<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1999
REGISTRATION NO. 333-76121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
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 1, 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>
In connection with this offering, 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.
Based on our revenues, we believe we are a leading Web-based retailer of
DVDs. We have grown rapidly since we commenced our online activities in April
1997. We had revenues of $11.2 million in the first quarter of 1999, up from
$1.6 million in the first quarter of 1998. Our net loss for the first quarter of
1999 was $5.3 million. We had revenues of $16.9 million in 1998 compared to $1.3
million in 1997. Our net loss for 1998 was $4.5 million, and our net loss for
1997 was $142,000.
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 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 subject to options granted to an employee
at an exercise price of $.0667 per share; and
- 1,384,006 shares of common stock subject to 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. DVD EXPRESS is our registered trademark. All other
trademarks or services marks used in this prospectus are the property of their
respective holders. 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.............. 17 365 6,261 278 6,132
----------- --------- --------- ---------- ----------
Operating profit (loss)......... (17) (142) (4,440) 2 (5,284)
Interest income (expense),
net........................... -- -- (74) -- 10
----------- --------- --------- ---------- ----------
Income (loss) before pro forma
provision for income taxes.... (17) (142) (4,514) 2 (5,274)
Pro forma provision for income
taxes (unaudited)............. -- -- -- -- --
----------- --------- --------- ---------- ----------
Pro forma net income (loss)
(unaudited)................... $ (17) $ (142) $ (4,514) $ 2 $ (5,274)
----------- --------- --------- ---------- ----------
----------- --------- --------- ---------- ----------
Basic and diluted earnings
(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
earnings (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 pursuant to 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.
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 $9.9 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 subject to 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
subject 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 is also subject to damage from 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 a substantial portion of
our 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
9
<PAGE>
relationships with them may allow us to 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.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS
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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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 is
subject to 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 subject to 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. Further, since we
carry a significant level of inventory, changing trends in the market for DVDs
subjects us to inventory risks. 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.
OUR OPERATING RESULTS COULD BE IMPAIRED IF WE BECOME SUBJECT TO BURDENSOME
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES.
It is possible that a number of laws and regulations may be adopted with
respect to 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.
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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.
WE MAY BE SUBJECT TO 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 SUBJECT TO LIABILITY 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.
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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 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."
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the shares purchased. We
estimate this dilution to be approximately $8.13 per share, or approximately 74%
based on an assumed initial public offering price of $11.00. Additional dilution
may occur upon the exercise of outstanding stock options or warrants.
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.
OUR STOCK PRICE COULD FLUCTUATE, 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
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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.
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 subject to 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. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. 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 subject to 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........................................... $25.0 million
Pay amounts due to America Online..................................... 7.0 million
Fund international expansion.......................................... 5.0 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.
21
<PAGE>
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 pursuant to 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 subject to options granted to an employee
at an exercise price of $.0667 per share; and
- 1,384,006 shares of common stock subject to 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 subject to 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)................. 17 365 6,261 278 6,132
------------- ------------- ------------- ------------- -------------
Operating profit (loss)............... (17) (142) (4,440) 2 (5,284)
Interest income (expense), net........ -- -- (74) -- 10
------------- ------------- ------------- ------------- -------------
Income (loss) before pro forma
provision for income taxes.......... (17) (142) (4,514) 2 (5,274)
Pro forma provision for income taxes
(unaudited)(2)...................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Pro forma net income (loss)
(unaudited)(2)...................... $ (17) $ (142) $ (4,514) $ 2 $ (5,274)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic and diluted earnings (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 earnings
(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.
Such 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 pursuant to 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, $4.5
million for 1998, $142,000 for 1997 and $17,000 for 1996. At December 31, 1998,
we had an accumulated deficit of $4.7 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............ 49 155 174 414 460
------------ ------------ ------------ ------------- ------------
Operating profit (loss)................. 2 (259) (484) (3,699) (5,284)
Interest income (expense), net.......... -- -- (16) (58) 10
------------ ------------ ------------ ------------- ------------
Net income (loss)....................... $ 2 $ (259) $ (500) $ (3,757) $ (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 92.4
----- ----- ----- ----- -----
Gross profit.................... 17.0 12.4 11.3 8.9 7.6
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 11.2
General and administrative.... 3.0 5.9 4.7 4.6 4.1
----- ----- ----- ----- -----
Operating profit (loss)......... 0.1 (9.9) (13.0) (41.5) (47.1)
Interest income (expense) net... -- -- (0.4) (0.6) 0.1
----- ----- ----- ----- -----
Net income (loss)............... 0.1% (9.9)% (13.4 )% (42.1 )% (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 7.6% 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. 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 relations efforts. 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
27
<PAGE>
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 $49,000 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. 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 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. We 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 $792,000 for 1998 compared to $91,000 for 1997. Through December 31,
1998, no salary had been charged or paid to Michael Dubelko, our Chairman, Chief
Executive Officer and President.
28
<PAGE>
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 $6.2 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 in connection with 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 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
29
<PAGE>
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.
In addition to this information technology, our non-information technology
systems, such as heating and air conditioning, security systems and other
systems with embedded technology may be subject to Year 2000 risks. We
developed our Web store software within the last 14 months and we believe we
constructed such systems around the Year 2000 problem. Our internal staff
has reviewed the Year 2000 readiness of our facility and operational
systems. Upon this review, we believe that our systems are Year 2000
compliant.
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 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 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. We intend to conduct formal discussions with, and obtain Year 2000
readiness disclosure statements from, each of these parties to verify the
Year 2000
30
<PAGE>
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 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, such as 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 such dedication of resources;
and
- an increase in litigation costs relating to losses suffered by our
customers due to Year 2000 problems.
OUR CONTINGENCY PLANS. 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 such a plan would be
adequate to meet our needs or that such a 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. 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.
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 97
million by the end of 1998 and will grow to approximately 320 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 27.6 million in
1998 to 128.4 million in 2002, which represents a compounded annual growth rate
of 47%.
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 $32.4 billion in 1998, and will increase to $425.7 billion in 2002.
Unlike traditional retail channels, online retailers do not have the costs of
managing and maintaining a
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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%.
Since the introduction of the VCR over twenty years ago, renting and purchasing
pre-recorded home videos has become a 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
14.3 million DVD-ROM drives will be installed in personal computers in the
United States during 2000, up from an estimated 11.1 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 2.7 million in 1998 to 19.7 million in 2002, which represents a compound
annual growth rate of 64%.
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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:
- 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.
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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.
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 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 advertise in THE WALL STREET
JOURNAL and entertainment related publications including ENTERTAINMENT
WEEKLY, PREMIERE, MOVIELINE and HOME THEATER. We also advertise in several
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. We
currently purchase a substantial portion 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
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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, 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.
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- 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 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
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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.
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 believe we have
purchased a substantial portion of the available 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
currently advertise on sites including Yahoo!, AOL, AltaVista, HotBot, Excite,
Lycos, Go.com, MSN.com and VideoSeeker.
In addition to Internet-specific marketing and advertising, we also conduct
campaigns utilizing traditional print, outdoor and radio advertising. We
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
advertise in several major radio markets, including New York, Los Angeles and
Chicago.
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.
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 an agreement with America
Online Inc. under which America Online will provide us with promotions
throughout the America Online service on AOL and America Online's Digital City.
The initial term of the agreement ends in October 2001. 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. If we breach our obligations under this agreement, America Online
may either reduce the promotional support provided to us or terminate this
agreement. We have guaranteed payments during the term to America Online of $15
million, and a percentage of our revenues attributable to America Online member
traffic. We have paid $5 million of the guaranteed payments to AOL through March
31, 1999. We have also granted to America Online a
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warrant to purchase up to 1,384,006 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. 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.
Under this agreement, Go.com will feature us in its Entertainment Channel and
various other areas throughout the service. 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. 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.
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 future, we
intend to use these funds to help pay for print and online advertising. 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.
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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 from
Pandesic LLC to operate our Web site and process orders. 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 favorable
pricing terms, we assist Pandesic in the development of new software features to
enhance their system. In exchange, Pandesic provides us with marketing support.
As of the date of this prospectus, we have paid approximately $410,000 under
this agreement. The agreement with Pandesic expires in May 2000.
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
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<PAGE>
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.
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.
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.
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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.
42
<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.
43
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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, subject to applicable employment contracts.
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 (the "Named
Executive Officer"), for services rendered during 1998. No executive officer
received compensation in excess of $100,000 for 1998.
44
<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. 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. 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 subject to 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.
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,
45
<PAGE>
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 an employee. 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 remain subject to 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 such
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, 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.
46
<PAGE>
CERTAIN 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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<PAGE>
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;
- the Named Executive Officer; 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 such
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).................................... 0 * *
Harold E. Hughes....................................... 0 * *
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.
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<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.
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<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 subject to 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 such 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. 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 is fully vested,
non-forfeitable 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.
50
<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 subject to 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.
51
<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 subject to manner of sale restrictions and
notice requirements and to 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 remain subject to Rule 144 restrictions
and the restrictions imposed by the lock-up agreements described below.
LOCK-UP AGREEMENTS. All of our officers, directors and stockholders 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
pursuant to 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 subject to such
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 remain subject to 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. Such 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.
52
<PAGE>
UNDERWRITING
Subject to 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 severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
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 such 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. Such consent may be given at any time without public
notice. During such 180-day period, we have agreed not to file any registration
53
<PAGE>
statement with respect to any shares of our common stock. This restriction does
not apply to the 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 an employee. 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 such jurisdiction. 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. In connection with 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 such 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.
54
<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 consummation of this offering, we will become subject to 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.
55
<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>
After the reincorporation and the concurrent 3-for-2 stock split of each
outstanding share of common stock, as discussed in Note 9 of Notes to
Consolidated Financial Statements is effected, we expect to be in a position to
render the following audit report.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 1, 1999
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.
Los Angeles, California
February 1, 1999 (except with
regard to the matters discussed
in Note 9, as to which the date is
, 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......................................... 348,500 16,494,288 23,697,305
Accumulated deficit................................................ (158,597) (4,673,039) (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 91,028 792,063 48,763 459,783
------------- ------------- -------------- ------------- --------------
Operating income (loss)........ (17,007) (141,590) (4,440,443) 1,617 (5,284,339)
Interest expense................... -- -- (73,999) -- (46,128)
Interest income.................... -- -- -- -- 56,347
------------- ------------- -------------- ------------- --------------
Income (loss) before pro forma
provision for income taxes....... (17,007) (141,590) (4,514,442) 1,617 (5,274,120)
Pro forma provision for income
taxes (unaudited)................ -- -- -- -- --
------------- ------------- -------------- ------------- --------------
Pro forma net income (loss)
(unaudited)...................... $ (17,007) $ (141,590) $ (4,514,442) $ 1,617 $ (5,274,120)
------------- ------------- -------------- ------------- --------------
------------- ------------- -------------- ------------- --------------
Basic and diluted earnings (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
earnings (loss) per common
share............................ $ (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
Net loss........................... -- -- -- -- -- (141,590) (141,590)
--------- ----- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1997........... -- -- 15,000,000 1,500 348,500 (158,597) 191,403
Capital contribution............... -- -- -- -- 1,150,000 -- 1,150,000
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........................... -- -- -- -- -- (4,514,442) (4,514,442)
--------- ----- ----------- ----------- ------------ ------------ ------------
Balance, December 31, 1998........... -- -- 15,000,000 1,500 16,494,288 (4,673,039) 11,822,749
Termination of S corporation
status........................... -- -- -- -- (4,673,039) 4,673,039 --
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 income (loss).......................... $ (17,007) $ (141,590) $ (4,514,442) $ 1,617 $ (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
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.
SIGNIFICANT LOSSES FROM OPERATIONS
DVD EXPRESS is an early stage enterprise and has incurred significant net
losses since its inception. 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.
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)
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 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 certain long-term marketing agreements.
Payments made and the fair value of other equity consideration are capitalized
as prepaid advertising which are amortized over the expected useful life based
upon the term or guaranteed impressions (see Note 5).
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>
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)
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.
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 profit (loss)....... $ (17,007) $ (141,590) $ (4,514,442) $ 1,617 $ (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 income (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, and under certain circumstances, a percentage of our revenues
attributable to America Online member traffic. 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.
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)
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>
The costs associated with its marketing agreements and strategic alliances
are being amortized over the contract terms, with the amortization method
primarily based on the rate of delivery of the guaranteed number of impressions
to be received during the contract term.
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 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.
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 is fully vested and non-forfeitable. 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
F-14
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
7. SHARE CAPITAL (CONTINUED)
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 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............................. $(141,590) $(4,514,442)
Net loss--pro forma............................... $(142,740) $(4,606,730)
</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.
F-15
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
7. SHARE CAPITAL (CONTINUED)
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>
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 three months ended March 31, 1999, DVD EXPRESS granted options
(excluding those that were also forfeited) under the stock incentive plan to
employees and directors to purchase 394,500 shares of common stock at a weighted
average price of $4.48.
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'
F-16
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
8. INCOME TAXES (CONTINUED)
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>
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>
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PAGE
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<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.................................................................. 32
Management................................................................ 42
Certain Relationships..................................................... 47
Principal Stockholders.................................................... 48
Description of Capital Stock.............................................. 50
Shares Eligible For Future Sale........................................... 52
Underwriting.............................................................. 53
Legal Matters............................................................. 55
Experts................................................................... 55
Additional Information.................................................... 55
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........................................ 50,000
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..................................................... 42,765
---------
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
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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
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<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
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<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
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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
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<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>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<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.+
24.1 Power of Attorney (included on signature page).*
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
+ To be filed by amendment.
+ Confidential treatment requested as to certain portions of this exhibit.
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 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
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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.
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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. 1 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 ,
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. 1 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 , 1999
Michael J. Dubelko and President
Chief Financial Officer,
/s/ ANDREW T. CRIST Chief Operating Officer
- ------------------------------ and Secretary (Principal June , 1999
Andrew T. Crist Financial and Accounting
Officer)
*
- ------------------------------ Director June , 1999
Steven S. Antebi
*
- ------------------------------ Director June , 1999
Kimberly S. Eads
*
- ------------------------------ Director June , 1999
Norman J. Pattiz
*
- ------------------------------ Director June , 1999
Stephen J. Cannell
*
- ------------------------------ Director June , 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>
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<PAGE>
4,500,000 SHARES
DVD EXPRESS, INC.
COMMON STOCK
(PAR VALUE $.0001 PER SHARE)
UNDERWRITING AGREEMENT
[________], 1999
ING BARING FURMAN SELZ LLC
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
NEEDHAM & COMPANY, INC.
As Representatives of the
several Underwriters
c/o ING Baring Furman Selz LLC
Park Avenue Plaza
New York, New York 10169
Ladies and Gentlemen:
SECTION 1. INTRODUCTION. DVD Express, Inc., a Delaware corporation
(the "COMPANY") proposes to issue and sell to the several underwriters named in
Schedule I hereto (the "UNDERWRITERS"), for which ING Baring Furman Selz LLC
("ING"), Friedman, Billings, Ramsey & Co., Inc. and Needham & Company, Inc. are
acting as representatives (the "REPRESENTATIVES"), an aggregate of 4,500,000
shares of the Company's common stock, par value $.0001 per share (the "COMMON
STOCK"). The 4,500,000 shares of Common Stock to be sold by the Company are
referred to herein as the "FIRM SHARES." The Company also proposes to issue and
sell to the several Underwriters an aggregate of not more than 675,000
additional shares of Common Stock (the "ADDITIONAL SHARES"), if requested by the
Underwriters in accordance with Section 9 hereof. The Firm Shares and the
Additional Shares are collectively referred to herein as the "SHARES." The
words "YOU" and "YOUR" refer to the Representatives.
The Company hereby agrees with the several Underwriters as follows:
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to, and agrees with, each of the Underwriters
that:
(a) PREPARATION, FILING OF REGISTRATION STATEMENT,
PRELIMINARY PROSPECTUSES, PROSPECTUS. A registration statement on Form S-
1 (File No. 333-76121) under the Securities Act of 1933 as amended (the
"ACT"), with respect to the Shares,
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<PAGE>
including a form of prospectus subject to completion, has been prepared by
the Company in conformity with the requirements of the Act and the rules
and regulations of the Securities and Exchange Commission (the
"COMMISSION") thereunder (the "RULES AND REGULATIONS"). Such registration
statement has been filed with the Commission under the Act, and one or
more amendments to such registration statement may also have been so
filed. As used in this Agreement, the term "REGISTRATION STATEMENT" means
such registration statement, as amended at the time when it was or is
declared effective, including all financial schedules and exhibits
thereto; the Registration Statement shall be deemed to include any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined) and shall also mean
any registration statement filed pursuant to Rule 462(b) under the Act;
the term "PRELIMINARY PROSPECTUS" means each prospectus subject to
completion contained in the Registration Statement or any amendment
thereto (including the prospectus subject to completion, if any, included
in the Registration Statement or any amendment thereto or filed pursuant
to Rule 424(a) under the Act at the time it was or is declared effective);
and the term "PROSPECTUS" means the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Act or, if no prospectus is
required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement.
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Company
has not received any order preventing or suspending the use of any
Preliminary Prospectus and the Company has not received any notice that
the Commission has instituted nor, to the Company's knowledge, has the
Commission threatened to institute any proceedings with respect to such an
order. When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of the
Act and the Rules and Regulations and (ii) did not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement was or is declared effective, it (i) contained or will contain
all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of
the Act and the Rules and Regulations and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if
the Prospectus is not required to be so filed, when the Registration
Statement containing the Prospectus was or is declared effective) and at
all times subsequent thereto up to and including the Closing Date (as
defined in Section 3 hereof) and the Option Closing Date (as defined in
Section 9 hereof), the Prospectus (i) contained or will contain all
statements required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements of, the Act
and the Rules and Regulations and (ii) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (b) shall not apply to (i) statements or
omissions made in any Preliminary Prospectus which
2
<PAGE>
have been corrected in a subsequent Preliminary Prospectus or the
Prospectus or (ii) statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon, and in
conformity with, information furnished in writing to the Company by or on
behalf of the Underwriters through the Representatives expressly for use
therein.
(c) DUE INCORPORATION, QUALIFICATION OF COMPANY,
SUBSIDIARIES. The Company (i) is a duly incorporated and validly existing
corporation in good standing under the laws of its jurisdiction of
incorporation, with corporate power and corporate authority to own or
lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and (ii) is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction (A) in which the conduct of its business requires
such qualification (except for those jurisdictions in which the failure so
to qualify has not had and will not have a MATERIAL ADVERSE EFFECT (as
hereinafter defined)) and (B) in which it owns or leases property.
"MATERIAL ADVERSE EFFECT" means, when used in connection with the Company,
any development, change or effect that is materially adverse to the
business, properties, assets, net worth, condition (financial or other) or
results of operations of the Company taken as a whole. The Company has no
subsidiaries.
(d) CAPITALIZATION. The Company has the duly authorized and
validly outstanding capitalization set forth under the caption
"Capitalization" in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and will have the
adjusted capitalization set forth therein on the Closing Date and the
Option Closing Date, based on the assumptions and including the exceptions
set forth therein and the footnotes thereto. The capital stock of the
Company conforms in all material respects to the description thereof
contained in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus). The outstanding shares of Common
Stock have been duly authorized and validly issued by the Company and are
fully paid and nonassessable. Except as created hereby or described in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there are no outstanding options, warrants,
rights or other arrangements requiring the Company or any subsidiary of
the Company at any time to issue any capital stock. No holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Shares, other
than those which have been waived or satisfied, and neither the filing of
the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
that have been waived or satisfied, for or relating to, the registration
of any securities of the Company. All offers and sales of the Company's
capital stock prior to the date hereof were at all relevant times exempt
from the registration requirements of the Act and were duly registered
with or the subject of an available exemption from the registration
requirements of the applicable state securities or Blue Sky laws. The
Shares have been duly authorized; on the Closing Date or the Option
Closing Date (as the case may be), after payment therefor in accordance
with the terms of this Agreement, (i) the
3
<PAGE>
Firm Shares and the Additional Shares to be sold by the Company hereunder
will be validly issued, fully paid and nonassessable, and (ii) good and
marketable title to the Shares will pass to the Underwriters on the
Closing Date or the Option Closing Date (as the case may be) free and
clear of any lien, encumbrance, security interest, claim or other
restriction whatsoever.
(e) EXCHANGE ACT REGISTRATION; NASDAQ. The Company has
filed a registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT") to register the
Common Stock thereunder. The Company has received, subject to notice of
issuance, approval to have the Shares quoted on the National Market System
of the National Association of Securities Dealers' Automated Quotation
System ("Nasdaq National Market") and the Company knows of no reason or
set of facts which is likely to adversely affect such approval.
(f) FINANCIAL STATEMENTS. The consolidated financial
statements and the related notes and schedules thereto included in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present, in all
material respects, the consolidated financial condition, results of
operations, stockholders' equity and cash flows of the Company at the
dates and for the periods specified therein. Such financial statements
and the related notes and schedules thereto have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved (except as otherwise noted
therein) and such financial statements have been examined by Arthur
Andersen LLP, which are independent public accountants within the meaning
of the Act and the Rules and Regulations, as indicated in their reports
filed therewith. The selected financial information set forth under the
captions "Prospectus Summary - Summary Financial Data" and "Selected
Financial Data" in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) has been prepared on a
basis consistent with the consolidated financial statements of the
Company.
(g) TAX RETURNS. The Company has filed all necessary
federal, state and local income, franchise and other material tax returns
and have paid all taxes shown as due thereunder, and the Company has no
knowledge of any tax deficiency that is reasonably likely to be assessed
against the Company which, if so assessed, would have a Material Adverse
Effect.
(h) INSURANCE. The Company maintains insurance of the
types, in amounts and with such deductibles generally deemed adequate for
the business of the Company, in such amounts and with such deductibles as
is customary for companies in the same or similar business, all of which
insurance is in full force and effect. The Company (i) has not received
any notice from any insurer or agent of such insurer that substantial
capital improvements or other material expenditures will have to be made
in order to continue such insurance and (ii) has no reason to believe that
it will not be able to renew its existing insurance coverage as and when
such coverage expires or will not be
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able to obtain similar coverage from similar insurers at a cost that would
not have a Material Adverse Effect.
(i) ABSENCE OF PROCEEDINGS. Except as disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there is no action, suit, proceeding or
investigation pending or, to the Company's best knowledge, threatened
before or by any court, regulatory body or administrative agency or any
other governmental agency or body, domestic or foreign, that (i) questions
the validity of the capital stock of the Company or this Agreement or of
any action taken or to be taken by the Company pursuant to or in
connection with this Agreement, (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings, if
any, as are summarized in the Registration Statement are accurately
summarized in all material respects), or (iii) if decided adversely to the
Company, would have a Material Adverse Effect.
(j) AUTHORIZATION; BINDING AGREEMENT; NO VIOLATION. The
Company has all requisite corporate, power and authority to enter into
this Agreement and to consummate the transactions provided for herein.
This Agreement has been duly authorized, executed and delivered by the
Company and, assuming it is a binding agreement of the Underwriters,
constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating
to or affecting the enforcement of creditors' rights and the application
of general equitable principles relating to the availability of remedies
and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such
laws), and none of the Company's execution or delivery of this Agreement,
its performance hereunder, its consummation of the transactions
contemplated herein, its application of the net proceeds of the offering
in the manner set forth under the caption "Use of Proceeds" or the conduct
of its business as described in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), conflicts or
will conflict with or results or will result in any breach or violation of
any of the terms or provisions of, or constitutes or will constitute a
default under, causes or will cause (or permits or will permit), except as
specifically disclosed in the Prospectus, the maturation or acceleration
of any liability or obligation or the termination of any right under, or
result in the creation or imposition of any lien, charge, or encumbrance
upon, any property or assets of the Company pursuant to the terms of
(i) the certificate of incorporation or by-laws of the Company, (ii) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note agreement or other agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of
its property is or may be subject or (iii) any statute, judgment, decree,
order, rule or regulation applicable to the Company of any government,
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its activities or properties, except, in the cases
of clauses (ii) and (iii) above, for
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breaches, violations, defaults or terminations which would not be
reasonably likely to have a Material Adverse Effect.
(k) EXHIBITS. All executed agreements or copies of executed
agreements filed as exhibits to the Registration Statement to which the
Company is a party or by it may be bound or to which any of its assets,
properties or businesses is or may be subject, have been duly and validly
authorized, executed and delivered by the Company and, assuming such
agreements are the legal, valid, binding and enforceable agreements of the
other parties thereto, constitute the legal, valid and binding agreements
of the Company enforceable against the Company in accordance with their
respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting the enforcement of
creditors' rights and the application of general equitable principles
relating to the availability of remedies and except as rights to indemnity
or contribution may be limited by federal or state securities laws and the
public policy underlying such laws). The descriptions in the Registration
Statement of contracts and other documents are accurate in all material
respects and fairly present the information required to be shown with
respect thereto by the Act and the Rules and Regulations, and there are no
contracts or other documents which are required by the Act or the Rules
and Regulations to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct
copies, in all material respects, of the documents of which they purport
to be copies.
(l) LIABILITIES, OBLIGATIONS, DIVIDENDS; NO MATERIAL ADVERSE
CHANGE. Subsequent to the most recent respective dates as of which
information is given in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and except as
expressly disclosed or contemplated therein, (i) the Company has not
incurred, other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent, or purchased any of its
outstanding capital stock, paid or declared any dividends or other
distributions on its capital stock or entered into any material
transactions not in the ordinary course of business and there has been no
material change in capital stock or long- or short-term debt of the
Company, and (ii) there has not been any material adverse change, or
development involving a prospective material adverse change, in the
business, properties, assets, net worth, condition (financial or other),
or results of operations of the Company taken as a whole.
(m) NO VIOLATION. Neither the Company nor the manner in
which it conducts its business is in breach or violation of, or in default
under, any term or provision of (i) its certificate of incorporation or
bylaws, (ii) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement or other agreement or
instrument to which it is a party or by which it is or may be bound or to
which any of its property is or may be subject, or any indebtedness, the
effect of which breach or default singly or in the aggregate may have a
Material Adverse Effect, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to the Company or
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of any arbitrator, court, regulatory body, administrative agency or any
other governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its activities or properties and
the effect of which breach or default singly or in the aggregate would
have a Material Adverse Effect.
(n) LABOR DISTURBANCES. No labor disturbance by the
employees of the Company exists or, to the Company's knowledge, is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, customers,
contractors or distribution (or syndication) partners which would have a
Material Adverse Effect.
(o) INTELLECTUAL PROPERTY. The Company owns and possesses
all right, title and interest in and to, or has duly licensed from other
parties, all Internet domains, trademarks, copyrights and other
proprietary rights which are used in and material to the business of the
Company taken as a whole ("TRADE RIGHTS"). The Company has not received
any notice of infringement, misappropriation or conflict from any party as
to such material Trade Rights that has not been resolved or disposed of
and the Company has not infringed, misappropriated or otherwise conflicted
with material Trade Rights of any third parties, which infringement,
misappropriation or conflict would have a Material Adverse Effect.
(p) ABSENCE OF FURTHER REQUIREMENTS. No consent, approval,
authorization or order of or filing with any court, regulatory body,
administrative agency or any other governmental agency or body, domestic
or foreign, is required for the performance of this Agreement or the
consummation of the transactions contemplated hereby, except (i) such as
have been or may be required to be obtained under the Act, (ii) such as
may be required under state securities or Blue Sky laws in connection with
the Underwriters' purchase and distribution of the Shares, (iii) for the
approval of the listing of the Common Stock on the Nasdaq National Market,
and (iv) for the review and no objection of the NASD to the terms of the
underwriting of the Shares as set forth in this Agreement.
(q) PROPERTIES AND ASSETS. The Company has good and valid
title to, or valid and enforceable leasehold interests in, all properties
and assets owned or leased by it, free and clear of all mortgages, liens,
encumbrances, security interests, claims, restrictions, equities, claims
and defects, except such as are described in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), or such as do not have a Material Adverse Effect.
The Company owns or leases all such properties as are materially necessary
to its operations as now conducted, and as proposed to be conducted as set
forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus);
and the properties and business of the Company conform in all material
respects to the descriptions thereof contained in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus). All the material leases and
subleases of the Company, and under which the
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Company holds properties or assets as lessee or sublessee, constitute
valid leasehold interests of the Company free and clear of any lien,
encumbrance, security interest, restriction, equity, claim or defect, are
in full force and effect, and the Company is not in default in respect of
any of the material terms or provisions of any such material leases or
subleases, and the Company has no notice of any claim which has been
asserted by anyone adverse to the Company's rights as lessee or sublessee
under either the material lease or sublease, or affecting or questioning
the Company's right to the continued possession of the leased or subleased
premises under any such material lease or sublease, in each case which
default or claim would have a Material Adverse Effect.
(r) ENVIRONMENTAL, SAFETY, HEALTH, SIMILAR LAWS. The
Company has not violated any environmental, safety, health or similar law
applicable to the business of the Company, nor any federal or state law
relating to discrimination in the hiring, promotion, or pay of employees,
nor any applicable federal or state wages and hours law, nor any
provisions of the federal Employee Retirement Income Security Act or the
rules and regulations promulgated thereunder, the consequences of which
violation would have a Material Adverse Effect.
(s) LICENSES, PERMITS. The Company holds and at the Closing
Date and any later Option Closing Date, as the case may be, will hold, all
franchises, licenses, permits, approvals, certificates and other
authorizations ("AUTHORIZATIONS") from federal, state and foreign and
other governmental or regulatory authorities necessary to the ownership,
leasing and operation of its properties or required for the present
conduct of its business, and such Authorizations are in full force and
effect and the Company is in compliance therewith in all material respects
except where the failure so to obtain, maintain or comply would not have a
Material Adverse Effect. No event has occurred (including, without
limitation, the receipt of any notice from any authority or governing
body) that allows or, after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such Authorization or results
or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization.
(t) RELATED PARTY RELATIONSHIPS/TRANSACTIONS. Except as
disclosed in the Prospectus, there are no business relationships or
related party transactions required to be disclosed therein by Item 404 of
Regulation S-K of the Commission.
(u) STATISTICAL, MARKET-RELATED DATA. The statistical and
market-related data included in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) are based on or
derived from independent sources that the Company believes to be reliable
and accurate in all material respects, or represent the Company's
good-faith estimate made on the basis of data derived from such sources.
(v) INTERNAL ACCOUNTING CONTROLS. The Company maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that: (i) transactions are executed in accordance with
management's general or specific
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authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(w) COMPLIANCE WITH CUBA ACT. The Company is in compliance
with all provisions of Florida Statutes Section 517.075, and the
regulations thereunder, relating to issuers doing business with Cuba.
(x) POLITICAL CONTRIBUTIONS; PAYMENTS TO OFFICIALS. The
Company has not at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any
payment to any foreign, United States or state governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the
United States.
(y) INVESTMENT COMPANY ACT. The Company is not, and after
giving effect to the offering of the Shares contemplated hereby and the
application of the proceeds therefrom, will not be, an "investment
company" or an entity "controlled" by an investment company, as such terms
are defined in Section 3(a) of the Investment Company Act of 1940, as
amended.
(z) YEAR 2000. The Company has reviewed its operations and
any other parties with which the Company has a material relationship in
order to evaluate the extent to which the business or operations of the
Company will be affected by the Year 2000 Problem (as defined below). As
a result of such review, management of the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will result in a
Material Adverse Effect or result in any material loss or interference
with the business or operations of the Company. The "Year 2000 Problem"
means any significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at least
as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
SECTION 3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis
of the representations, warranties, covenants and agreements herein contained,
but subject to the terms and conditions herein set forth, the Company agrees to
sell to each Underwriter and each Underwriter, severally and not jointly, agrees
to purchase from the Company at a purchase price of $[_______] per Share, the
number of Firm Shares set forth opposite the name of such Underwriter on
SCHEDULE I.
Delivery of certificates, and payment of the purchase price, for the
Firm Shares shall be made at the offices of ING Baring Furman Selz LLC at Park
Avenue Plaza, New York,
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New York 10169, or such other location as shall be agreed upon by the Company
and the Representatives. Such delivery and payment shall be made at 10:00 a.m.,
New York City time, on [__________], 1999 or at such other time and date not
more than ten business days thereafter as shall be agreed upon by the
Representatives and the Company. The time and date of such delivery and payment
are herein called the "CLOSING DATE." Delivery of the certificates for the Firm
Shares shall be made through the facilities of the Depository Trust Company to
the Representatives for the respective accounts of the several Underwriters
against payment by the several Underwriters through the Representatives of the
purchase price for the Firm Shares by wire transfer of immediately-available
funds to an account designated to the Representatives in writing at least two
business days preceding the Closing Date. The certificates for the Shares to be
so delivered will be in definitive, fully-registered form, will bear no
restrictive legends and will be in such denominations and registered in such
names as the Representatives shall request, not less than two full business days
prior to the Closing Date. The certificates for the Firm Shares will be made
available to the Representatives at such office or such other place as the
Representatives may designate for inspection, checking and packaging not later
than 9:30 a.m., New York time on the business day prior to the Closing Date.
SECTION 4. PUBLIC OFFERING OF THE SHARES. It is understood that
the Underwriters propose to make a public offering of the Shares at the price
and upon the other terms set forth in the Prospectus.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters that:
(a) FILING OF REGISTRATION STATEMENT, PROSPECTUS. Promptly
following execution of this Agreement, the Company shall file with the
Commission either (i) if the Registration Statement, as it may have been
amended, has been declared by the Commission to be effective under the
Act, a prospectus in the form most recently included in an amendment to
the Registration Statement filed with the Commission (or, if no such
amendment shall have been filed, in the Registration Statement), with such
insertions and changes as are required by Rule 430A under the Act and as
shall have been provided to and approved by the Representatives prior to
the filing thereof, or (ii) if the Registration Statement, as it may have
been amended, has not been declared by the Commission to be effective
under the Act, an amendment to the Registration Statement, including a
form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the filing thereof. If the
Registration Statement does not cover all of the Shares, the Company shall
file with the Commission, if available, a registration statement under
Rule 462(b) of the Rules and Regulations registering the Shares not so
covered by 10:00 p.m., New York City time, on the date of this Agreement,
and shall pay to the Commission the filing fee for such registration
statement at the time of filing or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) of the Rules and Regulations.
(b) EFFECTIVENESS; AMENDMENTS, FINAL PROSPECTUS. The
Company will use its best efforts to cause the Registration Statement, if
not effective at the time of
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execution of this Agreement, and any amendments thereto to become
effective as promptly as practicable. If required, the Company will file
the Prospectus and any amendment or supplement thereto with the Commission
in the manner and within the time period required by Rule 424(b) under the
Act. During any time when a prospectus relating to the Shares is required
to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the Rules and Regulations to
the extent necessary to permit the continuance of sales of or dealings in
the Shares in accordance with the provisions hereof and of the Prospectus,
as then amended or supplemented, and (ii) will not file with the
Commission the prospectus or the amendment referred to in the third
sentence of Section 2(a) hereof or any amendment or supplement to such
prospectus or any amendment to the Registration Statement, of which the
Representatives shall not previously have been advised and furnished with
a copy a reasonable period of time prior to the proposed filing and as to
which filing the Representatives shall not have given their consent.
(c) INFORMATION TO BE PROVIDED TO REPRESENTATIVES; STOP
ORDERS. As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives (i) when the Registration
Statement, as amended, has become effective; if the provisions of Rule
430A promulgated under the Act will be relied upon, when the Prospectus
has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective;
(ii) of any request made by the Commission for amending the
Registration Statement, for supplementing any Preliminary Prospectus or
the Prospectus or for additional information, or (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or any
order preventing or suspending the use of any Preliminary Prospectus or
the Prospectus in any jurisdiction or any amendment or supplement
thereto or the institution or threat of any investigation or proceeding
for that purpose, and will use its best efforts to prevent the issuance
of any such order and, if issued, to obtain the lifting thereof as soon
as possible.
(d) BLUE SKY LAWS. The Company will (i) use its best
efforts to arrange for the qualification of the Shares for offer and sale
under the state securities or Blue Sky Laws of such jurisdictions as the
Representatives may designate, and the continuation of such qualifications
in effect for as long as may be necessary to complete the distribution of
the Shares, and (ii) make such applications, file such documents and
furnish such information as may be required for the purposes set forth in
clause (i); PROVIDED, HOWEVER, that the Company shall not be required to
qualify as a foreign corporation or file a general or unlimited consent to
service of process in any such jurisdiction.
(e) USE OF PROSPECTUS; AMENDMENT. The Company consents to
the use of the Prospectus (and any amendment or supplement thereto) by the
Underwriters and all dealers to whom the Shares may be sold, in connection
with the offering or sale of the Shares and for such period of time
thereafter as the Prospectus is required by law to be
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delivered in connection therewith. The Company shall promptly notify the
Representatives if, at any time when a prospectus relating to the Shares
is required to be delivered under the Act, any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or it becomes
necessary at any time to amend or supplement the Prospectus to comply with
the Act or the Rules and Regulations. In such case, and at any other time
during such period that counsel to the Underwriters reasonably determines
that it is necessary to amend or supplement the Prospectus to comply with
the Act or the Rules and Regulations, the Company will, subject to Section
5(a) hereof, promptly prepare and file with the Commission an amendment to
the Registration Statement or an amendment or supplement to the Prospectus
that will correct such statement or omission or effect such compliance,
each such amendment or supplement to be reasonably satisfactory to counsel
to the Underwriters, and shall use its best efforts to cause any such
amendment to the Registration Statement to become effective as soon as
possible. In the event that any Underwriter is required to deliver a
prospectus nine months or more following the effective date of the
Registration Statement, the Company shall upon request (but at the expense
of such Underwriter) prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the Act.
(f) EARNINGS STATEMENT. As soon as practicable, but in any
event not later than 45 days after the end of the twelve-month period
beginning on the day after the end of the fiscal quarter of the Company
during which the effective date of the Registration Statement occurs (90
days in the event that the end of such fiscal quarter is the end of the
Company's fiscal year), the Company will make generally available to its
security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Representatives, an earnings statement which will
be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the
Act or the Rules and Regulations, covering a period of at least twelve
consecutive months after the effective date of the Registration Statement.
(g) REPORTS. During the period of three years from the date
hereof, the Company will furnish to its stockholders, as soon as
practicable, annual reports (including financial statements audited by
independent public accountants) and unaudited quarterly reports of
earnings, and will deliver to the Representatives:
(i) concurrently with furnishing any quarterly reports to
its stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders;
(ii) concurrently with furnishing annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of income,
stockholders' equity and cash flows of the Company
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for such fiscal year, accompanied by a copy of the report thereon
of independent public accountants;
(iii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the
Commission, the National Association of Securities Dealers, Inc.
("NASD") or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs that is released or prepared by the
Company; and
(vi) any additional information of a public nature
concerning the Company or its business that is in the possession
of the Company at such time and that the Representatives may
reasonably request.
During such three-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the
extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for
any significant subsidiary that is not so consolidated.
(h) MATERIAL TRANSACTIONS. The Company will not, prior to
the earliest of the Option Closing Date, the termination or expiration of
the Underwriters' right to purchase Additional Shares, and the purchase of
all Additional Shares available for purchase pursuant to Section 9, enter
into any material transaction, other than in the ordinary course of
business and except as contemplated by the Prospectus.
(i) TRANSFER AGENT, REGISTRAR. The Company will maintain a
transfer agent and, if necessary under the jurisdiction of incorporation
of the Company, a registrar (which may be the same entity as the transfer
agent) for the Common Stock.
(j) COPIES OF REGISTRATION STATEMENT, PRELIMINARY
PROSPECTUS, PROSPECTUS. The Company will furnish to the Representatives
or on the Representatives' order, without charge, at such place as the
Representatives may designate, copies of the Registration Statement (of
which two copies will be signed, and which will include all financial
statements and exhibits) and any pre-effective or post-effective
amendments thereto (of which two copies will be signed, and which will
include all financial statements and exhibits), each Preliminary
Prospectus and the Prospectus, and all amendments and supplements thereto,
in each case as soon as available and in such quantities as the
Representatives may reasonably request.
(k) CORRESPONDENCE WITH THE COMMISSION. The Company will
promptly deliver to the Representatives copies of all correspondence to
and from, and all
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documents issued to and by, the Commission in connection with the
registration of the Shares under the Act.
(l) LIMITATION ON ISSUANCE AND SALE. Without the prior
written consent of ING Baring Furman Selz LLC, the Company will not issue
or directly or indirectly offer, sell, offer to sell, contract to sell,
grant any option for the sale or purchase of, or otherwise dispose of (or
announce any issuance, offer, sale, offer to sell, contract to sell,
option grant or other disposition of) any shares of Common Stock or any
security convertible or exchangeable into or exercisable for Common Stock,
or any substantially similar securities, for a period of 180 days from the
date of the Prospectus.
(m) LISTING ON NASDAQ. The Company will use its best
efforts to cause the Shares to be included for quotation on the Nasdaq
National Market prior to the Closing Date, and to maintain the listing of
the Shares on the Nasdaq National Market or a national securities exchange
for a period of three years following the date of this Agreement.
(n) USE OF PROCEEDS. The Company will apply the net
proceeds of the offering received by it in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(o) FILING OF REPORTS. The Company will timely file all
such reports, forms or other documents as may be required from time to
time, under the Act, the Rules and Regulations, the Exchange Act and the
rules and regulations thereunder, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Rules and Regulations and the Exchange Act
and the rules and regulations thereunder.
(p) COMMUNICATIONS WITH PRESS. Prior to the earliest of the
Option Closing Date, the termination or expiration of the Underwriters'
right to purchase Additional Shares, and the purchase of all Additional
Shares available for purchase pursuant to Section 9, the Company will
issue no press release or other communication (except for communications
relating to product announcements in the ordinary course of business) and
hold no press conferences with respect to the Company or with respect to
the financial condition, results of operations, business, properties,
assets or liabilities of any of them, or the Offering, without the prior
consent of the Representatives, which shall not be unreasonably withheld.
(q) OTHER TASKS. The Company will exercise its best efforts
to do and perform all tasks required or necessary to be done or performed
under this Agreement by the Company prior to the Closing Date or any
Option Closing Date, as the case may be, and to satisfy all conditions
precedent to the delivery of the Shares.
SECTION 6. EXPENSES.
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(a) RESPONSIBILITY FOR COMPANY/UNDERWRITER EXPENSES.
Regardless of whether the transactions contemplated in this Agreement are
consummated, and regardless of whether for any reason this Agreement is
terminated, SUBJECT TO THIS SECTION 6, the Company will pay, and hereby
agrees to indemnify each Underwriter against, all fees and expenses
incident to the performance of the obligations of the Company under this
Agreement, including, but not limited to, (i) fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses
incurred in connection with the preparation (other than fees of counsel
for the Underwriters), duplication, printing, filing, delivery and
shipping of copies of the Registration Statement and any pre-effective or
post-effective amendments thereto, any Preliminary Prospectus and the
Prospectus and any amendments or supplements thereto (including postage
costs related to the delivery by the Underwriters of any Preliminary
Prospectus or Prospectus, or any amendment or supplement thereto), this
Agreement, the Agreement Among Underwriters, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney, and all other
documents in connection with the transactions contemplated herein,
including the cost of all copies thereof, (iii) fees and expenses relating
to qualification of the Shares under state securities or Blue Sky Laws,
including the cost of preparing and mailing the preliminary and final blue
sky memoranda and filing fees and disbursements and reasonable fees of
counsel for the Underwriters and other related expenses, if any, in
connection therewith, (iv) filing fees of the Commission relating to
registration of the Shares under the Act, (v) any fees and expenses in
connection with the quotation of the Shares on the Nasdaq National Market,
(vi) the filing fees incident to, and the fees and disbursements of
counsel for the Underwriters in connection with, securing any required
review by the NASD of the terms of the underwriting of the Shares as set
forth in this Agreement, (vii) costs and expenses incident to the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including the transfer agent's and the registrar's
fees and any applicable transfer taxes incurred in connection with the
delivery to the Underwriters of the Shares to be sold by the Company
pursuant to this Agreement, (viii) costs and expenses incident to any
meetings with prospective investors in the Shares (other than as shall
have been specifically approved by the Representatives to be paid for by
the Underwriters), (ix) costs and expenses of advertising relating to the
offering of the Shares (other than as shall have been specifically
approved by the Representatives to be paid for by the Underwriters), and
(x) all other costs and expenses incident to the performance of its
obligations hereunder that are not otherwise specifically provided for in
this section. Except as set forth above and in Section 6(b) below, the
Underwriters shall pay all of their own expenses (including the fees and
disbursements of their counsel and their travel expenses) incurred in
connection with this Agreement and the transactions contemplated hereby.
(b) RESPONSIBILITY FOR EXPENSES IF PURCHASE OF SHARES NOT
CONSUMMATED. If the purchase of the Shares as herein contemplated is not
consummated for any reason other than the Underwriters' default under this
Agreement or other than by reason of the Representatives giving the notice
to the Company set forth in Section 11(a), the Company shall reimburse the
several Underwriters for their reasonable out-of-pocket expenses
(including reasonable counsel fees and disbursements) in connection with
any
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investigation made by them, and any preparation made by them in respect of
marketing of the Shares or in contemplation of the performance by them of
their obligations hereunder.
SECTION 7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The
obligation of each Underwriter to purchase and pay for the Shares set forth
opposite the name of such Underwriter in SCHEDULE I is subject to, in the
discretion of the Underwriters, the continuing accuracy of the representations
and warranties of the Company herein as of the date hereof and as of the Closing
Date as if they had been made on and as of the Closing Date, the accuracy on and
as of the Closing Date of the statements of officers of the Company made
pursuant to the provisions hereof, the performance by the Company on and as of
the Closing Date of all of its covenants and agreements hereunder which are to
be performed on or prior to the Closing Date, and the following additional
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT, FILING OF
PROSPECTUS. If the Company has elected to rely on Rule 430A under the
Act, the Registration Statement shall have been declared effective, and
the Prospectus (containing the information omitted pursuant to Rule 430A)
shall have been filed with the Commission not later than the Commission's
close of business on the second business day following the date hereof or
such later time and date to which the Representatives shall have
consented; if the Company does not elect to rely on Rule 430A, the
Registration Statement (including any registration statement filed under
Rule 462(b)) shall have been declared effective not later than 11:00 a.m.
New York time, on the first business day following the date hereof or such
later time and date to which the Representatives shall have consented; if
required, in the case of any changes in or amendments or supplements to
the Prospectus in addition to those contemplated above, the Company shall
have filed such Prospectus as amended or supplemented with the Commission
in the manner and within the time period required by Rule 424(b) under the
Act; no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated or
threatened by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise).
(b) NO MISSTATEMENTS/OMISSIONS. The Registration Statement,
or any amendment thereto, shall not contain an untrue statement of
material fact, or omit to state a material fact that is required to be
stated therein or is necessary to make the statements therein not
misleading, and the Prospectus, or any supplement thereto, shall not
contain an untrue statement of material fact, or omit to state a material
fact that is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(c) OPINION OF UNDERWRITERS' COUNSEL. On or prior to the
Closing Date, the Representatives shall have received from Brobeck,
Phleger & Harrison LLP, counsel to the Underwriters, such opinion or
opinions with respect to the issuance and sale of the Firm Shares, the
Registration Statement and the Prospectus and such other
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related matters as the Representatives reasonably may request, and such
counsel shall have received such documents and other information as they
reasonably may request to enable them to pass upon such matters.
(d) OPINION OF COUNSEL TO THE COMPANY. On the Closing Date,
the Underwriters shall have received the opinion, dated the Closing Date,
of Troop Steuber Pasich Reddick & Tobey, LLP, counsel to the Company, in
the form attached hereto as APPENDIX A, addressed to the Underwriters.
(e) OTHER DOCUMENTS, CERTIFICATES, OPINIONS. On or prior to
the Closing Date, counsel to the Underwriters shall have been furnished
such documents, certificates and opinions as they may reasonably require
in order to evidence the accuracy, completeness or satisfaction of any of
the representations or warranties of the Company, or conditions herein
contained.
(f) COMFORT LETTER AND BRINGDOWN LETTER OF ARTHUR ANDERSEN
LLP. At the time of execution of this Agreement, the Representatives
shall have received a letter from Arthur Andersen LLP, addressed to the
Company and the Underwriters, confirming that it is an independent
certified public accountant with respect to the Company within the meaning
of the Act and the Rules and Regulations thereunder and setting forth
certain information as may be requested by the Representatives concerning
financial and operating data of the Company for the year ending December
31, 1998 and the quarter ending March 31, 1999 contained in the
Preliminary Prospectus (the "AA ORIGINAL LETTER"). On the Closing Date,
the Representatives shall have received a letter from Arthur Andersen LLP,
addressed to the Company and the Underwriters, dated the Closing Date,
confirming that it is an independent certified public accountant with
respect to the Company within the meaning of the Act and the Rules and
Regulations thereunder and based upon the procedures described in the AA
Original Letter, but carried out to a date not more than three days prior
to the Closing Date, (i) confirming that the statements and conclusions
set forth in the AA Original Letter are accurate as of the Closing Date;
and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the AA Original Letter that are necessary to
reflect any changes in the facts described in the AA Original Letter since
the date of such letter, or to reflect the availability of more recent
financial statements, data or information. It is a condition of the
Underwriters' obligations hereunder that such letter not disclose any
change, or any development involving a prospective change, in or affecting
the business or properties of the Company which, in ING's reasonable
judgment, makes it impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. In addition,
the Representatives shall have received from AA LLC a letter addressed to
the Company and made available to the Representatives for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent it deemed necessary in establishing the
scope of its latest examination of the Company's financial statements, did
not disclose any weaknesses in internal controls that it considered to be
material weaknesses. All such letters shall be in a form reasonably
satisfactory to the Representatives and their counsel.
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(g) OFFICERS' CERTIFICATE. On the Closing Date, the
Representatives shall have received a certificate, dated the Closing Date,
of the principal executive officer and the principal financial or
accounting officer of the Company to the effect that each of such persons
has carefully examined the Registration Statement and the Prospectus and
any amendments or supplements thereto and this Agreement, and that:
(i) The representations and warranties of the Company set
forth in this Agreement are true and correct, as if made on and as
of the Closing Date, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in
this Agreement on its part to be performed or satisfied at or prior
to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best
knowledge of each of such persons, are contemplated or threatened,
under the Act and any and all filings required by Rule 424 and Rule
430A have been timely made;
(iii) The Registration Statement and Prospectus and, if any,
each amendment and each supplement thereto, contain all statements
and information required to be included therein, and neither the
Registration Statement nor any amendment thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and neither the Prospectus nor any supplement
thereto includes any untrue statement of a material fact or omits or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus up to and including the Closing Date, other than as
disclosed or contemplated by the Prospectus: the Company has not
incurred, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; the
Company has not purchased any of its outstanding capital stock or
paid or declared any dividends or other distributions on its capital
stock; the Company has not entered into any transactions not in the
ordinary course of business; and there has not been any change in
the capital stock or consolidated long-term debt or any increase in
the consolidated short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the
Company or any material adverse change to the business, properties,
assets, net worth, condition (financial or other), or results of
operations of the Company taken as a whole; the Company has not
sustained any material loss or damage to its property or assets,
whether or not insured; and there is no litigation which is pending
or threatened against the Company which if adversely decided would
have a Material Adverse Effect.
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References to the Registration Statement and the Prospectus in this
paragraph (g) are to such documents as amended and supplemented at
the date of the certificate.
(h) NO MATERIAL CHANGE. Subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus up to and including the Closing Date there has not been (i) any
material change or decrease specified in the letter referred to in
paragraph (g) of this Section 7 or (ii) any material adverse change, or
any development involving a prospective material adverse change, in the
business or properties of the Company, whether or not arising in the
ordinary course of business, which change or decrease in the case of
clause (i) or change or development in the case of clause (ii) makes it
impractical or inadvisable in the Representatives' judgment to proceed
with the public offering or the delivery of the Shares as contemplated by
the Prospectus.
(i) NO STOP ORDERS BY STATE AUTHORITIES. No order
suspending the sale of the Shares in any jurisdiction designated by you
pursuant to Section 5(d) hereof has been issued on or prior to the Closing
Date and no proceedings for that purpose have been instituted or, to your
knowledge or that of the Company, have been or are contemplated.
(j) LOCKUP AGREEMENTS. The Representatives shall have
received from each person identified on APPENDIX B attached hereto an
agreement to the effect that, absent the prior written consent of ING
Baring Furman Selz LLC, such person will not (and, to the extent allowable
by law, will not permit any other person who is a transferee of such
person's shares of Common Stock or substantially similar securities of the
Company to) directly or indirectly offer, sell, offer to sell, contract to
sell, grant any option for the sale or purchase of, or otherwise dispose
of, any shares of Common Stock (including but not limited to any shares of
Common Stock issued or issuable upon conversion of any Preferred Stock of
the Company), or any security convertible or exchangeable into or
exercisable for Common Stock (including but not limited to shares of
Preferred Stock of the Company), or any substantially similar securities,
whether now owned or hereafter acquired or owned by such person listed on
APPENDIX B or with respect to which such person listed on APPENDIX B has
the power of disposition or beneficial ownership (collectively, the
"LOCKUP SHARES") or, in any manner, transfer all or a portion of the
economic consequences associated with the ownership of the Lockup Shares,
for a period of 180 days from the date of the Prospectus.
(k) ADDITIONAL DOCUMENTS. The Company shall have furnished
the Underwriters with such further opinions, letters, certificates or
documents as you or counsel for the Representatives may reasonably
request. All opinions, certificates, letters and documents to be
furnished by the Company shall be deemed to comply with the provisions
hereof (to the extent a form of such document is not attached hereto) only
if they are reasonably satisfactory in all material respects to the
Representatives and to counsel for the Representatives. The Company shall
furnish the Representatives with conformed copies of such opinions,
certificates, letters and documents in such quantities as you reasonably
request. The certificates delivered under this Section 7 shall constitute
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representations, warranties and agreements of the Company, as to all
matters set forth therein, as fully and effectively as if such matters had
been set forth in Section 2 of this Agreement.
(l) The Shares shall have been duly authorized for quotation
on the Nasdaq National Market.
SECTION 8. INDEMNIFICATION.
(a) BY THE COMPANY. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, against any and all losses, claims, damages or
liabilities, joint or several (and actions in respect thereof), to which
such Underwriter or such controlling person may become subject, under the
Act or other federal or state statutory law or regulation, at common law
or otherwise, insofar as such losses, claims, damages, liabilities or
actions arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission therein of a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and will reimburse, as incurred, such Underwriter or such controlling
persons for any legal or other expenses reasonably incurred by such
Underwriter or such controlling persons in connection with investigating,
defending or appearing as a third party witness in connection with any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged
omission made in any of such documents in reliance upon and in conformity
with information furnished in writing to the Company on behalf of such
Underwriter through the Representatives expressly for use therein. The
indemnity agreement in this paragraph (a) shall be in addition to any
liability that the Company may otherwise have.
(b) BY THE UNDERWRITERS. Each Underwriter agrees, severally
but not jointly, to indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the Registration Statement
and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any and
all losses, claims, damages or liabilities, joint or several (and actions
in respect thereof), to which the Company, its directors, each of its
officers who has signed the Registration Statement or such controlling
person may become subject, under the Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or actions arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or
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alleged omission therein of a material fact required to be stated
therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with information furnished
in writing by that Underwriter through the Representatives to the
Company expressly for use therein, and will reimburse, as incurred, the
Company, its directors, each of its officers who has signed the
Registration Statement and such controlling persons for any legal or
other expenses reasonably incurred by the Company or any such person in
connection with investigating, defending or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or
action. The indemnity agreement contained in this paragraph (b) shall
be in addition to any liability that the Underwriters may otherwise
have.
(c) INDEMNIFICATION PROCEDURE. Promptly after receipt by an
indemnified party under this Section 8 of notice of the commencement of
any action, such indemnified party will, if a claim in respect thereof is
to be made against one or more indemnifying parties under this Section 8,
notify such indemnifying party or parties of the commencement thereof; but
the omission so to notify the indemnifying party shall not relieve it from
any liability to the extent that the indemnifying party was not adversely
affected by such omission, or from any liability which it may have to any
indemnified party otherwise than under paragraph (a) or (b) of this
Section 8. In case any such action is brought against an indemnified
party and it notifies an indemnifying party or parties of the commencement
thereof, the indemnifying party or parties against which a claim is to be
made will be entitled to participate therein and, to the extent that it or
they may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party);
PROVIDED HOWEVER, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party
has reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnified party or
parties shall have the right to select separate counsel to assume such
legal defenses and otherwise to participate in the defense of such action
on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so
to assume the defense of such action and approval by the indemnified party
of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses (other than the
reasonable costs of investigation) subsequently incurred by such
indemnified party in connection with the defense thereof, other than
reasonable costs if investigation, unless (i) the indemnified party has
employed such counsel in connection with the assumption of such different
or additional legal defenses in accordance with the proviso to the
immediately preceding sentence, (ii) the indemnifying party has not
employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized
in writing the employment of counsel for the indemnified party at the
expense of the indemnifying party. No indemnifying party
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shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect
of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment
(i) incudes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include
a statement as to or an admission of fault, culpability or failure to
act, by or on behalf of any indemnified party.
(d) CONTRIBUTION. If the indemnification provided for in
this Section 8 is unavailable or insufficient to hold harmless an
indemnified party under paragraph (a) or (b) above in respect of any
losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in
respect thereof) (i) in such proportion as is appropriate to reflect the
relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified, on the other hand, from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified, on the other
hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is the
contributing party and the Underwriters are the indemnified party, the
relative benefits received by the Company on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts received by
the Underwriters hereunder, in each case as set forth in the table on the
cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by the
Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this paragraph (d) were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that
does not take account of the equitable considerations referred to above in
this paragraph (d). The amount paid or payable by an indemnified party as
a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this paragraph (d) shall be deemed
to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this paragraph (d), the
Underwriters shall not be required to contribute any amount in excess of
the underwriting discount applicable to the Shares purchased by the
Underwriters hereunder. The Underwriters' obligations to contribute
pursuant to this paragraph (d) are several in
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proportion to their respective underwriting obligations, and not joint.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For
purposes of this paragraph (d), (i) each person, if any, who controls
an Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act shall have the same rights to contribution as
such Underwriter and (ii) each director of the Company, each officer of
the Company who has signed the Registration Statement, and each person,
if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company, subject in each case to this paragraph
(d). Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against
such party in respect to which a claim for contribution may be made
against another party or parties under this paragraph (d), notify such
party or parties from whom contribution may be sought, but the omission
so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any other obligation
(x) it or they may have hereunder or otherwise than under this
paragraph (d) or (y) to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set
forth above shall be in addition to any liabilities which any
indemnifying party may otherwise have.
SECTION 9. RIGHT TO INCREASE OFFERING. At any time during a period
of 30 days from the date of the Prospectus, the Underwriters, by no less than
two business days' prior notice to the Company, may designate a closing (which
may be concurrent with, and part of, the closing on the Closing Date with
respect to the Firm Shares or which may be a second closing held on a date
subsequent to the Closing Date; in either case the date of such closing shall be
referred to herein as the "OPTION CLOSING DATE") at which the Underwriters may
purchase all or less than all of the Additional Shares in accordance with the
provisions of this Section 9 at the purchase price per share to be paid for the
Firm Shares. In no event shall the Option Closing Date be later than ten
business days after written notice of election to purchase Additional Shares is
given.
The Company agrees to sell to the several Underwriters on the
Option Closing Date the number of Additional Shares specified in such notice
and the Underwriters agree severally and not jointly, to purchase such
Additional Shares on the Option Closing Date. Such Additional Shares shall
be purchased for the account of each Underwriter in the same proportion as
the number of Firm Shares set forth opposite the name of such Underwriter on
Schedule I bears to the total number of Firm Shares (subject to adjustment by
ING to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of
the Firm Shares.
No Additional Shares shall be sold or delivered unless the Firm
Shares previously have been, or simultaneously are, sold and delivered. The
right to purchase the Additional Shares or any portion thereof may be
surrendered and terminated at any time upon notice by ING to the Company.
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Except to the extent modified by this Section 9, all provisions of
this Agreement relating to the transactions contemplated to occur on the Closing
Date for the sale of the Firm Shares shall apply, MUTATIS MUTANDIS, to the
Option Closing Date for the sale of the Additional Shares.
SECTION 10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The
respective representations, warranties, agreements, covenants, indemnities and
statements of, and on behalf of, the Company and its officers and the
Underwriters, respectively, set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of the Underwriters, and will survive delivery of and payment for the
Shares. Any successors to the Underwriters shall be entitled to the indemnity,
contribution and reimbursement agreements contained in this Agreement.
SECTION 11. EFFECTIVE DATE AND TERMINATION.
(a) EFFECTIVE DATE. This Agreement shall become effective
at 11:00 a.m., New York time on the first business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Representatives, in their sole discretion, shall release
the Shares for the sale to the public, unless the Representatives shall
have given written notice to the Company that the Representatives on
behalf of the Underwriters elect that this Agreement shall not become
effective; PROVIDED, HOWEVER, that the provisions of this Section and of
Section 6 and Section 8 hereof shall at all times be effective. For
purposes of this Section 11(a), the Shares to be purchased hereunder shall
be deemed to have been so released upon the earlier of notification by the
Representatives to securities dealers releasing such Shares for offering
or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the
Shares.
(b) TERMINATION. This Agreement (except for the provisions
of Sections 6 and 8 hereof) may be terminated by the Representatives by
notice to the Company if the Company has failed to comply in any respect
with any of the provisions of this Agreement required on its part to be
performed at or prior to the Closing Date or the Option Closing Date, or
if any of the representations or warranties of the Company is not accurate
in any respect or if the covenants, agreements or conditions of, or
applicable to the Company herein contained have not been complied with in
any respect or satisfied within the time specified on the Closing Date or
the Option Closing Date, respectively, or if prior to the Closing Date or
the Option Closing Date:
(i) the Company shall have sustained a loss by strike, fire,
flood, hurricane, accident or other calamity of such a character as
to interfere materially with the conduct of the business and
operations of the Company taken as a whole regardless of whether or
not such loss is covered by insurance;
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq
National Market System shall have
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been suspended or a material limitation on such trading shall have
been imposed or minimum or maximum prices shall have been
established on any such exchange or market system;
(iii) a banking moratorium shall have been declared by New
York State or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an
outbreak or escalation of any other insurrection or armed conflict
involving the United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the
present or prospective business or condition (financial or other) of
the Company taken as a whole that, in each case, in the
Representatives' judgment makes it impracticable or inadvisable to
make or consummate the public offering, sale or delivery of the
Company's Shares on the terms and in the manner contemplated in the
Prospectus and the Registration Statement.
(c) TERMINATION AFTER PURCHASE OF FIRM SHARES. Termination
of this Agreement under this Section 11 or Section 12 after the Firm
Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement
shall be without liability of any party to any other party other than as
provided in Sections 6 and 8 hereof.
SECTION 12. SUBSTITUTION OF UNDERWRITERS.
(a) DEFAULT BY UNDERWRITER OF 10% OR LESS. If one or more
of the Underwriters shall fail or refuse (otherwise than for a reason
sufficient to justify the termination of this Agreement under the
provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the
case of the Closing Date, the number of Firm Shares agreed to be purchased
by such Underwriter or Underwriters upon tender to you of such Firm Shares
in accordance with the terms hereof or (b) in the case of the Option
Closing Date, the number of Additional Shares agreed to be purchased by
such Underwriter or Underwriters upon tender to you of such Additional
Shares in accordance with the terms hereof, and the number of such Shares
shall not exceed 10% of the Firm Shares or Additional Shares required to
be purchased on the Closing Date or the Option Closing Date, as the case
may be, then each of the non-defaulting Underwriters shall purchase and
pay for (in addition to the number of such Shares or Additional Shares
that it has severally agreed to purchase hereunder) that proportion of the
number of Shares or Additional Shares that the defaulting Underwriter or
Underwriters shall have so failed or refused to purchase on such Closing
Date or Option Closing Date, as the case may be, which the number of
Shares or Additional Shares agreed to be purchased by such non-defaulting
Underwriter bears to the aggregate number of Shares or Additional Shares
so agreed to be purchased by all such non-defaulting Underwriters on such
Closing Date or Option Closing Date, as the case may be. In such case,
ING shall have the right to
25
<PAGE>
postpone the Closing Date or the Option Closing Date, as the case may
be, to a date not exceeding seven full business days after the date
originally fixed as such Closing Date or the Option Closing Date, as
the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made.
(b) DEFAULT BY UNDERWRITER OF MORE THAN 10%. If one or more
of the Underwriters shall fail or refuse (otherwise than for a reason
sufficient to justify the termination of this Agreement under the
provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the
case of the Closing Date, the number of Firm Shares agreed to be purchased
by such Underwriter or Underwriters upon tender to you of such Firm Shares
in accordance with the terms hereof or (b) in the case of the Option
Closing Date, the number of Additional Shares agreed to be purchased by
such Underwriter or Underwriters upon tender to you of such Additional
Shares in accordance with the terms hereof, and the number of such Shares
shall exceed 10% of the Firm Shares or Additional Shares required to be
purchased by all the Underwriters on the Closing Date or the Option
Closing Date, as the case may be, then (unless within 48 hours after such
default arrangements to ING's satisfaction shall have been made for the
purchase of the defaulted Shares by an Underwriter or Underwriters) and
subject to the provisions of Section 11(a) hereof, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter
or on the part of the Company except as otherwise provided in Sections 6
and 8 hereof. As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this paragraph. Nothing
in this Section 12, and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in
writing and if sent to the Representatives shall be mailed or delivered or
telecopied and confirmed by letter to ING Baring Furman Selz LLC at 55 East 52nd
Street, New York, New York 10055, ATTENTION: Syndicate Department, with a copy
to Brobeck, Phleger & Harrison LLP, 550 S. Hope Street, Los Angeles, California
90071, ATTENTION: Allen Z. Sussman, Esq., or, if sent to the Company, shall be
mailed or delivered or telecopied and confirmed by letter to the Company at 7083
Hollywood Boulevard, Los Angeles, California 90028, with a copy to Troop
Steuber Pasich Reddick & Tobey, LLP, ATTENTION: Scott W. Alderton, Esq.
SECTION 14. SUCCESSORS. This Agreement shall inure to the benefit
of and be binding upon the Company and each Underwriter and the Company's and
each Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representations, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also be
for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and
26
<PAGE>
except that the Underwriters' indemnity and contribution agreements shall also
be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, and any person or persons,
if any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Shares from the Underwriters
will be deemed a successor because of such purchase.
SECTION 15. APPLICABLE LAW; JURISDICTION. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to the choice of law or conflict of law principles
thereof. Each party hereto consents to the jurisdiction of each court in which
any action is commenced seeking indemnity or contribution pursuant to Section 8
above and agrees to accept, either directly or through an agent, service of
process of each such court.
SECTION 16. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and all
of which together shall be deemed to be one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
27
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate the Underwriters' acceptance thereof in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
DVD EXPRESS, INC.
By:
-----------------------------
Name: Michael Dubelko
Title: President
Accepted as of the date first
above written:
ING BARING FURMAN SELZ LLC
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
NEEDHAM & COMPANY, INC.
Acting on their own behalf and as
Representatives of the several Underwriters
referred to in the foregoing Agreement
By: ING BARING FURMAN SELZ LLC
By:
----------------------------
Name:
Title:
28
<PAGE>
SCHEDULE I
UNDERWRITERS
UNDERWRITING AGREEMENT DATED [__________], 1999
<TABLE>
<CAPTION>
NUMBER OF FIRM
SHARES TO BE
PURCHASED FROM
NAME AND ADDRESS THE COMPANY
---------------- -----------
<S> <C>
ING Baring Furman Selz LLC . . . . . . . . . . . . . . . . .
Friedman, Billings, Ramsey & Co., Inc. . . . . . . . . . . .
Needham & Company, Inc. . . . . . . . . . . . . . . . . . . .
--------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
--------------
--------------
</TABLE>
1
<PAGE>
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (this "AGREEMENT") is made this 31st day
of March, 1999, between DVD Express, Inc., a California corporation (the
"COMPANY"), and Michael Dubelko (the "SHAREHOLDER") (the Company and the
Shareholder are hereinafter referred to individually as a "PARTY" and
collectively as the "PARTIES").
WHEREAS, the Company recently completed a private offering of its Series A
Convertible Preferred Stock (the "PRIVATE OFFERING");
WHEREAS, from inception through the date prior to the date of the closing
of the Private Offering (the "CLOSING"), the Company was an S corporation under
the Internal Revenue Code of 1986, as amended (the "CODE"), and after the
Closing the Company became a C corporation under the Code (and under the
corresponding provisions of state income tax law);
WHEREAS, the Company has elected under Section 1362(e)(3) of the Code to
have the rules of Section 1362(e)(2) not apply for its S Termination year (as
hereinafter defined), to which election the Shareholder has consented; and
WHEREAS, the Company and the Shareholder wish to provide for a tax
indemnification agreement in connection with the Company's termination as an S
corporation.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. The following terms, as used herein, have the following
meanings:
"C CORPORATION TAXABLE YEAR" means any taxable year or portion thereof
during which the Company is taxable as a C Corporation.
"C SHORT YEAR" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(B) of the Code.
"S CORPORATION TAXABLE INCOME" means the taxable income of the Company
from all sources through and including the close of business on the last day of
the S Short Year of the Company.
"S CORPORATION TAXABLE YEAR" means any taxable year or portion thereof
during which the Company is taxable as an S corporation.
"S SHORT YEAR" means that portion of the S Termination Year of the
Company defined in Section 1362(e)(1)(A) of the Code.
<PAGE>
"S TERMINATION YEAR" shall have the meaning set forth in Section
1362(e)(4) of the Code.
ARTICLE II
TAXES
2.1 SHAREHOLDER'S FILING OF TAX RETURNS AND PAYMENT OF TAXES. The
Shareholder represents, covenants and agrees that: (i) he has duly included, or
shall duly include, in his own federal and state income tax returns all items of
income, gain, loss, deduction or credit attributable to the S Short Year of the
Company or any prior period (or that portion of any period) during which the
Company was an S corporation as required by applicable law; (ii) such returns
have included, or shall include, the S Corporation Taxable Income; and (iii) he
has paid, or shall pay, any and all taxes he is required to pay with respect to
the S Corporation Taxable Income for all taxable periods (or that portion of any
period) during which the Company was an S corporation.
2.2 COMPANY'S FILING OF TAX RETURNS AND PAYMENT OF TAXES. The Company
represents, covenants and agrees that: (i) the Company is and shall be
responsible for and has effected, or shall effect, the filing of all federal,
state, foreign and local returns for the Company with respect to any and all
taxable periods; (ii) such Company returns have included, or shall include, the
Company's income from all sources for all periods covered by the returns; and
(iii) the Company has paid, or shall pay, any and all taxes required to be paid
by the Company for all periods covered by the returns as required by applicable
law.
2.3 COMPANY'S INDEMNIFICATION FOR TAX LIABILITIES. The Company hereby
indemnifies and agrees to hold the Shareholder harmless from, against and in
respect of any federal and state income tax liability (including interest and
penalties and any taxes resulting from payments under this Section 2.3, but
reduced by the benefit received from the deduction for state income taxes paid
against taxable income for federal income tax purposes), if any, incurred by the
Shareholder resulting from or arising out of a final determination of an
adjustment (by reason of an amended return, claim for refund, audit or
otherwise) to the Company's income tax return for any S Corporation Taxable Year
resulting in a current or future decrease in the Company's federal or state, as
the case may be, taxable income for any C Corporation Taxable Year (by way of
additional or increased deduction, credit, depreciation, amortization or other
tax benefit, whether realized currently or to be realized in the future or over
a period of years) and a corresponding increase in the federal or state, as the
case may be, taxable income of the Shareholder with respect to the Shareholder's
allocable share of S Corporation Taxable Income; PROVIDED, HOWEVER, that in no
event shall the Company's liability to the Shareholder under this Section 2.3
exceed the amount of the income tax liability (including interest and penalties
and any taxes resulting from payments under this Section 2.3) of the Shareholder
arising from such increase in S Corporation Taxable Income allocated to the
Shareholder.
2.4 SHAREHOLDER INDEMNIFICATION FOR TAX LIABILITIES.
(a) The Shareholder hereby indemnifies and agrees to hold the Company
harmless from, against and in respect of any federal and state income tax
liability (including interest and penalties and any taxes resulting from
payments under this Section 2.4(a)), if any,
-2-
<PAGE>
resulting from or arising out of a final determination of any adjustment (by
reason of an amended return, claim for refund, audit or otherwise) to the
Shareholder's federal or state, as the case may be, taxable income resulting
in a decrease in the Shareholder's S Corporation Taxable Income and a
corresponding increase in the federal or state, as the case may be, taxable
income of the Company; PROVIDED, HOWEVER, the amount of any such indemnified
tax liability shall be reduced by an amount equal to the refund of state
income tax, including interest, received by the Company for state income
taxes paid by the Company in respect of any taxable income shifted from an S
Corporation Taxable Year to a C Corporation Taxable Year of the Company which
is subject to indemnification hereunder; and PROVIDED, FURTHER, that in no
event shall the Shareholder's liability under this Section 2.4(a) exceed the
amount of any credit or refund of taxes and interest actually received by the
Shareholder as a result of such final determination, related final
determination or claim for refund.
(b) The Shareholder hereby indemnifies and agrees to hold the Company
harmless from, against and in respect of any federal and state income tax
liability (including penalties, interest and any taxes resulting from the
payments under this Section 2.4(b)) incurred by the Company as a result of a
final determination that the Company was not an S corporation for federal or
state income tax purposes for any taxable period ending prior to the Closing
(including a short taxable period ending the day before the Closing); PROVIDED,
HOWEVER, that in no event shall the Shareholder's liability under this Section
2.4(b) exceed the amount of any credit or refund of taxes and interest actually
received by the Shareholder as a result of such final determination, related
final determination or claim for refund (after such amount of credit or refund
and interest has been reduced by the amount of the federal and state income tax
liability, if any, imposed on the Shareholder with respect to any distributions
received from the Company during or for such applicable taxable period).
2.5 PAYMENTS. The party providing the indemnity under either Section 2.3
or Section 2.4 (the "INDEMNIFYING PARTY") shall make any payment required to be
paid under this Agreement to the party being indemnified under Section 2.3 or
Section 2.4, respectively (the "INDEMNIFIED PARTY"), within thirty (30) days
after the receipt of notice from the Indemnified Party that a payment is due by
the Indemnified Party to the appropriate taxing authority pursuant to the
applicable final determination; PROVIDED, HOWEVER, that in no event shall an
Indemnifying Party providing the indemnity under Section 2.4 be required to pay
any such indemnified amount prior to thirty (30) days after the receipt by the
Indemnifying Party of the credit or refund of taxes, if any, resulting from the
corresponding applicable final determination, related final determination or
claim for refund.
2.6 SUBROGATION. The Indemnifying Party shall be subrogated to all rights
of recovery that the Indemnified Party may have against any person or
organization in respect of the tax liabilities for which the Indemnifying Party
is providing indemnity. Such right of subrogation shall not exceed the amount
paid by the Indemnifying Party to the Indemnified Party. The Indemnified Party
shall execute and deliver instruments and papers and such other items, and take
such actions, as are reasonably necessary to secure such rights of subrogation
for the Indemnifying Party and to permit the Indemnifying Party to pursue such
rights of recovery.
-3-
<PAGE>
ARTICLE III
MISCELLANEOUS
3.1 NOTICES. All notices and other communications made in connection with
this Agreement shall be in writing and shall be deemed given when delivered
personally or sent by facsimile transmission to the numbers indicated below (if
physical confirmation of transmission is retained) or on the third succeeding
business day after being mailed by registered or certified mail, deposited in
the United States mail, postage prepaid, return receipt requested, to the
appropriate party at its, his address below or at such other address for such
party (as shall be specified by written notice when in fact delivered pursuant
hereto):
If to the Company, at:
DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
If to the Shareholder, at:
Michael Dubelko
c/o DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
3.2 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which counterparts collectively
shall constitute an instrument representing the agreement between the parties
hereto.
3.3 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
3.4 GOVERNING LAW. THIS AGREEMENT AND THE LEGAL RELATIONS BETWEEN THE
PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
SUBSTANTIVE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CALIFORNIA CHOICE
OF LAW RULES.
3.5 AMENDMENT AND MODIFICATION. This Agreement may be amended only by the
written agreement of the Company and Shareholder.
3.6 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by either of the
parties hereto without the prior written consent of the other party, nor is this
Agreement intended to confer upon any other person except the parties, any
rights or
-4-
<PAGE>
remedies hereunder; PROVIDED, HOWEVER, nothing in this Section shall be
construed as prohibiting an assignment of this Agreement by the Company to a
successor by operation of law.
3.7 INTERPRETATION. The title, articles and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
3.8 SEVERABILITY. In the event that any one or more of the provisions of
this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
3.9 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no representations, promises, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
3.10 ARBITRATION. Any action to enforce or interpret this Agreement or to
resolve disputes arising in connection with this Agreement shall be settled by
arbitration in accordance with the rules of the American Arbitration
Association. Either party may commence arbitration by sending a written demand
for arbitration to the other party. Such demand shall set forth the nature of
the matter to be resolved by arbitration. The substantive law of the State of
California shall be applied by the arbitrator to the resolution of the dispute.
The Company, on the one hand, and the Shareholder, on the other hand, shall
share equally all initial costs of arbitration. The prevailing party shall be
entitled to reimbursement of attorney fees, costs, and expenses incurred in
connection with the arbitration. All decisions of the arbitrator shall be
final, binding, and conclusive on the parties. Judgment may be entered upon any
such decision in accordance with applicable law in any court having jurisdiction
thereof.
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed or caused this
Agreement to be executed on its behalf all as of the day and year first above
written.
"Company"
DVD Express, Inc.,
a California corporation
By /s/ Andrew Crist
-------------------------------
Its Chief Financial Officer
------------------------------
"Shareholder"
/s/ Michael Dubelko
---------------------------------
Michael Dubelko
-6-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (this "AGREEMENT") is made and entered
into as of this 1st day of March, 1999, by and between DVD Express, Inc., a
California corporation (the "COMPANY") and Michael J. Dubelko ("EXECUTIVE").
1. ENGAGEMENT AND DUTIES.
1.1 Upon the terms and subject to the conditions set forth in this
Agreement, the Company hereby engages and employs Executive as an officer of the
Company, with the title and designation of Chairman of the Board, Chief
Executive Officer and President of the Company. Executive hereby accepts such
engagement and employment.
1.2 Executive's duties and responsibilities shall be those which are
normally and customarily vested in the offices of Chairman of the Board, Chief
Executive Officer and President of a corporation, subject to the supervision,
direction and control of the Board of Directors (the "BOARD") of the Company.
In addition, Executive's duties shall include those duties and services for the
Company and its affiliates as the Board shall from time to time reasonably
direct. Executive shall report directly to the Board.
1.3 Executive agrees to devote his primary business time, energies,
skills, efforts and attention to his duties hereunder, and will not, without the
prior written consent of the Company, which consent will not be unreasonably
withheld, render any material services to any other business concern. Executive
will use his best efforts and abilities faithfully and diligently to promote the
Company's business interests.
1.4 Except for routine travel incident to the business of the
Company, Executive shall perform his duties and obligations under this Agreement
principally from an office provided by the Company in Los Angeles, California,
or such other location in Los Angeles County, California, as the Board may from
time to time determine.
2. TERM OF EMPLOYMENT. Executive's employment pursuant to this Agreement
shall commence on the date set forth above and shall terminate on the earliest
to occur of the following:
(a) the close of business on February 28, 2002;
(b) the death of Executive;
1
<PAGE>
(c) delivery to Executive of written notice of termination by the
Company if Executive shall suffer a physical or mental disability which renders
Executive, in the reasonable judgment of the Board, unable to perform his duties
and obligations under this Agreement for 90 days in any 12-month period;
(d) delivery to Executive of written notice of termination by the
Company "for cause," by reason of: (i) any act or omission knowingly undertaken
or omitted by Executive with the intent of causing damage to the Company, its
properties, assets or business or its stockholders, officers, directors or
employees; (ii) any act of Executive involving a material personal profit to
Executive, including, without limitation, any fraud, misappropriation or
embezzlement, involving properties, assets or funds of the Company or any of its
subsidiaries; (iii) Executive's consistent failure to perform his normal duties
or any obligation under any provision of this Agreement, in either case, as
directed by the Board; (iv) conviction of, or pleading NOLO CONTENDERE to, (A)
any crime or offense involving monies or other property of the Company; (B) any
felony offense; or (C) any crime of moral turpitude; or (v) the chronic or
habitual use of drugs or consumption of alcoholic beverages;
(e) delivery to Executive of written notice of termination by the
Company "without cause;" or
(f) delivery to the Company of written notice of termination by
Executive upon the occurrence of a "change of control" (as defined below).
Promptly following any change of control, the Company shall provide written
notice of such fact to Executive. Executive shall have 30 days following his
receipt of such notice to elect to notify the Company that Executive is treating
such change of control as a termination of this Agreement. For purposes of this
Section 2, the following events shall constitute a "change of control": (i) any
person or entity (or group of related persons or entities acting in concert),
other than Executive or an entity controlled by Executive, shall acquire shares
of capital stock of the Company entitled to exercise 35% or more of the total
voting power represented by all shares of capital stock of the Company then
outstanding; or (ii) the Company shall enter into an agreement to sell or
otherwise transfer all or substantially all of its assets or enter into an
agreement to merge, consolidate or reorganize with any other corporation or
entity, as the result of which less than 50% of the total voting power
represented by the capital stock or other equity interests of the corporation or
entity to which the Company's assets are sold or transferred or surviving such
merger, consolidation or reorganization shall be held by the persons and
entities who were holders of common stock of the Company on January 1, 1999.
3. COMPENSATION; EXECUTIVE BENEFIT PLANS.
3.1 The Company shall pay to Executive a base salary at an annual
rate of $50,000 during each fiscal year of this Agreement. The base salary
shall be payable in installments
2
<PAGE>
throughout the year in the same manner and at the same times the Company pays
base salaries to other executive officers of the Company. In the event that
Executive's employment is terminated pursuant to Section 2(e) or Section
2(f), above, the Company shall continue to pay Executive's then-current base
salary for a period of 12 months following the effective date of such
termination.
3.2 In addition to the base salary to be paid to Executive hereunder,
the Company may pay a bonus to Executive (the "Bonus") determined in accordance
with such "corporate goals" and "individual goals" for Executive as the Board
shall from time-to-time approve. In determining whether Executive has achieved
any of the "corporate goals" or "individual goals" established for Executive by
the Board, the Board shall consider any extraordinary events or circumstances
which may occur, the impact of those events on the "corporate goals" or
"individual goals" established for Executive by the Board, and the extent to
which those events were out of the control of Executive.
3.3 Executive shall be entitled each year to vacation for a minimum
of three calendar weeks, plus such additional period or periods as the Board may
approve in the exercise of its reasonable discretion, during which time his
compensation shall be paid in full.
3.4 Executive shall be entitled to reimbursement from the Company for
the reasonable costs and expenses which he incurs in connection with the
performance of his duties and obligations under this Agreement in a manner
consistent with the Company's practices and policies as adopted or approved from
time to time by the Board for executive officers.
3.5 The Company shall reimburse Executive and Executive's covered
dependents under any Executive Benefit Plan (as defined in Section 4 hereof) for
the full amount of any cost, expense, deductible, co-payment or other amount
incurred or paid by Executive in connection with Executive's or any of
Executive's dependents' coverage under any such Executive Benefit Plan, provided
such amounts are not paid by carriers under such Executive Benefit Plans. The
Company further agrees to pay such costs directly if invoices or other
appropriate documentation for such costs are submitted in advance to the Company
for approval. Nothing contained in this Section 3.5 shall, in any manner
whatsoever, directly or indirectly, require or obligate the Company to adopt or
implement, or to prevent, preclude or otherwise prohibit the Company from
amending, modifying, curtailing, discontinuing or otherwise terminating, any
Executive Benefit Plan at any time (whether during or after the term hereof).
3.6 The Company may deduct from any compensation payable to Executive
the minimum amounts sufficient to cover applicable federal, state and/or local
income tax withholding, old-age and survivors' and other social security
payments, state disability and other insurance premiums and payments.
3
<PAGE>
4. OTHER BENEFITS. During the term of his employment hereunder,
Executive shall be eligible to participate in all operative employee benefit and
welfare plans of the Company then in effect from time to time and in respect of
which all executive officers of the Company generally are entitled to
participate ("Executive Benefit Plans"), including, to the extent then in
effect, group life, medical, disability and other insurance plans, all on the
same basis applicable to employees of the Company whose level of management and
authority is comparable to that of Executive.
5. CONFIDENTIALITY OF PROPRIETARY INFORMATION AND MATERIAL.
5.1 INDUSTRIAL PROPERTY RIGHTS. For the purpose of this Agreement,
"INDUSTRIAL PROPERTY RIGHTS" shall mean all of the Company's patents,
trademarks, trade names, inventions, copyrights, know-how or trade secrets, now
in existence or hereafter developed or acquired by the Company or for its use,
relating to any and all products which are developed, formulated and/or
manufactured by the Company.
5.2 TRADE SECRETS. For the purpose of this Agreement, "TRADE
SECRETS" shall mean any formula, pattern, device, or compilation of information
which is used in the Company's business which gives the Company an opportunity
to obtain an advantage over its competitors who do not know and/or do not use
it. This term includes, but is not limited to, information relating to the
marketing of the Company's products, including price lists, pricing information,
customer lists, customer names, the particular needs of customers, information
relating to their desirability as customers, financial information, intangible
property and other such information which is not in the public domain.
5.3 TECHNICAL DATA. For the purpose of this Agreement, "TECHNICAL
DATA" shall mean all information of the Company in written, graphic or tangible
form relating to any and all products which are developed, formulated and/or
manufactured by the Company, as such information exists as of the date of this
Agreement or is developed by the Company during the term hereof.
5.4 PROPRIETARY INFORMATION. For the purpose of this Agreement,
"PROPRIETARY INFORMATION" shall mean all of the Company's Industrial Property
Rights, Trade Secrets and Technical Data. Proprietary Information shall not
include any information which (i) was lawfully in the possession of Executive
prior to Executive's employment with the Company, (ii) may be obtained by a
reasonably diligent businessperson from readily available and public sources of
information, (iii) is lawfully disclosed to Executive after termination of
Executive's employment by a third party which does not have an obligation to the
Company to keep such information confidential, or (iv) is independently
developed by Executive after termination of Executive's employment without
utilizing any of the Company's Proprietary Information.
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5.5 AGREEMENT NOT TO COPY OR USE. Executive agrees, at any time
during the term of his employment and for a period of ten years thereafter, not
to copy, use or disclose (except as required by law after first notifying the
Company and giving it an opportunity to object) any Proprietary Information
without the Company's prior written permission. The Company may withhold such
permission as a matter within its sole discretion during the term of this
Agreement and thereafter.
6. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. Upon any termination
of this Agreement, Executive shall turn over to the Company all property,
writings or documents then in his possession or custody belonging to or relating
to the affairs of the Company or comprising or relating to any Proprietary
Information.
7. DISCOVERIES AND INVENTIONS.
7.1 DISCLOSURE. Executive will promptly disclose in writing to the
Company complete information concerning each and every invention, discovery,
improvement, device, design, apparatus, practice, process, method, product or
work of authorship, whether patentable or not, made, developed, perfected,
devised, conceived or first reduced to practice by Executive, whether or not
during regular working hours (hereinafter referred to as "Developments"), either
solely or in collaboration with others, (a) prior to the term of this Agreement
while working for the Company, (b) during the term of this Agreement or (c)
within six months after the term of this Agreement, if relating either directly
or indirectly to the business, products, practices, techniques or confidential
information of the Company.
7.2 ASSIGNMENT. Executive, to the extent that he has the legal right
to do so, hereby acknowledges that any and all Developments are the property of
the Company and hereby assigns and agrees to assign to the Company any and all
of Executive's right, title and interest in and to any and all of such
Developments; PROVIDED, HOWEVER, that, in accordance with California Labor Code
Sections 2870 and 2872, the provisions of this Section 7.2 shall not apply to
any Development that the Executive developed entirely on his own time without
using the Company's equipment, supplies, facilities or trade secret information
except for those Developments that either:
(a) relate at the time of conception or reduction to practice of
the Development to the Company's business, or actual or demonstrably anticipated
research or development of the Company; or
(b) result from any work performed by Executive for the Company.
7.3 ASSISTANCE OF EXECUTIVE. Upon request and without further
compensation therefor, but at no expense to Executive, and whether during the
term of this Agreement or
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thereafter, Executive will do all reasonable lawful acts, including, but not
limited to, the execution of papers and lawful oaths and the giving of
testimony, that, in the reasonable opinion of the Company, its successors and
assigns, may be necessary or desirable in obtaining, sustaining, reissuing,
extending and enforcing United States and foreign Letters Patents, including,
but not limited to, design patents, on any and all Developments and for
perfecting, affirming and recording the Company's complete ownership and
title thereto, subject to the proviso in Section 7.2 hereof, and Executive
will otherwise reasonably cooperate in all proceedings and matters relating
thereto.
7.4 RECORDS. Executive will keep complete and accurate accounts,
notes, data and records of all Developments in the manner and form requested by
the Company. Such accounts, notes, data and records shall be the property of
the Company, subject to the proviso in Section 7.2 hereof, and, upon request by
the Company, Executive will promptly surrender the same to it or, if not
previously surrendered upon its request or otherwise, Executive will surrender
the same, and all copies thereof, to the Company upon the conclusion of his
employment.
7.5 OBLIGATIONS, RESTRICTIONS AND LIMITATIONS. Executive understands
that the Company may enter into agreements or arrangements with agencies of the
United States Government and that the Company may be subject to laws and
regulations which impose obligations, restrictions and limitations on it with
respect to inventions and patents which may be acquired by it or which may be
conceived or developed by employees, consultants or other agents rendering
services to it. Executive agrees that he shall be bound by all such
obligations, restrictions and limitations applicable to any such invention
conceived or developed by him during the term of this Agreement and shall take
any and all further action which may be required to discharge such obligations
and to comply with such restrictions and limitations.
8. NON-SOLICITATION COVENANT.
8.1 NONSOLICITATION AND NONINTERFERENCE. During the term of this
Agreement and for a period of two years thereafter, Executive shall not (a)
induce or attempt to induce any employee of the Company to leave the employ of
the Company or in any way interfere adversely with the relationship between any
such employee and the Company, (b) induce or attempt to induce any employee of
the Company to work for, render services or provide advice to or supply
confidential business information or trade secrets of the Company to any third
person, firm or corporation or (c) induce or attempt to induce any customer,
supplier, licensee, licensor or other business relation of the Company to cease
doing business with the Company or in any way interfere with the relationship
between any such customer, supplier, licensee, licensor or other business
relation and the Company.
8.2 INDIRECT SOLICITATION. Executive agrees that, during the term of
this Agreement and the period covered by Section 8.1 hereof, he will not,
directly or indirectly, assist or encourage any other person in carrying out,
directly or indirectly, any activity that would be
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prohibited by the provisions of Section 8.1 if such activity were carried out
by Executive, either directly or indirectly; and, in particular, Executive
agrees that he will not, directly or indirectly, induce any employee of the
Company to carry out, directly or indirectly, any such activity.
9. INJUNCTIVE RELIEF. Executive hereby recognizes, acknowledges and
agrees that in the event of any breach by Executive of any of his covenants,
agreements, duties or obligations contained in Sections 5, 6, 7 and 8 of this
Agreement, the Company would suffer great and irreparable harm, injury and
damage, the Company would encounter extreme difficulty in attempting to prove
the actual amount of damages suffered by the Company as a result of such breach,
and the Company would not be reasonably or adequately compensated in damages in
any action at law. Executive therefore covenants and agrees that, in addition
to any other remedy the Company may have at law, in equity, by statute or
otherwise, in the event of any breach by Executive of any of his covenants,
agreements, duties or obligations contained in Sections 5, 6, 7 and 8 of this
Agreement, the Company shall be entitled to seek and receive temporary,
preliminary and permanent injunctive and other equitable relief from any court
of competent jurisdiction to enforce any of the rights of the Company, or any of
the covenants, agreements, duties or obligations of Executive hereunder, and/or
otherwise to prevent the violation of any of the terms or provisions hereof, all
without the necessity of proving the amount of any actual damage to the Company
or any affiliate thereof resulting therefrom; PROVIDED, HOWEVER, that nothing
contained in this Section 9 shall be deemed or construed in any manner
whatsoever as a waiver by the Company of any of the rights which the Company may
have against Executive at law, in equity, by statute or otherwise arising out
of, in connection with or resulting from the breach by Executive of any of his
covenants, agreements, duties or obligations hereunder.
10. MISCELLANEOUS.
10.1 NOTICES. All notices, requests and other communications
(collectively, "Notices") given pursuant to this Agreement shall be in writing,
and shall be delivered by personal service or by United States first class,
registered or certified mail (return receipt requested), postage prepaid,
addressed to the party at the address set forth below:
If to Company:
DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
Attn: Board of Directors
If to Executive:
Michael J. Dubelko
c/o DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
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Any Notice shall be deemed duly given when received by the addressee thereof,
provided that any Notice sent by registered or certified mail shall be deemed to
have been duly given three days from date of deposit in the United States mails,
unless sooner received. Either party may from time to time change its address
for further Notices hereunder by giving notice to the other party in the manner
prescribed in this section.
10.2 ENTIRE AGREEMENT. This Agreement contains the sole and entire
agreement and understanding of the parties with respect to the entire subject
matter of this Agreement, and any and all prior discussions, negotiations,
commitments and understandings, whether oral or otherwise, related to the
subject matter of this Agreement are hereby merged herein. No representations,
oral or otherwise, express or implied, other than those contained in this
Agreement have been relied upon by any party to this Agreement.
10.3 ATTORNEYS' FEES. If any action, suit or other proceeding is
instituted to remedy, prevent or obtain relief from a default in the performance
by any party of its obligations under this Agreement, the prevailing party shall
recover all of such party's costs and reasonable attorneys' fees incurred in
each and every such action, suit or other proceeding, including any and all
appeals or petitions therefrom.
10.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES THEREOF.
10.5 CAPTIONS. The various captions of this Agreement are for
reference only and shall not be considered or referred to in resolving questions
of interpretation of this Agreement.
10.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
10.7 BUSINESS DAY. If the last day permissible for delivery of any
Notice under any provision of this Agreement, or for the performance of any
obligation under this Agreement, shall be other than a business day, such last
day for such Notice or performance shall be extended to the next following
business day (PROVIDED, HOWEVER, under no circumstances shall this provision be
construed to extend the date of termination of this Agreement).
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In witness whereof, the parties have executed this Agreement as of the date
first set forth above.
Company:
DVD EXPRESS, INC.
By: /s/ Andrew Crist
---------------------------
Andrew Crist,
Chief Financial Officer
Executive:
/s/ Michael Dubelko
------------------------------
Michael Dubelko
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EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (this "AGREEMENT") is made and entered
into as of this 1st day of March, 1999, by and between DVD Express, Inc., a
California corporation (the "COMPANY") and Andrew Crist ("EXECUTIVE").
1. ENGAGEMENT AND DUTIES.
1.1 Upon the terms and subject to the conditions set forth in this
Agreement, the Company hereby engages and employs Executive as an officer of the
Company, with the title and designation of Chief Financial Officer and Chief
Operating Officer of the Company. Executive hereby accepts such engagement and
employment. Executive acknowledges that it is the Company's intention to
restructure the Chief Financial Officer and Chief Operating Officer position
into two separate positions to be filled by separate individuals and, in
connection with any such restructuring, Executive agrees that the Company may
change Executive's title, duties and responsibilities, provided Executive shall
continue to report directly to Michael Dubelko.
1.2 Subject to the Company's right to change Executive's title,
duties and responsibilities as set forth in Section 1.1 above, Executive's
duties and responsibilities shall be those which are normally and customarily
vested in the office of Chief Financial Officer and Chief Operating Officer of a
corporation, subject to the supervision, direction and control of the Chief
Executive Officer and the Board of Directors (the "BOARD") of the Company. In
addition, Executive's duties shall include those duties and services for the
Company and its affiliates as the Chief Executive Officer and/or the Board shall
from time to time reasonably direct. Executive shall report directly to the
Chief Executive Officer of the Company.
1.3 Executive agrees to devote his primary business time, energies,
skills, efforts and attention to his duties hereunder, and will not, without the
prior written consent of the Company, which consent will not be unreasonably
withheld, render any material services to any other business concern; provided,
however, the Company expressly acknowledges that Executive may devote personal
business time to Beverly Crist Arts. Executive will use his best efforts and
abilities faithfully and diligently to promote the Company's business interests.
1.4 Except for routine travel incident to the business of the
Company, Executive shall perform his duties and obligations under this Agreement
principally from an office provided by the Company in Los Angeles, California,
or such other location in Los Angeles County, California, as the Board may from
time to time determine.
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2. TERM OF EMPLOYMENT. Executive's employment pursuant to this Agreement
shall commence on the date set forth above and shall terminate on the earliest
to occur of the following:
(a) the close of business on February 28, 2001;
(b) the death of Executive;
(c) delivery to Executive of written notice of termination by the
Company if Executive shall suffer a physical or mental disability which renders
Executive, in the reasonable judgment of the Board, unable to perform his duties
and obligations under this Agreement for 90 days in any 12-month period;
(d) delivery to Executive of written notice of termination by the
Company "for cause," by reason of: (i) any act or omission knowingly undertaken
or omitted by Executive with the intent of causing damage to the Company, its
properties, assets or business or its stockholders, officers, directors or
employees; (ii) any act of Executive involving a material personal profit to
Executive, including, without limitation, any fraud, misappropriation or
embezzlement, involving properties, assets or funds of the Company or any of its
subsidiaries; (iii) Executive's consistent failure to perform his normal duties
or any obligation under any provision of this Agreement, in either case, as
directed by the Chief Executive Officer and/or the Board; (iv) conviction of, or
pleading NOLO CONTENDERE to, (A) any crime or offense involving monies or other
property of the Company; (B) any felony offense; or (C) any crime of moral
turpitude; or (v) the chronic use of drugs or consumption of alcoholic
beverages;
(e) delivery to Executive of written notice of termination by the
Company "without cause;" or
(f) delivery to the Company of written notice of termination by
Executive upon the occurrence of a "change of control" (as defined below).
Promptly following any change of control, the Company shall provide written
notice of such fact to Executive. Executive shall have 30 days following his
receipt of such notice to elect to notify the Company that Executive is treating
such change of control as a termination of this Agreement. For purposes of this
Section 2, the following events shall constitute a "change of control": (i) any
person or entity (or group of related persons or entities acting in concert),
other than Michael Dubelko or an entity controlled by Michael Dubelko, shall
acquire shares of capital stock of the Company entitled to exercise 35% or more
of the total voting power represented by all shares of capital stock of the
Company then outstanding; or (ii) the Company shall enter into an agreement to
sell or otherwise transfer all or substantially all of its assets or enter into
an agreement to merge, consolidate or reorganize with any other corporation or
entity, as the result of which less than 50% of the total voting power
represented by the capital stock or other equity interests of the corporation or
entity to which the Company's assets
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are sold or transferred or surviving such merger, consolidation or
reorganization shall be held by the persons and entities who were holders of
common stock of the Company on January 1, 1999; or (iii) if Executive shall
no longer report directly to Michael Dubelko.
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3. COMPENSATION; EXECUTIVE BENEFIT PLANS.
3.1 The Company shall pay to Executive a base salary at an annual
rate of $150,000 during each fiscal year of this Agreement. The base salary
shall be payable in installments throughout the year in the same manner and at
the same times the Company pays base salaries to other executive officers of the
Company. In the event that Executive's employment is terminated pursuant to
Section 2(e) or Section 2(f), above, the Company shall continue to pay
Executive's then-current base salary for a period of 12 months following the
effective date of such termination.
3.2 In addition to the base salary to be paid to Executive hereunder,
the Company may pay a bonus to Executive (the "Bonus") determined in accordance
with such "corporate goals" and "individual goals" for Executive as the Board
shall from time-to-time approve. In determining whether Executive has achieved
any of the "corporate goals" or "individual goals" established for Executive by
the Board, the Board shall consider any extraordinary events or circumstances
which may occur, the impact of those events on the "corporate goals" or
"individual goals" established for Executive by the Board, and the extent to
which those events were out of the control of Executive.
3.3 Executive shall be entitled each year to vacation for a minimum
of three calendar weeks, plus such additional period or periods as the Board may
approve in the exercise of its reasonable discretion, during which time his
compensation shall be paid in full.
3.4 Executive shall be entitled to reimbursement from the Company for
the reasonable costs and expenses which he incurs in connection with the
performance of his duties and obligations under this Agreement in a manner
consistent with the Company's practices and policies as adopted or approved from
time to time by the Board for executive officers.
3.5 The Company shall reimburse Executive and Executive's covered
dependents under any Executive Benefit Plan (as defined in Section 4 hereof) for
the full amount of any cost, expense, deductible, co-payment or other amount
incurred or paid by Executive in connection with Executive's or any of
Executive's dependents' coverage under any such Executive Benefit Plan, provided
such amounts are not paid by carriers under such Executive Benefit Plans. The
Company further agrees to pay such costs directly if invoices or other
appropriate documentation for such costs are submitted in advance to the Company
for approval. Nothing contained in this Section 3.5 shall, in any manner
whatsoever, directly or indirectly, require or obligate the Company to adopt or
implement, or to prevent, preclude or otherwise prohibit the Company from
amending, modifying, curtailing, discontinuing or otherwise terminating, any
Executive Benefit Plan at any time (whether during or after the term hereof).
3.6 The Company may deduct from any compensation payable to Executive
the minimum amounts sufficient to cover applicable federal, state and/or local
income tax withholding,
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old-age and survivors' and other social security payments, state disability
and other insurance premiums and payments.
4. OTHER BENEFITS. During the term of his employment hereunder,
Executive shall be eligible to participate in all operative employee benefit and
welfare plans of the Company then in effect from time to time and in respect of
which all executive officers of the Company generally are entitled to
participate ("Executive Benefit Plans"), including, to the extent then in
effect, group life, medical, disability and other insurance plans, all on the
same basis applicable to employees of the Company whose level of management and
authority is comparable to that of Executive.
5. CONFIDENTIALITY OF PROPRIETARY INFORMATION AND MATERIAL.
5.1 INDUSTRIAL PROPERTY RIGHTS. For the purpose of this Agreement,
"INDUSTRIAL PROPERTY RIGHTS" shall mean all of the Company's patents,
trademarks, trade names, inventions, copyrights, know-how or trade secrets, now
in existence or hereafter developed or acquired by the Company or for its use,
relating to any and all products which are developed, formulated and/or
manufactured by the Company.
5.2 TRADE SECRETS. For the purpose of this Agreement, "TRADE
SECRETS" shall mean any formula, pattern, device, or compilation of information
which is used in the Company's business which gives the Company an opportunity
to obtain an advantage over its competitors who do not know and/or do not use
it. This term includes, but is not limited to, information relating to the
marketing of the Company's products, including price lists, pricing information,
customer lists, customer names, the particular needs of customers, information
relating to their desirability as customers, financial information, intangible
property and other such information which is not in the public domain.
5.3 TECHNICAL DATA. For the purpose of this Agreement, "TECHNICAL
DATA" shall mean all information of the Company in written, graphic or tangible
form relating to any and all products which are developed, formulated and/or
manufactured by the Company, as such information exists as of the date of this
Agreement or is developed by the Company during the term hereof.
5.4 PROPRIETARY INFORMATION. For the purpose of this Agreement,
"PROPRIETARY INFORMATION" shall mean all of the Company's Industrial Property
Rights, Trade Secrets and Technical Data. Proprietary Information shall not
include any information which (i) was lawfully in the possession of Executive
prior to Executive's employment with the Company, (ii) may be obtained by a
reasonably diligent businessperson from readily available and public sources of
information, (iii) is lawfully disclosed to Executive after termination of
Executive's employment by a third party which does not have an obligation to the
Company to keep such information
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confidential, or (iv) is independently developed by Executive after
termination of Executive's employment without utilizing any of the Company's
Proprietary Information.
5.5 AGREEMENT NOT TO COPY OR USE. Except as may be reasonably
necessary to fulfill his duties to the Company, Executive agrees, at any time
during the term of his employment and for a period of ten years thereafter, not
to copy, use or disclose (except as required by law after first notifying the
Company and giving it an opportunity to object) any Proprietary Information
without the Company's prior written permission. The Company may withhold such
permission as a matter within its sole discretion during the term of this
Agreement and thereafter.
6. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. Upon any termination
of this Agreement, Executive shall turn over to the Company all property,
writings or documents then in his possession or custody belonging to or relating
to the affairs of the Company or comprising or relating to any Proprietary
Information.
7. DISCOVERIES AND INVENTIONS.
7.1 DISCLOSURE. Executive will promptly disclose in writing to the
Company complete information concerning each and every invention, discovery,
improvement, device, design, apparatus, practice, process, method, product or
work of authorship, whether patentable or not, made, developed, perfected,
devised, conceived or first reduced to practice by Executive, whether or not
during regular working hours (hereinafter referred to as "Developments"), either
solely or in collaboration with others, (a) prior to the term of this Agreement
while working for the Company, (b) during the term of this Agreement or (c)
within six months after the term of this Agreement, if relating either directly
or indirectly to the business, products, practices, techniques or confidential
information of the Company.
7.2 ASSIGNMENT. Executive, to the extent that he has the legal right
to do so, hereby acknowledges that any and all Developments are the property of
the Company and hereby assigns and agrees to assign to the Company any and all
of Executive's right, title and interest in and to any and all of such
Developments; PROVIDED, HOWEVER, that, in accordance with California Labor Code
Sections 2870 and 2872, the provisions of this Section 7.2 shall not apply to
any Development that the Executive developed entirely on his own time without
using the Company's equipment, supplies, facilities or trade secret information
except for those Developments that either:
(a) relate at the time of conception or reduction to practice of
the Development to the Company's business, or actual or demonstrably anticipated
research or development of the Company; or
(b) result from any work performed by Executive for the Company.
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7.3 ASSISTANCE OF EXECUTIVE. Upon request and without further
compensation therefor, but at no expense to Executive, and whether during the
term of this Agreement or thereafter, Executive will do all reasonable lawful
acts, including, but not limited to, the execution of papers and lawful oaths
and the giving of testimony, that, in the reasonable opinion of the Company, its
successors and assigns, may be necessary or desirable in obtaining, sustaining,
reissuing, extending and enforcing United States and foreign Letters Patents,
including, but not limited to, design patents, on any and all Developments and
for perfecting, affirming and recording the Company's complete ownership and
title thereto, subject to the proviso in Section 7.2 hereof, and Executive will
otherwise reasonably cooperate in all proceedings and matters relating thereto.
7.4 RECORDS. Executive will keep complete and accurate accounts,
notes, data and records of all Developments in the manner and form requested by
the Company. Such accounts, notes, data and records shall be the property of
the Company, subject to the proviso in Section 7.2 hereof, and, upon request by
the Company, Executive will promptly surrender the same to it or, if not
previously surrendered upon its request or otherwise, Executive will surrender
the same, and all copies thereof, to the Company upon the conclusion of his
employment.
7.5 OBLIGATIONS, RESTRICTIONS AND LIMITATIONS. Executive understands
that the Company may enter into agreements or arrangements with agencies of the
United States Government and that the Company may be subject to laws and
regulations which impose obligations, restrictions and limitations on it with
respect to inventions and patents which may be acquired by it or which may be
conceived or developed by employees, consultants or other agents rendering
services to it. Executive agrees that he shall be bound by all such
obligations, restrictions and limitations applicable to any such invention
conceived or developed by him during the term of this Agreement and shall take
any and all further action which may be required to discharge such obligations
and to comply with such restrictions and limitations.
8. NON-SOLICITATION COVENANT.
8.1 NONSOLICITATION AND NONINTERFERENCE. During the term of this
Agreement and for a period of two years thereafter, Executive shall not (a)
induce or attempt to induce any employee of the Company to leave the employ
of the Company or actively and adversely interfere with the relationship
between any such employee and the Company, (b) induce or attempt to induce
any employee of the Company to work for, render services or provide advice to
or supply confidential business information or trade secrets of the Company
to any third person, firm or corporation or (c) induce or attempt to induce
any customer, supplier, licensee, licensor or other business relation of the
Company to cease doing business with the Company or actively and adversely
interfere with the relationship between any such customer, supplier,
licensee, licensor or other business relation and the Company.
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8.2 INDIRECT SOLICITATION. Executive agrees that, during the term of
this Agreement and the period covered by Section 8.1 hereof, he will not,
directly or indirectly, assist or encourage any other person in carrying out,
directly or indirectly, any activity that would be prohibited by the provisions
of Section 8.1 if such activity were carried out by Executive, either directly
or indirectly; and, in particular, Executive agrees that he will not, directly
or indirectly, induce any employee of the Company to carry out, directly or
indirectly, any such activity.
9. INJUNCTIVE RELIEF. Executive hereby recognizes, acknowledges and
agrees that in the event of any breach by Executive of any of his covenants,
agreements, duties or obligations contained in Sections 5, 6, 7 and 8 of this
Agreement, the Company would suffer great and irreparable harm, injury and
damage, the Company would encounter extreme difficulty in attempting to prove
the actual amount of damages suffered by the Company as a result of such breach,
and the Company would not be reasonably or adequately compensated in damages in
any action at law. Executive therefore covenants and agrees that, in addition
to any other remedy the Company may have at law, in equity, by statute or
otherwise, in the event of any breach by Executive of any of his covenants,
agreements, duties or obligations contained in Sections 5, 6, 7 and 8 of this
Agreement, the Company shall be entitled to seek and receive temporary,
preliminary and permanent injunctive and other equitable relief from any court
of competent jurisdiction to enforce any of the rights of the Company, or any of
the covenants, agreements, duties or obligations of Executive hereunder, and/or
otherwise to prevent the violation of any of the terms or provisions hereof, all
without the necessity of proving the amount of any actual damage to the Company
or any affiliate thereof resulting therefrom; PROVIDED, HOWEVER, that nothing
contained in this Section 9 shall be deemed or construed in any manner
whatsoever as a waiver by the Company of any of the rights which the Company may
have against Executive at law, in equity, by statute or otherwise arising out
of, in connection with or resulting from the breach by Executive of any of his
covenants, agreements, duties or obligations hereunder.
10. MISCELLANEOUS.
10.1 NOTICES. All notices, requests and other communications
(collectively, "Notices") given pursuant to this Agreement shall be in writing,
and shall be delivered by personal service or by United States first class,
registered or certified mail (return receipt requested), postage prepaid,
addressed to the party at the address set forth below:
If to Company:
DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
Attn: Board of Directors
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If to Executive:
Andrew Crist
1124 Alvira Street
Los Angeles, California 90035
Any Notice shall be deemed duly given when received by the addressee thereof,
provided that any Notice sent by registered or certified mail shall be deemed to
have been duly given three days from date of deposit in the United States mails,
unless sooner received. Either party may from time to time change its address
for further Notices hereunder by giving notice to the other party in the manner
prescribed in this section.
10.2 ENTIRE AGREEMENT. This Agreement, and a related option agreement
between the Company and Executive, contain the sole and entire agreement and
understanding of the parties with respect to the entire subject matter of this
Agreement, and any and all prior discussions, negotiations, commitments and
understandings, whether oral or otherwise, related to the subject matter of this
Agreement are hereby merged herein. No representations, oral or otherwise,
express or implied, other than those contained in this Agreement have been
relied upon by any party to this Agreement.
10.3 ATTORNEYS' FEES. In the event that any action, suit or
proceeding is instituted upon any breach of this Agreement, the prevailing
party shall be paid by the other party thereto an amount equal to all of the
prevailing party's costs and expenses, including attorneys' fees incurred in
each and every such action, suit or proceeding (including any and all appeals
or petitions therefrom). As used in this Agreement, "attorneys' fees" shall
mean the full and actual cost of any legal services actually performed in
connection with the matter involved calculated on the basis of the usual fee
charged by the attorney performing such services and shall not be limited to
"reasonable attorneys' fees" as defined in any statute or rule of court.
10.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES THEREOF.
10.5 CAPTIONS. The various captions of this Agreement are for
reference only and shall not be considered or referred to in resolving questions
of interpretation of this Agreement.
10.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
10.7 BUSINESS DAY. If the last day permissible for delivery of any
Notice under any provision of this Agreement, or for the performance of any
obligation under this Agreement,
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shall be other than a business day, such last day for such Notice or
performance shall be extended to the next following business day (PROVIDED,
HOWEVER, under no circumstances shall this provision be construed to extend
the date of termination of this Agreement).
In witness whereof, the parties have executed this Agreement as of the date
first set forth above.
Company:
DVD EXPRESS, INC.
By: /s/ Michael Dubelko
---------------------------------
Michael Dubelko,
Chief Executive Officer
and President
Executive:
/s/ Andrew Crist
---------------------------------
Andrew Crist
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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.
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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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) [***]
(iii) [***]
(iv) [***]
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.
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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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
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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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
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
8
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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.
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<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.
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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.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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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
--------------------------- ----------------------------
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<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES OR BLUE SKY LAWS. THESE SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN OPINION
OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED NOR SHALL THEY BE ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH THE TERMS HEREOF.
DVD EXPRESS, INC.
AMENDED AND RESTATED COMMON STOCK SUBSCRIPTION WARRANT
August 1, 1998
1. GENERAL.
(a) THIS CERTIFIES that, for value received, AMERICA ONLINE, INC. ("AOL"),
or assigns, is entitled to subscribe for and purchase FROM DVD EXPRESS, INC.,
a California corporation (the "Corporation"), at any time or from time to
time during the period (the "Exercise Period") commencing with the date
hereof and ending on the 10th anniversary of the date hereof, on the terms
and subject to the provisions hereinafter set forth (including the vesting
provisions set forth in Section 1(b) below), up to a maximum of 1,230,228
shares (subject to adjustment as provided herein) (the "Warrant Shares") of
fully paid and non-assessable shares of Common Stock, $.01 par value, of the
Corporation (the "Common Stock") at a price per share equal to $8.40 (the
"Warrant Price"). Notwithstanding the foregoing, in the event of an IPO (as
defined in Section 1(b) below), the maximum number of Warrant Shares that can
be purchased hereunder shall be reduced from 1,230,228 shares of Common Stock
to 922,671 shares of Common Stock (subject to adjustment as provided herein).
This Warrant is being issued pursuant to that certain Interactive Marketing
Agreement dated as of the date hereof (the "Agreement"), between the
Corporation and AOL. All terms used but not defined herein shall have the
meanings set forth in the Agreement.
(b) This amended and restated common stock subscription warrant
(this "Warrant") shall become exercisable as to that number of Warrant
Shares, and at such times, as are determined in accordance with EXHIBIT A
attached hereto; PROVIDED, HOWEVER, that this
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Warrant shall become immediately exercisable as to both the Time Warrant
Shares described in Paragraph A of Exhibit A and the Performance Warrant
Shares described in Paragraph B of Exhibit A upon the occurrence of a
Stipulated Event. As used herein, the term "Stipulated Event" shall mean (a)
a Corporate Transaction (as hereinafter defined) or (b) a termination of the
Agreement that results from a material breach by the Corporation of the
Agreement. A "Corporate Transaction" shall mean (A) any capital
reorganization, or any reclassification of the stock of the corporation
(other than a change in par value or from par value to no par value or from
no par value to par value or as a result of a stock dividend or subdivision,
split-up or combination of shares, any consolidation or merger of the
Corporation with or into any other corporation or other entity, other than
any merger or consolidation resulting in the holders of the capital stock of
the Corporation entitled to vote for the election of directors holding a
majority of the capital stock of the surviving or resulting corporation or
other entity entitled to vote for the election of directors, (B) any person
or entity (including any affiliates thereof) becoming the holder of a
majority of the capital stock of the Corporation entitled to vote for the
election of directors, (C) any sale or other disposition by the Corporation
of all or substantially all of its assets or capital stock or (D) an IPO. As
used herein, the term "IPO" shall mean the receipt of equity funding by the
Corporation as a result of the initial public offering of Securities of the
Corporation pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act").
(c) This Warrant is intended to supersede and replace the terms and
conditions, in their entirety, of that certain original common stock
subscription warrant executed by the Corporation on behalf of AOL and dated as
of the same date hereof.
2. EXERCISE OF WARRANT.
The rights represented by this Warrant may be exercised by the
holder hereof, as to those Warrant Shares for which this Warrant is then
exercisable as determined in accordance with Section 1, in whole or in part, at
any time or from time to time during the Exercise Period, by the surrender of
this Warrant (properly endorsed) at the office of the Corporation at 7083
Hollywood Boulevard, Suite 100, Los Angeles, CA 90028, or at such other agency
or office of the Corporation in the United States of America as it may designate
by notice in writing to the holder hereof at the address of such holder
appearing on the books of the Corporation, and by payment to the Corporation of
the Warrant Price in cash or by check and/or by cancellation of indebtedness for
each Warrant Share being purchased. In the event of the exercise of the rights
represented by this Warrant, a certificate or certificates for the Warrant
Shares so purchased, registered in the name of the holder, and if this Warrant
shall not have been exercised for all of the Warrant Shares, a new Warrant,
registered in the name of the holder hereof, of like tenor to this Warrant,
shall be delivered to the holder hereof within a reasonable time, not to exceed
ten (10) business days, after the rights represented by this Warrant shall have
been so exercised. The person in whose name any certificate for Warrant Shares
is issued upon exercise of this Warrant shall for all purposes be deemed to have
become the holder of record of such shares on the date
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on which the Warrant was surrendered and payment of the Warrant Price and any
applicable taxes was made, irrespective of the date of delivery of such
certificate, except that, if the date of such surrender and payment is a date
when the stock transfer books of the Corporation are closed, such person
shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are
open.
3. EXCHANGE OF WARRANT.
(a) In addition to, and independent of, the rights of the holder of
this Warrant set forth in Section 2 hereof, the holder hereof may at any time or
from time to time elect to receive, without the payment by the holder of any
additional consideration, that number of Warrant Shares determined as
hereinafter provided in this Section 3 by the surrender of this Warrant or any
portion hereof to the Corporation (a "Warrant Exchange"), accompanied by an
executed Notice of Exchange in substantially the form thereof attached hereto
(the "Net Issue Election"). Thereupon, the Corporation shall issue to the
holder hereof such number of fully paid and nonassessable Warrant Shares as is
computed using the following formula:
Y(A-B)
X = --------
A
where X = the number of Warrant Shares to be issued to the holder pursuant
to this Section 3.
Y = the number of Warrant Shares covered by this Warrant in respect of
which the Net Issue Election is made pursuant to this Section 3.
A = the Fair Market Value (as hereinafter defined) of one Warrant
Share determined at the time the Net Issue Election is made
pursuant to this Section 3 (the "Determination Date").
B = the Warrant Price in effect under this Warrant at the time the Net
Issue Election is made pursuant to this Section 3.
For purposes of the above calculation, "Fair Market Value" of one Warrant Share
as of the Determination Date shall mean:
(i) if the Common Stock of the Corporation is publicly traded,
(A) the average of the closing prices quoted on the National Association of
Securities Dealers, Inc. Automated Quotation National Market, if applicable, or
the average of the last bid and asked prices of the Common Stock quoted in the
over-the-counter-market or (B) if the Common Stock is then traded on a national
securities exchange, the average of the high and low prices of the Common Stock
listed on the principal national securities exchange on which the Common Stock
is so traded, in the case of either clause A or B, for the twenty (20) trading
days immediately
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<PAGE>
preceding the Determination Date or, if such date is not a business day on
which shares are traded, the next immediately preceding trading day;
(ii) in the event of a Warrant Exchange in connection with a
Corporate Transaction, the value per share of Common Stock received or
receivable by each holder thereof (assuming, in the case of a sale of assets,
the Corporation is liquidated immediately following such sale and the
consideration paid to the Corporation is immediately distributed to its
stockholders); and
(iii) in all other circumstances, the fair market value per share
of Common Stock as determined by the board of Directors; provided that in the
event that the holder of the Warrant should disagree with such determination,
and such disagreement shall not be resolved within fifteen (15) days following
written notice of such disagreement by the holder hereof, fair market value
shall be determined by a nationally recognized independent investment banking
firm jointly selected by the Corporation and the holder of this Warrant or, if
such selection cannot be made within five (5) business days after delivery of
the Notice of Exchange referred to above, by a nationally recognized independent
investment banking firm selected by the American Arbitration Association then
obtaining.
The closing of any Warrant Exchange shall take place at the offices of the
Corporation on the date specified in the Notice of Exchange (the "Exchange
Date"), which shall be not less than five (5) and not more than thirty (30) days
after the delivery of such Notice. At such closing, the Corporation shall issue
and deliver to the holder or its designee a certificate or certificates for the
Warrant Shares to be issued upon such Warrant Exchange, registered in the name
of the holder or such designee, and if such Warrant Exchange shall not have been
for all Warrant Shares, a new Warrant, registered in the name of the holder, of
like tenor to this Warrant for the number of shares still subject to this
Warrant following such Warrant Exchange.
4. ADJUSTMENT OF WARRANT PRICE AND WARRANT SHARES.
(a) The Warrant Price shall be subject to adjustment from time to time
as follows:
(i) If the Corporation shall at any time or from time to time
during the Exercise Period, issue any shares of Common Stock (or be deemed to
have issued any shares of Common Stock as provided herein), other than Excluded
Securities (as defined in Section 4(a)(v)) without consideration or for a
consideration per share less than the Warrant Price in effect immediately prior
to the issuance of Common Stock, the Warrant Price in effect immediately prior
to such issuance shall forthwith be lowered to a price equal to the amount of
such lower consideration per share.
(ii) For the purposes of any adjustment of the Warrant
Price pursuant to Section 4(a)(i), the following provisions shall be applicable:
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(A) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting therefrom any discounts, commissions or other expenses allowed,
paid or incurred by the Corporation for any underwriting or otherwise in
connection with the issuance and sale thereof.
(B) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof as determined in good
faith by the Board of Directors of the Corporation, irrespective of any
accounting treatment.
(C) In the case of the issuance of Common Stock without
consideration, the consideration shall be deemed to be $0.01 per share.
(D) In the case of the issuance of (x) options to
purchase or rights to subscribe for Common Stock, (y) securities by their terms
convertible into or exchangeable for Common Stock or (z) options to purchase
rights to subscribe for such convertible or exchangeable securities:
(1) the shares of Common Stock deliverable upon exercise
of such options to purchase or rights to subscribe for Common
Stock shall be deemed to have been issued at the time such options
or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subdivisions
(A), (B) and (C) above), if any, received by the Corporation upon
the issuance of such options or rights plus the minimum purchase
price provided in such options or rights for the Common Stock
covered thereby;
(2) the shares of Common Stock deliverable upon
conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and
for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or
accrued dividends), plus the additional consideration, if any, to
be received by the Corporation upon the conversion or exchange of
such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner
provided in subdivisions (A), (B) and (C) above);
(3) on any change in the exercise price of Common Stock
deliverable upon exercise of any such options or rights or
conversions of or exchanges for such securities, other than a
change resulting from the antidilution provisions thereof, the
applicable Warrant Price shall forthwith be readjusted to such
Warrant Price as would have resulted had the adjustment made upon
the issuance of such options, rights or securities not converted
prior to such change (or options or rights related to such
securities not
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<PAGE>
converted prior to such change) been made upon the basis of such
change; PROVIDED, HOWEVER, that such readjustment shall not result
in a Warrant Price that is greater than the original Warrant
Price; and
(4) on the expiration of all such options or rights, the
termination of all such rights to convert or exchange or the
expiration of all options or rights related to such convertible or
exchangeable securities in each case having been issued by the
Corporation for the same consideration (as determined pursuant to
subdivision (A), (B) and (C) above), the applicable Warrant Price
shall forthwith be readjusted to such Warrant Price as would have
resulted had the adjustment made upon the issuance of such
options, rights, securities or options or rights related to such
securities been made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise
of such options or rights, upon the conversion or exchange of such
securities, or upon the exercise of the options or rights related
to such securities and subsequent conversion or exchange thereof;
PROVIDED, HOWEVER, that such readjustment shall not result in a
Warrant Price that is greater that the original Warrant Price.
(iii) If, at any time during the Exercise Period, the
number of shares of Common Stock outstanding is increased by a
stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, following
the record date fixed for the determination of holders of Common
Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased and
the number of shares of Common Stock issuable upon exercise of
this Warrant shall be appropriately increased, in each case in
proportion to such increase in outstanding shares.
(iv) If, at any time during the Exercise Period, the
number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then,
following the record date for such combination, the Warrant Price
shall be appropriately increased and the number of shares of
Common Stock issuable upon exercise of this Warrant shall be
appropriately decreased, in each case, in proportion to such
decrease in outstanding shares.
(v) For purposes of Section 4(a), the term "Excluded
Securities" shall mean (A) up to 1,500,000 shares of Common
Stock (subject to equitable adjustment for stock splits,
dividends, combinations and like occurrences) issued to
officers, employees, consultants or directors of the
Corporation, pursuant to any agreement, plan or arrangement
approved by the Board of Directors of the Corporation, or
options to purchase or rights to subscribe for such Common
Stock, or securities by their terms convertible into or
exchangeable for such Common Stock, or options to purchase or
rights to subscribe for such convertible or exchangeable
securities pursuant to such agreement, plan or arrangement; (B)
shares of Common Stock issued as a stock dividend or upon any
stock split or other subdivision or combination of shares of
Common Stock; or (C) securities issued pursuant to the
acquisition of another corporation or other entity
6
<PAGE>
by the Corporation by merger or purchase of stock or purchase of
all or substantially all of such other corporation's or other
entity's assets whereby the Corporation owns not less than a
majority of the voting power of such other corporation or other
entity following such acquisition or purchase.
(vi) All calculations under this Section 4 shall be
made to the nearest one tenth (1/10) of a cent or to the
nearest one tenth (1/10) of a share, as the case may be.
(vii) Whenever the Warrant Price shall be adjusted as
provided in this Section 4 the Corporation shall forthwith
file, at the office of the Corporation or any transfer agent
designated by the Corporation for the Common Stock, a
statement, signed by its chief financial officer, showing in
detail the facts requiring such adjustment and the adjusted
Warrant Price. The Corporation shall also cause a copy of such
statement to be sent by first-class certified mail, return
receipt requested, postage prepaid, to each holder of a Warrant
at his or its address appearing on the Corporation's records.
Where appropriate, such copy may be given in advance and may be
included as part of a notice required to be mailed under the
provisions set forth immediately below.
(viii) In the event the Corporation shall propose to
take any action of the types described in Section 4(a) (iii) or
(iv) or Section 10, the Corporation shall give notice to each
holder of a Warrant in the manner set forth herein, which
notice shall specify the record date, if any, with respect to
any such action and the date on which such action is to take
place. Such notice shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate
the effect of such action (to the extent such effect may be
known at the date of such notice) on the Warrant Price then in
effect and the number, kind or class of shares or other
securities or property which shall be delivered or purchasable
upon the occurrence of such action or deliverable upon exercise
of this Warrant. In the case of any action which would require
the fixing of a record date, such notice shall be given at
least twenty (20) days prior to the date so fixed, and in case
of all other action, such notice shall be given at least thirty
(30) days prior to the taking of such proposed action. Failure
to give such notice, or any defect therein, shall not affect
the legality or validity of any such action.
(b) Upon each adjustment of the Warrant Price as provided in this
Section 4, the holder hereof shall thereafter be entitled to subscribe for and
purchase, at the Warrant Price resulting from such adjustment, the number of
Warrant Shares equal to the product of (i) the number of Warrant Shares existing
prior to such adjustment and (ii) the quotient obtained by dividing (A) the
Warrant Price existing prior to such adjustment by (B) the new Warrant Price
resulting from such adjustment. No fractional shares of Common Stock shall be
issued as a result of any such adjustment, and any fractional shares resulting
from the computations pursuant to this paragraph shall be eliminated without
consideration.
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5. COVENANTS AS TO COMMON STOCK.
The Corporation covenants and agrees that all shares of Common
Stock issuable upon the exercise of the rights represented by this Warrant,
will, upon issuance, be validly issued, fully paid and non-assessable and free
from all taxes, liens and charges with respect to the issue thereof. The
Corporation further covenants and agrees that the Corporation will from time to
time take all such action as may be required to assure that the stated or par
value per share of Common Stock is at all times equal to or less than the then
effective Warrant Price per share of Common Stock issuable upon exercise of this
Warrant. The Corporation further covenants and agrees that the Corporation will
at all times have authorized and reserved, free from preemptive rights, a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant. The Corporation further covenants and
agrees that if any shares of capital stock to be reserved for the purpose of the
issuance of shares of Common Stock upon the exercise of this Warrant require
registration with or approval of any governmental authority under any Federal or
state law before such shares may be validly issued or delivered upon exercise,
then the Corporation will in good faith and expeditiously as possible endeavor
to secure such registration or approval, as the case may be. If and so long as
the Common Stock issuable upon the exercise of the rights represented by this
Warrant is listed on any national securities exchange, the Corporation will, if
permitted by the rules of such exchange, list and keep listed on such exchange,
upon official notice of issuance, all shares of such capital stock.
6. NO SHAREHOLDER RIGHTS.
This Warrant shall not entitle the holder hereof to any voting
rights or other rights as a shareholder of the Corporation.
7. RESTRICTIONS ON TRANSFER.
The holder of this Warrant acknowledges that neither this Warrant
nor the Warrant Shares have been registered under the Securities Act and the
holder of this Warrant agrees that no sale, transfer, assignment, hypothecation
or other disposition of this Warrant or the Warrant Shares shall be made in the
absence of (a) current registration statement under the Securities Act as to
this Warrant or the Warrant Shares and the registration or qualification of this
Warrant or the Warrant Shares under any applicable state securities laws is then
in effect or (ii) an opinion of counsel reasonably satisfactory to the
Corporation to the effect that such registration or qualification is not
required. Each certificate or other instrument for Warrant Shares issued upon
exercise of this Warrant shall, if required under the Securities Act or the
rules promulgated thereunder, be imprinted with a legend substantially to the
foregoing effect.
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8. RIGHTS OF THE HOLDER.
The Corporation hereby grants to the holder of this Warrant those
rights set forth on EXHIBIT B attached hereto, the provisions of which are
incorporated herein by reference and made a part hereof as if set forth herein
in their entirety.
9. TRANSFER OF WARRANT; AMENDMENT.
Subject to the restriction set forth in Section 7, this Warrant and all
rights hereunder are transferable, in whole, or in part, at the agency or office
of the Corporation referred to in Section 2, by the holder hereof in person or
by duly authorized attorney, upon surrender of this Warrant properly endorsed.
Each taker and holder of this Warrant, by taking or holding the same, consents
and agrees that this Warrant, when endorsed, in blank, shall be deemed
negotiable, and, when so endorsed the holder hereof may be treated by the
Corporation and all other persons dealing with this Warrant as the absolute
owner hereof for any purposes and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer hereof on the books of the
Corporation, any notice to the contrary notwithstanding; but until each transfer
on such books, the Corporation may treat the registered holder hereof as the
owner hereof for all purposes. Notwithstanding the foregoing, this Warrant
shall not be transferred to any entity which the Corporation and AOL determine
to be a competitor to the Corporation.
10. REORGANIZATIONS, ETC.
In case, at any time during the Exercise Period, of any capital
reorganization, of any reclassification of the stock of the Corporation (other
than a change in par value or from par value to no par value or from no par
value to par value or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the Corporation
with or into another corporation (other than a consolidation or merger in which
the Corporation is the continuing operation and which does not result in any
change in the Common Stock) or of the sale of all or substantially all the
properties and assets of the Corporation as an entirety to any other
corporation, this Warrant shall, after such reorganization, reclassification,
consolidation, merger or sale, be exercisable for (i ) the kind and number of
shares of stock or other securities or property of the Corporation or of the
corporation resulting from such consolidation or surviving such merger or to
which such properties and assets shall have been sold to which such holder would
have been entitled if he had held the Common Stock issuable upon the exercise
hereof immediately prior to such reorganization, reclassification,
consolidation, merger or sale or (ii) in the event that the Corporation shall
not have consummated an IPO and the consideration being offered in clause (i)
above is anything other than an amount of cash, then at the option of the holder
of this Warrant, an amount of cash or other non stock consideration equal to the
fair market value of the number of Warrant Shares for which the Warrant has been
exercised as determined by the Board of Directors; provided that in the event
that the holder of the Warrant should disagree with such determination, and such
disagreement shall not be resolved within fifteen (15) days of written notice of
such disagreement by the holder hereof, fair market value
9
<PAGE>
shall be determined by a nationally recognized independent investment banking
firm jointly selected by the Corporation and the holder of this Warrant or ,
if such selection cannot be made within five (5) business days after delivery
by the holder hereof of notice to the Corporation of its intent to exercise
its rights hereunder, by a nationally recognized independent investment
banking firm selected by the American Arbitration Assciation then obtaining.
In any such reorganization or other action or transaction described above,
appropriate provision shall be made with respect to the rights and interests
of the holder of this Warrant to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant
Price and of the number of shares purchasable and receivable upon the
exercise of this Warrant) shall thereafter be applicable, as nearly as may
be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Corporation will not effect any
such consolidation, merger or sale unless, prior to the consummation thereof,
the successor corporation or entity (if other than the Corporation) resulting
from such transaction or the corporation or entity purchasing such assets
shall assume by written instrument, executed and mailed or delivered to the
registered holder hereof at the last address of such holder appearing on the
books of the Corporation, the obligation to deliver to such holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to purchase.
11. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT.
If this Warrant is lost, stolen, mutilated or destroyed, the Corporation
may, on such terms as to indemnity or otherwise as it may in its discretion
impose (which shall, in the case of a mutilated Warrant, include the surrender
thereof), issue a new Warrant of like denomination and tenor as the Warrant so
lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an
original contractual obligation of the Corporation, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
12. MODIFICATION AND WAIVER.
This Warrant and any provision hereof may be changed, waived, discharged
or terminated only by an instrument in writing signed by the party against which
enforcement of the same is sought.
13. NOTICES.
All notices, advices and communications to be given or otherwise made to
any party to this Agreement shall be deemed to be sufficient if contained in a
written instrument delivered in person or by telecopier or duly sent by first
class registered or certified mail, return receipt requested, postage prepaid,
or by overnight courier, or by electronic mail, with a copy thereof to be sent
by mail (as aforesaid) within 24 hours of such electronic mail, addressed to
such party at the address set forth below or at such other address as may
hereafter be designated in writing by the addressee to the addresser listing all
parties:
10
<PAGE>
(a) If to the Corporation, to:
DVD Express, Inc.
7083 Hollywood Boulevard
Suite 100
Los Angeles, CA 90028
[email protected]
and
(b) If to AOL, to:
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Attention:
Senior Vice President
Fax No: (703) 265-1202
e-mail address: AOL Notice @aol.com
with a copy to:
Deputy General Counsel
Fax No: (703) 265-2208
Or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been delivered and received
(i) in the case of personal delivery or delivery by telecopier, on the date of
such deliver, (ii) in the case of nationally-recognized overnight courier, on
the next business day after the date when sent and (ii) in the case of mailing,
on the third business day following that on which the piece of mail containing
such communication is posted. As used in this Section 14, "business day" shall
mean any day other than a day on which banking institutions in the Commonwealth
of Virginia are legally closed for business.
14. BINDING EFFECT ON SUCCESSORS; SURVIVAL.
This Warrant shall be binding upon any corporation succeeding the
Corporation by merger, consolidation or acquisition of all or substantially all
of the Corporation's assets. All of the obligations of the Corporation relating
to the Common Stock issuable upon the exercise of this Warrant shall survive the
exercise and termination of this Warrant. All of the covenants and agreements
of the Corporation shall inure to the benefit of the successors and assigns of
AOL.
11
<PAGE>
15. DESCRIPTIVE HEADINGS AND GOVERNING LAW.
The description headings of the several sections and paragraphs of this
Warrant are inserted for convenience only and do not constitute a part of this
Warrant. This Warrant shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the State of
California.
16. FRACTIONAL SHARES.
No fractional shares shall be issued upon exercise of this Warrant. The
Corporation shall, in lieu of issuing any fractional share, pay the holder
entitled to such fraction a sum in cash equal to such fraction multiplied by the
then Fair Market Value of one Warrant Share.
17. COUNTERPARTS.
This Warrant 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.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be
executed by its duly authorized officer on the date first above written.
DVD EXPRESS, INC.
By: MICHAEL DUBELKO
-----------------------------
Michael Dubelko,
President
ATTEST: /s/ ANDREW CRIST
-------------------------
Secretary
AGREED:
AMERICA ONLINE, INC.
By: /s/ ERIC L. KELLER
-------------------------------
Print Name: Eric L. Keller
-----------------------
Title: Vice President
----------------------------
12
<PAGE>
FORM OF SUBSCRIPTION
The undersigned, the holder of the Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, _________ shares of DVD EXPRESS, INC. and herewith makes
payment of $_________ therefor, and requests that the certificates for such
shares be issued in the name of and delivered to,
_________________________________, whose address is
_________________________________________________.
Dated:
----------------------
-----------------------------------
(Signature)
-----------------------------------
(Address)
13
<PAGE>
NOTICE OF EXCHANGE
The undersigned hereby irrevocably elects to exchange this Warrant
into __________ shares (the foregoing number constituting the number of Warrant
Shares to be issued pursuant to Section 3 of this Warrant) of DVD EXPRESS, INC.,
minus any shares to be deducted from the foregoing number in accordance with the
terms of this Warrant, according to the conditions thereof. The undersigned
desires to consummate such exchange on ________________.
Dated:
----------------------
-----------------------------------
Name of Holder:
By:
----------------------------------
14
<PAGE>
FORM OF ASSIGNMENT
For value received, the undersigned hereby sells, assigns and
transfers unto the right represented by the Warrant to purchase _______ shares
of DVD EXPRESS, INC., to which the Warrant relates, and appoints Attorney to
transfer such right on the books of DVD EXPRESS, INC., with full power of
substitution in the premises.
Dated:
----------------------
-----------------------------------
(Signature)
Signed in the presence of:
- -----------------------------------
15
<PAGE>
EXHIBIT A
NUMBER OF SHARES FOR WHICH THE
WARRANT SHALL BE EXERCISABLE:
The Warrant Shares shall vest as follows:
<TABLE>
<CAPTION>
Number of Warrant Shares Vesting
<S> <C>
(A) 492,090 shares (the "Time Warrant (a) 164,030 of the Time Warrant
Shares") Shares on the earlier to occur
of (i) an IPO or (ii) the
twelve (12) month anniversary
of the Effective Date,
(b) 164,030 of the Time Warrant
Shares on the earlier to occur
of (i) an IPO and (ii) the
eighteen (18) month anniversary
of the Effective Date, and
(c) 164,030 of the Time Warrant
Shares on the earlier to occur
of (i) an IPO or (ii) twenty
four (24) month anniversary of
the Effective Date.
(B) 738,138 shares (the "Performance (a) 105,480 of the Performance
Warrant Shares") Warrant Shares shall vest upon
the earlier of (i) an IPO, (ii)
such time as the Site Revenues
(as defined in the Agreement)
equal or exceed One Hundred
Million Dollars ($100,000,000),
or (iii) such time as the
aggregate AOL Purchasers (as
defined in the Agreement) equal
or exceed one hundred twenty
thousand (120,000) AOL
Purchasers;
(b) 105,443 of the Performance
Warrant Shares shall vest upon
the earlier of (i) an IPO, (ii)
such time as the Site Revenues
equal or exceed One Hundred
Twenty Million Dollars
($120,000,000), or (iii) such
time as the aggregate AOL
Purchasers equal or exceed one
hundred fifty thousand
(150,000) AOL Purchasers;
(c) 105,443 of the Performance
Warrant Shares shall vest upon
the earlier of (i) an IPO, (ii)
such time as the Site Revenues
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
equal or exceed One Hundred
Forty Million Dollars
($140,000,000), or (iii) such
time as the aggregate AOL
Purchasers equal or exceed one
hundred eighty thousand
(180,000) AOL Purchasers;
(d) 105,443 of the Performance
Warrant Shares shall vest upon
the earlier of (i) an IPO, (ii)
such time as the Site Revenues
equal or exceed One Hundred
Sixty Million Dollars
($160,000,000), or (iii) such
time as the aggregate AOL
Purchasers equal or exceed two
hundred ten thousand (210,000)
AOL Purchasers;
(e) 105,443 of the Performance
Warrant Shares shall vest upon
the earlier of (i) an IPO, (ii)
such time as Site Revenues
equal or exceed One Hundred
Eighty Million Dollars
($180,000,000), or (iii) such
time as the aggregate AOL
Purchasers equal or exceed two
hundred forty thousand
(240,000) AOL Purchasers;
(f) 105,443 of the Performance
Warrant Shares shall vest upon
the earlier of (i) an IPO, (ii)
such time as the Site Revenues
equal or exceed Two Hundred
Million Dollars ($200,000,000),
or (iii) such time as the
aggregate AOL Purchasers equal
or exceed two hundred seventy
thousand (270,000) AOL Purchasers;
and
(g) 105,443 of the Performance Warrant
Shares shall vest upon the earlier of
(i) an IPO, (ii) such time as the Site
Revenues equal or exceed Two Hundred
Twenty Million Dollars ($220,000,000),
or (iii) such time as the aggregate AOL
Purchasers equal or exceed three hundred
thousand (300,000) AOL Purchasers.
</TABLE>
(C.) In the event there is a termination of the Agreement, AOL shall
immediately vest in such number of Warrant Shares as shall have accrued at such
time as determined pursuant to the formulas presented in this Exhibit A.
17
<PAGE>
(D.) With respect to the Performance Warrant Shares described in paragraph B
of this Exhibit A, AOL's right to vest in such shares shall terminate upon the
termination of the Initial Term (except with respect to such portion of the
Performance Warrant Shares which AOL had the right to vest in immediately prior
to the termination of the Initial Term).
18
<PAGE>
EXHIBIT B
ADDITIONAL RIGHTS
1. INFORMATION RIGHTS.
(a) Until such time as the Corporation becomes subject to the periodic reporting
provisions of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Corporation shall furnish to the holder hereof, within ninety (90) days after
the end of each fiscal year of the Corporation, a balance sheet of the
Corporation as of the end of such fiscal year and the related statements of
income, changes in stockholders' equity and cash flows of the Corporation for
the fiscal year then ended, together with supporting notes thereto, certified in
accordance with generally accepted accounting principles, without qualification
as to scope of audit, by a firm of independent public accountants of recognized
national standing selected by the Corporation.
(b) At such time as the Corporation becomes subject to the
periodic reporting provisions of the Exchange Act, the Corporation shall provide
the holder hereof promptly upon filing, with copies of all registration
statements, prospectuses, periodic reports and other documents filed by the
Corporation with the Commission.
2. REGISTRATION RIGHTS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "COMMISSION" means the Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
(ii) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect
from time to time.
(iii) "OTHER SHARES" means at any time those shares of Common Stock
which do not constitute Primary Shares or Registrable Shares.
(iv) "PRIMARY SHARES" means at any time the authorized but unissued
shares of Common Stock or shares of Common Stock held by the
Corporation in its treasury.
(v) "REGISTRABLE SHARES" means at any time the shares of Common Stock
held (or to be held upon conversion of any Restricted Shares) by
AOL or its successors, assigns or transferees that constitute
Restricted Shares.
(vi) "REGISTRATION DATE" means the date upon which the registration
statement pursuant to which the Corporation shall have initially
registered shares
19
<PAGE>
of Common Stock under the Securities Act for sale to the public
shall have been declared effective.
(vii) "RESTRICTED SHARES" means at any time the Warrant Shares, any
shares of Common Stock issued or issuable upon conversion thereof,
and any shares or other securities received in respect thereof,
which are held by AOL and which have not previously been sold to
the public pursuant to a registration statement under the
Securities Act or pursuant to Rule 144.
(viii) "RULE 144" means Rule 144 promulgated under the Securities Act or
any successor rule thereto or any complementary rule thereto.
(ix) "SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated
thereunder, all as the same shall be in effect from time to time.
(x) "TRANSFER" means any disposition of any Restricted Shares or of
any interest therein which constitutes a sale within the meaning
of the Securities Act, other than any disposition pursuant to an
effective registration statement under the Securities Act and
complying with all applicable state securities and "blue sky"
laws.
(a) REQUIRED REGISTRATION. If the Corporation at any time after the
date which is one hundred and eighty (180) days following the date the
Corporation first completes an offering of its Common Stock to the public
pursuant to an effective Registration Statement filed under the Securities Act,
shall be requested by AOL to effect the registration under the Securities Act of
Registrable Shares in accordance with this Section, the Corporation shall
promptly use its best efforts to effect such registration under the Securities
Act of the Registrable Shares which the Corporation has been so requested to
register; provided, however, that the Corporation shall not be obligated to
effect any registration under the Securities Act except in accordance with the
following provisions:
(i) the Corporation shall not be obligated to
file (A) more than one (1) registration statement initiated
pursuant to this Section which becomes effective or (B) any
registration statement during any period in which any other
registration statement (other than on Form S-4 or Form S-8
promulgated under the Securities Act or any successor forms
thereto) pursuant to which Primary Shares are to be or were sold
has been filed and not withdrawn or has been declared effective
within the prior ninety (90) days;
(ii) the Corporation may delay the filing or
effectiveness of any registration statement for a period not to
exceed ninety (90) days after the date of a request for
registration pursuant to this Section 2(a) if (i) at the time of
such request the
20
<PAGE>
Corporation is engaged, or has fixed plans to engage within
sixty (60) days of the time of such request, in a firm
commitment underwritten public offering of Primary Shares in
which AOL may include Registrable Shares pursuant to this
Section 2 or (ii) the Corporation shall furnish to AOL upon
such registration, a certificate signed by the President of the
Corporation stating that, in the good faith judgment of the
Board of Directors of the Corporation, it would be seriously
detrimental to the Corporation and its shareholders for such
registration statement to be filed and it is therefore
essential to defer the filing of such registration statement
(provided that the Corporation may not utilize the right set
forth in this clause (c) more than once in any twelve (12-month
period); and
(iii) with respect to any registration pursuant to
this Section, the Corporation may include in such registration any
Primary Shares or Other Shares; provided, however, that if the
managing underwriter advises the Corporation that the inclusion of
all such securities in the registration would interfere with the
successful marketing (including pricing) of all such securities,
then the number of Registrable Shares, Primary Shares and Other
Shares proposed to be included in such registration shall be
included in the following order:
(a) FIRST, the Registrable Shares held by AOL,
PRO RATA with the Other Shares carrying registration
rights PARI PASSU with the Registrable Shares held
by AOL;
(b) SECOND, the Primary Shares; and
(c) THIRD, any Other Shares carrying registration
rights junior to the Registrable Shares held by AOL.
A requested registration under this Section 2(a) may be rescinded or withdrawn
by written notice to the Corporation by AOL; PROVIDED, HOWEVER, that such
rescinded registration shall not count as a registration statement initiated
pursuant to this Section 2(a) if such recession or withdrawal is based upon
material adverse information relating to the Corporation or its condition,
business or prospectus that is different from that generally known to AOL at the
time of its request. AOL shall select any firm of underwriters in connection
with a registration under this Section 2(a), which firm of underwriters shall be
reasonably acceptable to the Corporation.
(b) PIGGYBACK REGISTRATION. If the Corporation at any time after
the date which is one hundred and eighty (180) days following the date
the Corporation first completed an offering of its Common Stock to the
public pursuant to an effective registration statement filed under the
Securities Act, proposes for any reason to register Primary Shares,
Registrable Shares or Other Shares under the Securities Act (other than
on Form S-4 or Form S-8 promulgated under the Securities Act or any
successor forms thereto or other than in connection with an exchange
offer or offering solely to the Corporation's stockholders), it shall
promptly give written notice to AOL of its intention so to register the
Primary Shares or Other Shares and, upon the written request, given
within thirty (30)
21
<PAGE>
days after delivery of any such notice by the Corporation, to include
in such registration Registrable Shares (which request shall specify
the number of Registrable Shares proposed to be included in such
registration), the Corporation shall cause all such Registrable Shares
to be included in such registration on the same terms and conditions
as the securities otherwise being sold in such registration; PROVIDED,
HOWEVER, that if the managing underwriter advises the Corporation that
the inclusion of all Registrable Shares and/or Other Shares proposed
to be included in such registration would interfere with the
successful marketing (including pricing) of the Primary Shares
proposed to be registered by the Corporation, then the number of
Primary Shares, Registrable Shares and Other Shares, proposed to be
included in such registration shall be included in the following
order:
(i) FIRST, the Primary Shares;
(ii) SECOND, the Registrable Shares held by AOL, PRO RATA with
the Other Shares carrying registration rights PARI PASSU with
Registrable Shares held by AOL; and
(iii) THIRD, any Other Shares carrying registration rights junior
to the Registrable Shares held by AOL.
(c) REGISTRATIONS ON FORM S-3. Anything contained in Section 2 to
the contrary notwithstanding, at such time as the Corporation shall have
qualified for the use of Form S-3 promulgated under the Securities Act or
any successor form thereto, AOL shall have the right to request in
writing an unlimited number of registrations on Form S-3 or such
successor form of Registrable Shares, which request or requests shall (i)
specify the number of Registrable Shares intended to be sold or disposed
of, (ii) state the intended method of disposition of such Registrable
Shares, and (iii) relate to Registrable Shares having an anticipated
aggregate offering price of at least $500,000; PROVIDED, HOWEVER, AOL may
only make one such request in any 6-month period. A requested
registration on Form S-3 or any such successor form in compliance with
this Section shall not count as a registration statement demanded
pursuant to Section 2(a).
(d) HOLDBACK AGREEMENT. If in connection with the initial public
offering of shares of Common Stock of the Corporation registered pursuant
to the Securities Act, the managing underwriter for such registration
shall so request, AOL shall not sell, make any short sale of, grant any
option for the purchase of, or otherwise dispose of any Restricted Shares
without the prior written consent of the Corporation for a period
designated by the Corporation in writing to AOL, which period shall not
begin more than ten (10) days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be
made and shall not last more than one hundred and eighty (180) days after
the effective date of such registration statement; PROVIDED that AOL be
bound by this provision only if, and to the extent, all officers and
directors of the Corporation and all holders of at least two percent (2%)
of the outstanding Common Stock of the Corporation shall be bound by such
a provision.
22
<PAGE>
(e) PREPARATION AND FILING. If and whenever the Corporation is
under an obligation pursuant to the provisions of this Agreement to
effect the registration of any Registrable Shares, the Corporation shall,
as expeditiously as practicable:
(i) use its best efforts to cause a
registration statement that registers such Registrable Shares to
become and remain effective for a period of one hundred and eighty
(180) days or until all of such Registrable Shares have been disposed
of (if earlier);
(ii) furnish, at least five (5) business days
before filing a registration statement that registers such Registrable
Shares, a prospectus relating thereto or any amendments or supplements
relating to such a registration statement or prospectus, to a counsel
selected by AOL, copies of all such documents proposed to be filed (it
being understood that such five (5)-business-day period need not apply
to successive drafts of the same document proposed to be filed so long
as such successive drafts are supplied to such counsel in advance of
the proposed filing by a period of time that is customary and
reasonable under the circumstances);
(iii) prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep
such registration statement effective for at least a period of one
hundred and eighty (180) days or until all of such Registrable Shares,
have been disposed of (if earlier) and to comply with the provisions
of the Securities Act with respect to the sale or other disposition of
such Registrable Shares;
(iv) notify in writing AOL's counsel promptly
(i) of the receipt by the Corporation of any notification with respect
to any comments by the Commission with respect to such registration
statement or prospectus or any amendment or supplement thereto or any
request by the Commission for the amending or supplementing thereof or
for additional information with respect thereto, (ii) of the receipt
by the Corporation of any notification with respect to the issuance by
the Commission of any stop order suspending the effectiveness of such
registration statement or prospectus or any amendment or supplement
thereto or the initiation or threatening of any proceeding for that
purpose and (iii) of the receipt by the Corporation of any
notification with respect to the suspension of the qualification of
such Registrable Shares, for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purposes;
(v) register or qualify such Registrable
Shares, under such other securities or blue sky laws of such
jurisdictions as any seller of Registrable Shares reasonably requests
and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller of Registrable Shares to
consummate the disposition in such jurisdictions of the Registrable
Shares owned by such seller; provided, however, that the Corporation
will not be required to qualify generally to do business,
23
<PAGE>
subject itself to general taxation or consent to general service of
process in any jurisdiction where it would not otherwise be required so
to do but for this paragraph (v);
(vi) furnish to each seller of such Registrable
Shares such number of copies of a summary prospectus or other
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such
seller of Registrable Shares may reasonably request in order to
facilitate the public sale or other disposition of such Registrable
Shares;
(vii) use its best efforts to cause such
Registrable Shares to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of
the business and operations of the Corporation to enable the seller or
sellers thereof to consummate the disposition of such Registrable
Shares;
(viii) notify on a timely basis each seller of
such Registrable Shares at any time when a prospectus relating to such
Registrable Shares is required to be delivered under the Securities
Act within the appropriate period mentioned above, of the happening of
any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing
and, at the request of such seller, prepare and furnish to such seller
a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered
to the offerees of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;
(ix) make available for inspection by any
seller of such Registrable Shares, any underwriter participating in
any disposition pursuant to such registration statement and any
attorney, accountant or other agent retained by any such seller or
underwriter (collectively, the "Inspectors"), all pertinent financial
and other records, pertinent corporate documents and properties of the
Corporation (collectively, the "Records"), as shall be reasonably
necessary to enable them to exercise their due diligence
responsibility, and cause the Corporation's officers, directors and
employees to supply all information (together with the Records, the
"Information") reasonably requested by any such Inspector in
connection with such registration statement. Any of the Information
which the Corporation determines in good faith to be confidential, and
of which determination the Inspectors are so notified, shall not be
disclosed by the Inspectors unless (i) the disclosure of such
Information is necessary to avoid or correct a misstatement or
omission in the registration statement, (ii) the release of such
Information is ordered pursuant to a subpoena or other order from a
court of competent jurisdiction or (iii) such Information has been
made generally available to the public. The seller of Registrable
Shares, agrees that it will, upon learning that disclosure of such
Information
24
<PAGE>
is sought in a court of competent jurisdiction, give notice to the
Corporation and allow the Corporation, at the Corporation's expense,
to undertake appropriate action to prevent disclosure of the Information
deemed confidential;
(x) obtain from its independent certified
public accountants "comfort" letters in customary form and at
customary times and covering matters of the type customarily covered
by comfort letters;
(xi) obtain from its counsel an opinion or
opinions in customary form;
(xii) provide a transfer agent and registrar (which
may be the same entity and which may be the Corporation) for such
Registrable Shares;
(xiii) issue to any underwriter to which any
seller of Registrable Shares may sell shares in such offering
certificates evidencing such Registrable Shares;
(xiv) list such Registrable Shares on any
national securities exchange on which any shares of the Common Stock
are listed or, if the Common Stock is not listed on a national
securities exchange, use its best efforts to qualify such Registrable
Shares for inclusion on the automated quotation system of the National
Association of Securities Dealers, Inc. (the "NASD") or such national
securities exchange as the AOL shall request;
(xv) otherwise comply with all applicable rules
and regulations of the Commission and make available to the holders of
its shares, as soon as reasonably practicable, earnings statements
(which need not be audited) covering a period of twelve (12) months
beginning within three (3) months after the effective date of the
registration statement, which earnings statements shall satisfy the
provisions of Section 11(a) of the Securities Act; and
(xvi) use its best efforts to take all other
steps necessary to effect the registration of such Registrable Shares
contemplated hereby.
(f) EXPENSES. All expenses incurred by the Corporation in
complying with the provisions hereof, including, without limitation, all
registration and filing fees (including all expenses incident to filing
with the NASD), fees and expenses of complying with securities and blue
sky laws, printing expenses, and fees and expenses of the Corporation's
counsel and accountants, and the fees and expenses of the AOL's counsel
shall be paid by the Corporation; PROVIDED, HOWEVER, that all
underwriting discounts and selling commissions applicable to the
Registrable Shares and all fees and expenses of any special or interim
audit for any registration initiated by AOL pursuant to Section 2 that is
not otherwise required under the Securities Act in connection with such
registration, shall
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be borne by the seller or sellers thereof, in proportion to the number
of Registrable Shares sold by such seller or sellers.
(g) INDEMNIFICATION.
(i) In connection with any registration of any
Registrable Shares under the Securities Act pursuant to this
Agreement, the Corporation shall indemnify and hold harmless the
seller of such Registrable Shares, its partners, members in the case
of a limited liability corporation, beneficiaries in the case of a
trust, officers and directors, each underwriter, broker or any other
person acting on behalf of such seller and each other person, if any,
who controls any of the foregoing persons within the meaning of the
Securities Act against any losses, claims, damages or liabilities,
joint or several, (or actions in respect thereof) to which any of the
foregoing persons may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in
the registration statement under which such Registrable Shares were
registered under the Securities Act, any preliminary prospectus or
final prospectus contained therein or otherwise filed with the
Commission, any amendment or supplement thereto or any document
incident to registration or qualification of any Registrable Shares,
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or, with
respect to any prospectus, necessary to make the statements therein in
light of the circumstances under which they were made not misleading,
or any violation by the Corporation of the Securities Act or state
securities or blue sky laws applicable to the Corporation and relating
to action or inaction required of the Corporation in connection with
such registration or qualification under such state securities or blue
sky laws; and shall reimburse such seller, such officer or director,
such underwriter, such broker or such other person acting on behalf of
such seller and each such controllingperson for any legal or other
expenses reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Corporation shall not be liable in
any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in
said registration statement, preliminary prospectus, final prospectus,
amendment, supplement or document incident to registration or
qualification of any Registrable Shares in reliance upon and in
conformity with written information furnished to the Corporation
through an instrument duly executed by such seller or underwriter that
states that it is specifically for use in the preparation thereof.
(ii) In connection with any registration of
Registrable Shares, under the Securities Act pursuant to this
Agreement, each seller of Registrable Shares shall indemnify and hold
harmless (in the same manner and to the same extent as set forth in
the preceding paragraph of this Section) the Corporation, each
director of the
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Corporation, each officer of the Corporation who shall sign such
registration statement, each underwriter, broker or other person
acting on behalf of such seller, each person who controls any of the
foregoing persons within the meaning of the Securities Act and each
other seller of Registrable Shares under such registration statement
with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained
therein or otherwise filed with the Commission, any amendment or
supplement thereto or any document incident to registration or
qualification of any Registrable Shares, if such statement or omission
was made in reliance upon and in conformity with written information
furnished to the Corporation or such underwriter through an instrument
duly executed by such seller or underwriter that states that it is
specifically for use in connection with the preparation of such
registration statement, preliminary prospectus, final prospectus,
amendment, supplement or document; provided, however, that the
obligation to indemnify will be several, not joint and several, among
such sellers of Registrable Shares, and the maximum amount of
liability in respect of such indemnification shall be in proportion to
and limited to, in the case of each seller of Registrable Shares, an
amount equal to the net proceeds actually received by such seller from
the sale of Registrable Shares effected pursuant to such registration.
(iii) The indemnification required by this
Section 2(g) will be made by periodic payments during the course of
the investigation or defense, as and when bills are received or
expenses incurred, subject to prompt refund in the event any such
payments are determined not to have been due and owing hereunder.
(iv) Promptly after receipt by an indemnified
party of notice of the commencement of any action involving a claim
referred to in the preceding paragraphs of this Section, such
indemnified party will, if a claim in respect thereof is made against
an indemnifying party, give written notice to the latter of the
commencement of such action. In case any such action is brought
against an indemnified party, the indemnifying party will be entitled
to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying
party shall not be responsible for any legal or other expenses
subsequently incurred by the latter in connection with the defense
thereof; provided, however, that if any indemnified party shall have
reasonably concluded that there may be one or more legal or equitable
defenses available to such indemnified party which are additional to
or conflict with those available to the indemnifying party, or that
such claim or litigation involves or could have an effect upon matters
beyond the scope of the indemnity agreement provided in this Section,
the indemnifying party shall not have the right to assume the defense
of such action on behalf of such indemnified party and such
indemnifying party shall reimburse such indemnified party and any
person controlling
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such indemnified party for that portion of the fees and expenses of any
counsel retained by the indemnified party which is reasonably related to
the matters covered by the indemnity agreement provided in this
Section 2(g)(iv).
(v) The indemnification provided for under
this Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified party or any
officer, director or controlling person of such indemnified party and
will survive the transfer of securities.
(vi) If the indemnification provided for in
this Section is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss, claim,
damage, liability or action referred to herein, then the indemnifying
party, in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amounts paid or payable by such indemnified party as
a result of such loss, claim, damage, liability or action in such
proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions which resulted in
such loss, claim, damage or liability as well as any other relevant
equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying
party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Corporation and the sellers of
Registrable Shares agree that it would not be just and equitable if
contributions pursuant to this paragraph were determined by pro rata
allocation or by any other method of allocation which did not take
into account the equitable considerations referred to herein. The
amount paid or payable to an indemnified party as a result of the
losses, claims, damages, liabilities or expenses referred to above
shall be deemed to include, subject to the limitation set forth in the
fourth paragraph of this Section 2(f) any legal or other expenses
reasonably incurred in connection with investigating or defending the
same. Notwithstanding the foregoing, in no event shall the amount
contributed by a seller of Registrable Shares exceed the aggregate net
offering proceeds received by such seller from the sale of such
seller's Registrable Shares.
(h) INFORMATION BY HOLDER. AOL shall furnish to the Corporation
such written information regarding AOL and the distribution proposed by
AOL as the Corporation may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement.
(i) EXCHANGE ACT COMPLIANCE. From and after the Registration Date
or such earlier date as a registration statement filed by the Corporation
pursuant to the Exchange Act relating to any class of the Corporation's
securities shall have become effective, the
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Corporation shall comply with all of the reporting requirements of the
Exchange Act and with all other public information reporting
requirements of the Commission which are conditions to the
availability of Rule 144 for the sale of the Common Stock. The
Corporation shall cooperate with AOL in supplying such information as
may be necessary for AOL to complete and file any information
reporting forms presently or hereafter required by the Commission as a
condition to the availability of Rule 144.
(j) NO CONFLICT OF RIGHTS. The Corporation represents and
warrants to AOL that the registration rights granted to AOL hereby do not
conflict with any other registration rights granted by the Corporation.
The Corporation shall not, after the date hereof, grant any registration
rights which conflict with or impair the registration rights granted
hereby. To the extent that the Corporation grants any registration
rights after the date hereof which are PARI PASSU with the registration
rights granted to AOL hereunder, such registration rights shall not
conflict with or impair the registration rights of AOL.
(k) "MARKET STAND-OFF" AGREEMENT. AOL hereby agrees that it shall
not, to the extent requested by the Corporation and an underwriter of
Common Stock (or other securities) of the Corporation, sell or otherwise
transfer or dispose of any securities of the Corporation for a period of
one hundred eighty (180) days following the effective date of a
registration statement of the Corporation filed under the Securities Act;
provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Corporation which
covers shares (or securities) to be sold on its behalf
to the public in an underwritten offering; and
(b) all officers and directors of the Corporation, holders
of 5% or more of the Corporation's issued and
outstanding capital stock and all other persons with
registration rights (whether or not pursuant to this
Agreement) similarly agree not to sell or transfer.
29
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** EXECUTION COPY **
REGISTRATION RIGHTS AGREEMENT
Agreement made as of this 31st day of December, 1998 by and among DVD
Express, Inc., a California corporation (the "Company"), the persons or entities
listed on SCHEDULE A attached hereto (individually, an "Investor", and
collectively, the "Investors"), America Online, Inc. ("AOL") and the Founder (as
hereinafter defined).
1. CERTAIN DEFINITIONS
SECTION 1. As used in this Agreement, the following terms shall have the
following meanings:
1.1. COMMISSION means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act and the
Exchange Act.
1.2. COMMON STOCK means (a) the Company's Common Stock, as
authorized on the date of this Agreement, (b) any other capital stock of any
class or classes (however designated) of the Company, authorized on or after the
date hereof, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall ordinarily, in the
absence of contingencies or in the absence of any provision to the contrary in
the Company's Articles of Incorporation, as amended, be entitled to vote for the
election of a majority of directors of the Company (even though the right so to
vote has been suspended by the happening of such a contingency or provision),
and (c) any other securities into which or for which any of the securities
described in (a) or (b) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.
1.3. EXCHANGE ACT means the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
1.4. FOUNDER means Michael Dubelko.
1.4. FOUNDER SHARES shall mean the aggregate of 10,000,000 shares of
Common Stock that the Founder owns, or has the right to acquire on the date
hereof, but excluding any such Common Stock that has been (a) registered under
the Securities Act pursuant to an effective
<PAGE>
registration statement filed thereunder and disposed of in accordance with
the registration statement covering them or (b) publicly sold pursuant to
Rule 144 under the Securities Act.
1.6. HOLDERS means the Founder, the Investors and AOL and their
respective permitted assignees and transferees under Section 5 hereof.
1.7. PERSON means an individual, corporation, partnership, joint
venture, trust, or unincorporated organization, or a government or any agency or
political subdivision thereof.
1.8. PURCHASE AGREEMENT means the Series A Convertible Preferred
Stock Purchase Agreement dated the date hereof among the Company, the Investors
and the Founder.
1.9. REGISTRABLE SECURITIES means any shares of Common Stock owned by
an Investor or AOL, or an Investor's or AOL's permitted successors and assigns,
including shares of Common Stock (A) issued or issuable upon conversion of any
Series A Preferred Shares or (B) issued or issuable pursuant to a vested right
to acquire shares of Common Stock; except for any shares of such Common Stock
(i) which have at any time been sold by such parties other than to a permitted
assignee, as defined in Section 5 hereof, of an Investor or AOL, and (ii) which
have at any time been sold in a registered public offering or pursuant to
Rule 144 promulgated under the Securities Act.
1.10. SECURITIES ACT means the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
1.11. SERIES A PREFERRED SHARES means the shares of Series A
Convertible Preferred Stock purchased by the Investors pursuant to the Purchase
Agreement, and with respect to each Investor in the amounts set forth on
SCHEDULE I to the Purchase Agreement.
1.12. STOCKHOLDERS AGREEMENT means that certain Stockholders
Agreement dated as of the date hereof among the Company, the Investors and the
Founder.
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2. REGISTRATION RIGHTS
SECTION 2.1. REQUEST FOR REGISTRATION.
(a) If the Company shall receive at any time after (i) December 31,
2002 and before the effective date of the first registration statement for a
public offering of securities of the Company (other than a registration
statement relating either to the sale of securities to employees of the Company
pursuant to a stock option, stock purchase, or similar plan or a SEC Rule 145
transaction), a written request from Holders who are not then employees of the
Company and who hold at least 40% of the Registrable Securities that the Company
file a registration statement under the Act covering the registration of at
least a majority of the Registrable Securities then held by such Holders; or
(ii) six months following the effective date of the first registration statement
for a public offering of securities of the Company (other than a registration
statement relating to either the sale of securities to employees of the Company
pursuant to a stock option, stock purchase, or similar plan or a SEC Rule 145
transaction) a written request from Holders who are not then employees of the
Company and who hold at least 40% of the Registrable Securities that the Company
file a registration statement under the Act covering the registration of (i) at
least 20% of the Registrable Securities or (ii) any lessor percentage if the
anticipated gross offering price is at least $5,000,000, then, in either case,
the Company shall, within ten (10) days after the receipt thereof, give written
notice of such request to all Holders and shall, subject to the limitations of
Section 1.2(b) hereof, use its best efforts to effect, the registration under
the Act of all Registrable Securities which the Holders request to be registered
within twenty (20) days after the mailing of such notice by the Company.
(b) The Company is obligated to effect only two (2) registrations
pursuant to this Section 2.1 (counting for this purpose only registrations which
have been declared or ordered effective).
(c) The Company shall not be obligated to effect a registration
pursuant to this Section 2.1 during the period starting with the date sixty (60)
days prior to the Company's estimated date of filing of, and ending on the date
six (6) months immediately following the effective date of, any registration
statement pertaining to securities of the Company (other than a registration
statement relating to the sale of the Company's securities in connection with a
Rule 145 transaction or an employee benefit plan ), provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective.
(d) Notwithstanding the foregoing, if the Company shall furnish to
the Holders requesting that the Company file a registration statement pursuant
to this Section 2.1 a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its shareholders for such
registration statement to be filed and that it is, therefore, essential to defer
the filing of such registration statement, the Company shall have the right to
defer taking action
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with respect to such filing for a period of not more than ninety (90) days
after receipt of the request of the Holders; provided, however, the Company
may defer its obligations for this reason only once in any period of twelve
(12) months.
SECTION 2.2. PIGGYBACK REGISTRATIONS. If at any time or times after the
date hereof, the Company shall determine to register any of its Common Stock or
equity securities convertible into or exchangeable for Common Stock under the
Securities Act, whether in connection with a public offering of securities by
the Company (a "primary offering"), a public offering thereof by stockholders (a
"secondary offering"), or both (but not in connection with a registration
effected solely to implement an employee benefit plan or a transaction to which
Rule 145 or any other similar rule of the Commission under the Securities Act is
applicable), the Company will promptly give written notice thereof to the
holders of Registrable Securities and Founder Shares then outstanding, and will
use its best efforts to effect the registration under the Securities Act of all
Registrable Securities and Founder Shares which the Holders may request in a
writing delivered to the Company within fifteen (15) days after the notice given
by the Company; PROVIDED, HOWEVER, that in the event that any registration
pursuant to this Section 2.2 shall be, in whole or in part, an underwritten
public offering of Common Stock, the number of shares of Registrable Securities
and Founder Shares to be included in such an underwriting may be reduced (pro
rata among the requesting Holders based upon the number of shares of Registrable
Securities and Founder Shares owned by such Holders) if and to the extent that
the managing underwriter shall be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein, PROVIDED, HOWEVER, that in no event may less than one-third of the
total number of shares of Common Stock to be included in such underwriting be
made available for Registrable Securities and Founder Shares, and PROVIDED,
FURTHER, that, prior to any such reduction, the Company shall first exclude from
such registration, in the following order, all shares of Common Stock sought to
be included therein by (i) any holder thereof not having any such contractual,
incidental registration rights, and (ii) any holder thereof having contractual,
incidental registration rights subordinate and junior to the rights of the
Holders of Registrable Securities and Founder Shares.
SECTION 2.3. FORM S-3. If the Company becomes eligible to use Form
S-3, the Company shall use its reasonable efforts to continue to qualify at
all times for registration on Form S-3 (or any successor form). If and when
the Company becomes entitled to use Form S-3, the holders of Registrable
Securities shall have the right to request and have effected an unlimited
number of registrations of shares of Registrable Securities held by them on
Form S-3 for a public offering of shares of Registrable Securities having an
aggregate proposed offering price of not less than $500,000; provided,
however, that Holders of Registrable Securities can only make one such
request in any six (6) month period. Such requests shall be in writing and
shall state the number of shares of Registrable Securities to be disposed of
and the intended method of disposition of such shares by such holder or
holders. The Company shall not be required to cause a registration statement
requested pursuant to this Section 2.3 to become effective prior to 90 days
following the effective date of a registration statement initiated by the
Company, if the request for registration has been received by the Company
subsequent to the giving of written notice by the
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<PAGE>
Company, made in good faith, to the holders of Registrable Securities to the
effect that the Company is commencing to prepare a Company-initiated
registration statement (other than a registration effected solely to
implement an employee benefit plan or a transaction to which Rule 145 or any
other similar rule of the Commission under the Securities Act is applicable);
PROVIDED, HOWEVER, that the Company shall use its best efforts to achieve
such effectiveness promptly following such 90-day period if the request
pursuant to this Section 2.3 has been made prior to the expiration of such
90-day period. The Company shall give notice to all holders of Registrable
Securities of the receipt of a request for registration pursuant to this
Section 2.3 and shall provide a reasonable opportunity for such holders to
participate in the registration. Subject to the foregoing, the Company will
use its best efforts to effect promptly the registration of all shares of
Common Stock on Form S-3 to the extent requested by the holder or holders
thereof for purposes of disposition. Notwithstanding the foregoing, the
Company shall not be required to effect a registration under this Section 2.3
or Section 2.1 if, (i) in the opinion of counsel for the Company, which
counsel and opinion shall be reasonably acceptable to the Holders of
Registrable Securities, such Holders of Registrable Securities may then sell
to the public all Registrable Securities within a 90 day period without
registration under the Act; or (ii) if the Company shall furnish to the
Holders requesting that the Company file a registration statement pursuant to
this Section 2.3 a certificate signed by the President of the Company stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its shareholders for such
registration statement to be filed and that it is, therefore, essential to
defer the filing of such registration statement, the Company shall have the
right to defer taking action with respect to such filing for a period of not
more than sixty (60) days after receipt of the request of the Holders;
provided, however, the Company may defer its obligations for this reason only
once in any period of twelve (12) months.
SECTION 2.4. REGISTRATION EXPENSES. In the event of a registration
described in Sections 2.1, 2.2 and 2.3, all expenses of registration and
offering of the Company and the Holders participating in the offering including,
without limitation, printing expenses, fees and disbursements of counsel,
including one counsel for the selling Holders of Registrable Securities or
Founder Shares (provided such fee shall not exceed $10,000), and independent
public accountants, fees and expenses (including counsel fees incurred in
connection with complying with state securities or "blue sky" laws, fees of the
National Association of Securities Dealers, Inc. and fees of transfer agents and
registrars), shall be borne by the Company, except that the Holders shall bear
underwriting commissions and discounts attributable to their Registrable
Securities or Founder Shares, as the case may be, being registered.
SECTION 2.5. FURTHER OBLIGATIONS OF THE COMPANY. Whenever under the
preceding sections of this Agreement the Company is required hereunder to
register Registrable Securities or Founder Shares, it agrees that it shall also
do the following:
(a) Use its best efforts to diligently prepare for filing with the
Commission a registration statement and such amendments and supplements to
said registration statement and the prospectus used in connection therewith
as may be necessary to keep said
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registration statement effective and to comply with the provisions of the
Securities Act with respect to the sale of securities covered by said
registration statement for the period necessary to complete the proposed
public offering, but in no event shall such period exceed 180 days;
(b) Furnish to each selling Holder such copies of each preliminary
and final prospectus and such other documents as such holder may reasonably
request to facilitate the public offering of his Registrable Securities or
Founder Shares;
(c) Enter into any underwriting agreement with provisions reasonably
required by the proposed underwriter for the selling Holders, if any; and
(d) Use its best efforts to register or qualify the Registrable
Securities and Founder Shares covered by said registration statement under
the securities or "blue-sky" laws of such jurisdictions as any selling
holder of Registrable Securities or Founder Shares may reasonably request,
provided that the Company shall not be required to register in any states
which shall require it to qualify to do business or subject itself to
general service of process as a condition of such registration.
SECTION 2.6. OBLIGATIONS OF THE HOLDERS. Whenever under the preceding
sections of this Agreement the Company is required hereunder to register
Registrable Securities or Founders Shares, the Holders agree to do the
following:
(a) in the event that any such registration shall be an underwritten public
offering of Common Stock, to sell such Holders shares pursuant to the
underwriting agreement executed in connection with such registration; and
(b) provide to the Company upon any registration hereunder such information
relating to such Holder as may be reasonably requested by the Company.
3. INDEMNIFICATION. Incident to any registration referred to in this
Agreement, and subject to applicable law, the Company will indemnify each
underwriter, each Holder of Registrable Securities and Founder Shares so
registered, and each person controlling any of them against all claims, losses,
damages and liabilities, including legal and other expenses reasonably incurred
in investigating or defending against the same, arising out of any untrue
statement of a material fact contained in any prospectus or other document
(including any related registration statement) or any omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or arising out of any violation by the
Company of the Securities Act, any state securities or "blue-sky" laws or any
rule or regulation thereunder in connection with such registration; PROVIDED,
HOWEVER, that the Company will not be liable in any case to the extent that any
such claim, loss, damage or liability may have been caused by an untrue
statement or omission based upon information furnished in writing to the Company
by such Holder expressly for use therein. In the event of any registration of
any of the
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Registrable Securities or Founder Shares under the Securities Act pursuant to
this Agreement, each seller of Registrable Securities or Founder Shares, as
the case may be, jointly and severally, will indemnify and hold harmless the
Company, each of its directors and officers and each underwriter (if any) and
each person, if any, who controls the Company or any such underwriter within
the meaning of the Securities Act or the Exchange Act against any claim,
losses, damages and liabilities, including legal and other expenses
reasonably incurred in investigating or defending it against the same,
arising out of any untrue statement of a material fact contained in any
prospectus or other document (including any related registration statement)
or any omission to state therein a material fact required to be stated
therein or necessary to make the statement therein not misleading, if the
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of such
selling Holder, specifically for use in connection with the preparation of
such registration statement, prospectus, amendment of supplement; provided,
however, that the obligations of such selling Holders hereunder shall be
limited to an amount equal to the net proceeds to each Holder of Registrable
Securities or Founder Shares sold as contemplated herein.
4. RULE 144 REQUIREMENTS. If the Company becomes subject to the reporting
requirements of either Section 13 or Section 15(d) of the Exchange Act, the
Company will use its best efforts to file with the Commission such information
as the Commission may require under either of said Sections; and in such event,
the Company shall use its best efforts to take all action as may be required as
a condition to the availability of Rule 144 under the Securities Act (or any
successor exemptive rule hereinafter in effect). The Company shall furnish to
any Holder of Registrable Securities or Founder Shares upon request, a written
statement executed by the Company as to the steps it has taken to comply with
the current public information requirements of Rule 144.
5. TRANSFER OF REGISTRATION RIGHTS. The registration rights of the Holders
under this Agreement may be transferred to any transferee of any Series A
Preferred Shares or any Registrable Securities or Founder Shares who (i) is a
Holder of Registrable Securities or Founders Shares as of the date of this
Agreement, (ii) is an affiliate, as that term is defined in the Investment
Company Act of 1940, of a Holder of Registrable Securities as of the date of
this Agreement (including a partner of such Holder) or is any parent,
sibling, spouse, child, grandchild, father-in-law, mother-in-law,
brother-in-law, sister-in-law, uncle, aunt, nephew, niece or cousin of the
Founder, (iii) is the owner of an investment account which is managed or
advised by an Investor or by Geocapital Management IV, L.P., Geocapital
Management V, L.P., or by an affiliate of an Investor or Geocapital
Management IV, L.P., Geocapital Management V, L.P., or (iv) acquires at least
150,000 shares of Common Stock, assuming conversion of all Series A Preferred
Shares (or such lesser number of shares of Common Stock which constitutes the
total number of shares of Common Stock purchased by the transferring Holder
of Registrable Securities under this Agreement) (as adjusted for stock
splits, stock dividends, reclassifications, recapitalizations or other
similar events). Each such transferee shall be deemed to be a "Holder" for
purposes of this Agreement; provided, that, no transfer of registration
rights by a Holder
-7-
<PAGE>
pursuant to this Section 5 shall create any additional rights in the
transferee beyond those rights granted to Holders in this Agreement.
6. GRANTING OF REGISTRATION RIGHTS. The Company shall not, without the prior
written consent of the holders of at least a majority in interest of the
Registrable Securities, grant any rights to any Persons to register any shares
of capital stock or other securities of the Company if such rights could
reasonably be expected to be superior to or be on parity with, the rights of the
holders of Registrable Securities granted pursuant to this Agreement.
7. LOCK-UP AGREEMENT. Each Holder agrees, so long as such Holder holds one
percent (1%) or more of the Company's outstanding voting equity securities, in
connection with the Company's initial public offering of the Company's
securities, upon request of the underwriters managing any underwritten offering
of the Company's securities not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of such underwriters, as the case may be, for such period of time (not
to exceed one hundred eighty (180) days) from the effective date of such
registration as may be requested by the underwriters; PROVIDED, HOWEVER, that
the officers and directors of the Company who own stock of the Company agree to
the same such restrictions.
8. MISCELLANEOUS
SECTION 8.1. DAMAGES. The Company recognizes and agrees that the holders
of Registrable Securities will not have an adequate remedy if the Company fails
to comply with this Agreement and that damages may not be readily ascertainable,
and the Company expressly agrees that, in the event of such failure, it shall
not oppose an application by a Holder of Registrable Securities requiring
specific performance of any and all provisions hereof or enjoining the Company
from continuing to commit any such breach of this Agreement.
SECTION 8.2. APPROVAL OF UNDERWRITERS. The engagement by the Company of
any managing underwriter in any registration of the Company's securities under
Sections 2.1 or 2.3 shall require the prior written approval of the Holders of a
majority of the Registrable Securities being sold in such offering.
SECTION 8.3. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the
part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
The remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
SECTION 8.4. AMENDMENTS AND WAIVERS. Except as hereinafter provided,
amendments to this Agreement shall require and shall be effective upon receipt
of the written consent of: (i) the
-8-
<PAGE>
Company, (ii) the holders of at least a majority in interest of the
Registrable Securities and (iii) in the case of any amendment adversely
affecting the rights of the Founder, the holders of at least a majority in
interest of the Founder Shares. Except as hereinafter provided, compliance
with any covenant or provision set forth herein may be waived upon written
consent by the party or parties whose rights are being waived; PROVIDED,
THAT, (i) if the rights of holders of Registrable Securities are being
waived, upon the written consent of the holders of at least a majority in
interest of the Registrable Securities and (ii) if the rights of holders of
Founder Shares are being waived, upon the written consent of the holders of
at least a majority in interest of the Founder Shares. Notwithstanding the
foregoing, no waivers or amendments shall be effective to reduce the
percentage in interest of the Registrable Securities the consent of the
holders of which is required under this Section. Any waiver or amendments
may be given subject to satisfaction of conditions stated therein and any
waiver or amendments shall be effective only in the specific instance and for
the specific purpose for which given.
SECTION 8.5. NOTICES.
As the terms "notice" or "notices" are used herein as between the parties,
such term shall mean a written document, explaining in reason for the notice,
and the same shall be mailed by United States Postal Service Via Certified Mail,
Return Receipt Requested, addressed as follows:
to the Company:
DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
Attention: Michael Dubelko
with a copy by mail and fax to:
Scott W. Alderton, Esq.
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, California 90067-3010
to the Investors:
Geocapital IV, L.P.
Geocapital V, L.P.
Two Executive Drive
Fort Lee, NJ 07024
Attention: Kimberly S. Eads
-9-
<PAGE>
with a copy by mail and fax to:
William B. Asher, Jr., Esquire
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Fax: 617-248-7100
to AOL:
America Online, Inc.
22000 AOL Way
Dulles, VA 20166-9323
Attn: Senior Vice President
Fax No: (703) 265-1202
E-mail Address: [email protected]
Such notice shall be deemed to have been given on the date placed in the U.S.
Mails, and sent by fax to counsel, whether actually received by the addressee or
not. The parties shall, as a matter of convenience and courtesy, send each
party receiving notice a copy of said notice by facsimile or electronic means,
or by courier, Federal Express, or similar service, but such notifications shall
not be deemed lawful "notice" as required hereby. The parties may from time to
time amend the above addresses and names by written notice given the other
party.
SECTION 8.6. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
successors and assigns, except that the Company shall not have the right to
delegate its obligations hereunder or to assign its rights hereunder or any
interest herein without the prior written consent of the holders of at least a
majority in interest of the Registrable Securities.
SECTION 8.7. PRIOR AGREEMENTS. This Agreement constitutes the entire
agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
SECTION 8.8. SEVERABILITY. The provisions of this Agreement are severable
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of a provision contained in this
Agreement, shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision or part of a provision of this Agreement,
but this Agreement shall be reformed and construed as if such invalid or illegal
or unenforceable provision, or part of a provision, had never been contained
herein, and such provisions or part reformed so that it would be valid, legal
and enforceable to the maximum extent possible.
-10-
<PAGE>
SECTION 8.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the substantive laws of the State of California.
SECTION 8.10. HEADINGS. Article, section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
SECTION 8.11. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
SECTION 8.12. FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of any party hereto, the other parties shall execute
and deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-11-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Registration Rights
Agreement as of the day and year first above written.
DVD EXPRESS, INC.
By: /s/ MICHAEL DUBELKO
--------------------------
Name: Michael Dubelko
Title: President
GEOCAPITAL IV, L.P.
By: GEOCAPITAL IV MANAGEMENT,
L.P.
By: /s/ ILLEGIBLE
--------------------------
General Partner
GEOCAPITAL V, L.P.
BY: GEOCAPITAL V MANAGEMENT,
L.P.
By: /s/ ILLEGIBLE
--------------------------
General Partner
Peter J. Mooney, as Nominee
for the Broadview Partners Group
By: /s/ PETER J. MOONEY
---------------------------------
Peter J. Mooney, as Nominee
for the Broadview Partners Group
AMERICA ONLINE, INC.
By:
---------------------------------
Name:
Title:
-12-
<PAGE>
FOUNDER
/s/ MICHAEL DUBELKO
----------------------------
Michael Dubelko
-13-
<PAGE>
SCHEDULE A
INVESTORS
NAME AND ADDRESS
GEOCAPITAL IV, L.P.
Two Executive Drive
Fort Lee, New Jersey 07024
Attn: Richard Vines
GEOCAPITAL V, L.P.
Two Executive Drive
Fort Lee, New Jersey 07024
Attn: Kimberly S. Eads
Peter J. Mooney, as Nominee
for the Broadview Partners Group
One Bridge Plaza
Fort Lee, NJ 07024
-14-
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-1-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 MAR-31-1999
<CASH> 0 905 4,933
<SECURITIES> 0 0 0
<RECEIVABLES> 18 255 343
<ALLOWANCES> 0 0 0
<INVENTORY> 251 1,804 2,470
<CURRENT-ASSETS> 275 9,910 16,743
<PP&E> 42 738 1,023
<DEPRECIATION> 8 92 172
<TOTAL-ASSETS> 310 19,489 25,536
<CURRENT-LIABILITIES> 119 7,666 7,111
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 350 16,496 23,699
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 310 19,489 25,536
<SALES> 0 0 0
<TOTAL-REVENUES> 1,269 16,907 11,229
<CGS> 1,046 15,086 10,381
<TOTAL-COSTS> 364 6,261 3,133
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 74 46
<INCOME-PRETAX> 142 4,514 5,274
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 142 4,514 5,274
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 142 4,514 5,274
<EPS-BASIC> (0.01) (0.30) (0.35)
<EPS-DILUTED> (0.01) (0.30) (0.30)
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