Susan M. Daniher.......... 29 Vice President of Marketing
Jason L. Vagner........... 27 Vice President of Technology
Steven S. Antebi(1)....... 55 Director
Kimberly S. Eads(2)....... 32 Director
Norman J. Pattiz(1)....... 56 Director
Stephen J. Cannell........ 58 Director
Harold E. Hughes(2)....... 53 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of Audit Committee.
MICHAEL J. DUBELKO has been our Chairman of the Board, Chief Executive
Officer and President since DVD EXPRESS was founded in October 1996. From
December 1986 through July 1995, Mr. Dubelko served as President of the Cannell
Studios; from May 1982 through November 1986, he was Executive Vice President of
Cannell. In his role at Cannell, he oversaw the production and distribution of
over 30 prime-time television series, developed the largest motion picture and
television studio in Canada and formed a broadcast group of independent
television stations. Under his direction, Cannell grew to become one of the
largest privately-held film entertainment companies, prior to its sale to New
World Entertainment in 1995, which was subsequently acquired by News Corp. From
July 1995 until he founded DVD EXPRESS in October 1996, Mr. Dubelko was
responsible for managing Cannell assets that were not acquired by New World
Entertainment. From October 1980 to April 1982, he was employed by Jess S.
Morgan & Co., an entertainment business management firm. From January 1974
through September 1980, Mr. Dubelko was employed by Touche Ross & Co. as a
certified public accountant. Mr. Dubelko received his B.B.A. in finance from
Cleveland State University.
ANDREW T. CRIST has served as our Chief Financial Officer, Chief Operating
Officer and Secretary since February 1999. Prior to joining us, Mr. Crist was
Vice President of Financial Operations/Mergers and Acquisitions with Blockbuster
Entertainment Corporation from September 1996 to February 1999. From 1987 to
1996, Mr. Crist was Executive Director of International Development and Senior
Director of Retail Product Management with Alamo Rent A Car, Inc. He began his
career with a seven-year tenure at KPMG Peat Marwick in 1979. Mr. Crist has an
M.B.A. degree with honors from The University of Michigan and a B.A. degree in
accounting from Duke University. He is a certified public accountant.
JOAN A. ABEND joined us in February 1997 as Vice President of Operations.
From September 1994 to January 1997, Ms. Abend was employed by Cannell Motion
Pictures as a development executive. From January 1987 to June 1994, Ms. Abend
was employed by The Education Group as Vice President of Operations. From
October 1986 to August 1988, Ms. Abend was employed by The MGM Store as its
Retail Manager.
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<PAGE>
ALISON I. JOHNS joined us in June 1998 as Vice President and Executive
Editor. From September 1994 to July 1997, Ms. Johns was a Content Director in
Artdirect, Inc., a Web design studio. From March 1986 to June 1994, Ms. Johns
was employed by MILLIMETER, The Magazine of Motion Picture, Television and New
Media Production. During the last four years at MILLIMETER, she served as
Editor-in-Chief. Ms. Johns has been a journalist for over ten years covering
entertainment, technology and culture. Ms. Johns graduated from Rutgers College
with a B.A. in English Literature.
SUSAN M. DANIHER joined us in March 1998 as Vice President of Marketing.
From June 1992 to March 1998, Ms. Daniher was employed by Blockbuster
Entertainment Group in Washington, DC, Philadelphia and Dallas in various
marketing capacities, most recently as National Product Marketing Manager. From
June 1991 to May 1992, Ms. Daniher was employed by Marlo Furniture as its
Advertising Coordinator. Ms. Daniher received her B.A. in Advertising from the
University of Florida.
JASON L. VAGNER joined us in February 1998 as Vice President of Technology.
From September 1997 to January 1998, Mr. Vagner was an information security
analyst at Charles Schwab and Co. Mr. Vagner was employed by Strategic
Interactive Group from August 1996 to August 1997 as a Senior Unix
Administrator. From January 1996 to April 1996, Mr. Vagner was employed as a
senior systems administrator at Cape Internet. Mr. Vagner received his B.A. in
English from Arizona State University.
STEVEN S. ANTEBI has served as a Director since July 1998. Since 1998, Mr.
Antebi has been the Manager of Fontenelle LLC, a personal holding company
specializing in telecommunications and Internet investments. Since 1994, he has
also been the general partner of Maple Partners, a California partnership with
investments in equities. Since 1992, he has been the managing partner of JLA
Partners, a venture capital partnership specializing in late stage development
companies. Mr. Antebi is also President and Chairman of the Board of Novante
Communications, a Nevada corporation which invests in debt and equity marketable
securities. From March 1973 through June 1991, Mr. Antebi was employed by Bear
Stearns & Co. Inc., and from 1986 through 1991, served as a Managing Director.
From 1991 to 1993, Mr. Antebi was employed by Drake Capital. Mr. Antebi also
serves on the board of Nettaxi, a public company.
KIMBERLY S. EADS has served as a Director since January 1999. Since December
1998, Ms. Eads has been General Partner of Geocapital Partners, a venture
capital firm. From June 1997 to November 1998, she served as a Principal with
Geocapital Partners and from June 1995 to May 1997, she was an associate with
the firm. From August 1992 to March 1995, Ms. Eads was Vice President of Lease
Guarantee Corporation, a technology start-up that she co-founded. Ms. Eads
received her B.S. degree in Mechanical and Aeronautical Engineering from
Princeton University.
NORMAN J. PATTIZ has served as a Director since January 1999. Mr. Pattiz has
been the Chairman of the Board of Westwood One, Inc., a leading producer and
distributor of nationally sponsored radio programs and the nation's largest
radio network for the past five years. Mr. Pattiz founded Westwood One, Inc. in
1976 and was Chief Executive Officer until February 1994.
STEPHEN J. CANNELL has served as a Director since January 1999. Mr. Cannell
is the Emmy Award-winning creator and producer of over 35 television series, and
one of television's most prolific writers, with over 1,500 episodes to his
credit. He is also a national best-selling author of four novels. Mr. Cannell
was the founder, Chief Executive Officer and Chairman of the Board of the
Cannell Studios until its sale to New World Entertainment in July 1995. Since
July 1995, Mr. Cannell has been pursuing a career as an author.
HAROLD E. HUGHES has served as a Director since March 1999. Mr. Hughes is
the Chairman and Chief Executive Officer of Pandesic LLC. Pandesic is an
eCommerce software supplier owned jointly by Intel and SAP. Prior to joining
Pandesic in August of 1997, Mr. Hughes worked for 23 years at Intel Corporation
during which time he held a number of positions in financial and operational
management.
45
<PAGE>
His most recent assignments were as Vice President and Director of Planning and
Logistics and Chief Financial Officer. Prior to joining Intel, he served as an
Officer in the U.S. Army from 1968-1972. He received a B.A. from the University
of Wisconsin in 1968 and an M.B.A. from The University of Michigan in 1974. He
is on the boards of the London Pacific Group, Merant PLC and Hummingbird
Communications, each of which are public companies.
We have a staggered Board of Directors. Each Director holds office until the
annual meeting for the year in which his term expires or until his successor
shall be duly elected and qualified. Mr. Dubelko's and Mr. Antebi's terms expire
at the 2002 annual meeting. Mr. Cannell's and Mr. Pattiz's terms expire at the
2001 annual meeting. Ms. Eads' and Mr. Hughes' terms expire at the 2000 annual
meeting. Our Bylaws presently provide that the number of directors shall be
fixed at six. Vacancies on our Board of Directors may be filled only by a
majority vote of the remaining directors. In no case will our Board of Directors
reduce the number of directors to shorten the term of any incumbent director.
Executive officers are appointed and serve at the discretion of our Board of
Directors, except for Mr. Dubelko and Mr. Crist who have executed employment
agreements.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our Board of Directors recently created a compensation committee and an
audit committee. The compensation committee will evaluate our compensation
policies and administer our stock option plan. The members of the compensation
committee are Steven Antebi and Norman Pattiz. The audit committee will review
the scope of our audits, the engagement of our independent auditors and their
audit reports. The audit committee will also meet with the financial staff to
review accounting procedures and reports. The members of the audit committee are
Harold Hughes and Kimberly Eads.
DIRECTOR COMPENSATION
We intend to pay non-employee directors fees of $1,000 for each meeting
attended. Directors are also eligible to receive options under our Stock
Incentive Plan. As of March 31, 1999, we had granted options to purchase an
aggregate of 187,500 shares of common stock to our directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee for the fiscal year ended December
31, 1998. For the fiscal year ended December 31, 1998, all decisions regarding
executive compensation were made by our Board of Directors. No interlocking
relationship exists between any of our executive officers or any member of our
compensation committee and any member of any other company's board of directors
or compensation committee.
EXECUTIVE COMPENSATION
The following table presents both the compensation paid or to be paid by us
to Michael Dubelko, our President and Chief Executive Officer, for services
rendered during 1998. No executive officer received compensation in excess of
$100,000 for 1998.
46
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION NUMBER OF
FISCAL YEAR ----------------------------- SECURITIES
ENDED OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY BONUS COMPENSATION OPTIONS
- ---------------------------------------- ----------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael J. Dubelko, Chairman, Chief
Executive Officer and President(1).... 1998 $ 0 $ 0 $ 0 0
</TABLE>
- ------------------------
(1) Michael Dubelko did not receive a salary during 1998. Mr. Dubelko will be
entitled to receive an annual base salary of $50,000 for 1999 under his
employment agreement. For a description of Mr. Dubelko's employment
agreement, see "Employment Agreements with Executive Officers," below. Mr.
Dubelko does not hold any options to purchase our common stock.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Michael Dubelko has entered into a three-year employment agreement with us,
effective as of March 1, 1999, under which Mr. Dubelko will serve as our
Chairman, Chief Executive Officer and President. Under this agreement, Mr.
Dubelko will be entitled to a base salary of $50,000 per year. Mr. Dubelko may
also be paid a bonus at the discretion of the Board. The agreement also provides
for the reimbursement of employment related expenses and general employee
benefits, including medical insurance plans and paid vacation. The employment
agreement terminates on February 28, 2002, unless sooner terminated by its
terms. If Mr. Dubelko's employment is terminated without cause or as a result of
a change in control, he will be entitled to continue to receive his base salary
for a one-year period following his termination.
Andrew Crist has entered into a two-year employment agreement with us,
effective as of March 1, 1999, under which Mr. Crist will serve as our Chief
Financial Officer and Chief Operating Officer. Under this agreement, Mr. Crist
will be entitled to a base salary of $150,000 per year. Mr. Crist may also be
paid a bonus at the discretion of the Board. The agreement also provides for the
reimbursement of employment related expenses and general employee benefits,
including medical insurance plans and paid vacation. The employment agreement
terminates on February 28, 2001 unless sooner terminated by its terms. If Mr.
Crist's employment is terminated without cause or as a result of a change in
control, he will be entitled to continue to receive his base salary for a
one-year period following his termination.
Other than Michael Dubelko and Andrew Crist, officers are appointed by and
serve at the discretion of our Board of Directors.
STOCK INCENTIVE PLAN
We adopted a stock incentive plan in 1998. Each of our executive officers,
other employees, directors or consultants is eligible to be considered for the
grant of awards under our stock incentive plan. A maximum of 2,250,000 shares of
common stock may be issued under our stock incentive plan. Any shares of common
stock underlying an award which for any reason expires or terminates unexercised
are again available for issuance under our stock incentive plan.
Our stock incentive plan will be administered by our compensation committee.
The administrator will have full and final authority to select the executives
and other employees to whom awards will be granted, to grant the awards and to
determine the terms and conditions of the awards and the number of shares to be
issued.
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<PAGE>
AWARDS. Our stock incentive plan authorizes the administrator to enter into
both incentive and non-statutory options. An award under the stock incentive
plan may permit the recipient to pay all of the purchase price of the shares by
delivering previously-owned shares of our capital stock.
DURATION. Our stock incentive plan became effective upon its adoption by
our Board of Directors and the stockholder in January 1998. As of the date of
this prospectus, our Board has granted options covering an aggregate of
1,124,250 shares of common stock to our directors, officers and employees, with
a weighted average exercise price of $4.38 per share. No options have been
exercised. However, any award that was duly granted on or prior to December 31,
2007 may be exercised or settled after that date in accordance with its terms.
No award may be granted on or after December 31, 2007.
AMENDMENTS. The administrator may amend or terminate our stock incentive
plan at any time and in any manner. However, no recipient of any option may be
deprived of any of his or her rights under the option as a result of any
amendment or termination without his or her consent. Stockholder approval is
required to increase the number of shares available for issuance under our stock
incentive plan.
FORM S-8 REGISTRATION. We intend to file a registration statement under the
Securities Act to register the 2,250,000 shares of common stock reserved for
issuance under our stock incentive plan, and the option to purchase 300,000
shares granted to Joan Abend, Vice President of Operations. This registration
statement is expected to be filed shortly following the date of this prospectus
and will become effective immediately upon filing with the Commission. Shares
issued under our stock incentive plan after the effective date of this
registration statement generally will be available for sale to the public
without restriction, except for the 180-day lock-up provisions and except for
shares issued to our affiliates, which will continue to be governed by the
volume and manner of sale limitations of Rule 144. See "Shares Eligible for
Future Sale."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchases or
redemptions or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies including injunctive relief or recession.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Certificate of Incorporation
also permits 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 their
professional capacity, regardless of whether the provisions of law would permit
indemnification.
We plan to enter into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our Certificate of
Incorporation. These agreements provide for indemnification of our directors and
executive officers for expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by any of these people in any action or
proceeding,
48
<PAGE>
including any action by or in the right of DVD EXPRESS, arising out of these
people's services as a director or executive officer of DVD EXPRESS, any
subsidiary of DVD EXPRESS or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent where
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
49
<PAGE>
RELATED PARTY TRANSACTIONS
Since January 1, 1998, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party, in which the amount involved exceeded or will exceed $60,000 and in
which any director, executive officer, holder of more than 5% of our common
stock or any member of the immediate family of any of these people had or will
have a direct or indirect material interest other than:
- compensation agreements and other arrangements, which are described where
required in "Management;" and
- the transactions described below.
We have entered into a tax indemnification agreement with Michael Dubelko
relating to our respective income tax liabilities. See "Termination of S
Corporation Status."
On January 15, 1999, we sold an aggregate of 135,000 shares of our common
stock to three of our directors, Steven Antebi, Norman Pattiz and Stephen
Cannell, for a purchase price of $4.67 per share.
On January 4, 1999, we sold an aggregate of 1,714,285 shares of our Series A
Convertible Preferred Stock to Geocapital V, L.P., Geocapital IV, L.P. and
Broadview Partners Group for an aggregate purchase price of $12.0 million. The
1,714,285 shares of Series A Convertible Preferred Stock will convert into
2,571,427 shares of common stock upon the closing of this offering, after giving
effect to a 3-for-2 stock split. As a result of the Series A Convertible
Preferred Stock financing, Kimberly Eads, a general partner of Geocapital
Partners, was elected to our Board of Directors.
In December 1998, we borrowed $1.0 million from Michael Dubelko. The loan
was repayable upon demand and bore interest at 8.5%. Also, in December 1998, we
borrowed $300,000 from Michael Dubelko. This loan was also repayable upon demand
and bore interest at 8.5%. These loans were repaid in full during the first
quarter of 1999 for an aggregate amount of $1.3 million plus accrued interest of
$6,300.
Michael Dubelko has personally guaranteed the $2.0 million credit line and
the $1.0 million credit line we have with Wells Fargo Bank. We plan to repay
these credit lines with a portion of the net proceeds of this offering. Mr.
Dubelko's guarantees will terminate upon repayment of the credit lines. Mr.
Dubelko has also guaranteed the lease on our office space.
On March 25, 1998, we entered into an E-Business Solution Agreement with
Pandesic to provide our electronic commerce system. Harold Hughes is the
Chairman and Chief Executive Officer of Pandesic, and joined our Board of
Directors in March 1999. We have paid approximately $410,000 to Pandesic under
this agreement through March 31, 1999.
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PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of the common stock as of May 31, 1999, and as adjusted for our sale of
4,500,000 shares of common stock offered by this prospectus, for:
- each person who is known to us to be the beneficial owner of more than 5%
of the outstanding common stock;
- each of our directors;
- our Chief Executive Officer, no other officer received compensation in
excess of $100,000 for 1998; and
- all of our directors and executive officers as a group.
The address of each person listed is in care of us, at 7083 Hollywood
Boulevard, Los Angeles, California 90028, unless otherwise provided below the
person's name. All share numbers shown below reflect a 3-for-2 stock split of
our common stock that automatically will occur upon the closing of this
offering.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Michael J. Dubelko(2).................................. 14,904,000 84.2% 67.1%
Geocapital V, L.P.
Two Executive Drive
Fort Lee, New Jersey 07024............................. 1,500,000 8.5% 6.8%
Geocapital IV, L.P.
Two Executive Drive
Fort Lee, New Jersey 07024............................. 1,056,427 6.0% 4.8%
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166(3).............................. 1,384,006 7.2% 5.9%
Broadview Partners Group
One Bridge Plaza
Fort Lee, New Jersey 07024............................. 15,000 * *
Steven S. Antebi....................................... 45,000 * *
Stephen J. Cannell..................................... 45,000 * *
Norman J. Pattiz....................................... 45,000 * *
Kimberly S. Eads(4).................................... -- * *
Harold E. Hughes....................................... -- * *
All of the directors and executive officers as a group
(11 persons)(4)(5)................................... 15,293,169 85.1% 68.1%
</TABLE>
- ------------------------
* Less than 1%.
(1) Percentage ownership is based on 17,706,427 shares outstanding as of May 31,
1999, including 2,571,427 shares of common stock issuable upon conversion of
all outstanding preferred stock upon the closing of this offering, but
excluding 1,384,006 shares of common stock which may be purchased upon the
exercise of the warrant granted to America Online. Shares of common stock
under options currently exercisable or exercisable within 60 days of May 31,
1999 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options but are not deemed outstanding
for computing the percentage ownership of any other person. Except as
provided under applicable community property laws or as indicated in the
footnotes to this table, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by that stockholder.
51
<PAGE>
(2) Includes 300,000 shares of common stock held in the Dubelko 1999 Children's
Trust dated January 1, 1999, of which Michael Dubelko is trustee.
(3) Represents shares of common stock which may be purchased upon exercise of a
warrant that is currently exercisable.
(4) Kimberly Eads is a General Partner of Geocapital V, L.P. and Geocapital IV,
L.P. Ms. Eads disclaims beneficial ownership of the shares held by
Geocapital V, L.P. and Geocapital IV, L.P.
(5) Includes 254,169 shares of common stock which may be purchased upon exercise
of options that are exercisable or will become exercisable within 60 days
from May 31, 1999.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, par value
$.0001 per share, and 10,000,000 shares of preferred stock, par value $.0001 per
share. As of the date of this prospectus, there were 17,706,427 shares of common
stock outstanding and there were 24 holders of record of the common stock. There
are 2,571,427 shares of preferred stock outstanding, all of which will convert
to common stock on the closing date of this offering. The following statements
are brief summaries of our capital stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters on which the holders of common stock are entitled to vote.
The holders of common stock are entitled to receive dividends in proportion to
their ownership when, as and if declared by our Board of Directors out of
legally available funds. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled, subject to the rights of holders
of Preferred Stock issued by us, if any, to share proportionally in all assets
remaining available for distribution to them after payment of liabilities and
after provision is made for each class of stock, if any, having preference over
the common stock.
The holders of common stock have no preemptive or conversion rights, and
they are not liable for further calls or assessments by us. There are no
redemption or sinking fund provisions applicable to our common stock. The
outstanding shares of common stock are, and the common stock issuable in this
offering will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority to issue the authorized and
unissued preferred stock in one or more series with designations, rights and
preferences as it may determine from time to time. Accordingly, our Board of
Directors is empowered, without stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights superior to, or
which otherwise adversely affect, the voting power or other rights of the
holders of our common stock. In the event of issuance, our preferred stock could
be utilized as a way of discouraging, delaying or preventing an acquisition or
change in our control. After this offering, we will not have any shares of
preferred stock outstanding, and we do not presently intend to issue any shares
of preferred stock, although we may do so.
OPTIONS
As of the date of this prospectus, our Board of Directors has granted, under
our stock incentive plan, options covering an aggregate of 1,124,250 shares of
common stock to our directors, officers and employees, with a weighted average
exercise price of $4.38 per share. These options typically vest over a
three-year period.
In addition, on June 1, 1997, our Board of Directors granted stock options
to purchase up to 300,000 shares of common stock at $.0667 per share to Joan
Abend, Vice President of Operations. These options vest over a four-year period.
WARRANTS
On August 1, 1998, we granted a warrant to America Online, Inc., which was
subsequently amended, to purchase up to 1,384,006 shares of common stock at an
exercise price $5.60 per share. The America Online warrant becomes
non-forfeitable and vests fully on the closing of this offering and expires on
August 1, 2008. The America Online warrant does not have any voting rights,
dividend rights or preferences before it is exercised for shares of common
stock.
53
<PAGE>
REGISTRATION RIGHTS
After this offering, Michael J. Dubelko, Geocapital V, L.P., Geocapital IV,
L.P. and Broadview Partners Group will be entitled to registration rights with
respect to their shares. These holders can require us to register all or part of
their shares at any time following 180 days after this offering. In addition,
these holders may also require us to include their shares in future registration
statements that we file and may require us to register their shares on Form S-3.
Upon registration, the registered shares are freely tradable in the public
market without restriction.
Also, America Online is entitled to registration rights with respect to the
shares of common stock that can be purchased upon exercise of its warrant. This
holder can similarly require us to register all or part of its shares at any
time following 180 days after this offering. In addition, this holder may also
require us to include its shares in future registration statements we file and
may require us to register its shares on Form S-3. Upon registration, the
registered shares are freely tradable in the public market without restriction.
ANTI-TAKEOVER EFFECTS
Delaware law and our Certificate of Incorporation and Bylaws could make our
acquisition and the removal of our incumbent officers and directors by means of
a tender offer, a proxy contest or otherwise more difficult. These provisions,
summarized below, are expected to discourage coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
DVD EXPRESS to negotiate first with our management. We believe that the benefits
of increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantages of discouraging these proposals because negotiation of these
proposals could result in an improvement of their terms.
We are governed by Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in an "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or owned, within three prior years, 15% or
more of a corporation's voting stock. The existence of this provision would be
expected to have an anti-takeover effect with respect to transactions not
approved in advance by our Board of Directors, including discouraging attempts
that might result in a premium over the market price for the shares of Common
Stock held by stockholders.
Our Certificate of Incorporation and Bylaws, provide for a staggered Board
of Directors, do not provide for cumulative voting in the election of directors,
eliminate the right of stockholders to act by written consent and provides that
special meetings of the stockholders can only be called by our Board of
Directors, Chairman, Chief Executive Officer or President. Also, the
authorization of undesignated preferred stock makes it possible for our Board of
Directors to issue preferred stock with voting of other rights or preferences
that could impede the success of any attempt to change our control. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in our control or management.
TRANSFER AGENT
Our transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the prevailing market price
for our common stock. Sales of substantial amounts of our common stock in the
public market following this offering, or the perception that these sales may
occur, could adversely affect the prevailing market prices for our common stock.
Upon completion of this offering, we will have 22,206,427 shares of common
stock outstanding. Of those shares, the shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, unless purchased or held by our "affiliates" as that term is defined in
Rule 144.
RULE 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus any person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1.0% of the then outstanding shares of common stock; or
- the reported average weekly trading volume during the four weeks preceding
the sale.
Sales under Rule 144 are also governed by manner of sale restrictions and
notice requirements and by the availability of current public information about
us. Commencing 180 days after the date of this prospectus, 14,904,000 shares of
common stock held by our affiliates will be eligible for sale under Rule 144.
However, these shares of common stock continue to be governed by Rule 144
restrictions and the restrictions imposed by the lock-up agreements described
below.
LOCK-UP AGREEMENTS. All of our officers, directors and stockholders, as
well as America Online, have signed lock-up agreements under which they agreed
not to sell or otherwise transfer, directly or indirectly, any shares of common
stock or any securities convertible into, or exercisable or exchangeable for any
shares of common stock for a period of 180 days after the date of this
prospectus. Transfers or dispositions can be made sooner with the prior written
consent of ING Baring Furman Selz LLC. These lock-up agreements do not prevent
us from granting additional options under our stock incentive plan or from
issuing shares under our stock incentive plan. This restriction will expire
after the 180-day period, and shares permitted to be sold under Rule 144 will be
eligible for sale. ING Baring Furman Selz LLC may, in its sole discretion, at
any time and without notice, release all or any portion of the securities
underlying these lock-up agreements.
STOCK OPTIONS. Within 90 days after the date of this prospectus, we intend
to file a registration statement on Form S-8 covering the 2,250,000 shares of
common stock that have been reserved for issuance under the stock incentive plan
and 300,000 shares of common stock that may be issued upon exercise of options
granted to an employee. Shares of common stock issued upon exercise of options
after the effective date of the Form S-8 will be available for sale in the
public market. However, these shares continue to be governed by Rule 144 volume
limitations applicable to our affiliates and to the lock-up agreements.
REGISTRATION RIGHTS. Upon completion of this offering, holders of
17,475,427 shares of our common stock and America Online will be entitled to
request that we register their shares under the Securities Act. These holders
can require us to register all or part of their shares at any time following 180
days after this offering. If holders of registration rights elect to register
and sell a large number of shares into the public market, these sales could have
an adverse effect on the market price of our common stock.
55
<PAGE>
UNDERWRITING
Under the terms and conditions of an underwriting agreement, the
underwriters named below, acting through their representatives, ING Baring
Furman Selz LLC, Friedman, Billings, Ramsey & Co., Inc. and Needham & Company,
Inc., have each agreed to purchase from us the number of shares of common stock
shown opposite their names below. Other than the shares covered by the
over-allotment option, the underwriters are obligated to purchase and accept
delivery of all the shares of common stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
ING Baring Furman Selz LLC.........................................................
Friedman, Billings, Ramsey & Co., Inc..............................................
Needham & Company, Inc.............................................................
-----
Total..............................................................................
-----
-----
</TABLE>
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price shown on the
cover page of this prospectus and in part to dealers, including the
underwriters, at this price less a discount not in excess of $ per share. The
underwriters may allow, and these dealers may re-allow other dealers, a discount
not in excess of $ per share.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
EXERCISE NO EXERCISE FULL
- ------------------------------------------------------------------------ ------------- ---------
<S> <C> <C>
Per share............................................................... $ $
Total................................................................... $ $
</TABLE>
Other expenses of this offering, including the registration fees and the
fees and expenses of the financial printer, counsel and accountants, that are to
be paid by us are expected to be approximately $650,000.
OVER-ALLOTMENT. The underwriters have an option, exercisable within 30 days
after the date of this prospectus, to purchase up to an aggregate of 675,000
additional shares of common stock at the public offering price less the
underwriting discounts and commissions. The underwriters may exercise this
option solely to cover over-allotments, if any, made in this offering. If the
underwriters exercise this option, each underwriter will purchase shares in
approximately the same proportion as indicated in the table above.
INDEMNITY. We have agreed to indemnify the underwriters against some types
of liabilities, including liabilities under the Securities Act. We have also
agreed to contribute to payments that the underwriters may be required to make
in respect of any of those liabilities.
FUTURE SALES. DVD EXPRESS, its executive officers, directors and our
existing stockholders, have agreed not to offer, pledge, sell, hedge or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock for a period of 180 days from the date of this prospectus.
Transfers or dispositions can be made sooner with the prior written consent of
ING Baring Furman Selz LLC. Their consent may be given at any time without
public notice. During the 180-day period, we have agreed not to file any
registration statement with respect to any shares of our common stock. This
restriction does not apply to the
56
<PAGE>
registration statement on Form S-8 that we plan to file covering the 2,250,000
shares of common stock that have been reserved for issuance under our stock
incentive plan and the 300,000 shares of common stock that may be issued upon
exercise of options granted to Joan Abend, Vice President of Operations. In
addition, each of our executive officers, directors and all of our stockholders
with registration rights have agreed not to make any demand for, or exercise
these rights without the prior written consent of ING Baring Furman Selz LLC.
OFFERS IN OTHER JURISDICTIONS. Neither we nor the underwriters have taken
any action that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction other than the United States
where action for that purpose is required. The shares of common stock offered by
this prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements related to the offer
and sale of these shares of common stock be distributed or published, in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of these jurisdictions. This prospectus is not
an offer to sell or a solicitation of an offer to buy any shares of common stock
offered hereby in any jurisdiction in which such an offer or solicitation is
unlawful.
ING Baring Furman Selz LLC has advised us that the underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
STABILIZATION. During this offering, the underwriters may engage in
transactions on the Nasdaq National Market or the over-the-counter market or
otherwise that stabilize, maintain or otherwise affect the price of the common
stock. Specifically, the underwriters may overallot this offering, creating a
syndicate short position. In addition, the underwriters may bid for and purchase
shares of common stock in the open market to cover syndicate short positions or
to stabilize the price of the common stock. In addition, ING Baring Furman Selz
LLC, on behalf of the underwriters, may reclaim selling concessions allowed to
an underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. These activities may stabilize or
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities and may
discontinue any of these activities at any time.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for our common stock. As a result, the initial public offering price for
the common stock has been determined by negotiations between us and the
underwriters. Among the factors considered in determining the public offering
price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and development stages of other companies that
we and the underwriters believe to be comparable to us; and
- estimates of our growth potential.
DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up
to 337,500 shares of common stock to be issued by us and offered for sale by
this prospectus, at the initial public offering price, to directors, officers,
employees, business associates and related persons of DVD EXPRESS. The number of
shares of common stock available for sale to the general public will be reduced
to the extent these individuals purchase these reserved shares. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered by this prospectus.
57
<PAGE>
LEGAL MATTERS
Our counsel, Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California, has rendered an opinion that the common stock offered by us, upon
its sale, will be duly and validly issued, fully paid and non-assessable.
Brobeck, Phleger & Harrison, LLP, Irvine, California, has acted as counsel to
the underwriters of this offering.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in giving
said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement under the Securities Act with respect to this
offering. This prospectus does not contain all of the information set forth in
the registration statement and the related exhibits. With respect to any
contract or other document filed as an exhibit to the registration statement,
reference is made to the exhibit for a complete description of the matter
involved. For further information about us and the shares offered, please review
the registration statement and exhibits. A copy of the registration statement,
including the exhibits, may be inspected without charge at the Securities and
Exchange Commission's principal office in Washington, D.C., and copies of all or
any part of the registration statement may be obtained from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates.
Upon completion of this offering, we will be governed by the informational
requirements of the Exchange Act and will file reports and other information
with the Securities and Exchange Commission in accordance with its rules. These
reports and other information concerning us may be inspected and copied at the
public reference facilities referred to above as well some of the regional
offices of the Securities and Exchange Commission.
The Securities and Exchange Commission maintains a Web site which contains
reports, proxy and information statements and other information regarding
issuers, including us, that file electronically with the Securities and Exchange
Commission at http://www.sec.gov.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of March 31, 1999 (unaudited) and December
31, 1998 and 1997......................................... F-3
Statements of Operations for the Three Months Ended March
31, 1999 and 1998 (unaudited), the Years Ended December
31, 1998 and 1997 and for the Period From October 18
(inception) to December 31, 1996.......................... F-4
Statements of Stockholders' Equity for the Three Months
Ended March 31, 1999 (unaudited), the Years Ended December
31, 1998 and 1997 and for the Period From October 18
(inception) to December 31, 1996.......................... F-5
Statements of Cash Flows for the Three Months Ended March
31, 1999 and 1998 (unaudited), the Years Ended December
31, 1998 and 1997 and for the Period From October 18
(inception) to December 31, 1996.......................... F-6
Notes to the Financial Statements........................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF DVD EXPRESS, INC.:
We have audited the accompanying balance sheets of DVD EXPRESS, Inc. (a
California corporation, the "Company") as of December 31, 1998 and 1997, and the
related statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1998 and 1997 and the period from October 18
(inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 DVD EXPRESS, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997 and the period from October 18 to
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
February 1, 1999 (except with
regard to the matters discussed
in Note 9, as to which the date is
June 23, 1999)
F-2
<PAGE>
DVD EXPRESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1997 1998
----------- ------------- AS OF MARCH 31,
---------------
1999
---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 200 $ 904,865 $ 4,932,616
Accounts receivable................................................ 18,409 254,661 343,353
Inventories........................................................ 250,689 1,803,948 2,470,103
Prepaid advertising................................................ -- 6,884,901 8,534,237
Other assets....................................................... 6,037 61,269 462,706
----------- ------------- ---------------
Total current assets............................................. 275,335 9,909,644 16,743,015
Property and equipment, net.......................................... 34,653 646,528 850,423
Other assets:
Prepaid advertising................................................ -- 8,745,523 7,765,427
Intangible assets, net............................................. -- 187,015 176,814
----------- ------------- ---------------
Total assets..................................................... $ 309,988 $ 19,488,710 $ 25,535,679
----------- ------------- ---------------
----------- ------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 116,785 $ 3,082,334 $ 3,759,916
Accrued expense and other.......................................... 1,800 283,627 350,893
Advances under lines of credit..................................... -- 3,000,000 3,000,000
Stockholder loans.................................................. -- 1,300,000 --
----------- ------------- ---------------
Total current liabilities........................................ 118,585 7,665,961 7,110,809
----------- ------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value, 10,000,000 shares authorized,
none issued and outstanding at December 31, 1997 and 1998,
1,714,285 issued and outstanding at March 31, 1999............... -- -- 171
Share capital, $.0001 par value, 50,000,000 shares authorized,
15,000,000 issued and outstanding at December 31, 1997 and 1998,
15,135,000 issued and outstanding at March 31, 1999.............. 1,500 1,500 1,514
Additional paid-in capital......................................... 398,500 16,594,288 23,697,305
Accumulated deficit................................................ (208,597) (4,773,039) (5,274,120)
----------- ------------- ---------------
Total stockholders' equity....................................... 191,403 11,822,749 18,424,870
----------- ------------- ---------------
Total liabilities and stockholders' equity....................... $ 309,988 $ 19,488,710 $ 25,535,679
----------- ------------- ---------------
----------- ------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DVD EXPRESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
OCTOBER 18 TO DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------------- -----------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ -- $ 1,269,241 $ 16,906,630 $ 1,644,803 $ 11,229,350
Cost of revenues................... -- 1,046,112 15,085,763 1,365,294 10,381,086
------------- ------------- -------------- ------------- --------------
Gross profit................... -- 223,129 1,820,867 279,509 848,264
------------- ------------- -------------- ------------- --------------
Operating expenses:
Operating and development........ -- 177,051 1,309,232 102,197 1,176,839
Sales and marketing.............. -- 96,640 2,910,655 126,932 3,246,621
America Online warrant
amortization................... -- -- 1,249,360 -- 1,249,360
General and administrative....... 17,007 141,028 842,063 61,263 459,783
------------- ------------- -------------- ------------- --------------
Operating loss................. (17,007) (191,590) (4,490,443) (10,883) (5,284,339)
Interest expense................... -- -- (73,999) -- (46,128)
Interest income.................... -- -- -- -- 56,347
------------- ------------- -------------- ------------- --------------
Net loss........................... $ (17,007) $ (191,590) $ (4,564,442) $ (10,883) $ (5,274,120)
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Loss before pro forma provision for
income taxes..................... $ (17,007) $ (191,590) $ (4,564,442) $ (10,883) $ (5,274,120)
Pro forma provision for income
taxes (unaudited)................ -- -- -- -- --
------------- ------------- -------------- ------------- --------------
Pro forma net loss (unaudited)..... $ (17,007) $ (191,590) $ (4,564,442) $ (10,883) $ (5,274,120)
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Basic and diluted loss per common
share............................ $ (0.00) $ (0.01) $ (0.30) $ (0.00) $ (0.35)
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Weighted average number of shares
(unaudited)...................... 15,000,000 15,000,000 15,000,000 15,000,000 15,114,000
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Basic and diluted pro forma loss
per common share (unaudited)..... $ (0.00) $ (0.01) $ (0.30) $ (0.00) $ (0.30)
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Pro forma weighted average number
of shares (unaudited)............ 15,000,000 15,000,000 15,000,000 15,000,000 17,599,713
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DVD EXPRESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ------------------------ ADDITIONAL TOTAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance.................... -- $ -- -- $ -- $ -- $ -- $ --
Capital contribution............... -- -- -- -- 30,000 -- 30,000
Net loss........................... -- -- -- -- -- (17,007) (17,007)
--------- ----- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1996........... -- -- -- -- 30,000 (17,007) 12,993
Issuance of common stock........... -- -- 15,000,000 1,500 318,500 -- 320,000
Fair value of services contributed
by original stockholder.......... -- -- -- -- 50,000 -- 50,000
Net loss........................... -- -- -- -- -- (191,590) (191,590)
--------- ----- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1997........... -- -- 15,000,000 1,500 398,500 (208,597) 191,403
Capital contribution............... -- -- -- -- 1,150,000 -- 1,150,000
Fair value of services contributed
by original stockholder.......... -- -- -- -- 50,000 -- 50,000
Fair value of options issued in
connection with purchase of
intangible assets................ -- -- -- -- 3,463 -- 3,463
Fair value of America Online
warrant.......................... -- -- -- -- 14,992,325 -- 14,992,325
Net loss........................... -- -- -- -- -- (4,564,442) (4,564,442)
--------- ----- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1998........... -- -- 15,000,000 1,500 16,594,288 (4,773,039) 11,822,749
Termination of S corporation
status........................... -- -- -- -- (4,773,039) 4,773,039 --
Issuance of preferred stock........ 1,714,285 171 -- -- 11,246,070 -- 11,246,241
Issuance of common stock........... -- -- 135,000 14 629,986 -- 630,000
Net loss........................... -- -- -- -- -- (5,274,120) (5,274,120)
--------- ----- ----------- ----------- ------------ ------------ ------------
Balance, March 31, 1999
(unaudited)........................ 1,714,285 $ 171 15,135,000 $ 1,514 $ 23,697,305 $(5,274,120) $18,424,870
--------- ----- ----------- ----------- ------------ ------------ ------------
--------- ----- ----------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DVD EXPRESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED MARCH
OCTOBER 18 TO DECEMBER 31, 31,
DECEMBER 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
------------- ---------- ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $ (17,007) $ (191,590) $ (4,564,442) $ (10,883) $ (5,274,120)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization............ -- 7,706 101,125 2,227 90,479
America Online warrant amortization...... -- -- 1,249,360 -- 1,249,360
Contributed services..................... -- 50,000 50,000 12,500 --
Changes in certain assets and
liabilities:
Increase in prepaid advertising........ -- -- (1,887,459) -- (1,918,600)
Increase in accounts receivable........ -- (18,409) (236,252) (87,870) (88,692)
Increase in inventories................ -- (250,689) (1,553,259) (271,000) (666,155)
Increase in other assets............... -- (6,037) (55,232) (21,353) (401,437)
Increase in accounts payable........... -- 116,785 2,965,549 108,539 677,582
Increase in accrued expenses and
other................................ -- 1,800 281,827 32,265 67,265
------------- ---------- ------------ ---------- ------------
Net cash used in operating
activities......................... (17,007) (290,434) (3,648,783) (235,575) (6,264,318)
------------- ---------- ------------ ---------- ------------
Cash flows from investing activities:
Additions to property and equipment........ -- (42,359) (695,999) (14,425) (284,172)
Purchase of intangible assets.............. -- -- (200,553) -- --
------------- ---------- ------------ ---------- ------------
Net cash used in investing
activities......................... -- (42,359) (896,552) (14,425) (284,172)
------------- ---------- ------------ ---------- ------------
Cash flows from financing activities:
Capital contributions...................... 30,000 320,000 1,150,000 250,000 --
Net proceeds from sale of common stock..... -- -- -- -- 630,000
Net proceeds from sale of preferred
stock.................................... -- -- -- -- 11,246,241
Advances on lines of credit................ -- -- 3,000,000 -- --
Stockholder loans.......................... -- -- 1,300,000 -- (1,300,000)
------------- ---------- ------------ ---------- ------------
Net cash provided by financing
activities......................... 30,000 320,000 5,450,000 250,000 10,576,241
------------- ---------- ------------ ---------- ------------
Net increase (decrease) in cash and cash
equivalents................................ 12,993 (12,793) 904,665 -- 4,027,751
Cash and cash equivalents, beginning of
period..................................... -- 12,993 200 200 904,865
------------- ---------- ------------ ---------- ------------
Cash and cash equivalents, end of period..... $ 12,993 $ 200 $ 904,865 $ 200 $ 4,932,616
------------- ---------- ------------ ---------- ------------
------------- ---------- ------------ ---------- ------------
Supplemental disclosures:
Interest paid.............................. $ -- $ -- $ 47,691 $ -- $ 72,436
Income taxes paid.......................... $ -- $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS RISKS
DVD EXPRESS, Inc. is a specialty retail online video store which uses the
Internet as its primary channel of selling and marketing digital versatile disk
movies, games, and accessories. DVD EXPRESS was incorporated and commenced
principal operations on October 18, 1996.
RISKS OF BUSINESS
DVD EXPRESS has a limited operating history on which to base an evaluation
of its business. DVD EXPRESS will encounter numerous risks including, but not
limited to, the need to respond to changes in a rapidly evolving and
unpredictable business environment and the ability to manage growth effectively.
DVD EXPRESS must, among other things, expand its customer base, successfully
implement its business and marketing strategies, continue to develop and upgrade
its Web site and provide superior customer service. If DVD EXPRESS is not
successful in addressing such risks, it will be materially adversely affected.
LOSSES FROM OPERATIONS
DVD EXPRESS is an early stage enterprise and has incurred aggregate net
losses since its inception of approximately $9.9 million as of March 31, 1999.
To date, DVD EXPRESS has funded operations through the sale of its stock, bank
debt, and capital contributions and loans from the sole stockholder. There can
be no assurance that DVD EXPRESS will continue to be able to raise additional
capital as needed, which could have a material adverse effect on its business,
financial condition or results of operations. Additionally, there is no
assurance that DVD EXPRESS will attain profitability in the future. DVD EXPRESS'
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets such as online
commerce.
DVD EXPRESS intends to continue investing heavily in marketing and
promotion, strategic alliances, Web site development and technology, and
development of its administrative organization. As a result, DVD EXPRESS
believes that it will continue to incur substantial operating losses for the
foreseeable future, and at rates significantly above current levels. Achieving
profitability depends upon DVD EXPRESS' ability to generate and sustain
substantially increased revenue levels. There can be no assurance that DVD
EXPRESS will be able to generate sufficient revenues or gross margins to achieve
or sustain profitability in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INFORMATION AS OF MARCH 31, 1999 AND 1998
The accompanying financial statements as of March 31, 1999 and 1998 reflect
all adjustments which are, in the opinion of management, necessary for the fair
presentation of the financial statements
F-7
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for such interim periods. Such adjustments consist only of normal recurring
items. Interim results are not necessarily indicative of results for a full
year.
CASH AND CASH EQUIVALENTS
DVD EXPRESS considers cash and cash equivalents to consist of all highly
liquid debt instruments purchased with an initial maturity of three months or
less.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of credit card receivables. The
carrying amount of these receivables approximates realizable value.
INVENTORY
Inventories are comprised of DVD movies, videos and DVD-ROM software and are
stated at the lower of cost (first-in, first-out method) or market.
PREPAID ADVERTISING
DVD EXPRESS has entered into several long-term marketing agreements.
Payments made are capitalized as prepaid advertising. Prepaid advertising is
amortized over the expected useful life of the individual agreements based upon
the actual guaranteed impressions or click throughs if the information is
available or based upon the contractual guaranteed impressions or click throughs
as specified in the individual agreement if actual impressions or click throughs
have not yet been reported to DVD EXPRESS. See also Note 7. The carrying value
of the prepaid advertising is reviewed when events or circumstances indicate
that an impairment test is necessary (see Long Lived Assets).
INTANGIBLE ASSET
Intangible assets consist of cash amounts paid and the fair value of options
granted for domain names on the World Wide Web. DVD EXPRESS entered into an
agreement for the purchase of the following domain names: "dvd.com",
"hometheater.com", and "hometheater.net" for cash and the grant of stock options
to purchase 15,000 shares of common stock at an exercise price of $4.67 per
share. The options have been valued at a fair value of $3,463 using a
Black-Scholes Option Pricing Model.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed utilizing the straight-line method. These assets are
depreciable over the estimated useful lives as follows:
<TABLE>
<S> <C>
Furniture and equipment........................... 5 years
Computer equipment................................ 3 years
Leasehold improvements............................ Life of lease or asset life if shorter
</TABLE>
Major renewals and improvements are capitalized. Any maintenance and repairs
which do not improve or extend the life of the assets are expensed as incurred.
F-8
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost and accumulated depreciation for property and equipment sold,
retired or otherwise disposed of are relieved from the respective accounts and
resulting gains and losses are reflected in income.
LONG LIVED ASSETS
DVD EXPRESS had adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of." This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
carrying value of existing assets are reviewed when events or changes in
circumstances indicate that an impairment test is necessary in order to
determine if an impairment has occurred. When factors indicate that such assets
should be evaluated for possible impairment, DVD EXPRESS will estimate the
future cash flows expected to result from the use of the assets and their
eventual disposition, and compare the amounts to the carrying value of the
assets to determine if an impairment loss has occurred.
REVENUE RECOGNITION
Revenues, which consists primarily of DVD movies sold via the Internet,
include outbound shipping and handling charges and are recognized when the
products are shipped.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is calculated by dividing net income
(loss) available to common stockholders by the weighted average number of shares
outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution from the exercise of options or conversion of other
securities into common stock. Stock options to purchase and conversion of other
securities into 4,143,542, 309,658, 883,354, 174,913 and zero shares of common
stock outstanding for the three months ended March 31, 1999 and 1998, the years
ended December 31, 1998 and 1997, and the period ended December 31, 1996,
respectively, have not been included in the computation of diluted earnings
(loss) per share because to do so would have been antidilutive.
PRO FORMA EARNINGS (LOSS) PER COMMON SHARE
Pro forma earnings (loss) per common share is presented pursuant to
Statement of Financial Accounting Standards No. 128 "Earnings per share". Pro
forma earnings (loss) per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Series A Convertible Preferred Stock into Common Stock
effective upon the closing of the initial public offering as if such conversion
had occurred on January 4, 1999, the date of original issuance.
F-9
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and pro forma
earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
OCTOBER 18 TO --------------------------- ---------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................ $ (17,007) $ (191,590) $ (4,564,442) $ (10,883) $ (5,274,120)
Denominator:
Weighted average number
of shares............. 15,000,000 15,000,000 15,000,000 15,000,000 15,114,000
----------------- ------------ ------------- ------------ -------------
Basic................... 15,000,000 15,000,000 15,000,000 15,000,000 15,114,000
Effect of:
Series A Convertible
Preferred Stock..... -- -- -- -- 2,485,713
----------------- ------------ ------------- ------------ -------------
Pro forma basic........... 15,000,000 15,000,000 15,000,000 15,000,000 17,599,713
----------------- ------------ ------------- ------------ -------------
</TABLE>
INCOME TAXES
DVD EXPRESS accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS 109
specifies an asset and liability approach, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events which have been recognized in DVD EXPRESS' financial statements.
Through December 31, 1998, DVD EXPRESS elected to file federal and state
income tax returns as a S corporation and as a result, was not subject to
federal income tax but was subject to state income tax in certain states. In
accordance with the S corporation election, taxable income or loss of DVD
EXPRESS was included in the computation of adjusted gross income of DVD EXPRESS'
sole stockholder. As DVD EXPRESS reported losses since inception through
December 31, 1998 and paid only the minimum state tax required, no state income
tax provision was recorded.
As of January 1, 1999, DVD EXPRESS terminated its S corporation status and
recorded the effect of such termination in the first quarter of 1999 (see Note
8).
GOING CONCERN
The accompanying financial statements have been prepared assuming that DVD
EXPRESS will continue as a going concern. As shown in the accompanying balance
sheets, liabilities exceed assets at December 31, 1998; nevertheless, the
management of DVD EXPRESS intends to fund operations as necessary in order for
DVD EXPRESS to continue as a going concern through at least December 31, 1999.
F-10
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Aside from net loss, there are no other comprehensive income items for three
months ended March 31, 1999 and 1998, the years ended December 1998 and 1997 and
the period from October 18, 1996 to December 31, 1996.
SEGMENT REPORTING
DVD EXPRESS adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in 1998. This statement requires companies
to report certain information about operating segments in a financial statement
and information about their products and services, the geographic areas in which
they operate, and their major customers. DVD EXPRESS has adopted SFAS 131 in
1998. As DVD EXPRESS has only one reportable operating segment of its business
there is no segment information to report for the three months ended March 31,
1999 and 1998, the years ended December 1998 and 1997 and the period from
October 18 to December 31, 1996, other than the following geographic
information. DVD EXPRESS has no assets outside the United States and all
transactions are denominated in United States dollars.
Revenues from product shipments to geographic areas for the three months
ended March 31, 1999 and 1998, and the years ended December 31, 1998 and 1997
were approximately as follows: United States and possessions $5,300,000,
$800,000, $9,300,000, and $710,000; Europe $2,700,000, $400,000, $3,500,000, and
$250,000; and rest of world $1,700,000, $200,000, $2,100,000, and $160,000,
respectively.
Revenues from total worldwide shipping charges for the three months ended
March 31, 1999 and 1998, and the years ended December 31, 1998 and 1997 were
approximately $1,500,000, $200,000, $2,000,000, and $150,000, respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- ----------------- MARCH 31, 1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment................ $ 8,168 $ 270,869 $ 377,619
Computer equipment..................... 34,191 221,652 327,410
Leasehold improvements................. -- 245,837 317,500
------- -------- --------------
42,359 738,358 1,022,529
Less: Accumulated depreciation......... (7,706) (91,830) (172,106)
------- -------- --------------
$ 34,653 $ 646,528 $ 850,423
------- -------- --------------
------- -------- --------------
</TABLE>
4. BANK AND OTHER DEBT
LINES OF CREDIT
In July 1998, DVD EXPRESS entered into a revolving line of credit with Wells
Fargo Bank National Association aggregating $1,000,000. The interest expense is
computed at a rate of .75% above
F-11
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
4. BANK AND OTHER DEBT (CONTINUED)
prime rate (8.5% at December 31, 1998 and at March 31, 1999) beginning on
September 1, 1998. The revolving line of credit expires on September 1, 1999.
In October 1998, DVD EXPRESS entered into an additional revolving line of
credit with Wells Fargo Bank National Association aggregating $2,000,000. The
interest expense is computed at a rate of .25% below prime rate (7.5% at
December 31, 1998 and at March 31, 1999) beginning on October 1, 1998. The
revolving line of credit expires on November 1, 1999.
The credit lines are both fully utilized as of December 31, 1998 and March
31, 1999.
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Management believes, based upon the advice of legal counsel, that there are
no proceedings, either threatened or pending, against DVD EXPRESS that could
result in a material adverse effect on the results of operations or the
financial condition of DVD EXPRESS.
LETTERS OF CREDIT
On February 11, 1998, DVD EXPRESS entered into an agreement expiring on
September 1, 1999 under which Wells Fargo Bank, National Association will issue
standby letters of credit not to exceed $750,000. As of December 31, 1998 and
March 31, 1999, DVD EXPRESS had no letters of credits outstanding.
OPERATING LEASE AGREEMENTS
Prior to April 1998, DVD EXPRESS occupied business premises subject to a
month to month lease. DVD EXPRESS entered into a three-year operating lease
agreement for office space on April 1, 1998, which was amended to include
additional premises on August 5, 1998. Total rent expense for the three months
ended March 31, 1999 and 1998, the years ended December 31, 1998 and 1997, and
the period from October 18 to December 31, 1996 was $88,818, $17,925, $159,598,
$18,267, and $0, respectively.
Future minimum lease payments at December 31, 1998, relating to DVD EXPRESS'
non-cancelable operating leases, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 324,842
2000.............................................................................. 324,842
2001.............................................................................. 91,319
----------
$ 741,003
----------
----------
</TABLE>
F-12
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
MARKETING AGREEMENTS, STRATEGIC ALLIANCES AND SYSTEM PROVIDERS
AMERICA ONLINE AGREEMENT
In August 1998, DVD EXPRESS entered into an agreement with America Online
Inc. pursuant to which America Online will provide DVD EXPRESS with promotions
throughout the America Online service on AOL and America Online's Digital City.
The initial term of the agreement runs from October 1, 1998 to October 1, 2001.
DVD EXPRESS has guaranteed payments during the term to America Online of $15
million. As partial consideration, DVD EXPRESS granted a warrant to purchase
1,384,006 shares of its common stock to America Online. (See also Note 7).
INFOSEEK AGREEMENT
In October 1998, DVD EXPRESS entered into a distribution agreement with
Infoseek Corporation (commonly known as Go.com) pursuant to which Go.com will
feature us in its Entertainment Channel and various other areas throughout the
service. During the 24-month term of the agreement, DVD EXPRESS is obligated to
pay Infoseek a minimum of $5.3 million plus a percentage of our revenues
attributable to Go.com member traffic.
ONE ZERO MEDIA AGREEMENT
In September 1998, DVD EXPRESS entered into an agreement with One Zero
Media, Inc. One Zero Media is the exclusive producer and aggregating partner for
the "Entertainment Zone," the entertainment content area within the "AltaVista"
Web site. Pursuant to the agreement, DVD EXPRESS has been appointed as the sole
provider of the Entertainment Zone's DVD Store Area. The agreement also
contemplates promotional efforts on behalf of DVD EXPRESS in both the
Entertainment Zone and on the Wild Wild Web syndicated television show. DVD
EXPRESS pays One Zero Media based on the amount of traffic originating from
AltaVista.
SYSTEM PROVIDERS
DVD EXPRESS depends on Pandesic LLC to develop and service its commerce
systems, including the software that operates the transaction-processing
systems. The current agreement with Pandesic runs through May, 2000 and requires
minimum payments plus a percentage of revenues to be made. If Pandesic
terminates the agreement early or if the agreement is not renewed, DVD EXPRESS
would be forced to either enter into a relationship with another third-party
provider or undertake to develop and service its commerce systems internally.
DVD EXPRESS is required to pay aggregate minimum fees under marketing
agreements, strategic alliances and system providers as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------------
<S> <C>
1999........................................................................... $ 13,942,575
2000........................................................................... 7,839,394
2001........................................................................... 2,475,000
-------------
$ 24,256,969
-------------
-------------
</TABLE>
Many of DVD EXPRESS' agreements, including the America Online, Infoseek, and
One Zero Media Agreements, contain provisions which may require additional
payments to be made by DVD
F-13
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EXPRESS based on factors such as click-throughs and new customers generated.
Such payments are expensed as incurred. DVD EXPRESS will continue to evaluate
the realizability of assets recorded, if any, related to the America Online,
Infoseek, One Zero Media and other agreements, and, if necessary, write down the
assets to realizable value.
6. RELATED PARTY TRANSACTIONS
In December 1998, DVD EXPRESS entered into two agreements to borrow a total
of $1,300,000 from its sole stockholder. All borrowings were repaid by DVD
EXPRESS in January 1999. Through December 31, 1998, the sole stockholder has not
drawn a salary for his services. The value of his services of $50,000 per year
has been reflected as both contributed capital and salary expense for the years
ended December 31, 1997 and 1998.
7. SHARE CAPITAL
DVD EXPRESS has authorized 50,000,000 $.0001 par value shares of Common
Stock and 10,000,000 $.0001 par value shares of Preferred Stock. The original
stockholder purchased 15,000,000 shares of Common Stock for $320,000 in 1997.
The original stockholder also contributed additional capital of $30,000 during
1996 and $1,150,000 during 1998 to fund operating expenses.
On January 4, 1999, DVD EXPRESS entered into a Series A Convertible
Preferred Stock Purchase Agreement with Geocapital IV, L.P., Geocaptial V, L.P.
and Broadview Partners Group. DVD EXPRESS sold 1,714,285 shares of its Series A
Convertible Preferred Stock for $12,000,000 less offering costs of $754,000. The
shares are convertible into Common Stock at the rate of 3-for-2 upon completion
of DVD EXPRESS' initial public offering. On January 15, 1999, DVD EXPRESS sold
135,000 shares of Common Stock for net proceeds of $630,000.
AMERICA ONLINE WARRANT
On August 1, 1998, DVD EXPRESS granted a warrant to America Online, Inc. to
purchase up to 1,384,006 shares of Common Stock at an exercise price of $5.60
per share. The America Online warrant becomes non-forfeitable and vests fully on
the closing of this offering. The America Online warrant expires on August 1,
2008. The AOL warrant does not have any voting rights, dividend rights or
preferences until such time as it is exercised for shares of Common Stock. This
warrant was granted as partial compensation for the marketing agreement entered
into with America Online (see also Note 5). The America Online warrant was
valued at a fair value of $14,992,325 using the Black-Scholes Option Pricing
Model using the following assumptions: risk-free interest rate of 5.71%,
expected life of 10 years, dividend yield of 0% and volatility of 80%. The fair
value of the America Online warrant is included as prepaid advertising and is
being amortized on a straight-line basis over the term of the America Online
marketing agreement.
STOCK OPTION PLAN
DVD EXPRESS adopted a stock incentive plan during 1998. The stock incentive
plan allows for the granting of up to 2,250,000 stock options to certain
employees, officers or consultants at a price not less than 100% of the market
value of DVD EXPRESS' Common Stock or issue nonqualified stock options pursuant
to the stock incentive plan. Options issued to consultants and non-employees are
valued at the fair value of the consideration received or the fair value of the
options issued. The fair
F-14
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
7. SHARE CAPITAL (CONTINUED)
value of options issued to non-employees is valued using the Black-Scholes
Option Pricing Model. The stock incentive plan prescribes general terms for the
exercise of options and option periods subject to the condition that all options
terminate not more than ten years from the date of grant. Options granted are at
the discretion of the Board of Directors, however, in no event shall any option
vest at a rate of less than 20% per year over five years from the grant date.
DVD EXPRESS accounts for the stock incentive plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Under APB Opinion No. 25,
compensation cost is not recognized for options issued at market value of the
Common Stock at the date of the grant. Had compensation cost for the stock
incentive plan and the other grants to employees been determined consistent with
SFAS 123, DVD EXPRESS' net loss would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998
------------- ---------------
<S> <C> <C>
Net loss--as reported............................. $(191,590) $(4,564,442)
Net loss--pro forma............................... $(192,740) $(4,656,730)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the minimum value method with the following weighted average assumptions for
grants during 1998 and in 1997, respectively: risk-free interest rates of 5.47%
and 6.44%, expected lives of four years, zero volatility and payments of no
dividends.
The weighted average grant date fair value of options granted during 1998
was $0.80 per share.
No stock options were awarded under the stock incentive plan prior to 1998.
Information regarding stock options awarded under the stock incentive plan are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
WTD AVG.
SHARES EX. PRICE
------------- ----------
<S> <C> <C>
Options outstanding at beginning of
year.................................. -- $ --
Granted............................... 591,000 2.83
Exercised............................. -- --
Canceled.............................. (9,000) 4.00
------------- -----
Options outstanding at end of year...... 582,000 $ 2.81
------------- -----
------------- -----
</TABLE>
The following summarizes the number of shares exercisable and the exercise
price at December 31, 1998 for the stock incentive plan:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS REMAINING CONTRACTUAL OPTIONS
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
- -------------------------------------------------------------------- ----------- --------------------- -----------
<S> <C> <C> <C>
$1.33............................................................... 150,000 9.16 41,781
$1.67............................................................... 108,750 9.25 27,213
$3.34............................................................... 70,500 9.42 43,919
$4.00............................................................... 237,750 9.64 49,312
$4.67............................................................... 15,000 9.62 15,000
----------- --- -----------
582,000 9.42 177,225
----------- --- -----------
----------- --- -----------
</TABLE>
F-15
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
7. SHARE CAPITAL (CONTINUED)
DVD EXPRESS also granted options to purchase 300,000 shares of common stock
to an employee at an exercise price of $.0667 per share during 1997 with an
average grant date fair value of $0.15 per share. As of December 31, 1998,
118,767 of these shares are exercisable. The weighted average remaining
contractual life of these outstanding options at December 31, 1998, was 8.4
years.
During the period from January 1, 1999 to May 31, 1999, DVD EXPRESS granted
options (excluding those that were also forfeited) under the stock incentive
plan to employees and directors to purchase an additional 549,000 shares of
common stock at a weighted average price of $6.03.
8. INCOME TAXES
Prior to January 1, 1999, DVD EXPRESS operated as an S corporation, and
therefore was not subject to federal income taxes and only to state income taxes
at a reduced rate. As an S corporation, DVD EXPRESS' stockholders were subject
to federal and state taxes based on DVD EXPRESS' earnings. As a result of
terminating DVD EXPRESS' S corporation status on January 1, 1999, DVD EXPRESS
was required to record a one-time, non-cash charge against historical earnings
for additional deferred taxes based upon the increase in the effective tax rate
from DVD EXPRESS' S corporation status to C corporation status. The deferred
taxes are a result of timing differences, principally depreciation expense,
operating losses and other accrued expenses between amounts deducted for tax
purposes as compared to financial statement purposes. This charge was zero as
all net deferred tax assets have been fully offset by a valuation allowance as
their realization is uncertain. DVD EXPRESS also offset its accumulated deficit
as of December 31, 1998 as a charge against DVD EXPRESS' additional paid in
capital. The following pro forma tax information is presented as if DVD EXPRESS
was a C corporation since inception.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods and for
loss carryforwards. A valuation allowance is recognized if, based on the weight
of available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The tax effects of temporary differences which give rise to deferred tax
assets (liabilities) for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization........................ $ -- $ 25,993
Accrued expenses and other........................... -- 8,082
Net operating loss................................... 64,977 1,904,153
-------- -----------------
Subtotal gross tax (assets)........................ 64,977 1,938,228
Valuation allowance.................................. (64,977) (1,938,228)
-------- -----------------
Net deferred tax assets............................ $ -- $ --
-------- -----------------
-------- -----------------
</TABLE>
F-16
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
8. INCOME TAXES (CONTINUED)
The pro forma provision for income taxes for the years ended December 31,
1998, 1997 and for the period from October 18 to December 31, 1996 follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
OCTOBER 18 TO -------------------------
DECEMBER 31, 1996 1997 1998
----------------- ---------- -------------
<S> <C> <C> <C>
Current
Federal....................................... $ (5,952) $ (49,557) $ (1,599,117)
State......................................... (1,021) (8,447) (274,134)
------- ---------- -------------
(6,973) (58,004) (1,873,251)
Deferred........................................ 6,973 58,004 1,873,251
------- ---------- -------------
Pro forma provision for income taxes.......... $ -- $ -- $ --
------- ---------- -------------
------- ---------- -------------
</TABLE>
The following is a summary reconciliation of the effective tax rate to the
assumed federal tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
OCTOBER 18 TO ------------------------
DECEMBER 31, 1996 1997 1998
--------------------- ----- -----
<S> <C> <C> <C>
Assumed federal tax rate on pre-tax book loss............. 35% 35% 35%
State taxes............................................... 6% 6% 6%
Valuation allowance....................................... (41)% (41)% (41)%
-- -- --
Effective pro forma tax rate.............................. 0% 0% 0%
-- -- --
-- -- --
</TABLE>
9. SUBSEQUENT EVENT--REINCORPORATION AND STOCK SPLIT
On (BLANK DATE), 1999, DVD EXPRESS reincorporated in Delaware and effected a
concurrent 3-for-2 stock split of each outstanding share of Common stock. All
share, stock option and warrant data have been restated to reflect the stock
split.
F-17
<PAGE>
[PICTURES OF COMPANY PRODUCTS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Cautionary Notice Regarding Forward-Looking Statements.................... 19
Termination of S Corporation Status....................................... 20
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 21
Capitalization............................................................ 22
Dilution.................................................................. 23
Selected Financial Data................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 33
Management................................................................ 44
Related Party Transactions................................................ 50
Principal Stockholders.................................................... 51
Description of Capital Stock.............................................. 53
Shares Eligible For Future Sale........................................... 55
Underwriting.............................................................. 56
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
ING BARING FURMAN SELZ LLC
FRIEDMAN BILLINGS RAMSEY
NEEDHAM & COMPANY, INC.
JUNE , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses we incurred in connection with
this offering, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission.............. $ 15,985
NASD filing fee................................................... 6,250
Nasdaq National Market fee........................................ 90,000
Accounting fees and expenses...................................... 175,000
Legal fees and expenses (other than blue sky)..................... 250,000
Blue sky fees and expenses, including legal fees.................. 5,000
Printing; stock certificates...................................... 100,000
Transfer agent and registrar fees................................. 5,000
Miscellaneous..................................................... 2,765
---------
Total........................................................... $ 650,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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 (i) any breach of
their duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) 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
recession.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers,
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 Certificate of Incorporation
also permits us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the provisions of law would permit such
indemnification.
In addition to the indemnification provided for in our Certificate of
Incorporation, we plan to enter into agreements to indemnify our directors and
executive officers. These agreements, among other things, provide for
indemnification of our 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 DVD EXPRESS, arising out of such person's services as a director or
executive officer of DVD EXPRESS, any subsidiary of DVD EXPRESS or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are
II-1
<PAGE>
not aware of any threatened litigation or proceeding that might result in a
claim for such indemnification.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto sets
forth certain provisions with respect to the indemnification of certain
controlling persons, directors and officers against certain losses and
liabilities, including certain liabilities under the Securities Act.
We plan to obtain director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have 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.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Proposed form of Underwriting Agreement...................................... 1.1
Registrant's Certificate of Incorporation.................................... 3.3
Registrant's Bylaws.......................................................... 3.4
Registrant's Form of Indemnification Agreement............................... 10.4
Tax Agreement................................................................ 10.5
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 1, 1997, we issued stock options to purchase up to 300,000 shares of
Common Stock at $.0667 per share to Joan Abend. The issuance and sale of these
securities is exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act as a transaction not involving
any public offering, and also pursuant to Rule 701 because the offer and sale of
the securities was pursuant to a compensatory benefit plan relating to
compensation.
On March 1, 1998, we issued pursuant to the stock incentive plan stock
options to purchase up to 150,000 shares of Common Stock at $1.33 per share to
Jason Vagner. The issuance and sale of these securities is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act as a transaction not involving any public offering, and also
pursuant to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On April 1, 1998, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 108,750 shares of Common Stock at $1.67 per
share to four of our employees. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On June 1, 1998, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 70,500 shares of Common Stock at $3.34 per
share to eight of our employees. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On August 1, 1998, we issued pursuant to the stock incentive plan stock
options to purchase up to 112,500 shares of Common Stock at $4.00 per share to
Steven Antebi. The issuance and sale of these
II-2
<PAGE>
securities is exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act as a transaction not involving
any public offering, and also pursuant to Rule 701 because the offer and sale of
the securities was pursuant to a compensatory benefit plan relating to
compensation.
On August 1, 1998, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 93,750 shares of Common Stock at $4.00 per
share to seven of our employees. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On August 1, 1998, we granted a warrant to purchase up to 1,384,006 shares
of Common Stock at $5.60 per share to America Online, Inc. The issuance and sale
of these securities is exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering.
On August 15, 1998, we issued pursuant to the stock incentive plan stock
options to purchase up to 15,000 shares of Common Stock at $4.67 per share to
Tushar Patel. The issuance and sale of these securities is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act as a transaction not involving any public offering, and also
pursuant to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On December 1, 1998, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 33,750 shares of Common Stock at $4.00 per
share to six of our employees. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On January 4, 1999, we sold an aggregate of 1,714,285 shares of our Series A
Convertible Preferred Stock to Geocapital V, L.P., Geocapital IV, L.P. and
Broadview Partners Group for an aggregate offering price of $12 million less
offering costs of $754,000. The 1,714,285 shares of Series A Convertible
Preferred Stock will convert into 2,571,427 shares of common stock (post 3-for-2
stock split) upon the closing of this offering. Post conversion and stock split,
the purchase price of the Series A Convertible Preferred Stock is effectively
$4.67 per share. The issuance and sale of these securities is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) and
Rule 506 of the Securities Act as a transaction not involving any public
offering.
On January 15, 1999, we sold an aggregate of 135,000 shares of our Common
Stock to three directors, Steve Antebi, Norman Pattiz and Stephen Cannell, for a
purchase price of $4.67 per share. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) and Rule 506 of the Securities Act as a transaction not involving
any public offering. On January 15, 1999, we also issued pursuant to the stock
incentive plan options to purchase an aggregate of 75,000 shares of Common Stock
at $4.67 per share to each of Mr. Pattiz and Mr. Cannell. The issuance and sale
of these securities is exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering, and also pursuant to Rule 701 because the
offer and sale of the securities was pursuant to a compensatory benefit plan
relating to compensation.
On February 1, 1999, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 225,000 shares of Common Stock at $4.00 per
share to two of our employees. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act
II-3
<PAGE>
pursuant to Section 4(2) of the Securities Act as a transaction not involving
any public offering, and also pursuant to Rule 701 because the offer and sale of
the securities was pursuant to a compensatory benefit plan relating to
compensation.
On February 1, 1999, we issued pursuant to the stock incentive plan stock
options to purchase up to 78,750 shares of Common Stock at $4.67 per share to 13
of our employees. The issuance and sale of these securities is exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act as a transaction not involving any public offering, and also
pursuant to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On March 1, 1999, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 22,500 shares of Common Stock at $8.00 per
share to two of our employees. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On May 25, 1999, we issued pursuant to the stock incentive plan stock
options to purchase an aggregate of 154,500 shares of Common Stock at $10.00 per
share to seventeen of our employees. The issuance and sale of these securities
is exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Articles of Incorporation of the Registrant's predecessor.*
3.2 Amended and Restated Bylaws of the Registrant's predecessor.*
3.3 Certificate of Incorporation of Registrant.*
3.4 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.*
10.1 1998 Stock Incentive Plan.*
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).*
10.3 Form of Registrant's Stock Option Agreement (Incentive Stock Option).*
10.4 Form of Director and Officer Indemnification Agreement.*
10.5 Tax Indemnification Agreement, dated March 1, 1999, between Registrant and Michael Dubelko.*
10.6 Employment Agreement, dated March 1, 1999, between the Registrant and Michael Dubelko.*
10.7 Employment Agreement, dated March 1, 1999, between the Registrant and Andrew Crist.*
10.8 Office Space Lease, dated January 16, 1998, between the Registrant and Jahra Investments, N.V., as
amended by the First Amendment to Office Building Lease dated August 5, 1998.*
10.9 Interactive Marketing Agreement, dated August 1, 1998, between the Registrant and America Online, Inc.,
as amended by the First Amendment to Interactive Marketing Agreement, dated as of May 1, 1999.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.10 Amended and Restated Common Stock Subscription Warrant, dated August 1, 1998, between the Registrant and
America Online, Inc.*
10.11 Affiliate Agreement, dated September 1, 1998, between the Registrant and One Zero Media, Inc.+
10.12 Distribution Agreement, dated October 13, 1998, between the Registrant and Infoseek Corporation.+
10.13 E-Business Solution Agreement, dated March 25, 1998, between the Registrant and Pandesic, LLC, as
amended on April 9, 1999.+
10.14 Purchase Agreement for DVD.COM, dated August 3, 1998, between the Registrant and Tushar Patel.*
10.15 Revolving Line of Credit Note, dated July 23, 1998, between the Registrant and Wells Fargo Bank,
National Association, as amended by the Addendum to Promissory Note dated July 23, 1998, and the
Continuing Guaranty to Wells Fargo Bank, National Association, dated January 23, 1998, executed by
Michael J. Dubelko.*
10.16 Revolving Line of Credit Note, dated October 1, 1998, between the Registrant and Wells Fargo Bank,
National Association, as amended by the Addendum to Promissory Note dated October 1, 1998, and the
Continuing Guaranty to Wells Fargo Bank, National Association, dated October 1, 1998, executed by
Michael J. Dubelko.*
10.17 Letter of Credit, dated February 11, 1998, issued by Wells Fargo Bank, National Association to the
Registrant.*
10.18 Registration Rights Agreement, dated December 31, 1998, between the Registrant, Michael Dubelko,
Geocapital V, L.P., Geocapital IV, L.P. and Broadview Partners Group.*
10.19 Option Agreement, dated June 1, 1997, between the Registrant and Joan Abend.*
23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in its opinion filed as Exhibit 5.1
hereto).*
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Paul Kagan Associates, Inc.
23.4 Consent of International Data Corporation.
24.1 Power of Attorney (included on signature page).*
27.1 Financial Data Schedule.*
</TABLE>
- ------------------------
* Previously filed.
+ Portions of this exhibit have been omitted and filed separately with the
Commission under a request for confidential treatment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act
II-5
<PAGE>
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer of controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by a 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.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on June 23,
1999.
<TABLE>
<S> <C> <C>
DVD EXPRESS, INC.
By: /s/ MICHAEL J. DUBELKO
-----------------------------------------
Michael J. Dubelko, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL J. DUBELKO Chairman of the Board,
- ------------------------------ Chief Executive Officer June 23, 1999
Michael J. Dubelko and President
Chief Financial Officer,
/s/ ANDREW T. CRIST Chief Operating Officer
- ------------------------------ and Secretary (Principal June 23, 1999
Andrew T. Crist Financial and Accounting
Officer)
*
- ------------------------------ Director June 23, 1999
Steven S. Antebi
*
- ------------------------------ Director June 23, 1999
Kimberly S. Eads
*
- ------------------------------ Director June 23, 1999
Norman J. Pattiz
*
- ------------------------------ Director June 23, 1999
Stephen J. Cannell
*
- ------------------------------ Director June 23, 1999
Harold E. Hughes
</TABLE>
* Power of Attorney
<TABLE>
<S> <C> <C> <C>
By: /s/ MICHAEL J. DUBELKO
-------------------------
Michael J. Dubelko
ATTORNEY IN FACT
</TABLE>
II-7
<PAGE>
CONFIDENTIAL
INTERACTIVE MARKETING AGREEMENT
This Interactive Marketing Agreement (the "Agreement"), dated as of
August 1, 1998 (the "Effective Date"), is between America Online, Inc.
("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles,
Virginia 20166, and DVD Express, Inc. ("MP"), a California corporation, with
offices at 7083 Hollywood Boulevard, Suite 100, Los Angeles, CA 90028. AOL
and MP may be referred to individually as a "Party" and collectively as the
"Parties."
INTRODUCTION
AOL and MP each desires to enter into an interactive marketing
relationship whereby AOL will promote and distribute an interactive site
referred to (and further defined) herein as the Affiliated MP Site. This
relationship is further described below and is subject to the terms and
conditions set forth in this Agreement. Defined terms used but not defined in
the body of the Agreement will be as defined on Exhibit B attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1 AOL PROMOTION OF AFFILIATED MP SITE. Provided that MP is in
compliance with all material terms of this Agreement, AOL shall be
obligated to provide MP with the promotions for the Affiliated MP
Site described on Exhibit A attached hereto. Subject to MP's
reasonable approval, AOL will have the right to fulfill its
promotional commitments with respect to any of the foregoing by
providing MP comparable promotional placements in appropriate
alternative areas of the AOL Network. In addition, if AOL is unable
to deliver any particular Promotion, AOL will work with MP to
provide MP, as its sole remedy, a comparable promotional placement.
AOL reserves the right to redesign or modify the organization,
structure, "look and feel," navigation and other elements of the AOL
Network at any time. In the event such modifications materially and
adversely affect any specific Promotion, AOL will work with MP to
provide MP, as its sole remedy, a comparable promotional placement.
The promotions described on Exhibit A and any comparable promotions
provided herein shall be referred to as the "Promotions."
1.2 IMPRESSIONS COMMITMENT. During the Term, AOL shall deliver up to [***]
Impressions to MP through the Promotions (the "Impressions
Commitment"). With respect to the Impressions Commitment, AOL will
not be obligated to provide in excess of any Impressions target
amounts (as specified on Exhibit A) in any year. In the event AOL
provides an excess of Impressions in any year, the annual Impressions
target for the subsequent year will be reduced by the amount of such
windfall. Any shortfall in Impressions at the end of a year will not
be deemed a breach of the Agreement by AOL; instead such shortfall
will be added to the Impressions target for the subsequent year. In
the event there is (or will be in AOL's reasonable judgment) a
shortfall in Impressions as of the end of the Initial Term (a "Final
Shortfall"), as MP's sole remedy, AOL will either (i) continue to
provide MP with Integrated Promotions until such time as the
Impressions which comprise the Final Shortfall are delivered or (ii)
provide MP with targeted advertising placements on the AOL Network
which have a total value, based on AOL's then-current advertising
rate card, equal to the value of the Final Shortfall (determined by
multiplying the percentage of Impressions that were not delivered by
the total guaranteed payment provided for below). In the event that
at any point during the Term, Site Revenues generated by MP
hereunder shall exceed the Aggregate Revenue Threshold, the entire
Impressions Commitment will be deemed satisfied; provided, however,
that AOL shall continue to provide MP with all integrated Promotions
as provided on Exhibit A until the expiration of the Initial Term.
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1.3 CONTENT OF PROMOTIONS. Promotions for MP will link only to the
Affiliated MP Site and will promote only the Premier Product. The
specific MP Content to be contained within the Promotions
(including, without limitation, advertising banners and contextual
promotions) (the "Promo Content") will be determined by MP, subject
to AOL's technical limitations, the terms of this Agreement and
AOL's then-applicable policies relating to advertising and
promotions. MP will submit in advance to AOL for its review a
quarterly online marketing plan with respect to the Affiliated MP
Site. The Parties will meet in person or by telephone at least
monthly to review operations and performance hereunder, including a
review of the Promo Content to ensure that it is designed to
maximize performance. MP will consistently update the Promo Content
no less than twice per week. Except to the extent expressly
described herein, the specific form, placement, duration and nature
of the Promotions will be as determined by AOL in its reasonable
editorial discretion (consistent with the editorial composition of
the applicable screens).
1.4. MP PROMOTION OF AFFILIATED MP SITE AND AOL. As set forth in fuller
detail in Exhibit C, MP will promote AOL as its preferred
Interactive Service and will promote the availability of the
Affiliated MP Site through the AOL Network. MP will not implement or
authorize any promotion similar in any respect (including, without
limitation, in scope, purpose, amount, prominence or regularity) to
the promotion required or provided pursuant to Exhibit C for any
other Interactive Service.
2. AFFILIATED MP SITE.
2.1 CONTENT. MP will make available through the Affiliated MP Site the
comprehensive offering of Products and other related Content
described on Exhibit D. Except as mutually agreed in writing by the
Parties, the Affiliated MP Site will contain only Content that is
directly related to the Products listed on Exhibit D and will not
contain any third-party products, services, programming or other
Content. All sales of Products through the Affiliated MP Site will
be conducted through a direct sales format; MP will not promote,
sell, offer or otherwise distribute any products through any format
other than a direct sales format (e.g., through an auction or club
format) without the prior written consent of AOL. Notwithstanding
the foregoing, MP shall have the right to offer or distribute
products through an auction format so long as the availability of
an auction format for the purchase of products on the Affiliated MP
Site is promoted by MP at least two (2) clicks away from the AOL
Service and the products made available through an auction format
shall be subject to the prior written approval of AOL. MP will
review, delete, edit, create, update and otherwise manage all
Content available on or through the Affiliated MP Site in
accordance with the terms of this Agreement. MP will ensure that
the Affiliated MP Site does not in any respect promote, advertise,
market or distribute the products, services or content of any other
Interactive Service or any entity reasonably construed to be in
competition with AOL or any third party with which AOL has an
exclusivity or premier arrangement.
2.2 PRODUCTION WORK. Except as agreed to in writing by the Parties
pursuant to the "Production Work" section of the Standard Online
Commerce Terms & Conditions attached hereto as Exhibit F, MP will
be responsible for all production work associated with the
Affiliated MP Site, including all related costs and expenses.
2.3 TECHNOLOGY. MP will take all reasonable steps necessary to conform
its promotion and sale of Products through the Affiliated MP Site
to the then-existing technologies identified by AOL which are
optimized for the AOL Service. Additionally, MP shall have the
right to make available to AOL users (i) "streaming audio or video"
or any comparable audio or video delivery technology and (ii) "wav"
files, "mpeg" files or other downloadable, nonstreamed audio or
video files through any linked pages of the Affiliated MP Site;
provided that, MP shall not make available any full length Video
Products or any substantial portion thereof on the AOL Network,
through the products described in either clause (i) or (ii)
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above, and (b) if MP's provision of the foregoing products result
in an increase in AOL's network costs, AOL shall have the right to
restrict MP's offering of the foregoing and the Parties shall
renegotiate the economic terms of this Agreement. AOL will be
entitled to require reasonable changes to the Content (including,
without limitation, the features or functionality) within any linked
pages of the Affiliated MP Site to the extent such Content will, in
AOL's good faith judgment, adversely affect any operational aspect of
the AOL Network. AOL reserves the right to review and test the
Affiliated MP Site from time to time to determine whether the site is
compatible with AOL's then-available client and host software and the
AOL Network.
2.4 PRODUCT OFFERING. MP will ensure that the Affiliated MP Site
includes all of the Products and other Content (including, without
limitation, any features, offers, contests, functionality or
technology) that are then made available by or on behalf of MP through
any Additional MP Channel; provided, however, that (i) such inclusion
will not be required where it is commercially or technically
impractical to either Party (i.e., inclusion would cause either Party
to incur substantial incremental costs); and (ii) the specific changes
in scope, nature and/or offerings required by such inclusion will be
subject to AOL's review and approval and the terms of this Agreement.
2.5 PRICING AND TERMS. MP will ensure that: (i) the prices (and any other
required consideration) for Products in the Affiliated MP Site do
not exceed the prices for the Products or substantially similar
Products offered by or on behalf of MP through any Additional MP
Channel; (ii) the terms and conditions related to Products in the
Affiliated MP Site are no less favorable in any respect to the
terms and conditions for the Products or substantially similar
Products offered by or on behalf of MP through any Additional MP
Channel; and (iii) both the prices and the terms and conditions
related to Products in the Affiliated MP Site are reasonably
competitive in all material respects with the prices and terms and
conditions for the Products or substantially similar Products
offered by any MP Competitor through any Interactive Site.
2.6 SPECIAL OFFERS. MP will (i) use best efforts to promote through the
Affiliated MP Site any special or promotional offers made available
by or on behalf of MP through any Additional MP Channel and (ii)
promote through the Affiliated MP Site on a regular and consistent
basis special offers exclusively available to AOL Members and/or
AOL Users ((i) and (ii) collectively, the "Special Offers"). MP
will provide AOL with reasonable prior notice of Special Offers so
that AOL can market the availability of such Special Offers in the
manner AOL deems appropriate in its editorial discretion, subject
to the terms and conditions hereof.
2.7 OPERATING STANDARDS. MP will ensure that the Affiliated MP Site
complies at all times with the standards set forth in Exhibit E. To
the extent site standards are not established in Exhibit E with
respect to any aspect or portion of the Affiliated MP Site (or the
Products or other Content contained therein), MP will provide such
aspect of portion at a level of accuracy, quality, completeness,
and timeliness which meets or exceeds prevailing standards in the
video sale and rental industry. In the event MP fails to comply
with any material terms of this Agreement or any Exhibit attached
hereto, AOL will have the right (in addition to any other remedies
available to AOL hereunder) to decrease the promotion it provides
to MP hereunder (and to decrease or cease any other contractual
obligation hereunder) until such time as MP corrects its
non-compliance (and in such event, AOL will be relieved of the
proportionate amount of any promotional commitment made to MP by
AOL hereunder corresponding to such decrease in promotion) and (b)
any revenue threshold(s) set forth in Section 4 will each be
adjusted proportionately to correspond to such decrease in
promotion and other obligations during the period of
non-compliance. In the event that AOL decreases the promotions it
provides to MP hereunder, AOL shall promptly provide MP with notice
thereof.
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2.8 ADVERTISING SALES. MP shall have the right to sell promotions,
advertisements, links, pointers or similar services or rights
through the Affiliated MP Site ("Advertisements"). The specific
advertising inventory within the Affiliated MP Site will be as
reasonably determined by MP. Notwithstanding the foregoing, in the
event that MP desires to retain a third party to sell advertising
in the Affiliated MP Site on behalf of MP, MP shall first offer to
AOL the right to sell such Advertisements on behalf of MP on terms
and conditions that are no less favorable than those offered to any
third party. MP and AOL shall share the revenues derived from the
sale of Advertisements in the Affiliated MP Site pursuant to Section
4.3 hereof. All Advertisements in the Affiliated MP Site shall be
subject to AOL's then-applicable advertising policies,
exclusivities and prior approval.
2.9 TRAFFIC FLOW. MP will take reasonable efforts to ensure that AOL
traffic is either kept within the Affiliated MP Site or channeled
back into the AOL Network (with the exception of advertising links
sold and implemented pursuant to the Agreement). The Parties will
work together on implementing mutually acceptable links from the
Affiliated MP Site back to the AOL Service.
3. PREMIER STATUS.
3.1 PREMIER PRODUCT. Provided MP is in compliance with all material terms
of this Agreement, during the Initial Term, MP will be one of only
two third-party resellers of Premier Products (each a "Premier
Video Partner") expressly promoted by AOL in the specific manner
and on the specific screens of the AOL Service designated as
"Premier Screens" as provided on Exhibit A attached hereto.
3.2 EXCEPTIONS. Notwithstanding anything to the contrary contained in
this Section 3 (and without limiting any actions which may be taken
by AOL without violation of MP's rights hereunder), no provision of
this Agreement will limit AOL's ability (on or off the AOL Network)
to: (i) undertake activities or perform duties pursuant to existing
arrangements with third parties (or pursuant to any agreements to
which AOL becomes a party subsequent to the Effective Date as a
result of a Change of Control, assignment, merger, acquisition or
other similar transaction); (ii) sell advertisement placements
(e.g. banners, buttons, links, sponsorships), including standard
placements in any shopping area or channel; (iii) sell
advertisement placements to any video club, motion picture,
television or film studio or any entity which creates films,
television programs, or motion picture theatrical productions; (iv)
sell advertisement placements to any reseller of Video Products,
provided that, except for the other Premier Video Partner, such
promotions or advertisements cannot promote any online transactions
in connection with Video Products or link to a web site which
offers online transactions in connection with Video Products; (v)
enter into an arrangement with any third party for the primary
purpose of acquiring AOL Members whereby such party is allowed to
promote or market products or services to AOL Members that are
acquired as a result of such agreement; (vi) create contextual
links or editorial commentary relating to any third party marketer
of the Premier Product; or (vii) promote, advertise or distribute
the products of any third party which is an aggregator of products
(i.e., it is primarily engaged in activities other than marketing
Video Products) (each an "Aggregator"); provided that such
promotions do not expressly promote an Aggregator's Premier Product
within the Premier Screens.
3.3 PRODUCT OFFER RIGHT. In the event that MP does not offer certain Video
Products through the Affiliated MP Site, and if AOL, in its
reasonable judgment, determines that the offering of such Video
Products is important to a good AOL User experience, MP shall have
thirty (30) days after notice from AOL to provide such Video
Products in the MP Affiliated Site, and if within such thirty (30)
day period MP is unable to provide such Video Products, AOL shall
have the right to engage other third parties to provide such Video
Products.
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4. PAYMENTS.
4.1. GUARANTEED AOL SERVICE PAYMENTS. Subject to the
provisions of Section 4.2 hereof, MP will pay AOL a
non-refundable guaranteed payment of Fifteen Million
Dollars (US $15,000,000) as follows:
(i) [***]
(ii) [***] on or prior to each of [***]
(iii) [***] on or prior to each of [***] and
(iv) [***] on or prior to each of [***]
4.2. ACCELERATION OF PAYMENTS. (i) If a Financing Event shall
occur at any time prior to the [***] any payments due to
AOL pursuant to Section 4.1(i) or (ii) which have not yet
been paid shall immediately accelerate and shall be due
and payable within five (5) days of the occurrence of the
Financing Event, provided, however, that if the Financing
Event results in proceeds to MP of less than [***] (a
"Minor Financing Event"), then the portion of the
payments due pursuant to Section 4.1(i) or (ii) which
shall be accelerated, shall be equal to [***] of the
proceeds received in the Minor Financing Event, and the
remainder of the payments due pursuant to Section 4.1(i)
or (ii) (to the extent any shall remain) shall be paid on
the date(s) specified in Section 4.1(i) and (ii), or (ii)
if a Major Financing Event shall occur, and such Major
Financing Event occurs (a) prior to the [***] then
(x) any payments due to AOL pursuant to Section 4.1(i) or
(ii) which have not yet been paid shall immediately
accelerate and shall be due and payable within five (5)
days of the occurrence of the Major Financing Event and
(y), the payments provided for in Section 4.1(iii)(b)
shall immediately accelerate and MP shall pay AOL a total
of [***] on the [***] or (b) after the [***] but prior to
the [***] then the payments required pursuant to Section
4.1(iii)(b) shall immediately accelerate and MP shall
make such payments to AOL within five (5) days of the
occurrence of the Major Financing Event.
4.3. SHARING OF TRANSACTION REVENUES. If at any time during
the Term, (i) quarterly Site Revenues shall exceed [***]
(the "First Quarterly Hurdle") but is less than [***]
(the "Second Quarterly Hurdle"), MP shall pay to AOL an
amount equal to [***] of the Transaction Revenues derived
by MP between the First Quarterly Hurdle and the Second
Quarterly Hurdle or (ii) quarterly Site Revenues shall
exceed the Second Quarterly Hurdle, MP shall pay to AOL
an amount equal to [***] of Transaction Revenues derived
by MP after the Second Quarterly Hurdle has been met.
Notwithstanding the foregoing, if aggregate annual Site
Revenues shall exceed (a) [***] (the "First Annual
Hurdle") but is less than [***] (the "Second Annual
Hurdle"), MP shall pay AOL an amount equal to [***] of
the Transaction Revenues derived by MP between the First
Annual Hurdle and the Second Annual Hurdle or (b) the
Second Annual Hurdle, MP shall pay to AOL an amount equal
to [***] of the Transaction Revenues derived by MP after
the Second Annual Hurdle is met. MP will pay all of the
foregoing amounts to AOL within thirty (30) days
following the end of the quarter in which the applicable
Transaction Revenues were generated.
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4.4. SHARING OF ADVERTISING REVENUES. MP shall pay AOL an
amount equal to [***] of all Advertising Revenues
generated hereunder. MP shall make the foregoing payments
to AOL on a quarterly basis within thirty (30) days
following the end of the quarter in which such amounts
were generated by MP.
4.5. PAYMENTS ON RENEWAL/EXPIRATION. Pursuant to Section 6.2
hereof, upon renewal or expiration of this Agreement (as
the case may be), MP will pay to AOL either (i) a
percentage of Transaction Revenues that is equal to the
most favorable percentage of Transaction Revenues paid by
MP to any other third party that enters into a similar
marketing arrangement with MP (provided that such amount
does not exceed, in any given year, twenty five percent
(25%) of MP's gross margins as reported by MP from time
in MP's audited financial statements) and an amount equal
to [***] of Advertising Revenues (the "Renewal Revenue
Share") or (ii) the Renewal Revenue Share less amounts
derived by MP from AOL Purchasers acquired during the
Initial Term.
4.6. ALTERNATIVE REVENUE STREAMS. In the event MP or any of
its affiliates (a) receives or desires to receive,
directly or indirectly, any compensation in connection
with the Affiliated MP Site other than Site Revenues (an
"Alternative Revenue Stream"), MP will promptly inform
AOL in writing, and the Parties will negotiate in good
faith regarding whether MP will be allowed to market
Products producing such Alternative Revenue Stream
through the Affiliated MP Site, and if so, the equitable
portion of revenues from such Alternative Revenue Stream
(if applicable) that will be shared with AOL (in no event
less than the percentage of Transaction Revenues to be
paid to AOL pursuant to this Section 4).
4.7. LATE PAYMENTS; WIRED PAYMENTS. All amounts owed hereunder
not paid when due and payable will bear interest from the
date such amounts are due and payable at the prime rate
in effect at such time. All payments required hereunder
will be paid in immediately available, non-refundable US
funds wired to the "America Online" account, Account
Number 323070752 at The Chase Manhattan Bank, 1 Chase
Manhattan Plaza, New York, NY 10081 (ABA: 021000021).
4.8. AUDITING RIGHTS. MP will maintain complete, clear and
accurate records of all expenses, revenues and fees in
connection with the performance of this Agreement. For
the sole purpose of ensuring compliance with this
Agreement, AOL will have the right, at its expense, to
direct an independent certified public accounting firm to
conduct a reasonable and necessary inspection of portions
of the books and records of MP which are relevant to MP's
performance pursuant to this Agreement. Any such audit
may be conducted after twenty (20) business days prior
written notice only once during any twelve (12) month
period.
4.9. TAXES. MP will collect and pay and indemnify and hold AOL
harmless from, any sales, use, excise, import or export
value added or similar tax or duty not based on AOL's net
income, including any penalties and interest, as well as
any costs associated with the collection or withholding
thereof, including attorneys' fees.
4.10. REPORTS.
4.10.1. SALES REPORTS. MP will provide AOL in an
automated manner with a monthly report in an
AOL-designated format, detailing the following
activity in such period (and any other
information mutually agreed upon by the Parties
or reasonably required for measuring revenue
activity by MP through the Affiliated MP Site):
(i) summary sales information by day (date,
number of Products, number of orders, total
Transaction Revenues); and (ii) detailed sales
information (order data/timestamp (if
technically feasible), purchaser name and
screenname, SKU or Product description) (in
information in clauses (i) and (ii), "Sales
Reports"). AOL will be entitled to use the
Sales Reports in its business operations,
subject to
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the terms of this Agreement. More generally,
each payment to be made by MP pursuant to this
Section 4 will be accompanied by a report
containing information which supports the
payment, including information identifying (i)
gross Transaction Revenues and all items
deducted or excluded from gross Transaction
Revenues to produce Transaction Revenues,
including, without limitation, chargebacks and
credits for returned or canceled goods or
services (and, where possible, an explanation
of the type of reason therefor, e.g., bad
credit card information, poor customer service,
etc.) and (ii) any applicable Advertising
Revenues. AOL shall provide MP with standard
monthly usage information related to the
Promotions (e.g. a schedule of the Impressions
delivered by AOL at such time) which are similar
in substance and form to the reports provided
by AOL to other interactive marketing partners
similar to MP.
4.10.2. FRAUDULENT TRANSACTIONS. To the extent
permitted by applicable laws, MP will provide
AOL with an prompt report of any fraudulent
order, including the date, screenname or email
address and amount associated with such order,
promptly following MP obtaining knowledge that
the order is, in fact, fraudulent.
5. WARRANTS. In connection with the obligations of the Parties
hereunder, and subject to the provisions hereof, MP shall enter
into the Common Stock Subscription Warrant Agreement substantially
in the form of Exhibit H attached hereto (the "Warrant Agreement").
Provided, however, that in the event MP shall not have entered into
the Warrant Agreement within sixty (60) days after the execution
date hereof, AOL shall not be required to perform its obligations
hereunder.
6. TERM; RENEWAL; TERMINATION.
6.1. TERM. Unless earlier terminated as set forth herein, the
initial term of this Agreement will be thirty eight (38)
months from the Effective Date (the "Initial Term").
6.2. RENEWAL. Upon conclusion of the initial term of this
Agreement, AOL will have the right to renew the Agreement
for successive one-year renewal terms (each a "Renewal
Term" and together with the Initial Term, the "Term").
During any such Renewal Term: (i) MP will not be required
to pay any guaranteed, fixed payment or perform the
cross-promotional obligations specified in Section 1;
and (ii) AOL will not be required to provide MP with
prominent promotional placements as described on Exhibit
A; provided that (iii) for so long as AOL may elect to
continue to provide MP with prominent promotional
placements (including permanent placements in video
related and shopping areas) during a Renewal Term, MP will
continue to perform its cross-promotional obligations and
MP will pay to AOL the payments provided for pursuant to
Section 4.4(i) hereof. In the event that AOL does not
elect to continue to provide MP with prominent promotional
placements, then MP will pay to AOL the payments provided
for in Section 4.4(ii) hereof. A Renewal Term shall
automatically commence following the expiration of the
Initial Term (or prior Renewal Term, as the case may be),
provided that AOL shall be entitled to terminate any such
Renewal Term with thirty (30) days prior written notice
to MP.
6.3. EXPIRATION OF TERM. Upon expiration of the Initial Term
or the Term, as the case may be, AOL shall have the right
to promote one or more "pointers" or links from the AOL
Network to the Affiliated MP Site or, at MP's option, to
an MP Interactive Site selling products substantially
similar to the MP products, and use MP's tradenames,
trademarks and service marks in connection with such
promotion. In such event, MP shall make the payments
provided for in Section 4.4(ii) hereof, and the Parties
will continue to be bound by the legal provisions of
Exhibit G attached hereto.
6.4. TERMINATION FOR BREACH. Except as expressly provided
elsewhere in this Agreement, either Party may terminate
this Agreement at any time in the event of a material
breach of
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the Agreement by the other Party which remains uncured
after thirty (30) days written notice thereof to the
other Party (or such shorter period as may be specified
elsewhere in this Agreement); provided that AOL will not
be required to provide notice to MP in connection with
MP's failure to make any payment to AOL required
hereunder, and the cure period with respect to any
scheduled payment will be fifteen (15) days from the date
for such payment provided for herein. Notwithstanding the
foregoing, in the event of a material breach of a
provision that expressly requires action to be completed
within an express period shorter than 30 days, either
Party may terminate this Agreement if the breach remains
uncured after written notice thereof to the other Party.
6.5. TERMINATION FOR BANKRUPTCY/INSOLVENCY. Either Party may
terminate this Agreement immediately following written
notice to the other Party if the other Party (i) ceases
to do business in the normal course, (ii) becomes or is
declared insolvent or bankrupt, (iii) is the subject of
any proceeding related to its liquidation or insolvency
(whether voluntary or involuntary) which is not dismissed
within (90) calendar days or (iv) makes an assignment for
the benefit of creditors.
6.6. TERMINATION ON CHANGE OF CONTROL. In the event of (i) a
Change of Control of MP resulting in control of MP by an
Interactive Service or (ii) a Change of Control of AOL,
AOL may terminate this Agreement by providing thirty (30)
days prior written notice of such intent to terminate.
6.7. EARLY TERMINATION RIGHT. Notwithstanding anything to the
contrary contained herein, AOL shall have the right to
cancel this Agreement by providing MP with no less than
thirty (30) days written notice, on the one (1) year
anniversary of the Effective Date. In the event that AOL
exercises its termination right pursuant to this Section
6.7, and provided that MP shall not have generated
Transaction Revenues in excess of [***] as of the
termination date, then AOL shall pay to MP [***] within
thirty (30) days after the termination becomes effective,
and MP shall not be required to make the payments
provided for in Sections 4.1(iv)(b) and 4.1(v).
7. MANAGEMENT COMMITTEE/ARBITRATION.
7.1. MANAGEMENT COMMITTEE. The Parties will act in good faith
and use commercially reasonable efforts to promptly
resolve any dispute, claim, controversy or disagreement
(each a "Dispute") between the Parties or any of their
respective subsidiaries, affiliates, successors and
assigns under or related to this Agreement or any
document executed pursuant to this Agreement or any of
the transactions contemplated hereby. If the Parties
cannot resolve the Dispute within such time frame, the
Dispute will be submitted to the Management Committee for
resolution. For ten (10) days following submission of the
Dispute to the Management Committee, the Management
Committee will have the exclusive right to resolve such
Dispute; provided further that the Management Committee
will have the final and exclusive right to resolve
Disputes arising from any provision of the Agreement
which expressly or implicitly provides for the Parties to
reach mutual agreement as to certain terms. If the
Management Committee is unable to amicably resolve the
Dispute during the ten-day period, the the Management
Committee will consider in good faith the possibility of
retaining a third party mediator to facilitate resolution
of the Dispute. In the event the Management Committee
elects not to to retain a mediator, the dispute will be
subject to the resolution mechanisms described below.
"Management Committee" will mean a committee made up of a
senior executive from each of the Parties for the purpose
of resolving Disputes under this Section 7 and generally
overseeing the relationship between the Parties
contemplated by this Agreement. Neither Party will seek,
nor will be entitled to seek, binding outside resolution
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of the Dispute unless and until the Parties have been unable
amicably to resolve the Dispute as set forth in this Section 7
and then, only in compliance with the procedures set forth in
this Section 7.
7.2. ARBITRATION. Except for Disputes relating to issues of
(i) proprietary rights, including but not limited to intellectual
property and confidentiality, and (ii) any provision of the
Agreement which expressly or implicitly provides for the
Parties to reach mutual agreement as to certain terms (which
will be resolved by the Parties solely and exclusively through
amicable resolution as set forth in Section 7.1), any Dispute
not resolved by amicable resolution as set forth in Section 7.1
will be governed exclusively and finally by arbitration. Such
arbitration will be conducted by the American Arbitration
Association ("AAA") in Washington, D.C. and will be initiated
and conducted in accordance with the Commercial Arbitration
Rules ("Commercial Rules") of the AAA, including the AAA
Supplementary Procedures for Large Complex Commercial Disputes
("Complex Procedures"), as such rules will be in effect on the
date of delivery of a demand for arbitration ("Demand"), except
to the extent that such rules are inconsistent with the
provisions set forth herein. Notwithstanding the foregoing, the
Parties may agree in good faith that the Complex Procedures
will not apply in order to promote the efficient arbitration of
Disputes where the nature of the Dispute, including without
limitation the amount in controversy, does not justify the
application of such procedures.
7.3. SELECTION OF ARBITRATORS. The arbitration panel will consist
of three arbitrators. Each Party will name an arbitrator within
ten (10) days after the delivery of the Demand. The two
arbitrators named by the Parties may have prior relationships
with the naming Party, which in a judicial setting would be
considered a conflict of interest. The third arbitrator,
selected by the first two, should be a neutral participant,
with no prior working relationship with either Party. If the
two arbitrators are unable to select a third arbitrator within
ten (10) days, a third neutral arbitrator will be appointed by
the AAA from the panel of commercial arbitrators of any of the
AAA Large and Complex Resolution Programs. If a vacancy in the
arbitration panel occurs after the hearings have commenced, the
remaining arbitrator or arbitrators may not continue with the
hearing and determination of the controversy, unless the
Parties agree otherwise.
7.4. GOVERNING LAW. The Federal Arbitration Act, 9 U.S.C. Secs. 1-16,
and not state law, will govern the arbitrability of all
Disputes. The arbitrators will allow such discovery as is
appropriate to the purposes of arbitration in accomplishing a
fair, speedy and cost-effective resolution of the Disputes. The
arbitrators will reference the Federal Rules of Civil Procedure
then in effect in setting the scope and timing of discovery.
The Federal Rules of Evidence will apply in toto. The
arbitrators may enter a default decision against any Party who
fails to participate in the arbitration proceedings.
7.5. ARBITRATION AWARDS. The arbitrators will have the authority to
award compensatory damages only. Any award by the arbitrators
will be accompanied by a written opinion setting forth the
findings of fact and conclusions of law relied upon in reaching
the decision. The award rendered by the arbitrators will be
final, binding and non-appealable, and judgment upon such award
may be entered by any court of competent jurisdiction. The
Parties agree that the existence, conduct and content of any
arbitration will be kept
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confidential and no Party will disclose to any person any
information about such arbitration, except as may be required by
law or by any governmental authority or for financial reporting
purposes in each Party's financial statements.
7.6. FEES. Each Party will pay the fees of its own attorneys,
expenses of witnesses and all other expenses and costs in
connection with the presentation of such Party's case
(collectively, "Attorneys' Fees"). The remaining costs of the
arbitration, including without limitation, fees of the
arbitrators, costs of records or transcripts and administrative
fees (collectively, "Arbitration Costs") will be born equally
by the Parties. Notwithstanding the foregoing, the arbitrators
may modify the allocation of Arbitration Costs and award
Attorneys' Fees in those cases where fairness dictates a
different allocation of Arbitration Costs between the Parties
and an award of Attorneys' Fees to the prevailing Party as
determined by the arbitrators.
7.7. NON ARBITRATABLE DISPUTES. Any Dispute that is not subject to
final resolution by the Management Committee or to arbitration
under this Section 7 or by law (collectively, "Non-Arbitration
Claims") will be brought in a court of competent jurisdiction
in the Commonwealth of Virginia. Each Party irrevocably
consents to the exclusive jurisdiction of the courts of the
Commonwealth of Virginia and the federal courts situated in the
Commonwealth of Virginia, over any and all Non-Arbitration
Claims and any and all actions to enforce such claims or to
recover damages or other relief in connection with such claims.
8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
forth on Exhibit F attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit G attached hereto are each hereby made
a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. DVD EXPRESS, INC.
By: /s/ [illegible] By: /s/ Michael Dubelko
-------------------------- --------------------------
Name Name: Michael Dubelko
Title: Title: President
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EXHIBIT A
PLACEMENT/PROMOTION
AOL SERVICE, DCI, AOL INTERNATIONAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SCREEN DESCRIPTION TYPE OF PLACEMENT
------ ----------- -----------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
LEVEL 1 PROMOTIONS
- --------------------------------------------------------------------------------
1 Entertainment Channel- Permanent Branded Presence; Premier Screen*
Home Video Main (placement scheduled for 11/98)
- --------------------------------------------------------------------------------
2 Entertainment Channel, Rotational Banners
Run of Channel (Movies,
Video, etc.)
- --------------------------------------------------------------------------------
3 Network Programming- Seasonal and Holiday Premium
Seasonal/Holiday Promotional Packages; Rotational
Contextual Packages Banners
- --------------------------------------------------------------------------------
4 AOL Shopping Channel: Anchor Tenant Placement
Electronics & Video
Department
- --------------------------------------------------------------------------------
5 AOL Shopping Channel: Tenant Placement
Computing Software
Department
- --------------------------------------------------------------------------------
6 AOL Shopping Channel: Seasonal and Holiday Premium
Holiday Gift Programs Rotational Banners
- --------------------------------------------------------------------------------
7 DCI National Page Rotational placements-banners or
graphic/text integration
- --------------------------------------------------------------------------------
8 DCI Main City Level Page Rotational placements-banners or
graphic/text integration
- --------------------------------------------------------------------------------
9 DCI-Movie Guide Permanent Anchor Tenant
- --------------------------------------------------------------------------------
10 DCI Entertainment Main Rotational placements-banners or
Screens graphic/text integration
- --------------------------------------------------------------------------------
11 Sports, Lifestyles, Contextual Promotion and/or
Interests, Personal Rotational Banners
Finance, Health, Travel,
Research & Learn,
Infuluence and Games
Channels; AOL Live
- --------------------------------------------------------------------------------
12 Three (3) AOL Service Three (3) permanent Keywords for
keywords, DVD Express brand
- --------------------------------------------------------------------------------
</TABLE>
* To the extent that MP develops Content in connection with the Exclusive
Products which is satisfactory to AOL in its reasonable judgement and
discretion, AOL will provide MP with greater contextual integration of such
Content on this screen.
11
<PAGE>
AOL NETWORK (CONT'D)
<TABLE>
- --------------------------------------------------------------------------------
LEVEL 2 PROMOTIONS
- --------------------------------------------------------------------------------
<S> <C> <C>
1 People Connection: Rotational Banners in Contextually Relevent Chat
Arts and Entertainment
- --------------------------------------------------------------------------------
2 Run of Service- Rotational Banners Targeted by Key Demographic/
Demographically Psychographic Variables
Targeted Banners
- --------------------------------------------------------------------------------
3 Entertainment Channel Rotational Banners
Newsletters
- --------------------------------------------------------------------------------
4 AOL Find Placement in Products area of AOL Find
- --------------------------------------------------------------------------------
5 International (AOL Asia Placement in Entertainment and Shopping areas
and AOL Europe)
- --------------------------------------------------------------------------------
LEVEL 3 PROMOTIONS
- --------------------------------------------------------------------------------
1 Run of Service- Rotational Banners; Random Serving
General
- --------------------------------------------------------------------------------
2 Other Comparable As determined by the Parties
Promotions
- --------------------------------------------------------------------------------
TOTAL IMPRESSIONS: [ * * * ]
- --------------------------------------------------------------------------------
</TABLE>
AOL.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SCREEN DESCRIPTION
------ -----------
- --------------------------------------------------------------------------------
<S> <C> <C>
LEVEL 1 PROMOTIONS
- --------------------------------------------------------------------------------
1 AOL.com Shopping Permanent Anchor Tenant Placement (or equivalent
Channel: Books, Music, in case of redesign)
Video Department (or
equivalent case of
redesign)
- --------------------------------------------------------------------------------
2 AOL.com Shopping Tenant Placement
Channel: Computing
Software Department
- --------------------------------------------------------------------------------
3 AOL.com movies, Contextual Placement and/or Rotational Promotion
Entertainment, other
channels
- --------------------------------------------------------------------------------
4 AOL.com Keyword Entertainment Keyword Packages, Computing
Package Software keyword package
- --------------------------------------------------------------------------------
LEVEL 2 PROMOTIONS
- --------------------------------------------------------------------------------
1 AOL.com Home Page Banner on Home Page
- --------------------------------------------------------------------------------
2 Other Comparable As determined by the Parties
Broad Reach
Promotions
- --------------------------------------------------------------------------------
TOTAL IMPRESSIONS [ * * * ]
- --------------------------------------------------------------------------------
BONUS IMPRESSIONS POOL
- --------------------------------------------------------------------------------
LEVEL 1 PROMOTIONS [ * * * ]
- --------------------------------------------------------------------------------
OR
- --------------------------------------------------------------------------------
LEVEL 2 PROMOTIONS [ * * * ]
- --------------------------------------------------------------------------------
OR
- --------------------------------------------------------------------------------
LEVEL 3 PROMOTIONS [ * * * ]
- --------------------------------------------------------------------------------
</TABLE>
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
12
<PAGE>
During the first year of the Initial Term, AOL shall have the right, in its
sole discretion, to provide MP with the foregoing "bonus" Impressions in the
manner specified above and the Impressions Commitment will be adjusted
accordingly.
<TABLE>
ESTIMATED AGGREGATE
ANNUAL IMPRESSIONS
TARGETS
<C> <C>
Year 1 [***]
Year 2 [***]
Year 3 [***]
TOTAL [***]
</TABLE>
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
13
<PAGE>
EXHIBIT B
DEFINITIONS
The following definitions will apply to this Agreement:
ADDITIONAL MP CHANNEL. Any other distribution channel (e.g., an Interactive
Service other than AOL) through which MP makes available an offering
comparable in nature to the Affiliated MP Site.
ADVERTISING REVENUES. The combination of AOL Advertising Revenues and
Internet Advertising Revenues:
AOL ADVERTISING REVENUES. Aggregate amounts collected plus the fair
market value of any other compensation received (such as barter
advertising) by MP, AOL or either Party's agents, as the case may be,
arising from the license or sale of advertisements, promotions, links or
sponsorships ("Advertisements") that appear within any pages of the
Affiliated MP Site which may be exclusively available to AOL Users, less
applicable Advertising Sales Commissions. AOL Advertising Revenues does
not include amounts arising from Advertisements on any screens or forms
preceding, framing or otherwise directly associated with the Affiliated
MP Site, which will be sold exclusively by AOL.
INTERNET ADVERTISING REVENUES. For each Advertisement on a page of the
Affiliated MP Site or any MP Interactive Site which is not exclusively
available to AOL Users, the product of : (a) the amount collected plus
the fair market value of any other compensation received (such as barter
advertising) by MP or its agents arising from the license or sale of
such Advertisement attributable to a given period of time less
applicable Advertising Sales Commissions and (b) the quotient of (i)
Impressions on the page containing such Advertisement by AOL Users for
such period of time divided by (ii) total Impressions on the page
containing such Advertisement by all users for such period of time (the
"Internet Advertising Quotient") (or such other percentage or formula as
is mutually agreed upon in writing by the Parties). MP will be
responsible for calculating the Internet Advertising Quotient related to
Internet Advertising Revenues. For any period during which MP fails to
calculate the Internet Advertising Quotient (other than as a sole result
of AOL's failure to provide necessary Impressions information), such
quotient will be deemed to be one hundred percent (100%).
ADVERTISING SALES COMMISSION. (i) Actual amounts paid as commission to third
party agencies by either buyer or seller in connection with sale of the
Advertisement or (ii) [***] in the event the Party has sold the Advertisement
directly and will not be deducting any third party agency commissions.
AFFILIATED MP SITE. The specific MP Interactive Site to be promoted and
distributed by AOL hereunder through which MP can market and complete
transactions regarding its Products.
AGGREGATE REVENUE THRESHOLD. Site Revenues generated by MP hereunder equal to
[***].
AOL INTERACTIVE SITE. Any Interactive Site which is managed, maintained,
owned or controlled by AOL or its agents.
AOL LOOK AND FEEL. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally
associated with Interactive Sites within the AOL Service or AOL.com.
AOL MEMBER. Any authorized user of the AOL Service, including any
sub-accounts using the AOL Service under an authorized master account.
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
14
<PAGE>
AOL NETWORK. (i) The AOL Service, (ii) AOL.com and (iii) any other product or
service owned, operated, distributed or authorized to be distributed by or
through AOL or its affiliates worldwide (and including those properties
excluded from the definitions of the AOL Service or AOL.com). It is
understood and agreed that the rights of MP relate only to the AOL Service
and AOL.com and not generally to the AOL Network.
AOL PURCHASER. (i) Any person or entity who enters the Affiliated MP Site
from the AOL Network including, without limitation, from any third party area
therein (to the extent entry from such third party area is traceable through
both Parties' commercially reasonable efforts), and generates Transaction
Revenues (regardless of whether such person or entity provides an e-mail
address during registration or entrance to the Affiliated MP Site which
includes a domain other than an "AOL.com" domain); and (ii) any other person
or entity who, when purchasing a product, good or service through an MP
Interactive Site, provides an AOL.com domain name as part of such person or
entity's e-mail address; provided that any person or entity who has
previously satisfied the definition of AOL Purchaser will remain an AOL
Purchaser, and any subsequent purchases by such person or entity will also
give rise to Transaction Revenues hereunder (and will not be conditioned on
the person or entity's satisfaction of clauses (i) or (ii) above).
AOL SERVICE. The standard narrow-band U.S. version of the America
Online-Registered Trademark- brand service, specifically excluding (a)
AOL.com or any other AOL Interactive Site, (b) the international versions of
an America Online service (e.g., AOL Japan), (c) "ICQ," "AOL NetFind-TM-,"
"AOL Instant Messenger-TM-," "Digital Cities,"NetMail-TM-," "Electra",
"Thrive", "Real Fans", "Love@AOL", "Entertainment Asylum" or any similar
independent product, service or property which may be offered by, through or
with the U.S. version of the America Online-Registered Trademark- brand
service, (d) any programming or Content area offered by or through the U.S.
version of the America Online-Registered Trademark- brand service over which
AOL does not exercise complete operational control (including, without
limitation, Content areas controlled by other parties and member-created
Content areas), (e) any yellow pages, white pages, classifieds or other search,
directory or review services or Content offered by or through the U.S. version
of the America Online-Registered Trademark- brand service, (f) any property,
feature, product or service which AOL or its affiliates may acquire subsequent
to the Effective Date and (g) any other version of an America Online service
which is materially different from the standard narrow-band U.S. version of the
America Online brand service, by virtue of its branding, distribution,
functionality, Content and services, including, without limitation, any
co-branded version of the service and any version distributed through any
broadband distribution platform or through any platform or device other than a
desktop personal computer.
AOL USER. Any user of the AOL Service, AOL.com or the AOL Network.
AOL.com. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM-TM-" brand, specifically excluding (a) the AOL Service, (b) any
international versions of such site, (c) "ICQ, "AOL NetFind-TM-," "AOL
Instant Messenger-TM-,"NetMail-TM-" or any similar independent product or
service offered by or through such site or any other AOL Interactive Site,
(d) any programming or Content area offered by or through such site over
which AOL does not exercise complete operational control (including, without
limitation, Content areas controlled by other parties and member-created
Content areas), (e) any programming or Content area offered by or through the
U.S. version of the America Online-Registered Trademark- brand service which
was operated, maintained or controlled by the former AOL Studios division
(e.g., Electra), (f) any yellow pages, white pages, classifieds or other
search, directory or review services or Content offered by or through such
site or any other AOL Interactive Site, (g) any property, feature, product or
service which AOL or its affiliates may acquire subsequent to the Effective
Date and (h) any other version of an America Online Interactive Site which is
materially different from AOL's primary Internet-based Interactive Site
marketed under the "AOL.COM-TM-" brand, by virtue of its branding,
distribution, functionality, Content and services, including, without
limitation, any co-branded versions and any version distributed through any
broadband distribution platform or through any platform or device other than
a desktop personal computer.
CHANGE OF CONTROL. (a) The consummation of a reorganization, merger or
consolidation or sale or other disposition of substantially all of the assets
of a party; or (b) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1933, as amended) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under such Act) or more
15
<PAGE>
than 50% of either (i) the then outstanding shares of common stock of such
party; or (ii) the combined voting power of the then outstanding voting
securities of such party entitled to vote generally in the election of
directors.
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not
limited to, the material terms of this Agreement, information about AOL
Members, AOL Users, AOL Purchasers and MP customers, technical processes and
formulas, source codes, product designs, sales, cost and other unpublished
financial information, product and business plans, projections, and marketing
data. "Confidential Information" will not include information (a) already
lawfully known to or independently developed by the receiving Party, (b)
disclosed in published materials, (c) generally known to the public, or (d)
lawfully obtained from any third party.
CONTENT. Text, images, video, audio (including, without limitation, music
used in synchronism or timed relation with visual displays) and other data,
Products, advertisements, promotions, links, pointers and software, including
any modification, upgrades, updates, enhancements and related documentation.
DCI. Local interactive consumer content and services for particular
metropolitan or other local areas in the United States which is developed,
assembled, packaged and marketed by Digital City, Inc.
FINANCING EVENT. At any time after the Effective Date, the receipt by MP, in
a single transaction or series of related transactions, of funding of at
least [***] but less than [***].
IMPRESSION. User exposure to the applicable Promotion, as such exposure may
be reasonably determined and measured by AOL in accordance with its standard
methodologies and protocols.
INTERACTIVE SERVICE. An entity offering one or more of the following: (i)
online or Internet connectivity services (e.g., an Internet service
provider); (ii) a broad selection of aggregated third party interactive
content (or navigation thereto) (e.g., an online service or search and
directory service); (iii) communications software capable of serving as the
principal means through which a user creates, sends and receives electronic
mail or real time online messages.
INTERACTIVE SITE. Any interactive site or area, including, by way of example
and without limitation, (i) an MP site on the World Wide Web portion of the
Internet or (ii) a channel or area delivered through a "push" product such as
the Pointcast Network or interactive environment such as Microsoft's Active
Desktop.
KEYWORD SEARCH TERMS. The Keyword-TM- online search terms made available on
the AOL Service for use by AOL Members, combining AOL's Keyword-TM- online
search modifier with a term or phrase specifically related to MP (and
determined in accordance with the terms of this Agreement).
LICENSED CONTENT. All Content offered through the Affiliated MP Site pursuant
to this Agreement or otherwise provided by MP or its agents in connection
herewith (e.g., offline or online promotional Content, Promotions, AOL
"slideshows", etc.), including in each case, any modifications, upgrades,
updates, enhancements, and related documentation.
MAJOR FINANCING EVENT. At any time after the Effective Date, the occurrence
of either (i) the receipt by MP, in a single transaction or series of related
transactions, of funding of at least [***] or (ii) the receipt of funding by MP
as a result of the initial public offering of securities of MP pursuant to an
effective registration statement under the Securities Act of 1993, as amended
MP INTERACTIVE SITE. Any Interactive Site (other than the Affiliated MP Site)
which is managed, maintained, owned or controlled by MP or its agents.
PREMIER PRODUCTS. Consumer movies and other consumer oriented video content
delivered in fixed media formats (including, without limitation, VHS
cassettes, digital video disks, DIVX and laserdiscs,
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
16
<PAGE>
("Video Products"), specifically excluding, however, (i) music audio
entertainment products, (ii) any form of computer software (e.g. games and
entertainment programs) and (iii) any movie or video content or other
products distributed or delivered through an electronic data transfer format.
PRODUCT. Any product, good or service which MP (or others acting on its
behalf or as distributors) offers, sells, provides, distributes or licenses
to AOL Users directly or indirectly through (i) the Affiliated MP Site
(including through any Interactive Site linked thereto), (ii) any other
electronic means directed at AOL Users (e.g., e-mail offers), or (iii) an
"offline" means (e.g., toll-free number) for receiving orders related to
specific offers within the Affiliated MP Site requiring purchasers to
reference a specific promotional identifier or tracking code, including,
without limitation, products sold through surcharged downloads (to the extent
expressly permitted hereunder).
SITE REVENUES. The combination of Transaction Revenues and Advertising
Revenues.
TRANSACTION REVENUES. Aggregate amounts paid by AOL Purchasers in connection
with the sale, licensing, distribution or provision of any Products,
including, in each case, service charges, and excluding, in each case, (a)
amounts collected for sales or use taxes or duties and (b) credit card
processing fees and shipping and handling charges (provided that, if these
charges represent (at any time during the Term) a source of profit for MP,
such charges will be included in the definition of Transaction Revenues),
credits and chargebacks for returned or canceled goods or services, but not
excluding cost of goods sold or any similar cost.
17
<PAGE>
EXHIBIT C
MPA CROSS-PROMOTION
A. Within each MP Interactive Site, MP shall include the following (the "AOL
Promo"): a prominent promotional banner (at least 90 x 30 in size)
appearing on the first screen of the MP Interactive Site, to promote such
AOL products or services as AOL may designate (for example, the America
Online-Registered Trademark- brand service, the CompuServe-Registered
Trademark- brand service, the AOL.com-Registered Trademark- site, any of
the Digital City-Registered Trademark- services or the AOL Instant
Messenger-TM- service). AOL, in consultation with MP, will provide the
creative content to be used in the AOL Promo (including designation of
links from such content to other content pages). MP shall post (or
update, as the case may be) the creative content supplied by AOL within
the spaces for the AOL Promos within five days of its receipt of such
content from AOL. Without limiting any other reporting obligations of the
Parties contained herein, MP shall provide AOL with monthly written
reports specifying the number of Impressions to the pages containing the
AOL Promo during the prior month. In addition, within each MP Interactive
Site, MP shall provide prominent promotion for the keywords associated
with MP's Online Area and links from the MP Interactive Site to the
relevant topic areas on AOL's AOL.com site. In connection with the
foregoing, AOL will pay MP a standard bounty fee for any new subscribers
to the AOL Service who subscribe to the AOL Service through the AOL Promo.
B. In MP's television, radio, print and "out of home" (e.g., buses and
billboards) advertisements and in any publications, programs, features or
other forms of media over which MP exercises at least partial editorial
control, MP will include specific references or mentions (verbally where
possible) of the availability of MP's Online Area through the America
Online-Registered Trademark- brand service, which are at least as
prominent as any references that MP makes to any MP Interactive Site (by
way of site name, related company name, URL or otherwise). Without
limiting the generality of the foregoing, MP's listing of the "URL" for
any MP Interactive Site will be accompanied by an equally prominent
listing of the "keyword" term on AOL for MP's Online Area.
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<PAGE>
EXHIBIT D
DESCRIPTION OF PRODUCTS AND OTHER CONTENT
DVD - Video products
DVD - ROM products
DVD - Audio products
DVD - Recordable media
DVD - Enhanced DVD products, (e.g., products currently in development by VM
Labs)
Laserdisc
Videotape
Sega
Playstation
Movie memorabilia
Home Theater accessories (e.g., replacement cases, cd wipes, disk cleaners,
etc.)
Hats and T-Shirts, provided that any hats or t-shirts that are sold in the
Affiliated MP Site must be related to Video Products or contain an MP logo or
trademark, and cannot represent a substantial portion of Transaction Revenues.
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<PAGE>
EXHIBIT E
OPERATIONS
1. GENERAL. The Affiliated MP Site (including the Products and other Content
contained therein) will be in the top three (3) in the video sale and rental
industry, as determined by each of the following methods : (a) based on a
cross-section of third-party reviewers who are recognized authorities in such
industry and (b) with respect to all material quality averages or standards
in such industry, including each of the following: (i) pricing of Products,
(ii) scope and selection of Products, (iii) quality of Products, (iv)
customer service and fulfillment associated with the marketing and sale of
Products and (v) ease of use. In addition, the Affiliated MP Site will, with
respect to each of the measures listed above, be competitive in all respects
with that which is offered by any MP Competitors.
2. AFFILIATED MP SITE INFRASTRUCTURE. MP will be responsible for all
communications, hosting and connectivity costs and expenses associated with
the Affiliated MP Site. MP will provide all hardware, software,
telecommunications lines and other infrastructure necessary to meet traffic
demands on the Affiliated MP Site from the AOL Network. MP will design and
implement the network between the AOL Service and Affiliated MP Site such
that (i) no single component failure will have a materially adverse impact on
AOL Members seeking to reach the Affiliated MP Site from the AOL Network and
(ii) no single line will run at more than 70% average utilization for a
5-minute peak in a daily period. In this regard, MP will provide AOL, upon
request, with a detailed network diagram regarding the network infrastructure
supporting the Affiliated MP Site. In the event that MP elects to create a
custom version of the Affiliated MP Site in order to comply with the terms of
this Agreement, MP will bear responsibility for all aspects of the
implementation, management and cost of such mirrored site.
3. OPTIMIZATION; SPEED. MP will use commercially reasonable efforts to
ensure that: (a) the functionality and features within the Affiliated MP Site
are optimized for the client software than in use by AOL Members; and (b) the
Affiliated MP Site is designed and populated in a manner that minimizes
delays when AOL Members attempt to access such site. At a minimum, MP will
ensure that the Affiliated MP Site's data transfers initiate within fewer
than fifteen (15) seconds on average. Prior to commercial launch of any
material promotions described herein, MP will permit AOL to conduct
performance and load testing of the Affiliated MP Site (in person or through
remote communications), with such commercial launch not to commence until
such time as AOL is reasonably satisfied with the results of any such testing.
4. USER INTERFACE. MP will maintain a graphical user interface within the
Affiliated MP Site that is competitive in all material respects with
interfaces of other similar sites based on similar form technology. AOL
reserves the right to review and approve the user interface and site design
prior to launch of the Promotions and to conduct focus group testing to
assess compliance with respect to such consultation and with respect to MP's
compliance with the preceding sentence.
5. TECHNICAL PROBLEMS. MP agrees to use commercially reasonable efforts to
address material technical problems (over which MP exercises control)
affecting use by AOL Members of the Affiliated MP Site (a "MP Technical
Problem") promptly following notice thereof. In the event that MP is unable
to promptly resolve a MP Technical Problem following notice thereof from AOL
(including, without limitation, infrastructure deficiencies producing user
delays), AOL will have the right to regulate the promotions it provides to MP
hereunder until such time as MP corrects the MP Technical Problem at issue.
6. MONITORING. MP will ensure that the performance and availability of the
Affiliated MP Site is monitored on a continuous basis. MP will provide AOL
with contact information (including e-mail, phone, pager and tax information,
as applicable, for both during and after business hours) for Partner's
principal business and technical representatives for use in cases when issues
or problems arise with respect to the Affiliated MP Site.
7. TELECOMMUNICATIONS. The Parties agree to explore encryption methodology
to secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Users. The network will be sized such that no
single line runs at more than 70% average utilization for a 5-minute peak in
a daily period.
8. SECURITY. MP will utilize Internet standard encryption technologies
(e.g., Secure Socket Layer - SSL) to provide a secure environment for
conducting transactions and/or transferring private member information (e.g.
credit card numbers, banking/financial information, and member address
information) to and from the Affiliated MP Site. MP will facilitate periodic
reviews of the Affiliated MP Site by AOL in order to evaluate the security
risks of such site. MP will promptly remedy any security risks or breaches of
security as may be identified by AOL's Operations Security team.
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9. TECHNICAL PERFORMANCE.
i. MP will design the Affiliated MP Site to support the Windows
version of the Microsoft Internet Explorer 3.0 and 4.0 browser, the
Macintosh version of the Microsoft Internet Explorer 3.0, and make
commercially reasonable efforts to support all other AOL browsers
listed at:
"http://webmaster.info.com/BrowTable.html."
ii. To the extent MP creates customized pages on the Affiliated MP Site
for AOL Members, MP will configure the server from which it serves
the site to examine the HTTP User-Agent field in order to identify
the "AOL Member-Agents" listed at:
"http://webmaster.info.aol.com/Brow2Text.html."
iii. MP will periodically review the technical information made
available by AOL at http://webmaster.info.aol.com/CacheText.html.
iv. MP will design its site to support HTTP 1.0 or later protocol as
defined in RFC 1945 (available at "http://ds.internic.net/rfc/rfc
1945.text") and to adhere to AOL's parameters for refreshing cached
information listed at http://webmaster.info.aol.com/CacheText.html.
v. Prior to releasing material, new functionality or features through
the Affiliated MP Site ("New Functionality"), MP will use
commercially reasonable efforts to either (i) test the New
Functionality to confirm its compatibility with AOL Service client
software or (ii) provide AOL with written notice of the New
Functionality so that AOL can perform tests of the New
Functionality to confirm its compatibility with the AOL Service
client software.
10. AOL INTERNET SERVICES MP SUPPORT. AOL will provide MP with access to the
standard online resources, standards and guidelines documentation, technical
phone support monitoring and after-hours assistance that AOL makes generally
available to similarly situated web-based customers. AOL support will not, in
any case, be involved with content creation on behalf of MP or support for
any technologies databases, software or other applications which are not
supported by AOL or are related to any MP area other than the Affiliated MP
Site. Support to be provided by AOL is contingent on MP providing to AOL demo
account information (where applicable), a detailed description of the
Affiliated MP Site's software, hardware and network architecture and access
to the Affiliated MP Site for purposes of such performance and load testing
as AOL elects to conduct.
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EXHIBIT F
STANDARD ONLINE COMMERCE TERMS & CONDITIONS
1. AOL NETWORK DISTRIBUTION. MP will not authorize or permit any third
party to distribute or promote the Products or any MP Interactive Site
through the AOL Network absent AOL's prior written approval. The Promotions
and any other promotions or advertisements purchased from or provided by AOL
will link only to the Affiliated MP Site, will be used by MP solely for its
own benefit and will not be resold, traded, exchanged, bartered, brokered or
otherwise offered to any third party.
2. PROVISION OF OTHER CONTENT. In the event that AOL notifies MP that (i)
as reasonably determined by AOL, any Content within the Affiliated MP Site
violates AOL's then-standard Terms of Service (as set forth on the America
Online-Registered Trademark- brand service at Keyword term "TOS"), the terms
of this Agreement or any other standard, written AOL policy or (ii) AOL
reasonably objects to the inclusion of any Content within the Affiliated MP
Site (other than any specific items of Content which may be expressly
identified in this Agreement), then MP will take commercially reasonable
steps to block access by AOL Users to such Content using MP's then-available
technology. In the event that MP cannot, through its commercially reasonable
efforts, block access by AOL Users to the Content in question, then MP will
provide AOL prompt written notice of such fact. AOL may then, at its option,
restrict access from the AOL Network to the Content in question using
technology available to AOL. MP will cooperate with AOL's reasonable requests
to the extent AOL elects to implement any such access restrictions.
3. CONTESTS. MP will take all steps necessary to ensure that any contest,
sweepstakes or similar promotion conducted or promoted through the Affiliated
MP Site (a "Contest") complies with all applicable federal, state and local
laws and regulations.
4. NAVIGATIONAL ICONS. Subject to the prior consent of MP, which consent
will not be unreasonably withheld, AOL will be entitled to establish
navigational icons, links and pointers connecting the Affiliated MP Site (or
portions thereof) with other content areas on or outside of the AOL Network.
5. DISCLAIMERS. Upon AOL's request, MP agrees to include within the
Affiliated MP Site a product disclaimer (the specific form and substance to
be mutually agreed upon by the Parties) indicating that transactions are
solely between MP and AOL Users purchasing Products from MP.
6. AOL LOOK AND FEEL. MP acknowledges and agrees that AOL will own all
right, title and interest in and to the elements of graphics, design,
organization, presentation, layout, user interface, navigation and stylistic
convention (including the digital implementations thereof) which are
generally associated with online areas contained within the AOL Network,
subject to MP's ownership rights in any MP trademarks or copyrighted material
with the Affiliated MP Site.
7. MANAGEMENT OF THE AFFILIATED MP SITE. MP will manage, review, delete,
edit, create, update and otherwise manage all Products available on or
through the Affiliated MP Site, in a timely and professional manner and in
accordance with the terms of this Agreement. MP will ensure that each
Affiliated MP Site is current, accurate and well-organized at all times. MP
warrants that the Products and other Licensed Content: (i) will not infringe
on or violate any copyright, trademark, U.S. patent or any other third party
right, including without limitation, any music performance or other
music-related rights; (ii) will not violate AOL's then-applicable Terms of
Service; and (iii) will not violate any applicable law or regulation,
including those relating to contests, sweepstakes or similar promotions.
Additionally, MP represents and warrants that it owns or has a valid license
to all rights to any Licensed Content used in AOL "slideshow" or other
formats embodying elements such as graphics, animation and sound, free and
clear of all encumbrances and without violating the rights of any other
person or entity. MP also warrants that a reasonable basis exists for all
Product performance or comparison claims appearing through the Affiliated MP
Site. MP shall not in any manner, including, without limitation in any
Promotion, the Licensed Content or the Materials state or imply that AOL
recommends or endorses MP or MP's Products (e.g., no statements that MP is an
"official" or "preferred" provider of products or services for AOL). AOL will
have no obligations with respect to the Products available on or through the
Affiliated MP Site, including, but not limited to, any duty to review or
monitor any such Products.
8. DUTY TO INFORM. MP will promptly inform AOL of any information related to
the Affiliated MP Site which could reasonably lead to a claim, demand, or
liability of or against AOL and/or its affiliates by any third party.
9. CUSTOMER SERVICE. It is the sole responsibility of MP to provide
customer service to persons or entities purchasing Products through the AOL
Network ("Customers"). MP will bear full responsibility for all
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customer service, including without limitation, order processing, billing,
fulfillment, shipment, collection and other customer service associated with
any Products offered, sold or licensed through the Affiliated MP Site, and
AOL will have no obligations whatsoever with respect thereto. MP will receive
all emails from Customers via a computer available to MP's customer service
staff and generally respond to such emails within one business day of
receipt. MP will receive all orders electronically and generally process all
orders within one business day of receipt, provided Products ordered are not
advance order items. MP will ensure that all orders of Products are received,
processed, fulfilled and delivered on a timely and professional basis. MP
will offer AOL Users who purchase Products through such Affiliated MP Site a
money back satisfaction guarantee. MP will bear all responsibility for
compliance with federal, state and local laws in the event that Products are
out of stock or are no longer available at the time an order is received. MP
will also comply with the requirements of any federal, state or local
consumer protection or disclosure law. Payment for Products will be collected
by MP directly from customers. MP's order fulfillment operation will be
subject to AOL's reasonable review.
10. PRODUCTION WORK. In the event that MP requests AOL's production
assistance in connection with (i) ongoing programming and maintenance related
to the Affiliated MP Site, (ii) a redesign of or addition to the Affiliated
MP Site (e.g., a change to an existing screen format or construction of a new
custom form), (iii) production to modify work performed by a third party
provider or (iv) any other type of production work, MP will work with AOL to
develop a detailed production plan for the requested production assistance
(the "Production Plan"). Following receipt of the final Production Plan, AOL
will notify MP of (i) AOL's availability to perform the requested production
work, (ii) the proposed fee or fee structure for the requested production and
maintenance work and (iii) the estimated development schedule for such work.
To the extent the Parties reach agreement regarding implementation of
agreed-upon Production Plan, such agreement will be reflected in a separate
work order signed by the Parties. To the extent MP elects to retain a third
party provider to perform any such production work, work produced by such
third party provider must generally conform to AOL's standards & practices
(as provided on the America Online brand service at Keyword term
"styleguide"). The specific production resources which AOL allocates to any
production resources which AOL allocates to any production work to be
performed on behalf of MP will be determined by AOL in its sole discretion.
11. OVERHEAD ACCOUNTS. To the extent AOL has granted MP any overhead
accounts on the AOL Service, MP will be responsible for the actions taken
under or through its overhead accounts, which actions are subject to AOL's
applicable Terms of Service and for any surcharges, including, without
limitation, all premium charges, transaction charges, and any applicable
communication surcharges incurred by any overhead Account issued to MP but MP
will not be liable for charges incurred by any overhead account relating to
AOL's standard monthly usage fees and standard hourly charges, which charges
AOL will bear. Upon the termination of this Agreement, all overhead accounts,
related screen names and any associated usage credits or similar rights, will
automatically terminate. AOL will have no liability for loss of any data or
content related to the proper termination of any overhead account.
12. NAVIGATION TOOLS. Any Keyword Search Terms to be directed to the
Affiliated MP Site shall be (i) subject to availability for use by MP and
(ii) limited to the combination of the Keyword-TM- search modifier combined
with a registered trademark of MP. AOL reserves the right to revoke at any
time MP's use of any Keyword Search Terms which do not incorporate registered
trademarks of MP. MP acknowledges that its utilization of a Keyword Search
Term will not create in it, nor will it represent it has, any right, title or
interest in or to such Keyword Search Term, other than the right, title and
interest MP holds in MP's registered trademark independent of the Keyword
Search Term. Without limiting the generality of the foregoing, MP will not:
(a) attempt to register or otherwise obtain trademark or copyright protection
in the Keyword Search Term; or (b) use the Keyword Search Term, except for
the purposes expressly required or permitted under this Agreement. To the
extent AOL allows AOL Users to "bookmark" the URL or other locator for the
Affiliated MP Site, such bookmarks will be subject to AOL's control at all
times. Upon the termination of this Agreement, MP's rights to any Keyword
Search Terms and bookmarking will terminate.
13. AOL USER COMMUNICATIONS. To the extent MP sends any form of
communications to AOL Users, MP will promote the Affiliated MP Site as the
location at which to purchase Products (as compared to any more general or
other site or location). In addition, in any communication to AOL Users or on
the Affiliated MP Site, MP will not encourage AOL Users to take any action
inconsistent with the scope and purpose of this Agreement, including without
limitation, the following actions: (a) using Content other than the Licensed
Content; (b) bookmarking of Interactive Sites; (c) using Interactive Sites
other than those covered by the revenue-sharing provisions herein; (d)
changing the default home page on the AOL browser, or (e) using any
Interactive Service other than AOL. Any email newsletters sent to AOL Users
by MP or its agents
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will (i) be subject to AOL's policies on use of the email functionality,
including but not limited to AOL's policy on unsolicited bulk email, (ii) be
sent only to AOL Users requesting to receive such newsletters, (iii) not
contain Content which violates AOL's Terms of Service, and (iv) not contain
any advertisements, marketing or promotion for any other Interactive Service.
In any commercial e-mail communications to AOL Users which are otherwise
permitted hereunder, MP will provide the recipient with a prominent and easy
means to "opt-out" of receiving any future commercial e-mail communications
from MP.
14. MERCHANT CERTIFICATION PROGRAM. MP will participate in any generally
applicable "Certified Merchant" program operated by AOL or its authorized
agents or contractors. Such program may require merchant participants on an
ongoing basis to meet certain reasonable, generally applicable standards
relating to provision of electronic commerce through the AOL Network
(including, as a minimum, use of 40-bit SSL encryption and if requested by
AOL, 128-bit encryption) and may also require the payment of certain
reasonable certification fees to the applicable entity operating the program.
Each Certified Merchant in good standing will be entitled to place on its
affiliated Interactive Site an AOL designed and approved button promoting the
merchant's status as an AOL Certified Merchant.
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EXHIBIT G
STANDARD LEGAL TERMS & CONDITIONS
1. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the
other Party, for its prior written approval, which will not be unreasonably
withheld or delayed, any marketing, advertising, press releases, and all
other promotional materials related to the Affiliated MP Site and/or
referencing the other Party and/or its trade names, trademarks, and service
marks (the "Materials"); provided, however, that either Party's use of screen
shots of the Affiliated MP Site for promotional purposes will not require the
approval of the other Party so long as America Online-Registered Trademark-
is clearly identified as the source of such screen shots; and provided
further, however, that following the initial public announcement of the
business relationship between the Parties in accordance with the approval and
other requirements contained herein, either Party's subsequent factual
reference to the existence of a business relationship between the Parties
will not required the approval of the other Party. Each Party will solicit
and reasonably consider the views of the other Party in designing and
implementing such Materials. Once approved, the Materials may be used by a
Party and its affiliates for the purpose of promoting the Affiliated MP Site
and the content contained therein and reused for such purpose until such
approval is withdrawn with reasonably prior notice. In the event such
approval is withdrawn, existing inventories of Materials may be depleted.
Notwithstanding the foregoing, either Party may issue press releases and
other disclosures as required by law or as reasonably advised by legal
counsel without the consent of the other Party and in such event, the
disclosing Party will provide at least five (5) business days prior written
notice of such disclosure.
2. LICENSE. MP hereby grants AOL a non-exclusive worldwide license to
market, license, distribute, reproduce, display, perform, transmit and
promote the Licensed Content (or any portion thereof) through such areas or
features of the AOL Network as AOL deems appropriate. MP acknowledges and
agrees that the foregoing license permits AOL to distribute portions of the
Licensed Content in synchronism or timed relation with visual displays
prepared by MP or AOL (e.g., as part of an AOL "slideshow"). In addition,
AOL Users will have the right to access and use the Affiliated MP Site.
3. TRADEMARK LICENSE. In designing and implementing the Materials and
subject to the other provisions contained herein, MP will be entitled to use
the following trade names, trademarks, and service marks of AOL: the
"America Online-Registered Trademark-" brand service, "AOL-TM-"
service/software and AOL's triangle logo; and AOL and its affiliates will be
entitled to use the trade names, trademarks and service marks of MP for which
MP holds all rights necessary for use in connection with this Agreement
(collectively, together with the AOL marks listed above, the "Marks");
provided that each Party: (i) does not create a unitary composite mark
involving a Mark of the other Party without the prior written approval of
such other Party; and (ii) displays symbols and notices clearly and
sufficiently indicating the trademark status and ownership of the other
Party's Marks in accordance with applicable trademark law and practice.
4. OWNERSHIP OF TRADEMARKS. Each Party acknowledges the ownership of the
other Party in the Marks of the other Party and agrees that all use of the
other Party's Marks will inure to the benefit, and be on behalf, of the other
Party. Each party acknowledges that its utilization of the other Party's
Marks will not create in it, nor will it represent it has, any right, title,
or interest in or to such Marks other than the licenses expressly granted
herein. Each Party agrees not to do anything contesting or impairing the
trademark rights of the other Party.
5. QUALITY STANDARDS. Each Party agrees that the nature and quality of its
products and services supplied in connection with the other Party's Marks
will conform to quality standards set by the other Party. Each Party agrees
to supply the other Party, upon request, with a reasonable number of samples
of any Materials publicly disseminated by such Party which utilize the other
Party's Marks. Each Party will comply with all applicable laws, regulations,
and customs and obtain any required government approvals pertaining to use of
the other Party's marks.
6. INFRINGEMENT PROCEEDINGS. Each Party agrees to promptly notify the other
Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the
other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of if
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it
is otherwise bound; (iii) when executed and delivered by such
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Party, this Agreement will constitute the legal, valid and binding obligation
of such Party, enforceable against such Party in accordance with its terms;
and (iv) such Party acknowledges that the other Party makes no
representations, warranties or agreements related to the subject matter
hereof that are not expressly provided for in this Agreement. MP hereby
represents and warrants that it possesses all authorizations, approvals,
consents, licenses, permits, certificates or other rights and permissions
necessary to sell the MP Products.
8. CONFIDENTIALITY. Each Party acknowledges that Confidential Information
may be disclosed to the other Party during the course of this Agreement. Each
Party agrees that it will take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information,
during the term of this Agreement, and for a period of three years following
expiration nor termination of this Agreement to prevent the duplication or
disclosure of Confidential Information of the other Party, other than by or
to its employees or agents who must have access to such Confidential
Information to perform such Party's obligations hereunder, who will each
agree to comply with this section. Notwithstanding the foregoing, either
Party may issue a press release or other disclosure containing Confidential
Information without the consent of the other Party, to the extent such
disclosure is required by law, rule, regulation or government or court order.
In such event, the disclosing Party will provide at least five (5) business
days prior written notice of such proposed disclosure to the other Party.
Further, in the event such disclosure is required of either Party under the
laws, rules or regulations of the Securities and Exchange Commission or any
other applicable governing body, such Party will (i) redact mutually
agreed-upon portions of this Agreement to the fullest extent permitted under
applicable laws, rules and regulations and (ii) submit a request to such
governing body that such portions and other provisions of this Agreement
receive confidential treatment under the laws, rules and regulations of the
Securities and Exchange Commission or otherwise be held in the strictest
confidence to the fullest extent permitted under the laws, rules or
regulations of any other applicable governing body.
9. LIMITATION OF LIABILITY; DISCLAIMER; INDEMNIFICATION.
9.1 LIABILITY. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE
OR INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE, AOL COM OR THE
AFFILIATED MP SITE, OR ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT,
SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST
BUSINESS (COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY
WILL REMAIN LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES
ARE CLAIMED BY A THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO
SECTION 9.3 EXCEPT AS PROVIDED IN SECTION 9.3 (I) LIABILITY ARISING UNDER
THIS AGREEMENT WILL BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE DAMAGES, AND
(II) THE MAXIMUM LIABILITY OF ONE PARTY TO THE OTHER PARTY FOR ANY CLAIMS
ARISING IN CONNECTION WITH THIS AGREEMENT WILL NOT EXCEED THE AGGREGATE
AMOUNT OF PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY HEREUNDER IN THE YEAR
IN WHICH THE EVENT GIVING RISE TO LIABILITY OCCURS; PROVIDED THAT EACH PARTY
WILL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED
TO THE OTHER PARTY PURSUANT TO THE AGREEMENT.
9.2 NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING
THE AOL NETWORK, THE AOL SERVICE, AOL COM OR THE AFFILIATED MP SITE.
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF
PERFORMANCE WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL
SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY OF THE
AFFILIATED MP SITE.
9.3 INDEMNITY. Either Party will defend, indemnify, save and hold harmless
the other Party and the officers, directors, agents, affiliates,
distributors, franchisees and employees of the other Party from any and all
third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the Indemnifying
Party's material breach of any duty, representation or warranty of this
Agreement.
9.4 CLAIMS. If a Party entitled to indemnification hereunder (the
"Indemnified Party") becomes aware of any matter it believes is
indemnifiable hereunder involving any claim, action, suit, investigation,
arbitration or other proceeding against the Indemnified Party by any third
party (each an "Action"), the Indemnified Party will give the other
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Party (the "Indemnifying Party") prompt written notice of such Action. Such
notice will (i) provide the basis on which Indemnification is being asserted
and (ii) be accompanied by copies of all relevant pleadings, demands, and
other papers related to the Action and in the possession of the Indemnified
Party. The Indemnifying Party will have a period of ten (10) days after
delivery of such notice to respond. If the Indemnifying Party elects to
defend the Action or does not respond within the requisite ten (10) day
period, the Indemnifying Party will be obligated to defend the Action, at its
own expense, and by counsel reasonably satisfactory to the Indemnified
Party. The Indemnified Party will cooperate, at the expense of the
Indemnifying Party, with the Indemnifying Party and its counsel in the
defense and the Indemnified Party will have the right to participate fully,
at its own expense, in the defense of such Action. If the Indemnifying Party
responds within the required ten (10) day period and elects not to defend
such Action, the Indemnified Party will be free, without prejudice to any of
the Indemnified Party's rights hereunder, to compromise or defend (and
control the defense of) such Action. In such case, the Indemnifying Party
will cooperate at its own expense, with the Indemnified Party and the
counsel in the defense against such Action and the Indemnifying Party will
have the right to participate fully, at its own expense, in the defense of
Action. Any compromise or settlement of an Action will require the prior
written consent of both Parties hereunder, such consent not to be
unreasonably withheld or delayed.
9.5. ACKNOWLEDGMENT. AOL and MP each acknowledges that the provisions of
this Agreement were negotiated to reflect an informed, voluntary allocation
between them of all risks (both known and unknown) associated with the
transactions contemplated hereunder. The limitations and disclaimers related
to warranties and liability contained in this Agreement are intended to limit
the circumstances and extent of liability. The provisions of this Section 9
will be enforceable independent of and severable from any other enforceable
or unenforceable provision of this Agreement.
10. SOLICITATION OF AOL USERS. During the term of the Agreement and for a
two year period thereafter, MP will not use the AOL Network (including,
without limitation, the e-mail network contained therein) to solicit AOL
Members on behalf of another Interactive Service. More generally, MP will not
send unsolicited, commercial e-mail (i.e., "spam") through or into AOL's
products or services, absent a Prior Business Relationship. For purposes of
this Agreement, a "Prior Business Relationship" will mean that the AOL Member
to whom commercial e-mail is being sent has voluntarily either (i) engaged in
a transaction with MP or (ii) provided information to MP through a contest,
registration or other communication, which included clear notice to the AOL
Member that the information provided could result in commercial e-mail being
sent to that AOL Member by MP or its agents. Any commercial e-mail to be sent
through or into AOL's products or services shall also be subject to AOL's
then-standard restrictions on distribution of bulk e-mail (e.g., related to
the time and manner in which such e-mail can be distributed through or into
the AOL product or service in question).
11. COLLECTION AND USE OF USER INFORMATION. MP shall ensure that its
collection, use and disclosure of information obtained from AOL Members under
this Agreement ("Member Information") complies with (i) all applicable laws
and regulations and (ii) AOL's standard privacy policies, available on the
AOL Service at the keyword term "Privacy" (or, in the case of the Affiliated
MP Site, MP's standard privacy policies so long as such policies are
prominently published on the site and provide adequate notice, disclosure and
choice to users regarding MP's collection, use and disclosure of user
information). MP will not disclose Member Information collected hereunder to
any third party in a manner that identifies AOL Members as end users of an
AOL product or service or use Member Information collected under this
Agreement to market another Interactive Service.
12. EXCUSE. Neither Party will be liable for, or be considered in breach of or
default under this Agreement on account of, any delay or failure to perform as
required by this Agreement as a result of any causes or conditions which are
beyond such Party's reasonable control and which such Party is unable to
overcome by the exercise of reasonable diligence.
13. INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or MP of the other
Party. Neither Party will have any right, power or authority to enter into any
agreement for or on behalf of, or incur any obligation or liability of, or to
otherwise bind, the other Party. This Agreement will not be interpreted or
construed to create an association, agency, joint venture or partnership
between the Parties or to impose any liability attributable to such a
relationship upon either Party.
14. NOTICE. Any notice, approval, request, authorization, direction or other
communication under this Agreement will be given in writing and will be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered by electronic mail on the AOL Network (to screenname
"[email protected]" in the case of AOL) or by confirmed facsimile; (ii) on
the delivery date if delivered personally to the Party to whom the same is
directed; (iii) one business day after deposit with a commercial overnight
carrier, with written verification of receipt; or (iv) five business days
after the mailing date, whether or not actually received, if sent by U.S.
mail, return
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receipt requested, postage and charges prepaid, or any other means of rapid
mail delivery for which a receipt is available. In the case of AOL, such
notice will be provided to both the Senior Vice President for Business
Affairs (fax no. 703-265-1206) and the Deputy General Counsel (fax no.
703-265-1105); each at the address of AOL set forth in the first paragraph
of this Agreement. In the case of MP, except as otherwise specified
herein, the notice address will be the address for MP set forth in
the first paragraph of this Agreement, with the other relevant notice
information, including the recipient for notice and, as applicable, such
recipient's fax number or AOL e-mail address, to be as reasonably identified
by AOL.
15. LAUNCH DATES. In the event that any terms contained herein relate to or
depend on the commercial launch date of the Affiliated MP Site contemplated
by this Agreement (the "Launch Date"), then it is the intention of the
Parties to record such Launch Date in a written instrument signed by both
Parties promptly following such Launch Date; provided that, in the absence of
such a written instrument, the Launch Date will be as reasonably determined
by AOL based on the information available to AOL.
16. NO WAIVER. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to
exercise any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will
be and remain in full force and effect.
17. RETURN OF INFORMATION. Upon the expiration or termination of this
Agreement, each Party will, upon the written request of the other Party,
return or destroy (at the option of the Party receiving the request) all
confidential information, documents, manuals and other materials specified
the other Party.
18. SURVIVAL. Section 6.3 of the body of the Agreement, Section 13 of
Exhibit F, and Sections 8 through 28 of this Exhibit, will survive the
completion, expiration, termination or cancellation of this Agreement.
19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
20. AMENDMENT. No change, amendment or modification of any provision of this
Agreement will be valid unless set forth in a written instruments signed by
the Party subject to enforcement of such amendment, and in the case of AOL,
by an executive of at least the same standing to the executive who signed the
Agreement.
21. FURTHER ASSURANCES. Each Party will take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or
continuing performance of this Agreement.
22. ASSIGNMENT. MP will not assign this Agreement or any right, interests
or benefit under this Agreement without the prior written consent of AOL.
Assumption of the Agreement by any successor to MP that is an Interactive
Service (including, without limitation, by way of merger or consolidation),
will be subject to AOL's prior written approval. Subject to the foregoing,
this Agreement will be fully binding upon, inure to the benefit of and be
enforceable by the Parties hereto and their respective successors and assigns.
23. CONSTRUCTION SEVERABILITY. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be
construed or if any such provision is held invalid by a court with
jurisdiction over the Parties to this Agreement, (i) such provision will be
deemed to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii) the
remaining terms, provisions, covenants and restrictions of this Agreement
will remain in full force and effect.
24. REMEDIES. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to,
and not in lieu of, any other rights or remedies which the Party may possess
at law or in equity; provided that, in connection with any dispute hereunder,
MP will be not entitled to offset any amounts that it claims to be due and
payable from AOL against amounts otherwise payable by MP to AOL.
25. APPLICABLE LAW. Except as otherwise expressly provided herein, this
Agreement will be interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia except for its
conflicts of laws principles.
26. EXPORT CONTROLS. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any prescribed
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country listed in such applicable laws, regulations and rules unless properly
authorized.
27. HEADINGS. The captions and headings used in this Agreement are inserted
for convenience only and will not affect the meaning or interpretation of
this Agreement.
28. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute
one and the same document.
29
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FIRST AMENDMENT TO INTERACTIVE MARKETING AGREEMENT
This First Amendment (the "Amendment") dated as of May 1, 1999, is
entered into by and between American Online, Inc. ("AOL"), a Delaware
corporation with principal offices located at 22000 AOL Way, Dulles, VA 20166
and DVD EXPRESS, Inc. ("MP"), a California corporation, with offices located
at 7083 Hollywood Boulevard, Suite 1000, Los Angeles, CA 90028, and modifies
that certain Interactive Marketing Agreement dated as of August 1, 1998 by and
between AOL and MP (the "Original Agreement"). AOL and MP may be referred to
individually as a "Party" and collectively as the "Parties". Defined terms
used herein but not defined in this Amendment shall have the meanings
ascribed to such terms in the Original Agreement.
INTRODUCTION
WHEREAS, the Parties desire to modify certain terms of the Original
Agreement, as provided below.
NOW, THEREFORE, in consideration of the terms and conditions set forth
in this Amendment and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, AOL and MP hereby agree to amend
the Original Agreement in accordance with the following terms and conditions:
TERMS
1. EARLY TERMINATION RIGHT. Section 6.7 of the Original Agreement is hereby
amended by adding the following language to the end of the first sentence
of such Section: "(collectively, the 'Early Termination Right');
PROVIDED, HOWEVER, that in the event of the occurrence of an "IPO" prior
to such one (1) year anniversary of the Effective Date, such Early
Termination Right shall expire. For the purposes of this Section 6.7, an
'IPO' shall mean the receipt of equity funding by MP as a result of the
initial public offering of securities of MP pursuant to an effective
registration statement under the Securities Act of 1933, as amended."
2. ORDER OF PRECEDENCE. This Amendment is supplementary to and modifies the
Original Agreement. The terms of this Amendment supersede provisions of
the Original Agreement only to the extent that it is expressly provided
for herein, or to the extent that the terms hereof expressly conflict
with the terms of the Original Agreement. However, nothing contained in
this Amendment should be interpreted as invalidating the Original
Agreement, and provisions of the Original Agreement will continue to
govern relations between the Parties insofar as they do not
expressly conflict with this Amendment.
3. COUNTERPARTS. This Amendment may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute
one and the same document.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date first above written.
AMERICA ONLINE, INC. DVD EXPRESS, INC.
By: /s/ ERIC L. KELLER By: /s/ MICHAEL DUBELKO
------------------------------ -------------------------------
Print Name: Eric L. Keller Print Name: Michael Dubelko
---------------------- -----------------------
Title: Vice President Title: CEO
--------------------------- ----------------------------
31
<PAGE>
AFFILIATE AGREEMENT
This Affiliate Agreement (the "Agreement") is entered into as of September 1,
1998 (the "Effective Date") between One Zero Media, Inc. ("OZM"), a
Massachusetts corporation with principal offices at 65 Chapel Street, Newton,
Massachusetts 02158, and DVD Express, Inc. ("Affiliate"), a California
corporation with principal offices at 7083 Hollywood Blvd, Suite 305,
Hollywood, CA 90028.
INTRODUCTION
WHEREAS, OZM produces the television series entitled "Wild Wild Web" (the
"Series"), an entertainment series focusing on the Internet and computers, and
owns and operates the world wide web site currently accessible at
http://www.getwild.com (the "Entertainment Zone"), which features popular
culture and entertainment content, and is the exclusive producer and
aggregating partner for the entertainment content area on the world wide web
site called "AltaVista" as contracted in Exhibit A, and currently accessible
at http://www.altavista.digital.com (the "AltaVista Site").
OZM is the exclusive producer and aggregating partner for the entertainment
content and commerce area tentatively entitled the "Entertainment Zone" on
the AltaVista site, which content area also will be accessible at
http://www.getwild.com. OZM has exclusivity covering content and commerce
partners for entertainment news, entertainment events on the web, chats (on
the subject areas encompassed within this Section 2.1) and webcasts, popular
music (U.S.), concert listings, film and movies, TV, comedy, radio, episodic
content, extreme and amateur sports, games, literature, zines and various
magazines, pop culture and fashion coverage and such other topics and
features as the parties may mutually agree.
WHEREAS, Affiliate owns and operates a business marketing DVD's on a world
wide web site currently accessible at http://www.dvdexpress.com (the
"Affiliate Site"); and
WHEREAS, Affiliate desires to be the preferred provider of DVD content and
product on the Entertainment Zone, and to link the Affiliate Site to the
Entertainment Zone through an initial co-branded home page (the "Co-Branded
Home Page").
NOW, THEREFORE, the parties agree to the following terms and conditions:
1. OZM DUTIES
OZM hereby appoints Affiliate the "Preferred Provider" of the DVD Area on
the Entertainment Zone, which appointment shall entitle Affiliate to receive
the following services from OZM commencing as of August 25, 1998:
1.1. EXCLUSIVITY. Affiliate will be the sole provider of the
Entertainment Zone's DVD Store Area. Affiliate acknowledges and agrees that
the Entertainment Zone will feature Preferred Providers in a number of
different categories of goods and services and that some de
<PAGE>
minimis overlap in the goods and services offered by Preferred Providers in
different categories is possible. No other company can run DVD-based
advertising in the Entertainment Zone.
1.2. ADVERTISING.
a. MERCHANDISING ON ENTERTAINMENT ZONE. Affiliate may submit its
products/services to OZM for consideration for TV Series product placement to
enhance merchandising opportunities. OZM will use reasonable commercial
efforts to place Affiliate's submissions based on its editorial discretion
and consistent with applicable law.
b. ADVERTISEMENTS ON CO-BRANDED HOME PAGE. OZM shall sell
advertising for the Co-Branded DVD Store Home Page, and shall determine the
presentation, implementation, and location of such advertising through the
Entertainment Zone/Altavista standard templates. OZM will only sell
non-competitive advertising in this area.
c. AD BANNERS. As an allocation of Affiliate's compensation, [***]
worth of ad banners will be placed in the Entertainment Zone during year 1,
[***] in year 2, and [***] in year 3. These will be placed against a [***]
CPM on the site.
1.3. SEARCH RESULTS LINKS. See Altavista Search Results Agreement
document.
1.4. LINKS.
a. ENTERTAINMENT ZONE. OZM will provide Affiliate one
"Merchandising Link" on the home page of the Entertainment Zone per week
which shall be prominently displayed. A Merchandising Link is a mutually
agreed-upon graphical icon or logo that includes a hyperlink to the
Co-Branded Home Page.
b. MOVIES HOME PAGE. OZM will provide Affiliate one Merchandising
Link on the Movies Home Page on an ongoing basis. DVD Express will share this
Merchandising Link with OZM's Video's electronic commerce partner 50/50.
Co-habitation and/or rotation of merchandising links between DVD Express and
the video partner on the Movies Home Page will be designated by OZM through
consent of both DVD Express and the video partner. DVD Express will also
receive a graphical link on the Movies Home Page to the DVD store as well as
integration of links to the store from Entertainment Zone movie-related
content and editorial.
c. CO-BRANDED STORE HOME PAGE STORE. OZM shall control the
standard Entertainment Zone template which will live on the Co-Branded DVD
Store Home Page. All content and commerce on the DVD Store homepage other
than the standard templates and all other pages within the DVD Store will be
under the discretion and control of DVD Express.
1.5. TELEVISION SERVICES. OZM will produce for Affiliate one segment,
consistent with OZM's production practices and subject to applicable law,
featuring Affiliate's services which shall be aired on the Series a minimum
of two times during each twelve month term of this Agreement. The segment
shall feature the Affiliate's web site, and/or mutually-agreed upon goods or
services available from the Affiliate's web site. OZM shall also produce one
thirty second vignette of an editorial nature featuring Affiliate's content
which shall be distributed to a minimum of 130 television markets for the
purpose of insertion into local programming.
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SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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1.6. CONTESTS. OZM and DVDExpress will conduct contests from time to
time as mutually agreed to.
1.7. ENTERTAINMENT ZONE GUIDEBAR. OZM will include on the
Entertainment Zone guidebar a mutually-agreed upon graphical icon or
graphical text link to the Movies Home Page (OZM guidebars provide navigation
to different parts of the Entertainment Zone site.) The Co-branded DVD Store
Area shall be prominently listed as a main category on the Movies Home Page.
<PAGE>
2. AFFILIATE DUTIES
2.1. DVD AREA. Affiliate will use commercially reasonable efforts to
construct and have fully operational by September 1, 1998 the DVD Store
Area. Affiliate shall operate the Affiliate Site and Co-Branded Home Page
using the best business practices, high ethical standards, and in a manner
that enhances the good will of the Entertainment Zone, the foregoing being at
least equal to the practices of comparable companies offering comparable
world wide web services and products. If OZM becomes aware of any deficiency
in this area it will notify Affiliate, who will take prompt corrective
action to rectify the noted deficiency.
2.2. ADVERTISING. Affiliate shall provide OZM advertising and related
promotional materials for display on the Entertainment Zone in accordance
with the terms of this Section 2.2.
a. AFFILIATE SUBMISSIONS. OZM must receive all Affiliate
submissions of advertising and/or merchandising link materials ("Submissions")
at least ten (10) business days prior to the date on which an advertisement
is scheduled to appear ("Submission Deadline"). All Affiliate Submissions
should be e-mailed to [email protected]. Any change to an Affiliate
Submission must be made in writing, with an e-mail copy sent to
[email protected], and received by OZM at least five (5) business days
prior to the Submission Deadline.
b. REJECTIONS. OZM reserves the right, in its sole discretion
and without liability, to reject, omit or exclude any Affiliate Submissions
and/or advertisements that OZM believes contains unlawful, infringing or
objectionable content (as defined in Section 5.2 below) at any time, with or
without notice to Affiliate and regardless or whether such Affiliate
Subnmissions and/or Advertisements were previously accepted or published.
c. AFFILIATE SITE ADVERTISEMENTS. Affiliate shall control all
advertising and links on the Affiliate Site except for the Entertainment Zone
standard template on the DVD Store homepage, and shall determine the
presentation, implementation, and location of such advertising and links.
2.3 ADVERTISING TAG WORDS. Affiliate will work with OZM, to supply
the tag words for the DVD Area for purposes of the Search Results service set
forth in Section 1.
2.4 PROMOTION OF ENTERTAINMENT ZONE. Affiliate, at no cost to OZM,
will include at all times during the term of this Agreement a co-branded
presence for the Entertainment Zone within the DVD store page that is
linkable back to the Entertainment Zone Homepage and/or to the DVD Store
Homepage
2.5 CO-BRANDED HOME PAGE. Affiliate will use materials provided by
OZM, including Marks as defined in Section 9, to the Co-Branded Home Page.
The style of the Co-Branded Home Page will conform to Entertainment Zone
style standards.
3. COMPENSATION
<PAGE>
3.1 In consideration of OZM's performance hereunder, Affiliate shall
pay OZM as follows:
a. YEAR 1. In Year 1, which shall be the twelve months following
the Effective Date, Affiliate shall pay to OZM a nonrefundable $1,300,000
which amount represents a minimum guarantee payable as follows [***] payable
upon execution of this contract and receipt of invoice provided by OZM. An
additional [***] is payable upon launch of the Entertainment Zone and receipt
of invoice provided by OZM, with the remaining amount of [***] payable in
three installments of [***]. The first installment of [***] is due on the
[***] day after the execution of this agreement (unless delayed pursuant to
the last sentence of this section 3.1a), the second installment is due [***]
day after the payment of the first installment, the third installment is due
on the [***] day after the payment of the second installment. In Year 1, OZM
agrees to deliver a rate of [***] per user click-through against the
$1,300,000, thus guaranteeing a minimum of [***] to the DVD Store. Affiliate
is not required to make the first installment payment until it has received
[***]click-throughs.
b. YEAR 2. In Year 2, Affiliate shall pay to OZM a nonrefundable
$2,000,000 which amount represents a minimum guarantee, payable in [***]
consecutive payments of [***] with the first payment due upon the first day of
the second term of this agreement, and each subsequent payment due upon the
first business day of the following [***]. In Year 2, OZM agrees to deliver a
rate of [***] per user click-through against the $2,000,000, thus guaranteeing
a minimum of [***] users to the DVD Store.
c. YEAR 3. In Year 3, Affiliate shall pay to OZM a nonrefundable
$3,300,000, which amount represents a minimum guarantee, payable in [***]
consecutive payments of [***] with the first payment due upon the first day
of the third term of this agreement, and each subsequent payment due upon the
first business day of the following [***]. In Year 3, OZM agrees to deliver a
rate of [***] per user click-through against the $3,300,000, thus
guaranteeing a minimum of [***] users to the DVD Store.
3.2. AUDITS. OZM agrees that Affiliate may have auditors reasonably
acceptable to OZM audit OZM's books and records related to payments under
this Agreement not more than once per calendar year, during business hours
and upon ten (10) business days written notice. OZM agrees to reimburse
Affiliate for the reasonable costs of the audit if the audit discloses an
underpayment of ten percent (10%) or more.
3.3 MAKE GOODS. Affiliate is not required to make the scheduled payments
as specified until it has received its click-through from the prior payment.
4. TERM AND TERMINATION
4.1. TERM. This Agreement shall be effective as of the Effective Date
and, unless earlier terminated in accordance with this Section, will continue
in effect for an initial period of three years. Thereafter, this Agreement
shall automatically renew under new conditions unless
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
Affiliate elects not to renew this Agreement, by written notice to OZM given
at least 120 days prior to the expiration date of the current term.
4.2. TERMINATION. Either party may terminate this Agreement upon the
material breach by the other party of a material provision of the Agreement,
which breach is not cured within thirty (30) days of the date of written
notice thereof.
4.3. EFFECT OF TERMINATION. Immediately following termination or
expiration of this Agreement, (i) all linking to the Affiliate-related pages
from the Entertainment Zone and Altavista shall be terminated, (ii) each
party shall return to the other all tangible manifestations of Confidential
Information; (iii) all licenses granted by either party hereunder shall
automatically terminate and each party shall immediately cease use of the
licensed materials; and (iv) each party shall immediately pay the other party
all amounts due and owing. Other than for compensation due, neither party
shall be liable to the other party merely as a result of termination or
expiration of this Agreement in accordance with this Section.
4.4. SURVIVAL. In addition to those sections of this Agreement that
survive expiration or termination of this Agreement by their express terms,
Sections 3.2, 3.3, 4.3, 4.4, 5, 6, 7, 8, AND 10 shall survive expiration or
termination of this Agreement.
5. WARRANTIES
5.1. OZM REPRESENTATIONS AND WARRANTIES. OZM hereby represents and
warrants to Affiliate:
a. RIGHTS GRANTED. (i) OZM has authorized the person who has
signed this Agreement for OZM to execute and deliver this Agreement to
Affiliate on behalf of OZM; (ii) it has all rights and licenses necessary to
enter into this Agreement and perform its obligations hereunder; and (iii) it
has not previously granted and will not grant the specific rights granted to
Affiliate herein to any third party.
b. DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH HEREIN, OZM DOES NOT
MAKE ANY WARRANTIES CONCERNING THE ENTERTAINMENT ZONE AND ALL MATERIALS
THEREIN, EXPRESS, IMPLIED OR OTHERWISE. OZM SPECIFICALLY DISCLAIMS THE
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT WITH RESPECT TO THE ENTERTAINMENT ZONE AND ALL RELATED
MATERIALS, ALL OF WHICH ARE PROVIDED BY OZM ON AN "AS IS" AND "AS AVAILABLE
BASIS".
5.2. AFFILIATE REPRESENTATIONS AND WARRANTIES. Affiliate hereby
represents and warrants to OZM:
a. RIGHTS GRANTED. (i) Affiliate has authorized the person who has
signed this Agreement for Affiliate to execute and deliver this Agreement to
OZM on behalf of Affiliate; (ii) it has all rights and licenses necessary to
enter into this Agreement and perform its obligations hereunder.
<PAGE>
b. NO INFRINGEMENT OR VIOLATION OF RIGHTS. All material made
available or provided by Affiliate to OZM hereunder, including without
limitation material within Affiliate's advertisements, the activities
conducted through the Affiliate Site, the DVD Area, and Affiliate's Marks
(as defined in Section 9), do not now, and will not, violate any civil or
criminal laws or any rights of any third parties, including, but not limited
to, infringement or misappropriation of any copyright, patent, trademark,
service mark, trade secret, music, image, or other proprietary or property
right, false advertising, unfair competition, defamation, obscenity, invasion
of privacy or rights of celebrity, violation of any anti-discrimination law
or regulation, gambling, gaming and contest laws, rules and regulations, or
any other right of any person or entity.
c. COMPLIANCE WITH LAW; NO OBJECTIONABLE CONTENT. Affiliate will
at all times comply with all applicable state, federal and foreign laws,
rules and regulations. All material made available or provided by Affiliate
to OZM hereunder, including without limitation material within Affiliate's
advertisements, Affiliate Site, the DVD Area, and Affiliate's Marks (as
defined in Section 9), do not now, and will not, include or link to any
material that is: unlawful, harmful, fraudulent, threatening, abusive,
harassing, defamatory, vulgar, obscene, profane, hateful, racially,
ethnically or otherwise objectionable, including, without limitation, any
material that encourages conduct that would constitute a criminal offense,
give rise to civil liability, or otherwise violate any applicable local,
state, national or international law.
6. LIMITATION OF LIABILITY AND INDEMNIFICATION
6.1. LIMITATION. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER
OR ANY THIRD PARTY FOR ANY LOST PROFITS, LOST DATA, COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, OR ANY FORM OF SPECIAL, INCIDENTAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND (WHETHER OR NOT FORESEEABLE),
ARISING OUT OF, UNDER OR RELATING TO THIS AGREEMENT, WHETHER BASED ON BREACH
OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE,
EVEN IF SUCH OTHER PARTY IS INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH
DAMAGES. OZM'S TOTAL LIABILITY UNDER THIS AGREEMENT IS LIMITED TO THE
PAYMENTS RECEIVED BY OZM FROM AFFILIATE HEREUNDER DURING THE TWELVE MONTH
PERIOD PRIOR TO THE EVENT GIVING RISE TO LIABILITY. THE FOREGOING LIMITATIONS
SHALL NOT APPLY TO ACTS OR OMISSIONS INVOLVING INTENTIONAL MISCONDUCT.
6.2. FAILURE OF ESSENTIAL PURPOSE. The parties have agreed that the
limitations and exclusions of liability specified in this Agreement will
survive and apply even if any limited remedy specified in this Agreement is
found to have failed of its essential purpose. Affiliate acknowledges that
OZM has set its rates and entered into this Agreement in reliance upon the
limitations of liability and the disclaimers of warranties and damages set
forth herein, and that the same form an essential basis of the bargain between
the parties.
6.3. INDEMNIFICATION. Each party will defend and indemnify the other
party and its customers and affiliates for, and hold them harmless from, any
loss, expense (including reasonable attorney's fees and court costs), damage
or liability arising out of any claim, demand or suit resulting from a breach
of any of the representations and warranties of the indemnifying
<PAGE>
party set forth herein. As a condition to indemnification: (a) the
indemnified party will promptly inform the indemnifying party in writing of
any such claim, demand or suit and the indemnifying party will fully
cooperate in the defense thereof; (b) the indemnified party will give the
indemnifying party sole control of the defense and all related settlement
negotiations (unless the indemnified party shall have reasonably concluded
that counsel selected by the indemnifying party shall have a conflict of
interest due to different or additional defenses in which case the
indemnifying party shall be liable for the fees of separate counsel for
indemnified party); and (c) the indemnified party will not agree to the
settlement of any such claim, demand or suit prior to a final judgement
thereon without the consent of the indemnifying party, which consent shall
not be unreasonably withheld or delayed.
7. CONFIDENTIALITY
7.1. CONFIDENTIAL INFORMATION. For purposes of this Agreement,
Confidential Information means: (i) business or technical information of
either party, including but not limited to any information relating to either
party's product plans, designs, costs, product prices and names, finances,
marketing plans, web site usage data, customer lists, business opportunities,
personnel, research, development or know-how; (ii) any written information
designated by either party as confidential or proprietary or, if orally
disclosed, reduced to writing by the disclosing party and designated as
confidential or proprietary within thirty (30) days of such disclosure; (iii)
all materials furnished by one party in connection with any audit conducted
hereunder; and (iv) the terms and conditions of this Agreement.
7.2. EXCLUSIONS. Confidential Information will not include: (i)
information that is or becomes generally known or available by publication,
commercial use or otherwise through no fault or breach of this Agreement by the
receiving party; (ii) information that is rightfully in the receiving party's
possession prior to first receiving it from the disclosing party; (iii)
information that is lawfully received by the receiving party from a third
party, without restriction on use or disclosure and without breach of a nonuse
or nondisclosure obligation; or (iv) information that the receiving party can
prove with written evidence is independently developed by the receiving party,
without use of or access to Confidential Information of the disclosing party.
7.3. OBLIGATIONS. Each party will not use the other party's
Confidential Information, except as expressly permitted under this Agreement
and will not disclose such Confidential Information to any third party, except
to its employees and consultants with a need to know for such party's
performance of this Agreement (and only subject to binding use and disclosure
restrictions at least as protective as those set forth herein executed in
writing by such employees or consultants). However, each party may disclose
Confidential Information of the other party: (i) pursuant to an order or
requirement, to which it is subject, of a court, administrative agency or
other governmental body, provided that such party gives reasonable notice to
the other party to contest such order or requirement; (ii) on a confidential
basis to legal and financial advisors and potential investors, provided,
however, that prior to such disclosure, the party disclosing the Confidential
Information shall secure an agreement from the third party receiving the
Confidential Information to keep such information confidential; and (iii)
otherwise as required by any law, rule, or regulation, to which it is
subject, provided that such party gives the other party reasonable advance
notice of such disclosure.
<PAGE>
8. PROPRIETARY RIGHTS
OZM and Affiliate each shall retain any and all right, title and interest
in and to each such party's respective intellectual property of any nature
(including patents, rights under patent applications and patents issuing on
such applications, trade secrets, copyrights, trademarks and other business
names (including goodwill in such marks), among others), subject to the
rights granted by the parties in Section 9 (concerning rights with respect
to business marks). OZM and Affiliate each agree to reproduce, and agree not
to remove or obscure proprietary rights legends (such as copyright notices,
among others) or license terms and conditions included with any intellectual
property provided in connection with this Agreement. If, as a result of any
collaboration by OZM or Affiliate under this Agreement, they become joint
owners of intellectual property by operation of law, then they will
cooperate, subject to prudent business judgment, to establish, register,
maintain and protect such intellectual property.
9. TRADEMARK LICENSE
OZM and Affiliate each will have the right, without separate charge, to
use in promoting the Entertainment Zone and the DVD Area the other's
("Owner's") business name and any trade names, trademarks and service marks
(collectively, "Marks") that OZM may adopt for use with the Entertainment
Zone or that Affiliate may adopt for use with the DVD Area. Any such use must
be identical to the use by the Owner, or as approved by the Owner in writing
in advance, or otherwise in accordance with any Mark usage guidelines
communicated by the Owner. The Owner retains all goodwill and all other
rights thereto, and the other party obtains no goodwill or any other rights
thereto as a result of the use of the owner's Marks.
<PAGE>
10. GENERAL
10.1. ASSIGNMENT. Affiliate may not assign this Agreement in whole or in
part, by operation of law or otherwise, without OZM's written consent, and
any attempted assignment of this Agreement without such consent will be null
and void. Subject to the foregoing, the rights and obligations of the parties
will bind and inure to the benefit of their respected successor and assigns.
Notwithstanding the foregoing, affiliate may transfer and assign this
Agreement to any party that acquires affiliate by merger, sale of stock, sale
of assets or otherwise.
10.2. GOVERNING LAW. The validity, construction and performance of this
Agreement, and the legal relations between the parties to this Agreement,
will be governed by and only in the courts of the State of Massachusetts and
the United States. In any such action, Affiliate submits to the personal
jurisdiction of such courts and waives any objections to venue of such courts.
10.3. FORCE MAJEURE. Except for the obligation to pay money, neither
party will be liable to the other party for any failure or delay in
performance caused by reasons beyond such party's reasonable control, and
such failure or delay will not constitute a breach of this Agreement.
10.4. U.S. DOLLARS. All payments by one party to the other party under
this Agreement shall be in U.S. Dollars.
10.5. NOTICES. Any notices under this Agreement will be sent by
confirmed facsimile, nationally-recognized express delivery service, or
certified or registered mail, return receipt requested, to the address first
set forth above or such other address as the party specifies in writing.
Notice by confirmed facsimile or express delivery service will be deemed
received and effective upon delivery. Notice by certified or registered mail
will be deemed received and effective five (5) days after dispatch.
10.6. RELATIONSHIP OF PARTIES. Neither this Agreement nor the parties'
business relationship establishing hereunder will be construed as a
partnership, joint venture or agency relationship or as granting a franchise.
10.7. WAIVER. The waiver of any breach or default of this Agreement
will not constitute a waiver of any subsequent breach or default, and will
not act to amend or negate the rights of the waiving party.
10.8. SEVERABILITY. If one or more of the provisions contained in this
Agreement is determined to be invalid, illegal or unenforceable in any
respect under any applicable statute or rule of law, then such provision will
be considered inoperable to the extent of such invalidity, illegality or
unenforceability, and the reminder of this Agreement will continue in full
force and effect. The parties hereto agree to replace any such invalid,
illegal or unenforceable provision with a new provision that has the most
nearly similar permissible economic and legal effect.
10.9. ENTIRE AGREEMENT. This Agreement is the complete and exclusive
agreement between the parties with respect to the subject matter hereof,
superseding and replacing any and
<PAGE>
all prior agreements, communications, and understandings (both written and
verbal) regarding such subject matters. This Agreement may only be modified,
or any rights under it waived, by a written document executed by both parties.
10.10. COMPLIANCE WITH LAW. Each party shall comply in all material
respects with all applicable federal, state and local laws, statutes,
ordinances, rules and regulations in the performance of its duties hereunder.
10.11. COUNTERPARTS. This Agreement may be executed in counterparts.
Each of which shall be deemed as original and all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their duly authorized representatives as of the date first
written above.
AFFILIATE ONE ZERO MEDIA, INC.
Signature: /s/Michael Dubelko 8/14/98 Signature: /s/Gordon Thomas Aley
Name: Michael Dubelko Name: Gordon Thomas Aley
Title: President Title: VP, Business Development
Signature: /s/ Alan B. Chebot
Name: Alan B. Chebot
Title: President
<PAGE>
EXHIBIT A
FOUR YEAR EXCLUSIVE CONTRACT BETWEEN ALTAVISTA AND ONEZERO MEDIA, INC.
<PAGE>
Exhibit 10.12
DISTRIBUTION AGREEMENT
This AGREEMENT is entered into by and between Infoseek Corporation, a
corporation duly organized under the laws of California, with its principal
place of business at 1399 Moffett Park Drive, Sunnyvale, California
94089-1134, hereinafter referred to as "Infoseek", and DVD Express Inc., a
corporation organized under the laws of the State of California with its
principal place of business at 7083 Hollywood Boulevard, Suite 100, Los
Angeles, California, hereinafter referred to as "Content Partner" or "DVD".
WITNESSETH:
WHEREAS, Infoseek has developed and maintains an Internet information search
and navigation service (the "Service") located at www.infoseek.com through
which information is provided to its users ("Users"); and
WHEREAS, Content Partner is the provider of information described in Appendix
A hereto (the "Content"), which Content Partner and Infoseek desire to make
available to Users;
NOW, THEREFORE, for good and valuable consideration, and in consideration of
the mutual covenants and conditions herein set forth, and with the intent to
be legally bound thereby, Infoseek and Content Partner hereby agree as
follows:
1. LICENSE; OBLIGATIONS OF CONTENT PARTNER
1.1 Subject to the terms and conditions of this Agreement, Content
Partner hereby grants to Infoseek and its subsidiaries and
affiliates (collectively "Infoseek"), a fully-paid, irrevocable,
worldwide, non-exclusive right and license to use, reproduce,
adapt, incorporate, integrate, distribute and otherwise exploit the
Content on the Service to be hosted on Infoseek's servers
("Infoseek-hosted Content") to Users via on-line access provided
directly or indirectly by Infoseek and, in conjunction with
Infoseek's activities pursuant to this Agreement, to exploit the
applicable copyrights, trade names, trade dress, trademarks and
other intellectual property rights of Content Partner. Content
Partner shall license to Infoseek only such Content to which it
owns and/or has rights to provide hereunder. Content Partner shall
notify Infoseek within a reasonable time in the event such Content
becomes no longer available for display on the Service and Infoseek
will remove such Content within a reasonable time. The terms set
forth in the Appendices attached hereto shall also apply to this
Agreement.
1.2 a. Content Partner will deliver to Infoseek the Infoseek-hosted
Content in a mutually agreeable format, electronically via
modem or Internet access (e.g. Internet ftp, Internet html, or
Internet e-mail). Content Partner agrees to certify that all
deliveries hereunder were made electronically. Content Partner
will promptly correct any errors contained in the
Infoseek-hosted Content of which it becomes aware. Content
Partner will make updates to the Infoseek-hosted Content
available to Infoseek on a regular mutually agreed upon basis.
Infoseek shall have the right, but not the obligation, to
remove, or direct Content Partner to remove, from the
Infoseek-hosted Content, information or other material which
Infoseek, in its sole discretion, determines to be offensive,
in poor taste, or otherwise objectionable.
b. The portion of the Content not to be hosted on Infoseek's
servers will be hosted on Content Partner's servers and
accessed by Users from a Content Partner/Infoseek co-branded
Web page ("Co-Branded Page") pursuant to the specifications in
Appendix C hereto. Content Partner shall cooperate and assist
Infoseek by promptly answering questions and complaints
regarding the Content. Content Partner shall promptly inform
Infoseek of any event or circumstance, and provide all
information pertaining to such event or circumstance, related
to the Content which could lead to a claim or demand against
Infoseek by any third party.
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1.3 Content Partner agrees not to override browser back button
functionality to prevent Users who link to the Content Partner
service from the Service from returning to the Service.
1.4 Each party will be responsible for its respective
telecommunications charges with respect to the provision of
respective portions of the Content to Infoseek and to Users.
Infoseek retains the right to adapt or otherwise alter the design,
look, content and any other attributes of the Content and the
Service and Service pages. Infoseek will use commercially
reasonable efforts to incorporate into the Content error
corrections, as provided and identified as such by Content Partner.
2. FEES AND PAYMENTS
2.1 Content Partner will make payments to Infoseek in the amounts and
at the times specified in Appendix B. Content Partner will be
responsible for the proper payment of all taxes, including sales,
excise and value added taxes, which may be levied in connection
therewith, exclusive of taxes based upon Infoseek's net income.
2.2 a. Each payment will be accompanied by a report which details the
payment due and which contains the methodology used to
calculate the payment due. Such report will include the
information specified in Appendix B.
b. Infoseek shall have the right to retain a U.S. nationally
prominent or other mutually agreeable independent auditor to
whom Content Partner shall allow reasonable access to Content
Partner's applicable books of account and other for the
purpose of verifying the amounts due and payable to Infoseek
under this Agreement. Access to Content Partner's
documentation shall be during Content Partner's regular
business hours upon at least fifteen (15) business days prior
written notice. Infoseek may request audits no more than once
in a consecutive twelve (12) month period and may not review
records more than twelve (12) months old. In the event that an
audit discloses an underpayment, Content Partner shall
immediately pay to Infoseek the amount of such underpayment
and in the event that an audit discloses an underpayment of
one hundred thousand dollars ($100,000) or more, Content
Partner shall immediately pay to Infoseek the amount of such
underpayment and shall pay the reasonable costs of such audit.
3. CONFIDENTIAL INFORMATION
3.1 Either Infoseek or Content Partner may disclose to the other (the
"Receiving Party") certain information that the disclosing party
deems to be confidential and proprietary ("Proprietary
Information"), and technical and other business information of the
disclosing party that is not generally available to the public.
3.2 The Receiving Party agrees to use Proprietary Information solely in
conjunction with its performance under this Agreement and not to
disclose or otherwise use such information in any fashion. The
Receiving Party, however, will not be required to keep confidential
such Proprietary Information that becomes generally available
without fault on its part; is already rightfully in the Receiving
Party's possession without restriction prior to its receipt from
the disclosing party; is independently developed by the Receiving
Party; is disclosed by third parties without similar restrictions;
is rightfully obtained by the Receiving Party from third parties
without restriction; or is otherwise required by law or judicial
process.
4. REPRESENTATIONS AND WARRANTIES
4.1 Content Partner is the owner and/or has the right to grant the
rights hereunder and Content Partner is solely responsible for any
legal liability whether in tort, contract, or otherwise
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arising out of or relating to (i) the Content, and/or (ii) any
material to which users can link through the Content. Content
Partner represents and warrants to Infoseek, and any entities
("Third Party Entities") to and by whom Content is delivered for
display to users, that it holds the necessary rights to permit the
use of Content by Infoseek for the purpose of this Agreement; that
its entry into this Agreement does not violate any agreement with
any other party; that its performance under this Agreement will
conform to applicable laws and government rules and regulations;
and that the use, reproduction, distribution, transmission, or
display of Content, any data regarding users, and any material to
which users can link through Content, will not (a) violate any laws
or any rights of any third parties, including, but not limited to,
such violations as infringement or misappropriation of any
copyright, patent, trademark, trade dress, trade secret, music,
image, or other proprietary or property right, false advertising,
unfair competition, defamation, invasion of privacy or publicity
rights, moral or otherwise, or rights of celebrity, violation of
any antidiscrimination law or regulation, or any other right of any
person or entity; or (b) contain any material that is: unlawful,
harmful, fraudulent, threatening, abusive, harassing, defamatory,
vulgar, obscene, profane, hateful, racially, ethnically, or
otherwise objectionable, including, without limitation, any material
that supports, promotes or otherwise encourages wrongful
conduct that would constitute a criminal offense, give rise to
civil liability, or otherwise violate any applicable local, state,
national or international laws.
4.2 Infoseek represents and warrants to Content Partner that its entry
into this Agreement does not violate any agreement with any other
party; that its performance under this Agreement will conform to
applicable laws and government rules and regulations; and that the
technology as utilized by the Service does not infringe any
copyright, patent, trademark, trade dress or trade secret of any
person or entity.
5. LIMITATION OF LIABILITY; DISCLAIMER
5.1 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR EXEMPLARY DAMAGES OF ANY
NATURE, EVEN IF SUCH PARTY SHALL HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
5.2 EXCEPT AS SET FORTH IN SECTION 4, NEITHER PARTY MAKES ANY, AND EACH
PARTY ACKNOWLEDGES THAT THE OTHER HAS NOT MADE ANY, AND HEREBY
SPECIFICALLY DISCLAIMS ANY, REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, REGARDING THE SERVICE, THE CONTENT OR THE OPERATION OF
THE CONTENT ON THE SERVICE, INCLUDING, BUT NOT LIMITED TO ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
6. TERM AND TERMINATION
6.1 This Agreement shall be effective on the date executed by Infoseek
("Effective Date") and shall continue in force for an initial term
ending twenty four (24) months from the Effective Date ("Initial
Term"). Launch Date is defined as the date the Content Partner's
elements become available to Users on the Service as designated in
writing by Infoseek to Content Partner. Upon prior mutual written
agreement, the then current term of this Agreement may be renewed at
the end of such initial term and each anniversary date thereafter
for one (1) year renewal terms. Infoseek or Content Partner may
terminate this Agreement at any time, without cause, upon at least
sixty (60) days prior written notice.
6.2 Either party will have the right to terminate this Agreement if the
other party is in default of any obligation herein, which default
is incapable of cure or which, being capable of cure, is not cured
within sixty (60) days (or fourteen (14) days with respect to any
default in any payment obligation) after receipt of written notice
of such default from the non-defaulting party or within such
additional cure period as the non-defaulting party may authorize.
If the
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Content Partner's service does not meet the following performance
standards, Infoseek shall notify the Content Partner in writing and
upon such notice Infoseek shall have the right to terminate in
accordance with the following:
a. Uptime Performance: The Content Partner service shall maintain a
one hundred percent (100%) uptime within a one week period
(with the exception of any scheduled maintenance performed by
Content Partner where Infoseek is notified in advance) as
measured by HTML requests from Infoseek at five (5) minute
intervals with thirty (30) second time-outs. Service uptime
means a User is able to link to Content Partner's service. If
Content Partner's service fails to meet such uptime
performance standards and is not corrected within forty-eight
(48) hours from written notification to Content Partner by
Infoseek, Infoseek may immediately terminate this Agreement
upon written notice. Such Uptime Performance shall be measured
by multiple independent third party ISPs.
b. Functional Performance: The Content Partner service shall
function ninety-nine percent (99%) of the time within a one
week period (with the exception of any scheduled maintenance
performed by Content Partner where Infoseek is notified in
advance) as measured by HTML requests from Infoseek at five
(5) minute intervals with thirty (30) second time-outs. If the
Content Partner's service fails to meet such functional
performance standards for a period of five (5) consecutive
working days after written notification by Infoseek, Infoseek
may immediately terminate the Agreement upon written notice.
Functional service means a User can perform a transaction on
Content Partner's service. Such Functional Performance shall be
measured by multiple independent third party ISPs.
6.3 All provisions of this Agreement which may be reasonably
interpreted or construed as surviving the termination or expiration
of this Agreement shall survive the termination or expiration of
this Agreement.
6.4 Upon the termination or expiration of this Agreement, each party
shall promptly return all Proprietary Information, and other
information, documents, manuals and other materials belonging to the
other party, except as may be otherwise provided in this Agreement.
7. FORCE MAJEURE
Neither party will be liable for delay or default in the performance of
its obligation under this Agreement (other than for non-payment) if
such delay or default is caused by conditions beyond its reasonable
control, including, but not limited to, fire, flood, accident,
earthquakes, telecommunications line failures, storm, acts of war, riot,
government interference, strikes and/or walk-outs.
8. ADVERTISING AND PROMOTION
8.1 Content Partner and Infoseek may undertake such joint marketing
efforts as may be mutually agreed upon from time to time. Each
party shall cooperate and assist the other party by supplying,
without charge, reasonable quantities of materials for the other
party's marketing and promotional activities.
8.2 Unless required by law or to assert its rights under this
Agreement, and except for disclosure on a "need to know basis" to
its own employees, and its legal, investment, financial and other
professional advisers on a confidential basis, each party agrees
not to disclose the terms of this Agreement or matters related
thereto without the prior written consent of the other party.
Content Partner, however, may identify Infoseek in its published
listing of available services or distributors.
9. INDEMNIFICATION
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9.1 Content Partner agrees to defend, indemnify and hold Infoseek and
Third Party Entities and its and their officers, directors, agents and
employees harmless from and against any and all claims, demands,
liabilities, actions, judgments, and expenses, including reasonable
fees and expenses of attorneys, paralegals and other professionals,
arising out of or related to (i) any breach of any of Content
Partner's representations and warranties hereunder, or (ii) any injury
to person or property caused by any products or services sold or
otherwise made available through the Content.
9.2 Infoseek agrees to defend, indemnify and hold Content Partner and its
officers, directors, agents and employees harmless from and against
any and all claims, demands, liabilities, actions, judgments, and
expenses, including reasonable fees and expenses of attorneys,
paralegals and other professionals, arising out of or related to any
breach of any of Infoseek's representations and warranties hereunder.
10. GENERAL TERMS AND CONDITIONS
10.1 The parties to this Agreement are independent contractors. Neither
party is an agent, representative or partner of the other party.
Neither party shall have any right, power or authority to enter into
any agreement for or on behalf of, or to incur any obligation or
liability for, or to otherwise bind, the other party. This Agreement
shall not be interpreted or construed to create an association, joint
venture, co-ownership, co-authorship, or partnership between the
parties or to impose any partnership obligation or liability upon
either party.
10.2 Content Partner shall not assign, sublicense or otherwise transfer
(voluntarily, by operation of law or otherwise) this Agreement or any
right, interest or benefit under this Agreement, without the prior
written consent of Infoseek. Any attempted assignment, sublicense or
transfer in derogation hereof shall be null and void. Subject to the
foregoing, this Agreement shall be fully binding upon, inure to the
benefit of and be enforceable by the parties hereto and their
respective successors and assigns.
10.3 No change, amendment or modification of any provision of this
Agreement or waiver of any of its terms will be valid unless set forth
in writing and signed by the party to be bound thereby.
10.4 This Agreement shall be interpreted, construed and enforced in all
respects in accordance with the laws of the State of California. Each
party irrevocably consents to the exclusive jurisdiction of any state
or federal court for or within Santa Clara County, California over any
action or proceeding arising out of or related to this Agreement, and
waives any objection to venue or inconvenience of the forum in any
such court.
10.5 The failure of either party to insist upon or enforce strict
performance by the other party of any provision of this Agreement or
to exercise any right under this Agreement shall not be construed as
a waiver or relinquishment to any extent of such party's right to
assert or rely upon any such provision or right in that or any other
instance; rather the same shall be and remain in full force and
effect.
10.6 Any notice, approval, request, authorization, direction or other
communication under this Agreement shall be given in writing, will
reference this Agreement, and shall be deemed to have been delivered
and given (a) when delivered personally; (b) three (3) business days
after having been sent by registered or certified U.S. mail, return
receipt requested, postage and charges prepaid, whether or not
actually received; or (c) one (1) business day after deposit with a
commercial overnight courier, with written verification of receipt.
All communications will be sent to the addresses set forth below or to
such other address as may be designated by a party by giving written
notice to the other party pursuant to this section 10.6.
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If to Content Partner: If to Infoseek:
DVD Express Inc. Infoseek Corporation
Attention: Legal Department Attention: Legal Department
7083 Hollywood Boulevard 1399 Moffett Park Drive
Suite 100 Sunnyvale, CA 94089-1134
Los Angeles, CA 90028
10.7 This Agreement constitutes the entire agreement between the parties
and supersedes any and all prior agreements or understandings between
the parties with respect to the subject matter hereof. Neither party
shall be bound by, and each party specifically objects to, any term,
condition or other provision or other condition which is different
from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered
by the other party in any purchase order, correspondence or other
document, unless the party to be bound thereby specifically agrees to
such provision in writing.
10.8 The headings used in this document are for convenience only and are
not to be construed to have legal significance. In the event that any
provision of this Agreement conflicts with the law under which this
Agreement is to be construed or if any such provision is held invalid
by a court with jurisdiction over the parties to this Agreement, such
provision shall be deemed to be restated to reflect as nearly as
possible the original intentions of the parties in accordance with
applicable law, and the remainder of this Agreement shall remain in
full force and effect.
ACCEPTED FOR INFOSEEK CORPORATION ACCEPTED FOR DVD EXPRESS
By:/s/ Andrew E. Newton By:/s/ Michael Dubelko
------------------------------- -----------------------------
Authorized Signature Authorized Signature
Print Name: Andrew E. Newton Print Name: Michael Dubelko
------------------------- ----------------------
Title: VP and General Counsel Title: President
------------------------------ ---------------------------
Date: 10/13/98 Date: 10/8/98
------------------------------ ---------------------------
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APPENDIX A
1. CONTENT
"Content" means the Infoseek-hosted Content, and all materials, logos,
attributions, information, and data (a) appearing on the Co-Branded Pages,
excluding portions thereof provided by Infoseek; (b) linked to or from the
Infoseek-hosted Content; or (c) originated by and/or appearing on Content
Partner's site.
PROGRAM DESCRIPTION
For the term of this Agreement, Content Partner shall be the exclusive paid
DVD movie promoter on the Movie Sub-Channel homepage on the Service as
specified in Appendix D, excluding unpaid content, except as otherwise
specified herein. "Exclusive paid DVD movie promoter" means that Infoseek
shall not enter into an Agreement to display any ad banners, spotlights
and content selling DVD movies on the Movie Sub-Channel homepage. In
addition, for the term of this Agreement, Infoseek agrees that that no
more than one paid promoter of VHS video movies shall appear on the Movie
Sub-Channel homepage, excluding ad banners and spotlights and unpaid
content, on the Service.
For the term of this Agreement, Infoseek will not accept advertising on the
Movie Sub-Channel homepage promoting the sale of DVD movies on the Service
from Named Direct Competitors listed on Appendix E. Infoseek shall not be
prevented from entering into arrangements with any entity involving direct
advertising and promotion on the Service of anything other than the sale of
DVD Movies. Infoseek shall guarantee the following elements and positioning
as described below. Above the fold shall mean the appearance of text or
graphics at the top of a web page visible to Users on an 800x600-pixel
screen without scrolling down ("Above the Fold").
2.1 YEAR 1
a. ONE (1) ANCHOR SPONSOR BUTTON sponsoring the Movie Sub-channel: to be
located Above the Fold, on the Entertainment Channel Home Page. Such
button shall link directly to a Co-branded page hosted by DVD. Annual
Traffic Guarantee [***].
b. ONE (1) CONTENT BOX: to be located Above the Fold, on the Movie
Sub-channel of the Entertainment Channel. Annual Traffic Guarantee
[***].
c. TEXT LINK: to be located on the Entertainment Channel Directory
Results Pages. Annual Traffic Guarantee [***].
d. BANNERS - ENTERTAINMENT CHANNEL: Annual Traffic Guarantee [***].
e. BANNERS - ULTRAMATCH: Annual Traffic Guarantee [***].
f. BANNERS - GENERAL ROTATION: Annual Traffic Guarantee [***].
g. KEYWORDS - DVD, MOVIE(S): Annual Traffic Guarantee [***].
YEAR 2
h. ONE (1) ANCHOR SPONSOR BUTTON sponsoring the Movie Sub-channel: to be
located Above the Fold, on the Entertainment Channel Home Page.
Such button shall link directly to a Co-branded page hosted by DVD.
Annual Traffic Guarantee [***].
i. ONE (1) CONTENT BOX: to be located Above the Fold, on the Movie
Sub-channel of the
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Entertainment Channel. Annual Traffic Guarantee [***].
j. TEXT LINK: to be located on the Entertainment Channel Directory
Results Pages. Annual Traffic Guarantee [***].
k. BANNERS - ENTERTAINMENT CHANNEL: Annual Traffic Guarantee [***].
l. BANNERS - ULTRAMATCH: Annual Traffic Guarantee [***].
m. BANNERS - GENERAL ROTATION: Annual Traffic Guarantee [***].
n. KEYWORDS - DVD, MOVIE(S): Annual Traffic Guarantee [***].
2.2 Infoseek shall provide Content Partner with a weekly report which will
summarize weekly page impressions delivered to the Entertainment Music
Sub-Channel for each of the elements described in 2.1 above; Anchor
sponsor button, Content Box, Text Link, Banners - Entertainment Channel
Banners - Ultramatch, Banners - General Rotation, & the Keywords - DVD and
Movie(s).
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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FEES AND PAYMENTS
1. FEES AND PAYMENTS
1.1 YEAR 1
Content Partner shall pay Infoseek a total Fixed Fee of two million
seventy five thousand dollars ($2,075,000) in such amounts and on such
dates as follows:
a. [***] as prepayment which must be received by Infoseek from Content
Partner upon the Launch Date as set forth in Section 6.1; and
b. [***] due and payable the first day of each month following the
Launch Date, as designated solely by Infoseek, and shall continue for
eleven (11) contiguous months thereafter.
1.2 YEAR 2
Content Partner shall pay Infoseek a total Fixed Fee of three million
two hundred thousand dollars ($3,220,000) in such amounts and on such
dates as follows:
c. [***] as prepayment which must be received by Infoseek from Content
Partner prior to the first day of the second year of initial term,
as set forth in Section 6.1; and
d. [***] due and payable the first day of each month following the
first day of the second year of the initial term, and shall continue
for eleven (11) contiguous months thereafter.
1.2 For the term of this Agreement, Infoseek shall submit an invoice to
Content Partner prior to the end of each month following the Launch Date
indicating the amount due and payable to Infoseek with respect to
Sections 1.1 and 1.2.
1.3 In the event this Agreement is terminated before the end of the Initial
Term, a prorated refund of fixed fees calculated in good faith by
Infoseek shall be made to Content Partner.
1.4 REVENUE SHARING
DVD shall pay to Infoseek a revenue share of [***] on all gross revenue
generated from goods and services sold by DVD to Users originating their
interaction from www.infoseek.com or the Co-Branded Pages, less
exchanges, returns, and shipping, not to exceed [***] of gross sales.
Such revenue share payments shall be paid net 30 days from the end of
each quarter in which it is earned.
2.0 PAYMENT ADDRESSES
All payments are to be mailed to:
Attention: Accounts Receivable
Infoseek Corporation
1399 Moffett Park Drive
Sunnyvale, CA 94089
All invoices from Infoseek are to be mailed to:
APPENDIX C
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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SPECIFICATIONS
Co-Branded Pages Specifications:
- - Infoseek will provide the Infoseek logo to Content Partner
- - Content Partner shall not resize the Infoseek logo, animate it, change the
background color of the Infoseek logo, or place any other image within
15 pixels of the top, bottom, or sides of the Infoseek logo
- - The Infoseek logo must be linked to http:www.infoseek.com
- - The Infoseek logo must appear above the fold on all Co-Branded Pages that
are linked to and/or from the applicable Infoseek channel home page.
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APPENDIX D
MOCK-UP PAGES(S)
See attached pages
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APPENDIX E
NAMED DIRECT COMPETITORS
DVD empire
amazon.com
reel.com
netflix.com
mega dvd
imdb.com
videoserve.com
lada universal
image entertainment
ken crain's
big star
spree
kozmo
blockbuster
dvd next
videos now
total E
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<PAGE>
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----------- ------------------------ ----------
- --------------------------------------------------------------------------------
RESULTS 1-10 OF 9,482 TOTAL RESULTS HIDE SUMMARIES | UNGROUP RESULTS | NEXT 10 |
-------------- --------------- -------
*** PAGES FROM THE SAME SITE ARE GROUPED TOGETHER.
---------------------
DVD BY 888 CAMCORDER BUY THE BOOK.
- -------------------- Books about film,
TO PLACE AN ORDER CALL TOLL FREE 1-888-226-2673 ----- -----
For information or orders outside the United music and the arts.
States, call (516)462-8951 DIGITAL VIDEO DISC ----- ---------
Call Our Toll Free Number To Speak To Our Visit Borders.com.
Representative For price... ------------
75% DATE: 2 JUL 1998, Size 19.9K, The best selection
http://www.888camcorder.com/dvd.htm in the world.
---------------------
VIDEO MAGIC. VIDEOS AND DVDS FOR SALE AND RENT; MOVIES,
- -------------------------------------------------------
FILMS, VHS VIDEO CASSETTES AND... ---------------------
- --------------------------------- CLASSIFIEDS.
Video Magic. 205 N Hwy 77, Marietta, OK 73448. Find anything from
We sell new and used movies and films in the TV's to concert
following formats: videos, videocassettes, ---------------
videotapes, DVDs, video cassettes, video tapes. tickets. Even find a
We have the latest new releases of videos and dvds. --------
74% DATE: 24 AUG 1998, Size 12.3K, new mate or friend!
http://www.videomagic.formovies.com/html/index.htm ---------------------
FIRST CHOICE VIDEO (CELINA). VIDEOS AND DVDS FOR SALE AND RENT; MOVIES, FILMS,
- -------------------------------------------------------------------------------
VHS VIDEO...
- ------------
First Choice Video (Celina). 1927 Havemann Rd, Celina, OH 45822. We sell new
and used movies and films in the following formats: videos, videocassettes,
videotapes, DVDs, video cassettes, video tapes. We have the latest new...
74% DATE: 22 AUG 1998, Size 12.5K,
http://www.firstchoice-celina.formovies.com/html/index.htm
COUNTRYSIDE VIDEO (LUNENBURG). VIDEOS AND DVDS FOR SALE AND RENT; MOVIES,
- --------------------------------------------------------------------------
FILMS, VHS VIDEO...
- -------------------
Countryside Video (Lunenburg). 21 Main Street, Lunenburg, MA 01462. We sell
new and used movies and films in the following formats: videos, videocassettes,
videotapes, DVDs, video cassettes, video tapes. We have the latest new releases
of...
74% DATE: 21 AUG 1998, Size 12.5K,
http://www.countryside-lunenburg.formovies.com/
***See more pages from this site
-----------------------------
<PAGE>
<TABLE>
<S><C>
MULTIMEDIA
- ----------
JULY 28, 1997 VOL. 150 NO. 4 ASIA Hot Stuff: A Complete Film on One Side of a Disc Digital Video Discs
have arrived, and they look superb. Is this curtains for VHS and laser? By Steve...
74% DATE: 22 JUL 1997, Size 5.1K, http://www.pathfinder.com/time/magazine/1997/int/970728/multimedia_dont_put_up.html
***See more pages from this site
-----------------------------
TENDING TO "BLACK AND WHITE" SOMEWHAT: THE MPI DVDS VS. LASERDISC
- -----------------------------------------------------------------
Home page | Beatle News Briefs | Beatle TV Alert | Beatle Calendar of Events | The Beatles - today |
The Beatles - yesterday | Beatle archives | Beatles discographies | Links, ...
70% DATE: 31 MAY 1998, Size 13.1K, http://www.best.com/--abbeyrd/beatdvd.htm
JUMBO VIDEO (FONTHILL). VIDEOS AND DVDS FOR SALE AND RENT; MOVIES, FILMS, VHS VIDEO ...
- ---------------------------------------------------------------------------------------
Jumbo Video (Fonthill). Village Plaz Hwy #20, Fonthill, ON LOS 130. We sell new and used movies and
films in the following formats: videos, videocassettes, videotapes, DVDs, video cassettes, video tapes.
We have the latest new releases of videos and dvds.
70% DATE: 26 AUG 1998, Size 12.6K, http://www.jumbo115.formovies.com/
DVD FAQ
- -------
Answers to your questions about DVD technology.
67% DATE: 11 SEP 1998, Size 79.8K, http://www.videodiscovery.com/vdyweb/dvd/dvdfaq.html
MANY DVD'S FS : CAESAR HAS HEARD YOUR PLEAS!
- --------------------------------------------
[Follow Ups][Post Followup][DVDHunt.com Want To Sell Message Board] Posted by J Edmonds on August 02,
1998 at 12:10:26: In accordance with everyone who says I was asking too much, I ...
67% DATE: 14 AUG 1998, Size 12.2K, http://www.dvdhunt.com/sell/messages/501.html
***See more pages from this site
-----------------------------
JUMBO VIDEO # 109 (ST. JOHN'S). VIDEOS AND DVDS FOR SALE AND RENT: MOVIES, FILMS, VHS VIDEO ...
- -----------------------------------------------------------------------------------------------
Jumbo Video # 109 (St. John's). 141 Torbay Rd, St Johns, NF A1A 2H1. We sell new and used movies and
films in the following formats: videos, videocassettes, videotapes, DVDs, video cassettes, video tapes.
We have the latest new releases of ...
57% DATE: 27 AUG 1998, Size 12.9K, http://www.jumbo109.formovies.com/html/index.htm
</TABLE>
RESULTS 1-10 OF 9,482 TOTAL RESULTS HIDE SUMMARIES | UNGROUP RESULTS | NEXT 10
-------------- --------------- -------
*** PAGES FROM THE SAME SITE ARE GROUPED TOGETHER.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO] HOME - STOCKS - NEWS - YELLOW PAGES UPS
MAPS - CHAT - FREE WEB PAGE - HELP PACKAGE
TRACKING
- --------------------------------------------------------------------------------
------------------------ ------
ENTERTAINMENT Infoseek Entertainment Go
------------------------ ------
- --------------------------------------------------------------------------------
[LOGO].COM
Click here
----------
Books about music and film at Borders.com. In stock. Fast delivery.
---------------------------------------------------------------------
BOOKS MUSIC SPONSORED BY
- ----- ----- MUSIC BOULEVARD
Shopping, reviews, SPONSORED BY CDs, the charts
magazines -----------
BORDERS.COM
-----------
MOVIES SPONSORED BY TELEVISION
- ------ ----------- ----------
Showtimes, videos DVD EXPRESS Listings, soaps, dramas, stars
-----------
- --------------------------------------------------------------------------------
ENTERTAINMENT NEWS
- --------------------------------------------------------------------------------
MUSIC:
NEWS HEADLINES FROM myLAUNCH
--------
- - Porn Site Owners To Webcast 'World's Biggest Hip-Hop Concert'
-------------------------------------------------------------
9/9/98 6:00:00 PM
- -----------------
- - Fat Joe, Big Pun Busted; Noreaga Surrenders 9/9/98 6:00:00 PM
-------------------------------------------------------------
- - Dust Brothers Get Busy With Several New Projects 9/9/98 6:00:00 PM
------------------------------------------------------------------
- - It's All About The Benjamins For Stones, Master P 9/9/98 11:00:00 AM
--------------------------------------------------------------------
- - Fugees' Lauryn Queen Of The Hill For Second Week 9/9/98 11:00:00 AM
-------------------------------------------------------------------
MORE MUSIC: Rocktropolis | Jazz Central Station
------------ --------------------
TV: Popular TV shows | Soap operas
---------------- -----------
MOVIES: Movie meta-sites | Hollywood news
---------------- --------------
BOOKS: Literary sites | Reviews
-------------- -------
- --------------------------------------------------------------------------------
EXPLORE REVIEWED WEB SITES
- --------------------------------------------------------------------------------
- - Find games
----------
- - Theme parks
-----------
- - Listen to radio
---------------
- - Go to the theater
-----------------
- - What's your sign?
-----------------
- - Japanese animation
------------------
- - Science fiction and stuff
-------------------------
- --------------------------------------------------------------------------------
OUR TOP 10 ENTERTAINMENT SITES
1. Mr. Showbiz
-----------
2. CelebSite
---------
3. Hollywood Reporter
------------------
4. National Public Radio
---------------------
5. The Drudge Report
-----------------
6. Rec.Humor.Funny.
----------------
7. Playbill
--------
8. Firstview
---------
9. The Getty
---------
10. Smithsonian Magazine
--------------------
- --------------------------------------------------------------------------------
DO IT TONIGHT
- --------------------------------------------------------------------------------
CHECK YOUR LOCAL LISTINGS FOR THE TIMES OF YOUR FAVORITE TV SHOWS AT TVgrid.Com.
----------
Enter your ZIP code:
- ------ --------
seek
- ------ --------
- --------------------------------------------------------------------------------
USE MovieLink TO LOCATE THE SILVER SCREEN NEAREST YOU.
---------
Enter your zip code:
- --------------------------- --------
94089 seek
- --------------------------- --------
<PAGE>
PANDESIC LLC
HOSTED PANDESIC-TM- E-BUSINESS SOLUTION
AGREEMENT
PANDESIC-TM- E-BUSINESS SOLUTION
CONTRACT #_______
Date: March 25, 1998
With: DVD EXPRESS, Inc., 7083 Hollywood Blvd., Suite 305, Los Angeles, CA,
90028 ("Merchant")
This agreement (the "Agreement") sets out the terms and conditions under
which Pandesic LLC, a Delaware limited liability company, with its offices at
Sunnyvale, California ("Pandesic") will make available the Pandesic-TM-
E-Business Solutions service to Merchant who wishes to implement an
electronic commerce capability with integrated internal business
functionality. Pandesic and Merchant agree as follows:
1. PANDESIC E-BUSINESS SOLUTIONS SERVICE AND LICENSE
Pandesic will provide services which include the implementation, hosting and
administration of Merchant's Pandesic-TM- E-Business Solution on
computer servers operated by Pandesic (the "Hosted Services") and
configured with and containing the software and related documentation
(which together with any upgrades, modifications, or enhancements which
Pandesic may provide to Merchant hereunder shall be referred to as the
"Licensed Software"), all as more specifically described in this
Agreement and in Schedule A hereto (collectively, the "Pandesic
E-Business Solutions Service").
2. DEFINITIONS
In this Agreement,
a) "Documentation" means the standard documentation provided to
Merchant by Pandesic describing the Pandesic E-Business Solutions
Service and the Licensed Software and their operation, whether
transmitted on paper, on magnetic media or by electronic means.
b) "Affiliates" means those entities whose goods and services are sold
by Merchant, on a consignment basis, through Merchant's web site
utilizing Merchant's Pandesic E-Business Solutions Service.
3. PANDESIC-TM- E-BUSINESS SOLUTIONS SERVICE
Pandesic or its representatives will:
i) install the Licensed Software on servers operated by Pandesic,
at Pandesic's facilities or on other servers, as mutually
agreed upon (the "Pandesic Server");
ii) implement, host and administer Merchant's Internet commerce
activities utilising the Pandesic-TM- E-Business Solution; and
iii) provide a total of up to 5 hours of training to Merchant's
employees at Merchant's facilities in the U.S.A..
4. SOFTWARE LICENSE
a) Pandesic hereby grants to Merchant, during the Pandesic E-Business
Solutions Service Term, a non-exclusive, and non-assignable (except
as permitted in Section 18) license to use the Licensed Software
for the purposes of conducting business over the Internet, subject
to the limitations set out in Schedule A hereto.
b) Merchant acknowledges that certain third party software programs
are bundled in the Licensed Software (the "Supplier Software") and
may be subject to electronic clickwrap licenses from such suppliers
(a "Supplier Agreement"). Merchant agrees that it will not access
or use the Supplier Software unless it has accepted the Supplier
Agreement in accordance with the procedure required by such
supplier(s), and it further agrees that in case of any conflict
between this Agreement and a Supplier Agreement, the terms of the
Supplier Agreement shall govern with respect to the Supplier Software
licensed pursuant hereto.
5. MAINTENANCE AND SUPPORT SERVICES
a) Pandesic will provide to Merchant the maintenance and support services
set out in Schedule B in respect of the Licensed Software (the
"Maintenance and Support Services"). Merchant agrees to provide access
for, accept, and do nothing to prevent electronic communications from
and to Pandesic and its third party service providers. It is
acknowledged and agreed that network and server security is the joint
responsibility of Merchant and
<PAGE>
-2-
Pandesic and Pandesic cannot be responsible for third party spamming of
Merchant's system.
6. ADDITIONAL TERMS
a) Pandesic will provide the enhanced functionality to the Pandesic
E-Business Solutions Service, either specifically for Merchant or
generally as part of the standard product, according to the timetable
and functionality list set out in Schedule D, attached.
b) Notwithstanding any other provision of this Agreement, Merchant shall
have the option of terminating this Agreement for any reason within 90
days of the date the Licensed Software is made ready for use by the
Merchant. Sections 13, 14 and 15 shall continue to apply in such event.
c) In consideration of Merchant assisting Pandesic in the validation of the
Pandesic E-Business model, Pandesic shall pay to Merchant a market
development fee, being [***] of the Merchant's service fees calculated in
accordance with Schedule C. In return, Merchant shall; (i) participate
in at least 2 marketing activities in each month, as requested by
Pandesic, such as reference calls and site visits by potential Pandesic
merchants, customer meetings, participation in public seminars and
participation in trade shows; (ii) Merchant shall prominently display the
Pandesic logo on the home page of its storefront web site, subject to the
trademark provisions of Section 20. The size and placement of the logo
shall be determined by Pandesic and Merchant, acting reasonably, with the
intent that it be a prominent feature of the web site look and feel;
(iii) Merchant shall employ a full-time director of technology whose
function will be to act as liaison to Pandesic in developing new
functionality and applications for the Licensed Software.
d) The Merchant acknowledges that its rights to use the Pandesic
trademarked logo (the "Logo") hereunder will terminate upon the earlier
of (a) termination of this Agreement and (b) at Pandesic's request for
any reason. The Merchant will only use the Logo as permitted hereunder.
The Merchant acknowledges that the Merchant has no rights or interest in
the Logo and all use of the Logo shall inure to the benefit of Pandesic.
The nature and quality of all services rendered by the Merchant in
connection with the Logo, and related advertising, promotional and other
related uses of the Logo by the Merchant shall conform to standards set
by and shall be under the control of Pandesic.
e) Pandesic shall have Merchant's web site live and operational within by
April 27, 1998 failing which Merchant may terminate in accordance with
Sub-section 6(b), above. This obligation is contingent upon Merchant
co-operating fully with Pandesic in such web site creation and
deployment. The new Merchant web site shall have the a similar format,
look and feel to their current web site.
f) Pandesic agrees not to provide, in the future, the Pandesic E-Business
Solutions Service to a direct competitor of Merchant (a virtual store
selling digital video disks where the sales of such digital video discs
are greater than, at the time of contracting, [***] of such competitor's
total online revenues) for the initial term of this Agreement. This
provision has no effect with respect to current Pandesic merchants.
g) Pandesic agrees that, for the initial term of this Agreement, the rates
for the monthly service fees charged to Merchant and described in Schedule
C shall be the maximum charged to other Pandesic Merchants. If any lower
transaction percentage rates are offered to any other Pandesic merchant
by Pandesic both above and below the [***] sales per month level (the
calculation to determine whether the rates are lower shall include the
calculation of the development fee described in sub-section 6(c) above),
Pandesic shall make such lower rates applicable to Merchant and will
advise Merchant immediately.
7. TITLE TO THE LICENSED SOFTWARE
Merchant acknowledges that its rights pursuant to this Agreement do not
extend beyond the rights to the licenses granted pursuant to Section 4
and that it does not otherwise acquire any rights of ownership or
possession or any interest in intellectual property in the Licensed
Software. Merchant agrees that it will not, at any time during or after
the termination of this Agreement, contest or challenge Pandesic's and
its suppliers ownership of or rights in or related to the intellectual
property in the Licensed Software. Title to any medium containing the
Licensed Software delivered to Merchant shall remain with Pandesic.
***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
-3-
8. RESTRICTIONS
Merchant, its employees, agents, consultants and Affiliates will not:
a) copy, modify, alter, disassemble, decompile, translate or convert into
human readable form, or reverse engineer, all or any part of the
Licensed Software and shall not use the Licensed Software to develop
any derivative works or any functionally compatible or
competitive software, except to the extent permitted under
applicable law. However, Merchant may create interfaces to
the Licensed Software or modify the provided interfaces to
permit interfacing with Merchant's legacy database systems. Merchant
shall not separate the Licensed Software into its component parts nor
incorporate any component files into any product, nor shall it remove
any proprietary, trademark or copyright markings or confidentiality
legends within the Licensed Software (and Pandesic agrees that it
shall not make such markings or legends visible to customers of
Merchant);
b) offer, for a fee or free of charge, services consisting of the
processing of data through the use of the Pandesic Server or the
Licensed Software for or for the benefit of any person other than
Merchant or its Affiliates;
c) use the Pandesic Server or the Licensed Software for commercial time
sharing, rental or service bureau use;
d) SELL, LEASE, RENT, LICENSE, SUB-LICENSE, TRANSFER, MARKET, DISTRIBUTE,
REDISTRIBUTE, OR OTHERWISE PART WITH THE LICENSED SOFTWARE OR ANY
COPIES OF THE LICENSED SOFTWARE, IN ANY MANNER OR IN ANY FORM NOT
EXPRESSLY PERMITTED BY THIS AGREEMENT; or
e) use the Licensed Software in any manner which violates any law or
regulation; is for a fraudulent purpose; contravenes public policy;
may cause Pandesic or its licensors to be subject to investigation,
prosecution or legal action or in contravention with the written
instructions provided by Pandesic.
9. CHARGES
a) In respect of Pandesic's provision of the Pandesic E-Business
Solutions Service Merchant will pay to Pandesic the service fees in
the amount and within the time set out Schedule C. The fees referred
to in this Section 9 do not include any taxes. If Pandesic is
required to pay any sales, use, property, value added, goods and
services or other federal or state or local taxes (excepting any taxes
on Pandesic's income) based on or as a result of the Pandesic
E-Business Solutions Service, lease or the license granted pursuant to
this Agreement, or Merchant's use of the Pandesic Server or the
Licensed Software, such taxes shall be charged to and collected from
Merchant in addition to the service fees set out in Part 1 of Schedule
C.
b) Merchant shall maintain complete and accurate records of its accounts
including, without limitation, invoices, correspondence and all
banking, financial or other records related to its use of the Pandesic
E-Business Solutions Service during the existence of this Agreement
and for at least three years after termination or expiration.
10. AUDIT
Pandesic shall have the right, on a once per year basis, to audit and inspect
Merchant's use of the Pandesic E-Business Solutions Service and the sales
records associated therewith in order to verify compliance with the terms
of this Agreement.
11. TERM
a) The term of this Agreement will commence on the date hereof.
b) Subject to Section 12, the term of Pandesic's obligation to provide
the Pandesic-TM- E-Business Solutions Service and Merchant's
obligations to pay for such will end 24 months from the date on which
the Licensed Software is made ready for use by the Merchant (the
"Initial Term"), following which it will be automatically renewed for
further successive one year terms (each, a "Renewal Term") unless
Pandesic or Merchant gives the other party at lease 90 days notice of
non-renewal prior to the end of the Initial Term or any Renewal Term
(the Initial Term and any
<PAGE>
-4-
Renewal Terms collectively, the "Pandesic-TM- E-Business Solutions
Service Term").
12. TERMINATION
a) Pandesic may immediately terminate this Agreement and its obligations
under all Schedules attached hereto by notice in writing to Merchant
if any of the following occur:
i. Merchant's use of the Licensed Software exceeds the scope of the
license conferred by Section 4;
ii. Merchant materially breaches any term of this Agreement and such
breach is not cured within 10 days of notice to Merchant of such
breach; or
iii. MERCHANT MAKES ANY ATTEMPT TO ASSIGN, SUB-LICENCE, OR OTHERWISE
TRANSFER ANY OF ITS RIGHTS UNDER THIS AGREEMENT OTHER THAN AS
PERMITTED BY SECTION 18.
b) The provisions of Sections 12, 13, 14 and 15 will continue to apply
between Pandesic and Merchant following the termination of this
Agreement.
c) Upon the termination of this Agreement pursuant to Section 12(a):
i) Merchant's rights under Section 4 shall immediately cease;
ii) Merchant shall return to Pandesic, or destroy (such destruction
to be certified in writing by an officer of Merchant), at the
Merchant's expense, all copies of the Licensed Software and
Documentation within 30 days of termination;
iii) Pandesic shall be under no further obligation to provide the
Maintenance and Support Services.
d) Termination of this Agreement shall not limit either party from
pursuing any other remedies available to it, including injunctive
relief, not shall such termination relieve Merchant, in the event that
it terminates this Agreement or its breach causes such termination,
from its obligation to pay fees accrued prior to the termination and
the present value of the minimum monthly fees from the date of
termination through the end of the E-Business Solutions Service Term,
discounted at a rate of six (6%) per annum.
e) In the event of any termination hereunder, Merchant shall not be
entitled to any refund of any payments made by Merchant.
13. CONFIDENTIALITY
a) Merchant and Pandesic each acknowledge that, during the term of this
Agreement, it will receive information from the other party that the
disclosing party regards as confidential (collectively, the
"Confidential Information"). Pandesic and Merchant each agree to take
measures to protect the confidentiality of the other party's
Confidential Information that, in the aggregate, are no less
protective than those measures it uses to protect the confidentiality
of its own Confidential Information, but at a minimum, Merchant
and Pandesic shall take reasonable steps to (i) use Confidential
Information of the other party only for the purposes of this
Agreement; (ii) avoid disclosure of such Confidential Information
to any third party, without the disclosing party's prior written
consent, other than to each other's employees and contractors on
a need-to-know basis; (iii) advise its employees and contractors
of the confidential nature of the Confidential Information and
of the prohibitions contained herein; (iv) not duplicate such
Confidential Information, except as reasonably necessary to
perform their duties hereunder, and (vi) not remove or destroy
any proprietary or copyright notice appearing therein.
b) This Section 13 will not apply to Confidential Information that:
i) is rightfully known to the recipient prior to receipt from the
disclosing party;
ii) is required to be disclosed under the laws of that party's
jurisdiction (provided that the parties shall meet and discuss in
good faith reasonable and lawful methods for limiting such
disclosure);
iii) is disclosed to an assignee of Pandesic; or
iv) is or later enters the public domain.
c) Pandesic and Merchant each acknowledge that its failure to comply with
the provisions of this Section 13 will cause irreparable harm to the
other party which cannot be adequately compensated for in damages, and
accordingly acknowledges that the other party will be
<PAGE>
-5-
entitled, in addition to any other remedies available to it, to
interlocutory and permanent injunctive relief to restrain any
anticipated, present or continuing breach of this Section.
14. NO WARRANTIES.
PANDESIC WARRANTS THAT THE LICENSED SOFTWARE WILL SUBSTANTIALLY CONFORM TO
THE FUNCTIONAL SPECIFICATIONS CONTAINED IN THE DOCUMENTATION. PANDESIC
DOES NOT WARRANT THAT THE LICENSED SOFTWARE WILL OPERATE UNINTERRUPTED OR
THAT IT WILL BE FREE FROM MINOR DEFECTS OR ERRORS WHICH DO NOT MATERIALLY
AFFECT SUCH PERFORMANCE OR THAT THE APPLICATIONS CONTAINED IN THE
LICENSED SOFTWARE ARE DESIGNED TO MEET ALL OF MERCHANT'S OR ITS
AUTHORIZED AFFILIATES' BUSINESS REQUIREMENTS.
ONE OF PANDESIC'S LICENSORS IS TAXWARE INTERNATIONAL, INC. ("TAXWARE"). WITH
RESPECT TO SUCH TAXWARE SOFTWARE AND DATA, PANDESIC DOES NOT WARRANT THE
ACCURACY OF THE DATA AND OTHER CALCULATIONS MADE BY THE TAXWARE SOFTWARE.
MERCHANT BEARS FULL RESPONSIBILITY FOR THE DETERMINATION OF THE ACCURACY
AND APPLICABILITY OF THE OUTPUT FROM THE TAXWARE SOFTWARE AND
ACKNOWLEDGE AND UNDERSTAND THAT TAX CALCULATIONS OFTEN INVOLVE
INTERPRETATIONS AND THAT THE DATA OF MANY JURISDICTIONS CAN CHANGE
RAPIDLY. MERCHANT UNDERSTANDS THAT TAXWARE IS NOT PROVIDING SPECIFIC TAX
ADVICE AND MERCHANT SHOULD OBTAIN THE ADVICE OF QUALIFIED PROFESSIONALS
IN THIS AREA.
15. LIMITATION OF LIABILITY.
A) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY
STATUTE OR RULE OF LAW, SUBJECT TO SECTION 13(C), PANDESIC'S
CUMULATIVE LIABILITY FOR ALL CLAIMS ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT AND ANY SCHEDULES ATTACHED HERETO, WHETHER DIRECTLY
OR INDIRECTLY, INCLUDING, WITHOUT LIMITATION, FROM OR IN CONNECTION
WITH THE PANDESIC E-BUSINESS SOLUTIONS SERVICE, THE PANDESIC SERVER,
THE HOSTING SERVICES, THE LICENSED SOFTWARE, OR THE PROVISION OF THE
MAINTENANCE AND SUPPORT SERVICES SHALL NOT EXCEED THE LESSER OF THE
CHARGES PAYABLE BY MERCHANT PURSUANT TO THIS AGREEMENT IN THE YEAR IN
WHICH THE CAUSE OF ACTION AROSE OR $500,000.
B) NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT,
CONSEQUENTIAL OR SPECIAL DAMAGES CLAIMED BY ONE OF THE PARTIES OR
ANY THIRD PARTY, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF
PROFITS OR REVENUE, DATA LOSS OR FAILURE TO RELEASE EXPECTED SAVINGS,
HOWEVER DERIVED.
C) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY
STATUTE OR RULE OF LAW EXCEPT FOR ITS OBLIGATIONS UNDER SECTIONS 9
AND 13, MERCHANT'S CUMULATIVE LIABILITY FOR ALL CLAIMS ARISING OUT OF
OR IN CONNECTION WITH THIS AGREEMENT AND ANY SCHEDULES ATTACHED
HERETO, WHETHER DIRECTLY OR INDIRECTLY, INCLUDING, WITHOUT LIMITATION,
FROM OR IN CONNECTION WITH THE PANDESIC E-BUSINESS SOLUTIONS SERVICE,
THE PANDESIC SERVER, THE HOSTING SERVICES, THE LICENSED SOFTWARE, OR
THE PROVISION OF THE MAINTENANCE AND SUPPORT SERVICES SHALL NOT
EXCEED THE LESSER OF THE CHARGES PAYABLE BY MERCHANT PURSUANT TO THIS
AGREEMENT IN THE YEAR IN WHICH THE CAUSE OF ACTION AROSE OR $500,000.
D) THIS SECTION 15 APPLIES REGARDLESS OF THE GROUNDS ON WHICH MERCHANT
BASES ITS CLAIM, INCLUDING BUT NOT LIMITED TO CONTRACT OR TORT, EVEN
IF THE DAMAGES ARE CAUSED BY BREACH OF CONTRACT (INCLUDING, WITHOUT
LIMITATION, FUNDAMENTAL BREACH), OR BY THE NEGLIGENCE, GROSS
NEGLIGENCE, NEGLIGENT MISREPRESENTATION OR OTHER FAULT OF
PANDESIC,AND EVEN IF
<PAGE>
-6-
PANDESIC HAS BEEN ADVISED OF THE POSSIBILITY OF THESE DAMAGES.
16. AUTHORIZATION
The relationship between Pandesic and Merchant is intended to be that of
independent contractors. Merchant acknowledges that Pandesic is
providing a service and granting a license only, and that by
providing the Pandesic E-Business Solutions Service Pandesic is not
acting as the employee, agent or representative in any other capacity
of Merchant.
17. PROPRIETY RIGHT INFRINGEMENT
a) Subject to Section 15, Pandesic will indemnify Merchant and save
Merchant harmless for and against any and all costs, losses, damages,
legal costs and expenses, liability, claims and demands incurred by
or made against Merchant alleging that the use of the Licensed
Software by Merchant in accordance with the terms of this Agreement
infringes or otherwise breaches the copyright, trade secret, or other
intellectual property, other than patent rights, of any third party,
provided that Merchant gives Pandesic prompt notice of, and
reasonable assistance in defending, any claim to which this Section
17 applies, and provided further that Pandesic will have sole
authority to defend and contest or settle any claim to which this
Section 17 applies.
b) Pandesic will have no liability under this Section 17 for, and
Merchant will indemnify and save Pandesic harmless from and against
any and all costs, losses, damages, legal costs and expenses,
liability, claims and demands incurred by or made against Pandesic in
connection with any claim described in this Section 17 and any claim
for breach of patent rights which is based upon Merchant's use of the
Licensed Software in connection with any other hardware, software or
services not provided by Pandesic, or in any manner which is not
authorized by this Agreement.
c) If any of the Licensed Software becomes, or in Pandesic's judgment is
likely to become, the subject of a claim that infringes a proprietary
right or if Pandesic settles a claim of infringement, Pandesic may, at
its sole option, discretion and expense:
i) obtain for Merchant the right to continue using the Licensed
Software;
ii) replace or modify the Licensed Software to make in non-infringing
so long as the replacement or modification is substantially
similar to the Licensed Software; or
iii) terminate this Agreement and refund to Merchant the Service fees
paid pursuant to Section 9(a) during the month in which the
termination occurs.
d) The maximum aggregate liability of Pandesic under this Section 17
shall equal the lesser of the aggregate payments made by Merchant to
Pandesic under this Agreement in the twelve months immediately prior
to the time the claim of infringement arises or $500,000, and if
there should be more than one claim of infringement, the amount
payable under such indemnity in respect of each claim shall be
divided pro rata.
e) This Section 17 states the entire liability of Pandesic and the
exclusive remedy of Merchant with respect to any claim of
infringement, including patent, copyright or trade secret infringement.
18. ASSIGNMENT
A) MERCHANT MAY NOT, WITHOUT PANDESIC'S PRIOR WRITTEN CONSENT, ASSIGN,
SUBLICENSE, PLEDGE, GRANT A SECURITY INTEREST IN OR OTHERWISE TRANSFER
THIS AGREEMENT OR ANY OF ITS RIGHTS OR OBLIGATIONS UNDER THIS
AGREEMENT, TO ANY PERSON.
B) ANY ATTEMPT OR ANY PURPORTED ACT OR ATTEMPTED ACT TO DO ANY OF THE
THINGS PROHIBITED BY THIS SECTION 18 SHALL BE NULL AND VOID.
19. ARBITRATION
Except for the right of either party to apply to a court of competent
jurisdiction for a temporary restraining order or other provisional
remedy to preserve the status quo or prevent irreparable harm pending
the selection and confirmation of a panel of arbitrators, and for the
right of Pandesic to bring suit on an open account for any payments
due Pandesic hereunder, any controversy or claim arising out of
<PAGE>
-7-
or relating to this Agreement shall be settled by arbitration in San
Francisco, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgement upon the award rendered
by the arbitrators may be entered in any court having jurisdiction thereof.
Arbitration shall be conducted by a single arbitrator who shall have a
background or training in computer law, computer science, or marketing of
computer products. The arbitrator shall have the authority to grant
injunctive relief in a form substantially similar to that which would
otherwise be granted by a court of law.
20. General
a) The inclusion of headings in this Agreement is for convenience of
reference only and shall not affect its construction or
interpretation.
b) This Agreement and the Schedules attached hereto constitute the
entire agreement between the parties pertaining to the subject
matter hereof. There are no warranties, conditions, or
representations (including any that may be implied by statute) and
there are no agreements in connection with such subject matter
except as specifically set forth or referred to in this Agreement.
No reliance is placed on any warranty, representation, opinion,
advice or assertion of fact made by any party hereto or its
directors, officers, employees or agents, to any other party hereto
or its directors, officers, employees or agents, except to the
extent that the same has been reduced to writing and included as a
term of this Agreement. Accordingly, there shall be no liability,
either in tort or in contract, assessed in relation to any such
warranty, representation, opinion, advice or assertion of fact,
except to the extent aforesaid.
c) Except as expressly provided in this Agreement, no amendment or
waiver of this Agreement shall be binding unless executed in
writing by the party to be bound thereby. No agent or
representative of Pandesic, except an Officer, has authority to
alter, modify or waive any provision of this Agreement. No waiver
of any provision of this Agreement shall constitute a waiver of any
other provision nor shall any waiver of any provision of this
Agreement constitute a continuing waiver unless otherwise expressly
provided.
d) This Agreement shall inure to the benefit of and be binding upon
the respective successors and permitted assigns of the parties
hereto.
e) If any provisions of this Agreement shall for any reason be held
illegal or unenforceable, such provision shall be deemed separable
from the remaining provisions of this Agreement and shall in no way
affect or impair the validity of the enforceability of the
remaining provisions of this Agreement.
f) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO
CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT THIS AGREEMENT
IS NOT SUBJECT TO AND SHALL NOT BE INTERPRETED BY THE UNITED
NATIONS CONVENTION ON CONTRACTS FOR THE SALE OF GOODS.
g) Any notice or other communication required or permitted to be given
pursuant to or in connection with this Agreement shall be in
writing and shall be given by hand or overnight delivery to the
address noted above for each of the respective parties.
h) Time is of the essence of this Agreement.
i) Neither party shall be liable under this Agreement by reason of any
failure or delay in the performance of its obligations hereunder
(except for the payment of money) on account of any cause which is
beyond the reasonable control of such party.
j) Merchant shall not disclose the terms of this Agreement to any
third parties.
k) It is acknowledged and agreed that Pandesic may use sub-contractors
to perform any or all of the services to be performed hereunder.
<PAGE>
-8-
IN WITNESS WHEREOF Pandesic and Merchant have
executed this Agreement on the date first written.
PANDESIC LLC
Per: /s/ Harold Hughes
-----------------------------
DVD EXPRESS, INC.
Per: /s/ Michael Dubelko 3/26/98
-----------------------------
<PAGE>
SCHEDULE A
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # __________
SOFTWARE LIST
DESCRIPTION OF SERVICE EQUIPMENT:
Description of Licensed Software:
Pandesic-TM- E-business solution software product version 2.0
RESTRICTIONS AND LIMITATIONS OF THE PANDESIC E-BUSINESS SOLUTION SERVICE AND
LICENSE:
i) Merchant shall have a maximum of 10,000 base products offered on its Web
site.
ii) Merchant is permitted a maximum of 9 warehouses.
iii) Merchant operates on a supplier, reseller or physical consignment
business model.
iv) Merchant is permitted to place its web site on the hosted server to a
maximum configuration of 50MB of disk space and 1 GB bandwith
utilisation per month, provided that Merchant uses static web pages for
its web site.
DOCUMENTATION:
Attached hereto in the form of Appendices to this Schedule A.
<PAGE>
- 10 -
SCHEDULE A, APPENDIX 1
PANDESIC HOSTING DEFINITION
The Pandesic Hosted E-Business Solution allows a Merchant to receive the
benefits of the Pandesic Solution without the costs of running and
supporting a system at their own site.
OBJECTIVE
This document outlines Pandesic's responsibilities and obligations to the
Merchant.
1. SOLUTION COMPONENTS (SEE PANDESIC PRODUCT DEFINITION OVERVIEW)
1.1. HOSTING SERVER AND NETWORK BANDWIDTH -- Pandesic will allocate the
appropriate (to be mutually agreed between the parties acting
reasonably) server capacity and network bandwidth to the Merchant for
their Pandesic Solution, subject only to minimum monthly fees.
1.1.1. CORPORATE WEBSITES -- Hosting includes 25-200 MB of disk
space and 0.5-2 GB of network bandwidth per month for
hosting corporate static web pages, beyond which additional
usage-based fees will be applicable. Pandesic cannot host
dynamic web pages (pages linked to non-Pandesic applications
or databases).
1.2. ADDITIONAL HARDWARE -- Pandesic will provide two Wedge barcode
scanners and one printer (including a network card and barcode
printing cartridge) for the Merchant's first warehouse, and will
install them in the Merchant's warehouse. After the first
warehouse, Pandesic will install further warehouses on a time and
materials basis (required hardware is purchased by the Merchant).
1.2.1. PROVIDED BY MERCHANT -- The Merchant will need to provide a
PC and appropriate software (for specifications see PANDESIC
PRODUCT DEFINITION OVERVIEW), and security hardware if desired
or necessary. If the Merchant is not located in the warehouse,
they will also need one or more additional Web-enabled PCs to
maintain their Pandesic Solution.
1.3. SOFTWARE -- The Hosted Solution encompasses all the software
functionality described in the PANDESIC PRODUCT DEFINITION
OVERVIEW. Pandesic will provide the Merchant with SAP Client
software.
1.3.1. PROVIDED BY MERCHANT -- The Merchant needs a system capable
of Web browsing with Microsoft Internet Explorer 3.0 (or
higher) or Netscape Navigator 3.0 (or higher). Pandesic does
not provide the Merchant with web editing software such as
Microsoft FrontPage or Visual Interdev.
2. DEPLOYMENT (SEE DEPLOYMENT STATEMENT OF WORK)
2.1. PREPARATION -- During the preparation phase, the Merchant completes
the pre-work (including designing the store front and preparing
catalog content) and education is provided to the Merchant on the
Pandesic Solution.
2.2. INSTALLATION -- The hardware and software, as described above, is
delivered, setup, configured and tested.
2.3. INITIALIZATION -- The Merchant receives 5 hours of training and the
Pandesic Solution is personalized with basic store setup. The
Merchant tests the system.
2.4. ROLLOUT -- The Merchant completes the store setup, including
loading all of their catalog products, and links the store to their
corporate web site.
<PAGE>
-11-
2.5. CUSTOMIZATION - The Merchant is responsible for additional
customization or legacy integration. Pandesic will only allow and
support hosted systems utilizing SAP's ALE (Application Link
Enabling) technology or flat-file transfers. Customization and
legacy integration may require additional fees due to service,
hardware or bandwidth requirements.
3. EVERGREEN SERVICES AND UPGRADES
3.1. SYSTEM MAINTENANCE AND ADMINISTRATORS - System monitoring and
maintenance will be provided by Pandesic and/or an authorized
Hosting Partner. These services will encompass the hardware,
Windows NT, Microsoft SQL Sever, Microsoft IIS, Pandesic Application
Software, SAP R/3, Cybercash, Taxware, Citibank, and any other
hosted components of the Pandesic Solution.
3.2. BACKUP SERVICES - The Merchant's system will be backed up daily
and weekly, or as per a mutually agreed upon schedule.
3.3. DOWNTIME RESPONSE - 24x7x365 mission-critical downtime response.
3.4. CUSTOMER AND TECHNICAL SUPPORT - Customer and technical support
will be available Monday through Friday, 5am PST to 8pm PST.
3.5. EVERGREEN HARDWARE, NETWORK SCALABILITY - Pandesic will guarantee
Evergreen server capacity and network bandwidth as is appropriate
to meet mutually agreed upon performance benchmarks.
3.5.1. ADDITIONAL SERVER, NETWORK REQUIREMENTS - If the Merchant
requires additional non-Pandesic Solution server or bandwidth
capacity, including legacy integration traffic, Pandesic may
elect to charge additional usage-based fees which shall be
based upon actual out-of-pocket costs.
3.6. EVERGREEN UPGRADES - Pandesic or an authorized partner will perform
upgrades and patches at Pandesic's discretion, barring
backwards-compatibility or legacy integration issues. If such
issues exist, Pandesic will work with the Merchant to determine a
mutually acceptable timeframe and process for upgrading.
4. HOSTING FACILITIES
4.1. CURRENT FACILITIES - Pandesic currently hosts systems at its
Folsom, CA site. It provides T1 Internet access, firewall security,
physical security, and immediate proximity to Pandesic technicians.
T1 redundancy and UPS capabilities are currently being evaluated
for installation.
4.2. PANDESIC HOSTING PARTNER - Pandesic is currently evaluating
best-of-class Network Service Providers as candidates for a
Pandesic Hosting Partner. If selected, the Pandesic Hosting Partner
will provide the hosting facilities and services in cooperation
with Pandesic. Pandesic customers installed at Pandesic's Folsom,
CA site will be moved to the Hosting Partner's site within a
mutually agreed upon timeframe.
<PAGE>
-12-
SCHEDULE A, APPENDIX 2
PANDESIC PRODUCT DEFINITION OVERVIEW
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
HARDWARE - PROVIDED BY PANDESIC
- -------------------------------------------------------------------------------
SERVER CAPACITY Shared capacity; Compaq or
Hewlett-Packard; 4 x 200 MHz Intel
Pentium-Registered Trademark- Pro
processors; 1 GB RAM; 30 GB Hard Disk;
Ethernet Card
BANDWIDTH Shared T1 access
WAREHOUSE PRINTER Hewlett-Packard 5Si; Barcode printing
cartridge; Ethernet Card
BARCODE SCANNER Symbol LS4004 Wedge scanner
- -------------------------------------------------------------------------------
HARDWARE - PROVIDED BY MERCHANT
- -------------------------------------------------------------------------------
WAREHOUSE PC Intel 166 MHz Pentium-Registered
Trademark- Processor or equivalent; 32
Mb RAM; 1 Gb Hard Drive; CD-ROM;
Ethernet Card; Windows NT Server v4.0
TERMINALS ON LAN FOR OS is Unix, Windows 95, or Windows NT
- CUSTOMER SUPPORT FUNCTION Hardware is unspecified
- ACCOUNTING AND FINANCE
- MERCHANDISING (PRODUCT
MANAGEMENT)
- WEB DEVELOPMENT (IF NOT
OUTSOURCED)
SECURITY HARDWARE Optional, depends on security required
SCANNER OR DIGITAL CAMERA Unspecified - for catalog setup/maintenance
- -------------------------------------------------------------------------------
SOFTWARE - PROVIDED BY PANDESIC
- -------------------------------------------------------------------------------
PANDESIC APPLICATION SOFTWARE
DATABASE SERVER Microsoft SQL Server 6.5
OS & WEB SERVER LICENSE Microsoft Windows NT Server 4.0
NT Resource Kit
Microsoft Internet Information Server
(IIS) 4.0
BROWSER Microsoft LE 4.0
ELECTRONIC MAIL MetaInfo Send Mail
TRANSACTION PAYMENTS SYSTEM Cybercash
TAX SOFTWARE AVP Taxware
SAP INTERFACE SAP GUI client
REMOTE TERMINAL ACCESS SOFTWARE PCAnywhere
<PAGE>
-13-
- -------------------------------------------------------------------------------
SOFTWARE - PROVIDED BY MERCHANT
- -------------------------------------------------------------------------------
OS ON OFFICE TERMINALS Unix, Windows 95, Windows NT
BROWSER ON OFFICE TERMINALS Netscape 3.0 or MS LE 3.0, or higher
versions
WEB EDITING PROGRAM Examples: MS FrontPage 97, MS Visual Interdev
IMAGE EDITOR Unspecified - for catalog setup/maintenance
</TABLE>
<PAGE>
-14-
SCHEDULE A, APPENDIX 3
STATEMENT OF WORK
HOSTED
The purpose of this document is to identify the activities and deliverables
that are included in the deployment portion of the Pandesic-TM- e-business
solution; to identify who completes these activities and what optional
services are available from the Certified Installer.
DEPLOYMENT OBJECTIVE
The objective of the Pandesic Deployment is for the Certified Installer, the
Merchant and Pandesic to work together on establishing and launching the
Internet shopping environment for the Merchant using the Pandesic-TM-
e-business solution.
ROLES AND RESPONSIBILITIES
The following resources are involved during a Deployment of the Pandesic
Solution:
1. Pandesic Deployment Manager
2. Certified Installers
3. Merchant Resources
The roles and responsibilities for these people include the following:
1. THE PANDESIC DEPLOYMENT MANAGER - The Pandesic Deployment Manager
has overall responsibility for the delivery and deployment of the
Pandesic-TM- e-business solution. They assist the merchant with
understanding the deployment methodology, preparing the prework
needed for the installation and coordinate activities with the
Certified Installer.
2. CERTIFIED INSTALLER - The Certified Installer will be responsible
for the initial personalization of software and the installation of
the printer at the distribution site.
3. MERCHANT - Multiple roles within the merchant's organization need
to be represented during the Deployment of the Pandesic-TM-
e-business solution. The following list is designed to provide you
with some guidelines as to the type of roles that will need to be
performed. This could represent different individuals or the same
person could facilitate multiple roles. When identifying Merchant
resources for the Deployment project, representatives from the
following areas should be included:
DISTRIBUTION CENTER - A representative from the warehouse that
will be used to stock merchandise for shipment to the
customer. This person will be responsible for executing
transactions to receive inventory into the warehouse, process
deliveries and return orders, and move inventory within the
the warehouse.
MARKETING/PLANNING - A representative who will be responsible
for executing transactions to maintain product and catalog
information, and maintain business information such as
supplier and freight costs and minimum inventory levels.
CUSTOMER SERVICE - A representative from the customer service
organization who will assist customers when required. This
person will be responsible for executing transactions to
cancel orders, issue customer credits, and sent replacement
orders when required.
<PAGE>
-15-
FINANCE - A representative from finance/accounting
organization who will process vendor payments, maintain month
end/ year-end period close and maintain vendor information.
Additionally, a project leader or primary contact should be identified
for the project. This project leader can also represent one of the
functional roles listed above.
SCOPE AND APPROACH
The deployment of the Pandesic Solution is accomplished utilizing the
Pandesic Deployment Methodology. This methodology is comprised of four
phases, which are highlighted below:
1. PREPARATION
During the Preparation phase, the merchant completes the pre-work
and education is provided to the Merchant on the Pandesic System.
2. INSTALLATION
The hardware and software is delivered, setup, configured and tested.
3. INITIALIZATION
The merchant receives additional training and the Pandesic Solution
is personalized with basic store setup. Merchant tests the system.
4. ROLLOUT
Merchant completes store setup, develops the creative store front if
desired, and integrates the store into the existing web site if
applicable.
PREPARATION
The preparation phase of the project sets the foundation for the installation
and initialization of the system. It is during this phase that the Merchant
must complete the activities outlined in the Merchant Pre-work Document.
These activities include, but are not limited to:
- Identify Credit Cards Vendors
- Sign up with CyberCash
- Establish business relationship with transportation carriers
- Identify consignment model
- Register a domain name
- Obtain a VeriSign Secure Server ID
- Establish online business rules
- Establish banking relationships
- Provide catalog, product and inventory information
- Develop strategies for marketing products online
- Establish physical space for the installation
- Obtain digital pictures of merchandise
- Complete Merchant Questionnaire
It is during the Preparation Phase that the Deployment coordinates the
scheduling of the installation with the Certified Installers based upon
completion of the Merchant pre-work. Additionally, the Deployment Manager
provides the Merchant with a high level overview of both the deployment
process and the Pandesic-TM- e-business solution.
<PAGE>
- 16 -
INSTALLATION
The installation of the Pandesic-TM- e-business solution is the first of a
two phase process. In this phase the Pandesic-TM- e-business solution is
configured, and tested at the hosting site. The installation of the
Pandesic-TM- e-business solution can only begin upon completion of the
Merchant Pre-work. It is during this phase that Pandesic will be responsible
for:
- Execution of the Pandesic provided Technical Script. Activities within
the script may include but are not limited to:
- Prepare the IP Configuration
- Prepare network properties
- Establish system settings
- Configure Internet information server
- Configure SQL Server
- Configure SAP System
- Run Patch Transports
- Update hostnames in RFC's
- NT configuration tasks
- Test SAP connection server
- Verify DCOM setting s
- Configure Cybercash
- Configure Citibank World Link
- Configure Verisign
- System Testing
Additionally, Pandesic will be responsible for the installation of a
single printer at a warehouse location.
The Functional Certified Installer will be responsible for using the
responses provided in the Prew-Work Questionnaire to execute the Functional
Script. Activities within the script may include but are not limited to:
- System preparation
- Create company basic information
- Define shipping conditions
- Update tax jurisdictions
- Create credit card conditions
- Establish financial information
- Establish automated background processes
- Create base materials, attributes and catalogs
- System testing
INITIALIZATION
During the Initialization Phase of the project is when the Merchant receives
training, the Pandesic-TM- e-business solution is personalized with basic
store set up, and the Merchant tests the initial system.
During this phase the Certified Installer will load the basic material,
catalog and inventory information for the base system.
The initial load of the Merchants information includes the following:
- Baseline configuration of 3 distribution centers
- Install 1 printer at a single distribution center
- Base line population of 50 products
<PAGE>
- 17 -
- Create basic product catalog - establish a basic
catalog hierarchy and build at least 10 basic
branches of that hierarchy
- Update inventory levels - populate the inventory levels
of the catalog products for at least 50 of the product
line items.
- Establish user id's and security to support the baseline
configuration
- Perform system backup.
Additionally, during this phase, the Certified Installer will deliver five
hours of functional training for the Merchant on overall operation and
maintenance of the Pandesic System. The final component of the Initialization
Phase of deployment is for the Merchant to test the baseline of products which
have been loaded during the Initialization phase. Upon completion of a
successful system test, the Merchant, Certified Installer, and Deployment
Manager will sign-off on the completion of the Installation and Initialization
of the Pandesic-TM- e-business solution.
ROLLOUT
It is during the Rollout Phase that the Merchant completes store set up,
develops the creative storefront and integrates the store into the existing
web site. Activities that the Merchant should perform include:
- Create full product material load
- Create all catalog levels
- Create all distribution centers
- Update inventory levels for full product line
- Establish security for all users
- Integrate Pandesic store with existing web site
- Full system testing
Upon completion of the above activities, the Pandesic-TM- e-business solution
is ready to go live.
ASSUMPTIONS
The following outlines the assumptions Pandesic has made related to the
deployment of the Pandesic-TM- e-business solution.
- The entire Merchant Pre-work document is completed before
beginning the installation phase of the project.
- Additional work related to the deployment not listed above is
not included in the pricing of the Pandesic-TM- e-business
solution, but may be contracted for an additional fee.
FEES
As part of the Pandesic-TM- e-business solution, Pandesic will provide a
Deployment Manager at no additional charge. Fees that are the responsibility
of the merchant include:
- Registration of the domain name through Internic
- Obtaining VeriSign Secure Digital ID
- Bank Fees and other fees associated with establishing
secure financial transaction processing
Any additional services, other than those described above, provided by the
Certified Installer are arranged directly between the Merchant and the
Certified Installer.
<PAGE>
-18-
- --------------------------------------------------------------------------------
MERCHANT ROLES NOT INCLUDED AS PART OF THE PANDESIC E-BUSINESS SOLUTION
PREWORK
MERCHANT WEBSITE DESIGN & CONTENT
PREPARATION
Pandesic Project Coordination
Merchant Education
Merchant Complete Merchant Questionnaire
INSTALLATION
Pandesic Installation Support
Certified Installer Functional & Technical Installation
Merchant Training
INITIALIZATION
Pandesic Installation Support
Certified Installer System Initialization & Test
System Restoration
Merchant certification
ROLLOUT
Pandesic Quality Control
MERCHANT SYSTEM CUSTOMIZATION
- --------------------------------------------------------------------------------
EVERGREEN - PROVIDED BY PANDESIC
- --------------------------------------------------------------------------------
24x7 MISSION CRITICAL COVERAGE Database down, hardware problems, etc.
BACKUP SERVICES Daily and weekly backups
CUSTOMER, TECHNICAL SUPPORT 5am PST - 8pm PST, Mon-Fri
SOFTWARE UPGRADES Minimize downtime on major upgrades
HARDWARE, NETWORK UPGRADES Pandesic will determine performance
benchmarks and upgrade as needed
<PAGE>
SCHEDULE B
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # ______
MAINTENANCE AND SUPPORT SERVICES
1. MAINTENANCE AND SUPPORT SERVICES
a) During such periods as Pandesic makes available such services
generally to its Merchants for the Pandesic E-Business Solutions
Services, Pandesic will provide the following maintenance and support
services (the "Maintenance and Support Services") to Merchant in
respect of the Licensed Software:
i) telephone support, consisting of the following:
a) explaining specific functions and features of the Service
Equipment and the Licensed Software;
b) guiding Merchant's employees in the performance of specific
operations using the Service Equipment and the Licensed
Software; and,
c) first level response to defect reports; and,
ii) correction of errors in the Licensed Software, which Pandesic is
able to reproduce and which cause a material loss of function in
the Licensed Software;
subject, in each case, to Pandesic's ability to procure from third party
licensors, where necessary, assistance or software required to provide
the Maintenance and Support Services. In order to receive Maintenance
and Support Services hereunder, Merchant must provide the required
remote support and update connections to the Service Equipment as and
when required by Pandesic.
b) Pandesic will provide the Maintenance and Support Services on a 7 day
by 24 hour basis.
c) Any request for Maintenance and Support Services must be made by
Merchant to Pandesic by telephone and must describe, with reasonable
specificity, the Maintenance and Support Services required.
2. EXCLUDED SERVICES
a) Maintenance and Support Services will not include the following
("Excluded Services"):
i) user education and training except as otherwise expressly stated
in this Agreement;
ii) third party software implementation or installation;
iii) on-site support;
iv) modification of the Licensed Software;
v) correction of errors attributable, in Pandesic's reasonable
opinion, to operator error;
vi) correction of errors attributable, in Pandesic's reasonable
opinion, to the Merchant's use of software other than the
Licensed Software in conjunction with the Licensed Software; and
vii) Merchant's individual network security unless it is part of
Pandesic's general network security for its hosted E-Business
Solutions Service server operations.
b) Pandesic may, at its sole option, provide Excluded Services to the
Merchant from time to time at such rates and charges as may be
mutually agreed between Pandesic and the Merchant.
<PAGE>
-20-
3. LICENSED SOFTWARE UPGRADES
Pandesic may from time to time make available modified and/or enhanced
versions of the Licensed Software ("Upgrades"). Pandesic will make each
such Upgrade available to Merchant on the same terms as Pandesic makes
such Upgrade generally available to other licensees of the Licensed
Software. Maintenance and Support shall only be provided in respect of
the most current version of the Licensed Software and the previous
version (i.e. version 1.x and version 1.[x minus 1]).
<PAGE>
-21-
SCHEDULE C
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # ________
CHARGES TO MERCHANT
(A) Merchant shall pay to Pandesic the sum of [***] upon the acceptance by
Pandesic of this agreement.
(B) Upon the completion of installation, Merchant shall remit to Pandesic
within 30 days following the expiration of each calendar month (in the
event the installation is completed mid-month, the Fees shall be
prorated for that month) the aggregate incremental transaction
percentage amounts of Merchant's gross revenues (for clarification
purposes, gross revenues shall not include sales tax charged to
customers of Merchant or bank transaction fees associated with customer
revenues) generated by the sale or other distribution of products or
services provided by Merchant through use of the Pandesic-TM- E-Business
Solutions Service during such month, less the amount of post-invoice
credits granted by Merchant to its customers during such month in
accordance with Merchant's standard credit and returns policy end (the
"Fees"). If such fees do not equal or exceed the Monthly Base Fee
applicable to Licensee Monthly Sales up to [***] in any month, Merchant
shall remit the difference to Pandesic within 30 days of the end of such
month.
The fees are predicated on the Merchant offering less than [***] Base
Products utilizing the Pandesic-TM- E-Business Solutions Service (a Base
Product being a distinct product which can have color and size
variations), AND Merchant having less than ten warehouses, AND Merchant
operates on a supplier, reseller or physical consignment business model.
Such payments shall be paid sooner than on a monthly basis as and when
software functionality in the Licensed Software provides the ability to
do so. Merchant agrees to utilize such software functionality when
available. Merchant shall provide to Pandesic, together with such Fees,
a detailed report (the "Report"), which shall include (a) the number of
sales or other distribution of products or services provided by Merchant
through use of the Pandesic-TM- E-Business Solutions Service, (b) the
amount of revenue generated by such sale or distribution and (c) the
number, amount, and nature of post-invoice credits granted.
***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
-22-
<TABLE>
<CAPTION>
Licensee Monthly Sales Monthly Transaction Fee
- ---------------------- ------------------------------------------------------------
From To Monthly Base Fee Incremental Transaction %
- -------- -------- ---------------- -------------------------------------
<S> <C> <C> <C>
[***] [***] [***] Plus [*] of the amount over $50,000
[***] [***] [***] Plus [*] of the amount over $100,000
[***] [***] [***] Plus [*] of the amount over $250,000
[***] [***] [***] Plus [*] of the amount over $500,000
[***] [***] [***] Plus [*] of the amount over $1,000,000
[***] [***] [***] Plus [*] of the amount over $2,500,000
[***] [***] to be renegotiated at such time
</TABLE>
For example, a Merchant that transacts [***] of revenue is responsible
for a monthly transaction fee of [***].
From the table above:
<TABLE>
<S> <C> <C> <C>
[***] [***] [***] +/- [***] of the amount over $500,000
</TABLE>
Base fee [***]
[***] of [***] (amount over [***]) [***]
Total [***]
***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
-23-
SCHEDULE D
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # ______
LIST AND TIMETABLE OF FUNCTIONALITY ENHANCEMENTS
------------------------------------------------
PHASE 1: ON INSTALLATION
REQUIREMENT: CUSTOMER BASED ORDER MANAGEMENT:
- Customer needs web based facility to make changes to their
outstanding orders. Changes will include adding line items,
deleting line items, change delivery dates
SOLUTION: Initial solution will provide customer with order change
capability but the back-end processing of those changes will result in
the cancellation and re-entry of the order. This will be invisible to
the customer except that he/she will receive a new order number when
changing orders. Longer term solution will be for customer changes to
be applied to the original order rather than deletion and creation of
a new order
CUSTOM DEVELOPMENT REQUIRED: Front-end changes to allow customer to make
changes to the order, then taking those changes and passing them back
to the R/3 engine so the original order can be deleted then a new
order created. Longer term solution will require re-configuration of
the R/3 engine to allow for change orders and a front-end facility to
allow customers to make those changes.
REQUIREMENT: PRE-ORDERS AND BACK-ORDERS:
- System needs to allow the customer to distinguish between
pre-(advanced releases of videos) and back-orders (titles not in
stock)
- System needs to allow customer to order a DVD prior to official
release of the title
- Provide ability for customer select delivery/shipment options
such as "ship complete" or ship when three titles at a minimum
are available, etc.
SOLUTION: Creation of separate catalog categories, and the assignment of
specific videos to those categories will allow customers to
distinguish between pre-releases and other titles when browsing the
catalog. Pre-releases titles will be set with an inventory qty of 0,
allowing the customer to place the order. The Licensed Software will
treat these pre-release orders like back-orders. Distinction between
pre-release orders and standard back orders can be explained through
language on the site explaining the difference between pre-releases
and back-orders for titles already released. Customer would then have
the option to select either "ship order complete" or "ship when
available" for their order.
CUSTOM DEVELOPMENT REQUIRED: Enable the Licensed Software to allow the
consumer to select "ship order complete", indicating that the order is
not to be shipped until all line items are ready for delivery. The
Licensed Software's default setting is to ship each line item as it's
available. This will give the customer the choice to "ship when
available" or "ship order complete."
REQUIREMENT: COMBINE PICK AND PACK SLIP AND REDUCE THAT PROCESS TO ONE FORM:
<PAGE>
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SOLUTION: Merchant will attempt to use the Licensed Software standard
configuration of separate pick and pack slips, but reserves the right to
request re-configuration to a single form if this is not workable in the
long run.
REQUIREMENT: DYNAMIC CREATION OF "WHAT'S NEW", "COMING ATTRACTIONS", AND
SEARCH-ALPHA LIST.
SOLUTION: The Licensed Software will allow for "What's New" and "Coming
Attraction" categories in the catalog. To achieve this, Merchant only has
to assign individual titles to those categories. The Licensed Software
will also provide a "Search-Alpha" list for users to see all store titles
(except adult videos) in a single drop-down box.
CUSTOM DEVELOPMENT REQUIRED: Creation of a "Search-Alpha" capability.
REQUIREMENT: DYNAMIC CATEGORIES
- Conceal adult titles on storefront via secure access of some type
- Block customers referred from certain sites (Gateway) from seeing
adult and Playboy titles in any and all places these titles may
appear including withing the "new arrivals" section.
- Adult and Playboy title option display in user profile
SOLUTION: The Licensed Software will provide a capability to block
customers referred from certain sites from seeing adult titles. Concealed
adult titles on store front via secure access and "Adult title option
display in user profile" will be delivered in a later phase.
CUSTOM DEVELOPMENT REQUIRED: Track customers coming from certain sites and
prevent the "Adult-title" catalog category from being displayed to
customer.
REQUIREMENT: SEND EMAIL NOTIFICATION TO A CUSTOMER IF A PRE-ORDERED PRODUCT
SHIPPING DATE IS CHANGED. PROVIDE A MANUAL OR SCHEDULED PROCESS TO RUN EVERY N
DAY(S) TO EMAIL CUSTOMERS ABOUT STATUS CHANGES TO ORDERS.
SOLUTION: The Licensed Software already supports this requirement.
REQUIREMENT: PROVIDE THE ABILITY TO ALLOW THE CUSTOMER TO ENTER SPECIFIC
SHIPPING INSTRUCTIONS ON AN ORDER SUCH AS "DO NOT INCLUDE INVOICE IN BOX".
SOLUTION: The Licensed Software is to provide capability to allow customer
to specify special shipping conditions. These requests will be in the form
of text based note entered by the customer at order placement time and will
print on the pick list.
CUSTOM DEVELOPMENT REQUIRED: Enable "special notes" field on order form.
These notes will print on pick list as special handling instructions for
warehouse.
<PAGE>
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REQUIREMENT: TRACK FOR REPORTING PURPOSES, ORDERS REFERRED FROM CERTAIN
URLs. (THIS IS TO ACCOMMODATE COMMISSION TACKING.)
SOLUTION: The Licensed Software will provide the capability to
track orders referred from certain URL's through reporting.
CUSTOM DEVELOPMENT REQUIRED: Ability to track referred customers
from certain sites. This requires we associate a specific order from
a referred site. Creation of a report to identify orders actually
placed from referred site visits.
PHASE 2: TARGETED FOR MID/LATE JUNE IMPLEMENTATION
REQUIREMENT: PROVIDE THE ABILITY TO DEFINE SELECTED ORDERS FOR HUMAN REVIEW
PRIOR TO PROCESSING (I.E., HOLD ALL FOREIGN ORDERS, HOLD ORDERS THAT HAVE
DIFFERENT SHIP-TO ADDRESSES FROM BILL-TO ADDRESSES, HOLD MULTIPLE ORDERS FOR
THE SAME CREDIT CARD.)
SOLUTION: Pandesic and Merchant to work to refine requirements and
provide solution for June delivery.
CUSTOM DEVELOPMENT REQUIRED: Enable block order capability based on
Merchant conditions. Also provide Review Queue to allow Merchant to
view blocked orders and disposition as appropriate.
REQUIREMENT: STORE CUSTOMERS USER ACCOUNT PROFILE WITH CREDIT CARD
INFORMATION -- NEEDS TO STORE MULTIPLE CREDIT CARD NUMBERS.
SOLUTION: PANDESIC TO ADD TO VER. 2.1 ROADMAP. The Licensed Software
to provide functionality so consumer does not have to re-enter credit
card information if they've shopped at the store before. For June
delivery. The Licensed Software can either store the credit card numbers
with the customer account information on the same Pandesic server or
Pandesic can utilize the Cybercash database to retrieve previously used
credit cards. Pandesic will also work with Merchant to define longer term
solution requirements for inclusion into 2.1 release.
CUSTOM DEVELOPMENT REQUIRED: Custom work will depend on Merchant
solution preference:
a) Store credit card numbers on Pandesic server. The Licensed Software
will store multiple credit card numbers with the customers profile
information on the Pandesic server. Allow customer to either use
existing credit card info or enter a different number as an override.
b) Utilize Cybercash database to retrieve previously used credit cards:
Credit card numbers will not be stored on Pandesic server but rather
retrieved from remote Cybercash database using previous order
information.
REQUIREMENT: SUPPORT ORDERS TAKEN BY PHONE (1-800) AS WELL AS WWW.
<PAGE>
-26-
SOLUTION: Pandesic is already working on 1-800 call center
templates which will allow Merchant 1-800 operators to utilize a more
efficient interface for placing phone orders. These new templates
will be ready for the June phase.
CUSTOM DEVELOPMENT REQUIRED: Provided Merchant is content with the
templates already being developed, there is no custom development
required. However, if the templates do not meet Merchant's needs,
custom work will be required.
PHASE 3: TARGETED FOR PANDESIC 2.1 RELEASE (SCHEDULED FOR AUGUST)
REQUIREMENT: "ONE CLICK" ORDER CAPABILITY
SOLUTION: ADD TO PANDESIC'S 2.1 ROADMAP. Pandesic and Merchant to work
to refine requirements and provide solution for Pandesic release 2.1
delivery. REQUIREMENT: GIFT CERTIFICATES
SOLUTION: Already on Pandesic 2.1 roadmap.
REQUIREMENT: PROVIDE THE ABILITY TO STAGE PICKING (I.E., STAGE ALL FOREIGN
SHIPMENTS TO PRINT JUST THOSE PICK, PACK AND SHIPPING PAPERS).
SOLUTION: ADD TO PANDESIC'S 2.1 ROADMAP. Pandesic is already planning
on staged shipments for ver. 2.1 but not currently planning on
staging by ship-to destination (country). Need to work with Merchant
to understand requirements and incorporate into 2.1 solution.
REQUIREMENT: PROVIDE THE ABILITY TO ALLOW THE CUSTOMER TO SPECIFY A FIXED
NUMBER OF TITLES TO BE SHIPPED IN EACH SHIPMENT. THIS PROVIDES THE CUSTOMER
THE ABILITY TO MINIMIZE SHIPPING COSTS. EXAMPLE: "SHIP WHEN A MINIMUM OF
THREE TITLES ARE AVAILABLE."
SOLUTION: ADD TO PANDESIC'S 2.1 ROADMAP. Need to work with Merchant to
understand requirements and incorporate into 2.1 solution.
CUSTOM DEVELOPMENT REQUIRED: Modification to R-3 engine to allow for
variable customer shipment criteria.
PHASE 4: FUTURE PANDESIC RELEASES BEYOND VER 2.1 (TARGET DECEMBER)
REQUIREMENT: IF A CUSTOMER REQUESTS TWO BACKORDERED TITLES TO BE SHIPPED AS
AVAILABLE, AND THE ARRIVE ON THE SAME DAY BUT ONE IN THE MORNING AND ONE IN
THE AFTERNOON, HOW MIGHT WE DEAL WITH THE SUPERFLUOUS SHIPPING CHARGES THAT
WOULD REQUIRE THE CUSTOMER TO PAY?
<PAGE>
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SOLUTION: Not a planned feature. Pandesic and Merchant to discuss for
consideration into future releases. The system will not generate
multiple shipping charges to the customer, however Merchant may incur
added shipping charges for the subsequent shipments.
CUSTOM DEVELOPMENT: Pandesic to deliver a consolidated batch picking
process that will provide ability to consolidate multiple deliveries
per order based on a Merchant schedule.
REQUIREMENT: CUSTOMER MAINTAINED ORDERS, "MULTIPLE" ORDER MANAGEMENT:
Provide the ability for customers to maintain multiple order baskets
(example, CDNOW's Lunchbox.)
SOLUTION: Pandesic and Merchant to discuss the planned 'personal wish
list' to see if this meets the Lunchbox requirements. This feature
provides the customer the ability to maintain a selection of items
and to decide at a later date to create an order from this selection.
The 'wish list' is a planed feature for the 2.1 release in August.
<PAGE>
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AGREEMENT
This Agreement (the "Agreement") is entered into by and between Pandesic
LLC, a Delaware limited liability company, with its offices in Sunnyvale,
California ("Pandesic") and DVD Express, Inc., a California corporation with
its offices in Hollywood, California ("DVD Express") as of this 9th day of
April, 1999.
WHEREAS, Pandesic and DVD Express entered into that certain E-Business
Solution Agreement dated March 25, 1998 (the "E-Business Agreement"); and
WHEREAS, the E-Business Agreement was entered into by both Pandesic and
DVD Express during the early stages of their respective business development;
and
WHEREAS, Section 13 of the E-Business Agreement entitled
"Confidentiality" does not specifically obligate either Pandesic or DVD
Express to keep the terms of such E-Business Agreement confidential; and
WHEREAS, it was always the understanding and intent of both Pandesic and
DVD Express that the terms of the E-Business Agreement be subject to the
confidentiality provisions set forth in Section 13 of such E-Business
Agreement; and
WHEREAS, DVD Express is filing a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") in connection with an initial public offering of its common
stock; and
WHEREAS, in accordance with the rules promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), DVD Express is required to
file the E-Business Agreement with the Commission as an exhibit to the
Registration Statement; and
WHEREAS, Pandesic and DVD Express acknowledge and are concerned about
the filing of the E-Business Agreement in that it may result in disclosure to
the public of highly sensitive economic, commercial, proprietary and other
such information set forth in the E-Business Agreement which could cause
competitive and economic harm to both Pandesic and DVD Express; and
WHEREAS, DVD Express has agreed to file with the Commission an
application for an order granting confidential treatment of certain highly
sensitive portions of the E-Business Agreement (the "Confidential Treatment
Application"), in connection with, but not part of, DVD Express' Registration
Statement; and
WHEREAS, Pandesic permits DVD Express to file the Confidential Treatment
Application with the Commission; and
WHEREAS, Pandesic and DVD Express wish to include the terms and
provisions of the E-Business Agreement within the definition of "Confidential
Information" contained in Section 13 of such E-Business Agreement; and
<PAGE>
-29-
WHEREAS, Pandesic and DVD Express mutually agree to use their best
efforts to keep confidential the terms of the E-Business Agreement.
NOW, THEREFORE, for good and valuable consideration, and in
consideration of the mutual covenants set forth above, Pandesic and DVD
Express hereby agree as follows:
Section 13 of the E-Business Agreement is hereby amended to read as
follows:
13. Confidentiality.
a) Merchant and Pandesic each acknowledge that, during the term of
this Agreement, it will receive information from the other party
that the disclosing party regards as confidential, including the
terms and provisions of this Agreement (collectively, the
"Confidential Information"). Pandesic and Merchant each agree
to take measures to protect the confidentiality of the other
party's Confidential Information that, in the aggregate, are no
less protective than those measures it uses to protect the
confidentiality of its own Confidential Information, but at a
minimum, Merchant and Pandesic shall take reasonable steps to
(i) use Confidential Information of the other party only for the
purposes of this Agreement; (ii) avoid disclosure of such
Confidential Information to any third party, without the
disclosing party's prior written consent, other than to each
other's employees and contractors on a need-to-know basis; (iii)
advise its employees and contractors of the confidential nature
of the Confidential Information and of the prohibitions
contained herein; (iv) not duplicate such Confidential
Information, except as reasonably necessary to perform their
duties hereunder, and (v) not remove or destroy any proprietary
or copyright notice appearing therein.
b) This Section 13 will not apply to Confidential Information that:
i) is rightfully known to the recipient prior to receipt from
the disclosing party;
ii) is required to be disclosed under the laws of that party's
jurisdiction and/or the federal securities laws (provided
that the parties shall meet and discuss in good faith
reasonable and lawful methods for limiting such disclosure);
iii) is disclosed to an assignee of Pandesic; or
iv) is or later enters the public domain.
c) Pandesic and Merchant each acknowledge that its failure to
comply with the provisions of this Section 13 will cause
irreparable harm to the other party which cannot be adequately
compensated for in damages, and accordingly acknowledges that
the other party will be entitled, in addition to any other
remedies available to it, to interlocutory and permanent
<PAGE>
-30-
injunctive relief to restrain any anticipated, present or
continuing breach of this Section.
IN WITNESS WHEREOF, Pandesic and DVD Express have executed this
Agreement as of the date above first written.
Pandesic LLC
/s/ Harold Hughes
---------------------------
By: Harold Hughes
Its:
DVD Express, Inc.
/s/ Michael Dubelko
---------------------------
By: Michael Dubelko
Its: President
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement No. 333-76121 on Form S-1.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
June 23, 1999
<PAGE>
June 22, 1999
Andrew Crist, CFO
DVD Express, Inc.
7083 Hollywood Blvd.
Los Angeles, CA 90028
c/o Danny Meidan
Friedman, Billings, Ramsey & Co., Inc.
Dear Sir:
This letter constitutes Paul Kagan Associates, Inc. permission to use
selected PKA materials derived from a 9/2/98 document dealing with DVDs
purchased from Baseline by Friedman, Billings, Ramsey & Co. Specifically, you
may use the following five bullet points:
- - According to Paul Kagan Associates, the U.S. market for both VHS and DVD
videos combined will increase from $8.9 billion in 1998 to $11.1 billion
in 2002, which represents a compounded annual growth rate of 5.7%. During
those years, Paul Kagan Associates expects DVD video sales to increase
from $268 million in 1998 to $2.9 billion in 2002. Paul Kagan Associates
expects VHS sales to decrease from $8.6 billion in 1998 to $8.2 billion in
2002.
- - Paul Kagan Associates estimates that the installed base of DVD players in
U.S. households will increase from 1.1 million in 1998 to 12.0 million in
2002, which represents a compounded annual growth rate of 82%.
- - Paul Kagan Associates also estimates that DVD-Video discs sold in the
United States will increase from 13.4 million discs in 1998 to
approximately 159.6 million discs in 2002, which represents a compounded
annual growth rate of 86%.
- - Paul Kagan Associates also estimates that annual U.S. DVD-Video sales will
be $661 million in 1999, $1.3 billion in 2000 and $2.9 billion in 2002.
- - According to Paul Kagan Associates, during the same period the number of
VHS tapes sold in the United States is estimated to decrease from 609.2
million in 1998 to 556.5 million in 2002.
It is understood this is a one-time approval authorizing the use of this
material in your company's registration statement no. 333-76121. This
material may not be used or disseminated for any other purpose without our
prior consent. Thank you for seeking our approval to use this information.
Sincerely,
Dwight W. Beach
Vice President of Operations
<PAGE>
EXHIBIT 23.4
INTERNATIONAL DATA CORPORATION
June 22, 1999
Andrew Crist, CFO
DVD Express, Inc.
7083 Hollywood Blvd.
Los Angeles, CA 90028
c/o Danny Meidan
Friedman, Billings, Ramsey & Co., Inc.
This letter serves as permission for Friedman, Billings, Ramsey & Co. Inc. to
use the following data points from IDC for DVD Express' SEC registration
statement no. 333-76121.
International Data Corporation estimates that the number of Web users
worldwide grew to approximately 142 million by the end of 1998 and will grow
to approximately 399 million by 2002.
According to International Data Corporation, the number of Web buyers
worldwide is estimated to increase from 30.8 million in 1998 to 133.9
million in 2002, which represents a compound annual growth rate of 44%.
International Data Corporation estimates that the total value of goods and
services purchased worldwide over the Web grew from $296 million in 1995 to
$50.4 billion in 1998, and will increase to $733.6 billion in 2002.
International Data Corporation predicts approximately 16.0 million DVD-ROM
drives will be installed in personal computers in the United States during
2000, up from an estimated 8.3 million DVD-ROM drives to be installed in 1999.
International Data Corporation predicts that DVD-ROM drives sold for United
States households will increase from $2.9 million in 1998 to 27.3 million in
2002, which represents a compound annual growth rate of 75%.
/s/ Alan McClogh
------------------------------
Alan McClogh
Senior Vice President
5 Speen Street - Framingham, MA 01701
-------------------------------------
(508) 872-8200 - Fax (508) 935-4015
[Logo]
http://www.idc.com
