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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MP3.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3652 33-0840026
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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10350 SCIENCE CENTER DRIVE
BUILDING 14
SAN DIEGO, CA 92121
(619) 320-2120
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL L. ROBERTSON
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
MP3.COM, INC.
10350 SCIENCE CENTER DRIVE
BUILDING 14
SAN DIEGO, CA 92121
(619) 320-2120
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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FREDERICK T. MUTO, ESQ. GARY J. SINGER, ESQ.
CHRISTOPHER J. KEARNS, ESQ. KAREN K. DREYFUS, ESQ.
BLAKE T. BILSTAD, ESQ. CHRISTOPHER A. WHYTOCK, ESQ.
COOLEY GODWARD LLP O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1100 610 NEWPORT CENTER DRIVE, 17TH FLOOR
SAN DIEGO, CA 92121-2128 NEWPORT BEACH, CA 92660-6429
(619) 550-6000 (949) 760-9600
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Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
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Common Stock ($.001 par value).............................. $115,000,000 $31,970
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(1) Includes shares that the Underwriters will have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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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 is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 14, 1999
Shares
[MP3 LOGO]
Common Stock
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Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $ and
$ per share. We have applied to have the shares approved for listing on
the Nasdaq National Market under the symbol "MPPP."
At the request of MP3.com, the underwriters have reserved up to shares
of common stock offered hereby for sale at the initial public offering price to
artists and customers of MP3.com, consultants, business associates and certain
other persons. See "Underwriting."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares. See "Underwriting."
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 6.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MP3.COM
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Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS CHARLES SCHWAB & CO.
Prospectus dated , 1999.
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DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
The following text appears in the center of the page against a blue background:
There's a new order in the world of music. A community where any artist can
play to an audience of millions. Its official name is MP3.com.
INSIDE TWO-PAGE GATEFOLD SPREAD
Image depicting three pages of MP3.com website: "Home" page, "Featured Artist"
page and "Music" page. Text accompanying the website images reads as follows in
a large headline:
MP3.com. Where the world comes for music.
The following text appears as subheads and smaller copy blocks that relate to
the accompanying webpage images:
- Over 5,000,000 visitors per month.
- Over 21,000,000 songs downloaded.
- A database of over 2,500,000 music lovers.
- Home to over 11,000 artists, with hundreds added weekly. Top acts of
tomorrow as well as current major artists.
- The most unique collection of music on the planet. With 270 genres of
music and more than 56,000 songs.
- A new venue for any and all artists. Anyone can download, listen to and
share music for free.
- A vast, interactive music community where music lovers share with one
another.
- Fans communicate directly with artists.
- A new way for artists to be discovered, regardless of the size of their
audience.
- A new forum for artist empowerment and consumer choice.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 2
RISK FACTORS.......................... 5
USE OF PROCEEDS....................... 15
DIVIDEND POLICY....................... 15
CAPITALIZATION........................ 16
DILUTION.............................. 17
SELECTED HISTORICAL FINANCIAL DATA.... 18
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS............... 19
BUSINESS.............................. 25
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PAGE
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MANAGEMENT............................ 38
CERTAIN TRANSACTIONS.................. 44
PRINCIPAL STOCKHOLDERS................ 45
DESCRIPTION OF CAPITAL STOCK.......... 47
SHARES ELIGIBLE FOR FUTURE SALE....... 49
UNDERWRITING.......................... 51
NOTICE TO CANADIAN RESIDENTS.......... 53
LEGAL MATTERS......................... 54
EXPERTS............................... 54
ADDITIONAL INFORMATION................ 54
INDEX TO FINANCIAL STATEMENTS......... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
Except as otherwise indicated, all information in this prospectus assumes:
- the underwriters' over-allotment option will not be exercised;
- a three-for-two split in our common stock that will become effective
prior to the effectiveness of this registration statement;
- the conversion of each outstanding share of preferred stock into one and
one-half shares of common stock upon the closing of this offering;
- the exercise of a warrant to purchase 118,557 shares of common stock;
- the issuance of $2.5 million of common stock (valued at the initial
public offering price) concurrent with the closing of this offering in a
private placement pursuant to an agreement with a strategic partner
entered into on May 12, 1999; and
- the filing, upon approval of our stockholders, of our restated
certificate of incorporation.
MP3.com, the MP3.com logo, DAM CD and the DAM CD logo are trademarks of
MP3.com, Inc. All other trade names and trademarks appearing in this prospectus
are the property of their holders.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before buying shares in this offering. You should read the
entire prospectus carefully.
MP3.COM, INC.
MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music catalog. Our
website contains over 56,000 songs from over 11,000 artists, representing one of
the largest collections of digital music available on the Internet. Consumers
can search, sample and download music free of charge.
We receive revenue from online advertising, e-commerce and offline
sponsorships. To date, the majority of our revenues have been from the sale of
advertising space on our website. In addition, we sell CDs online, both
fully-packaged albums created by our MP3.com artists (which we call Digital
Automatic Music or "DAM CDs") and albums we compile featuring the work of
multiple MP3.com artists (which we call "compilation CDs"). We also receive
revenue from advertisers for their sponsorship of CD samplers, which are
distributed free of charge to consumers and contain collections of music from
MP3.com artists.
Our unique business model provides the following advantages for artists and
consumers:
- creates an easy and convenient way for consumers to listen to, download
and purchase music;
- dramatically lowers costs for artists to promote and distribute their
music;
- enables artists to reach a large number of consumers worldwide;
- enables consumers to discover local and lesser-known artists in ways they
cannot through traditional music retailers; and
- facilitates direct communication between fans and artists.
We believe that large numbers of artists and consumers are drawn to MP3.com
because they have historically been underserved by the traditional music
industry. We will continue to introduce new products and services designed to
meet their entertainment, e-commerce, communications and information needs.
MP3.com was incorporated in March 1998. During 1998, our operations
consisted largely of developing the infrastructure necessary to download music
on the Internet. Since the beginning of the year, our growth has been dramatic.
Headcount increased from eight employees on December 31, 1998, to 54 employees
on March 31, 1999, to 75 employees on April 30, 1999. Traffic to our website
increased over 20% from March to April 1999. In April 1999, we added over 80
artists and 600 new songs on average each day. During April 1999, our website
served over 50 million pageviews, 9 million song deliveries and 4.5 million
music searches.
Our principal executive offices are located at 10350 Science Center Drive,
Building 14, San Diego, California 92121. Our telephone number is (619)
320-2120. Our website is www.mp3.com. The information found on our website is
not a part of this prospectus.
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THE OFFERING
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Common stock offered......................... shares
Common stock to be outstanding after the
offering................................... shares
Directed shares.............................. At our request, the underwriters have
reserved up to shares of common
stock offered hereby for sale at the initial
public offering price to artists and
customers of MP3.com, consultants, business
associates and certain other persons. See
"Underwriting."
Use of proceeds.............................. For general corporate purposes, including
working capital and potential acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... MPPP
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Common stock to be outstanding after the offering is based upon the number
of shares outstanding as of May 1, 1999, assuming an initial public offering
price of $ . It excludes 13,050,000 shares of common stock reserved for
issuance under our stock benefit plans, of which, as of May 1, 1999, 2,955,900
shares were subject to outstanding options at a weighted average exercise price
of $0.34 per share. It also excludes 450,000 shares of common stock issued
subsequent to May 1, 1999 upon the exercise of options with an exercise price of
$1.00. See "Capitalization," "Description of Capital Stock" and "Management --
1998 Equity Incentive Plan."
SUMMARY FINANCIAL DATA
The following financial information should be read together with the
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
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PERIOD FROM
MARCH 17, 1998 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1998 MARCH 31, 1999
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STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 1,162,438 $ 665,785
Gross profit................................................ 947,480 460,482
Loss from operations........................................ (219,768) (1,478,287)
Net loss.................................................... (357,538) (1,404,996)
Basic and diluted net loss per share........................ $ (0.01) $ (0.05)
Weighted average shares used in net loss per share, basic
and diluted............................................... 26,182,785 27,537,067
Pro forma net loss per share, basic and diluted(1).......... $ (0.01) $ (0.04)
Shares used pro forma in per share calculations(1).......... 36,907,785 38,262,067
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AT MARCH 31, 1999
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ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 9,327,149 $14,245,197
Working capital.................................... 9,146,989 14,898,370
Total assets....................................... 11,245,608 18,663,655
Total stockholders' equity......................... 10,359,317 17,777,366
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(1) For a description of the computation of the net loss per share and the
number of shares used in the per share calculations, see Note 1 of Notes to
Financial Statements.
(2) The Pro Forma column gives effect, upon the closing of this offering, to (a)
the conversion of 7,150,000 shares of convertible Series A preferred stock
outstanding as of March 31, 1999 into 10,725,000
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shares of common stock; (b) the conversion of 1,100,000 shares of
convertible Series A preferred stock issued during April 1999 into 1,650,000
shares of common stock; (c) the conversion of 439,103 shares of convertible
Series B preferred stock issued during April 1999 into 658,654 shares of
common stock; (d) the exercise of warrants to purchase 658,654 shares of
common stock; and (e) the issuance of $2.5 million of common stock (assuming
an initial public offering price of $ per share) in a private
placement pursuant to an agreement with a strategic partner entered into on
May 12, 1999. See Note 6 of Notes to Financial Statements.
(3) The As Adjusted column reflects our receipt of the net proceeds from the
offering (assuming an initial public offering price of $ per share),
after deducting estimated underwriting discounts and commissions and
estimated offering expenses. See "Capitalization" and "Use of Proceeds."
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. You should also refer to the other
information set forth in this prospectus, including our financial statements and
the related notes.
RISKS RELATED TO OUR BUSINESS MODEL
WE HAVE A NEW AND UNPROVEN BUSINESS MODEL.
Our model for conducting business and generating revenues is new and
unproven. Our business model depends upon our ability to generate revenue
streams from multiple sources through our website, including:
- website advertising fees from third parties;
- online sales of CDs and music-related merchandise;
- promotional activity fees; and
- leveraging our aggregated artist and consumer information.
It is uncertain whether a music-based website that relies on attracting
people to learn about, listen to and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. We cannot assure you that
this business model will succeed or will be sustainable as our business grows.
In order for our business to be successful, we must not only develop
services that directly generate revenue, but also provide content and services
that attract consumers to our website frequently. We will need to develop new
offerings as consumer preferences change and new competitors emerge. We cannot
assure you that we will be able to provide consumers with an acceptable blend of
products, services, and informational and community offerings that will attract
consumers to our website frequently. We provide many of our products and
services without charge, and we may not be able to generate sufficient revenue
to pay for these products and services. Accordingly, we are not certain that our
business model will be successful or that we can sustain revenue growth or be
profitable.
WE ARE COMPETING IN A NEW MARKET.
The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for our products and
services are subject to a high degree of uncertainty and risk. We are attempting
to capitalize on a talent pool of artists not currently served by the
traditional recording industry. We cannot assure you that consumers will
continue to be interested in listening to or purchasing music from these
artists. If this new market fails to develop, develops more slowly than expected
or becomes saturated with competitors, or our products and services do not
achieve or sustain market acceptance, our business could be harmed.
We believe the future popularity of downloadable digital music will depend,
in part, on the availability of portable devices to store and replay this music.
To the extent that consumer acceptance or distribution of these portable devices
is delayed or these devices are not available at affordable prices, our market,
and thus a portion of our revenues, may not grow at a sufficient pace and our
business could be harmed.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.
MP3.com was incorporated in March 1998. During 1998, our operating
activities consisted largely of developing the infrastructure necessary to
download music on the Internet. Our limited operating history makes it difficult
to evaluate our current business and prospects. Before investing, you should
evaluate the risks, expenses and problems frequently encountered by companies
such as ours that are in the early stages of development.
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OUR FAILURE TO MANAGE GROWTH COULD HARM US.
We currently are experiencing a period of rapid expansion in our website
traffic, headcount, facilities and infrastructure. For example, the number of
daily visitors to our website increased approximately 60% from December 1998 to
April 1999. Our headcount increased from eight on December 31, 1998 to 75 on
April 30, 1999. We expect further significant expansion will be required to
address potential growth in our artist and consumer bases, the breadth of our
product and service offerings, and other opportunities. This expansion has
placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources.
WE WILL CONTINUE TO RELY ON REVENUE FROM ONLINE ADVERTISING.
Although our business model contemplates multiple sources of revenue, we
anticipate that in the foreseeable future we will depend substantially on
revenue from online advertising. In 1998, revenue from online advertising
accounted for 91% of our net revenues, and in the first quarter of 1999
accounted for 84% of our net revenues.
We currently depend on a small group of customers for our revenue from
online advertising. In the first quarter of 1999, two customers accounted for
approximately 14% and 13%, respectively, of net revenues, and our top ten
customers accounted for approximately 70% of net revenues. If any of these
important customers were to leave us, our business could be harmed. If we do not
increase revenue from online advertising, our business may not grow or survive.
Increasing our revenue from online advertising depends largely on our ability
to:
- conduct successful selling and marketing efforts aimed at advertisers;
- increase the size of our sales force;
- increase the size of the MP3.com audience by increasing both our artist
and consumer bases;
- increase the amount of revenues per advertisement;
- target advertisements to appropriate segments of our audience; and
- measure accurately the size and demographic characteristics of our
audience.
Our failure to achieve these objectives could decrease our revenue from
online advertising and ultimately harm our business.
WE RELY HEAVILY ON ARTISTS.
We rely on artists to provide us with content for our website. Our success
depends on having a website that offers high quality and diverse music choices,
all of which come from outside artists. Our failure to attract and retain
artists who can provide us with content would limit the overall quality and
quantity of the offerings on our website and harm our business. Because our
artist contracts are non-exclusive and can be terminated by the artist at any
time, our retention of artists requires that we offer sufficient benefits, such
as artist services and artist-oriented content, to encourage them to remain
MP3.com artists and continue providing us with content. If we are not able to
maintain our ability to serve and provide valuable tools to artists, artists may
leave our website and remove their content. This could also prevent us from
attracting new artists. The loss of artists and the inability to attract new
artists would impair our ability to generate advertising revenue targeted to the
MP3.com artist community and generate CD revenues.
Although most of our artists are not bound by record contracts, certain
artists, including most internationally-recognized artists, typically sign
multi-year exclusive recording contracts that may prevent them from becoming
MP3.com artists. As a result, our access to internationally-recognized artists
and our ability to distribute this music or place their music on our website is
limited. For this reason, and because of the emphasis of our business model on
underserved artists, we expect our content to continue to concentrate
principally on lesser-known and local artists.
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DEVELOPMENT OF NEW STANDARDS FOR THE ELECTRONIC DELIVERY OF MUSIC MAY THREATEN
OUR BUSINESS.
We currently rely on mp3 technology for both brand identity and as a
delivery method for the digital distribution of music. Mp3 is an open standard
adopted by the Moving Picture Experts Group for the compression of audio files.
We do not own or control mp3 technology. The onset of competing industry
standards for the electronic delivery of music could significantly affect the
way we operate our business as well as the public's perception of MP3.com as a
company. For example, some of the major recording studios have recently
announced a plan to develop a universal standard for the electronic delivery of
music, called the Secured Digital Music Initiative, or SDMI, and have announced
their intention to make this delivery method available by the end of 1999. In
addition, major corporations such as Microsoft Corporation, IBM Corporation,
AT&T Corp. and Sony Corporation have launched efforts to establish proprietary
audio formats that will compete with the mp3 format. Some competitive formats
offer security and rights-tracking features that mp3 technology does not
currently offer. These features are especially popular among certain groups
associated with the traditional music industry, and are being promoted by some
of our competitors. Widespread industry and consumer acceptance of any of these
audio formats could significantly harm our business if we are unable to adapt
and respond to such changing standards.
Although we are not tied exclusively to the use of mp3 technology or to any
other specific standard for the electronic delivery of music, if a proprietary,
or closed, music delivery format receives widespread industry and consumer
acceptance, we may be required to license additional technology and information
from third parties in order to adopt such a format. We cannot assure you that
this third-party technology and information will be available to us on
commercially reasonable terms, if at all. Any failure to obtain any of these
technology and information licenses or to successfully reconfigure our music
library to support these technologies could prevent us from making our music
available in the most widely accepted formats, which could make our offerings
less popular or unaccessible to both consumers and artists and thus harm our
business.
MP3 TECHNOLOGY IS CONTROVERSIAL WITHIN THE TRADITIONAL MUSIC INDUSTRY AND MAY
FACE CONTINUED OPPOSITION, WHICH MAY HARM OUR BUSINESS.
The traditional music industry has not embraced the development of the mp3
format to deliver music, in part because users of mp3 technology can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Although our business model for the digital distribution of
music does not facilitate music piracy and can support multiple audio
compression and delivery technologies, our brand identity is currently linked to
the mp3 technology. As a result, we may face opposition from a number of
different music industry sources including record companies and studios, the
Recording Industry Association of America and certain artists, due to our
current brand identity and its potentially negative associations. In addition,
adverse news or events relating to mp3 technology may lead to confusion in the
public markets regarding our company and its prospects, and may harm our
business.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET AND THE AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS.
The success of our business will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high speed modems, for
providing reliable Internet access and services. Because global commerce on the
Internet and the online exchange of information is new and evolving, we cannot
predict whether the Internet will prove to be a viable commercial marketplace in
the long term.
The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to continue to upload
and download mp3 and other music files, as well as to conduct commercial
transactions with us, without significant delays or aggravation that may be
associated with decreased availability of Internet bandwidth and access to our
website. Our penetration of a broader consumer market will depend, in part, on
continued proliferation of high speed Internet access. Even compressed in mp3
format, a typical three minute song file
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can occupy more than three megabytes of storage space. This file could take as
much as two minutes to download over an xDSL or cable modem compared to 10 to 20
minutes over a conventional 56Kbps modem.
The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased frequency
of use and increased bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on it. In addition, increased users or
bandwidth requirements may harm the performance of the Internet. The Internet
has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and delays in the
future. This might include outages and delays resulting from the "year 2000"
problem. See "-- We face year 2000 risks." These outages and delays could reduce
the level of Internet usage as well as the level of traffic, and could result in
the Internet becoming an inconvenient or uneconomical source of music and
music-related products and services. The infrastructure and complementary
products or services necessary to make the Internet a viable commercial
marketplace for the long term may not be developed successfully or in a timely
manner. Even if these products or services are developed, the Internet may not
become a viable commercial marketplace for the products or services that we
offer.
WE MAY HAVE DIFFICULTY COMPETING FOR OR EXECUTING STRATEGIC ALLIANCES AND
ACQUISITIONS.
Our business strategy includes entering into strategic alliances and may
include acquiring complementary businesses, technologies, content or products.
We may be unable to complete suitable strategic alliances and acquisitions on
commercially reasonable terms, if at all. We expect to face competition for
strategic alliance and acquisition candidates and sponsorships. This competition
could impair our ability to successfully pursue these aspects of our business
strategy.
Strategic alliances or acquisitions could disrupt our ongoing business,
distract our management and employees and increase our expenses. If we acquire a
company, we could face difficulties assimilating that company's personnel and
operations. In addition, the key personnel of the acquired company may decide
not to work for us. Acquisitions of additional services or technologies also
involve risks of incompatibility and lack of integration into our existing
operations. If we finance the acquisitions by incurring debt or issuing equity
securities, this could dilute our existing stockholders. Any amortization of
goodwill or other assets, or other charges resulting from the costs of such
acquisitions, could adversely affect our operating results.
FINANCIAL RISKS
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST.
As a result of our limited operating history, we do not have historical
financial data for a significant number of periods upon which to forecast
quarterly revenues and results of operations. We believe that period-to-period
comparisons of our operating results are not meaningful and should not be relied
upon as indicators of future performance. In addition, revenue streams may be
subject to unpredictable seasonal effects due to the combined effect of the
business cycles of the music industry and Internet commerce in general. In one
or more future quarters our results of operations may fall below the
expectations of securities analysts and investors, and the trading price of our
common stock may drop.
WE EXPECT NET LOSSES IN THE FUTURE.
We expect substantial net losses and negative cash flow for the foreseeable
future. We believe it is critical to our long term success that we continue to
develop MP3.com brand awareness and loyalty through marketing and promotion,
expand our artist and consumer networks, develop our online content and expand
our other services. We expect that our operating expenses will increase
significantly during the next several years, especially in sales and marketing.
With increased expenses, we will need to generate significant additional
revenues to achieve profitability. As a result, we may never achieve or sustain
profitability and, if we do achieve profitability in any period, we may not be
able to sustain or increase profitability on a quarterly or annual basis.
8
<PAGE> 12
WE MAY NEED TO OBTAIN ADDITIONAL FINANCING.
The proceeds of this offering are expected to be sufficient to meet our
cash requirements for at least the next 12 months. However, we may need to raise
additional funds in order to:
- finance unanticipated working capital requirements;
- develop or enhance existing services or products;
- fund distribution relationships;
- respond to competitive pressures; or
- acquire complementary businesses, technologies, content or products.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take advantage
of unanticipated opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited. If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced, and these securities
may have rights, preferences or privileges senior to those of such stockholders.
RISKS RELATED TO SALES, MARKETING AND COMPETITION
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
We believe that our historical growth and brand recognition have been
largely attributable to word of mouth. We have benefited from frequent and
visible national and local media exposure. The frequency or quality of this
media exposure may not continue. We believe that continuing to strengthen our
brand will be critical to achieve widespread acceptance of our products and
services. Favorable public perception of our brand will depend largely on our
ability to continue providing users with high quality products and services and
the success of our marketing efforts. We plan to increase our marketing
expenditures to create and maintain brand recognition. However, brand promotion
activities may not yield increased revenues and, even if they do, any increased
revenues may not offset the expenses we incur in building our brand.
The growth of our business will also depend in significant part on our
ability to develop a brand identity that transcends a mere association with the
mp3 format. We must pursue a brand development strategy that identifies our
company as a primary source for interesting and diverse high quality music and
artists above and beyond mp3 technology. Although MP3.com is not tied
exclusively to the use of mp3 technology or to any other specific standard for
the electronic delivery of music, failure to achieve such brand recognition
apart from the mp3 format could significantly harm our business.
OUR MARKETING AND SALES EFFORTS RELY HEAVILY ON OUR ABILITY TO COLLECT
INFORMATION.
We plan to use consumer data to expand, refine and target our marketing and
sales efforts. We collect most of our data from users who report information to
us as they conduct transactions on our website. If a large proportion of users
impede our ability to collect data or if they falsify data, our marketing and
sales efforts and advertising revenues would be less effective. In addition,
laws relating to privacy and the use of the Internet to collect personal
information could limit our ability to collect data and utilize our database.
Because we use e-mail for direct marketing, any legislative or consumer efforts
to regulate unsolicited bulk e-mails, commonly referred to as "spam," as well as
other laws regulating the use of e-mail could significantly impair our sales and
marketing efforts.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE.
The market for the online promotion and distribution of music and
music-related products is competitive. Barriers to entry on the Internet are
relatively low, and we expect competition to increase significantly in the
future. We face competitive pressures from numerous actual and potential
competitors including:
- Providers of online music content such as GoodNoise Corporation, Launch
Media, Inc. and various private companies.
9
<PAGE> 13
- Companies offering mp3 or other audio compression formats, such as those
of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft Corporation
and RealNetworks, Inc. Some of these companies also offer customers the
ability to download music from their websites.
- Online destination sites with greater resources than us such as online
music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
like America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos,
Inc. and Yahoo!, Inc.
- Traditional music industry companies, including BMG Entertainment, a unit
of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc.; and
Universal Music Group, a unit of the Seagram Company Ltd. Certain of
these companies have recently entered the online commercial community and
are currently backing the SDMI security format.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, in May 1999, Microsoft Corporation and Sony Corporation announced an
agreement to pursue a number of cooperative activities. Sony has announced that
it will make its music content downloadable from the Internet using Microsoft's
multimedia software. In addition, Universal Music Group and BMG Entertainment
have announced a joint venture to form an online music store.
Many of our existing and potential competitors have longer operating
histories, greater brand name recognition, larger consumer bases and
significantly greater financial, technical and marketing resources than we do.
We cannot assure you that websites maintained by our existing and potential
competitors will not be perceived by consumers, artists, talent management
companies and other music-related vendors or advertisers as being superior to
ours. We also cannot assure you that we will be able to maintain or increase our
website traffic levels, purchase inquiries and number of click-throughs on our
online advertisements or that competitors will not experience greater growth in
these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.
RISKS RELATED TO OPERATIONS
OUR BUSINESS COULD BE HARMED IF WE LOSE MEMBERS OF, OR FAIL TO INTEGRATE, OUR
MANAGEMENT TEAM.
Our future performance will be substantially dependent on the continued
services of our management and our ability to retain and motivate them. The loss
of the services of any of our officers or senior managers could harm our
business. We do not have long-term employment agreements with any of our key
personnel, and we do not maintain any "key person" life insurance policies
except on our Chief Executive Officer.
Almost all of our management team joined MP3.com in 1999. Most of these
individuals have not previously worked together and are currently being
integrated as a management team. If our senior managers are unable to work
effectively as a team, our business would be harmed.
WE MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES.
Our future success will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers, web designers and advertising sales personnel, and we may be unable
to successfully attract sufficiently qualified personnel. Substantially all of
our employees have joined us in 1999 and we expect that our rate of hiring will
continue at a very rapid pace. To manage the expected growth of our operations,
we will need to integrate these employees into our business. Our inability to
hire, integrate and retain qualified personnel in sufficient numbers may reduce
the quality of our programs, products and services, and could harm our business.
WE MUST CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE.
In April 1999, an average of approximately 14.6 gigabytes of musical
content was added to our website each week and the visitors to the site
increased by approximately 20% from the previous month. We must continue to add
hardware and enhance software to accommodate the increased content and use of
our
10
<PAGE> 14
website. If we are unable to increase the data storage and processing capacity
of our systems at least as fast as the growth in demand, our website may become
unstable and may fail to operate for unknown periods of time. Unscheduled
downtime could harm our business and also could discourage users of our website
and reduce future revenues.
WE ARE IN THE PROCESS OF IMPLEMENTING A NEW FINANCIAL ACCOUNTING SYSTEM.
In May 1999, we began installing a new financial accounting system. We
anticipate this installation will be completed in stages through the remainder
of 1999. If the accounting system does not work effectively, we may experience
delays or failures in our accounting processes. This could adversely impact the
promptness and accuracy of our transaction processes, and our financial
accounting and reporting.
To manage the expected growth of our operations and personnel, we will need
to improve our operational and financial systems, transaction processing,
procedures and controls. Our current and planned systems, transaction
processing, procedures and controls may not be adequate to support future
operations.
OUR DATA WAREHOUSING AND WEB SERVER SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS,
FAILURE OF THIRD-PARTY SERVICES AND OTHER UNEXPECTED PROBLEMS.
Since our data warehousing, web server and network facilities are all
located in Southern California, an earthquake or other natural disaster could
affect all of our facilities simultaneously. An unexpected event such as a power
or telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at either of our two Internet service providers'
facilities could cause the loss of critical data and prevent us from offering
our services to artists and consumers. Our business interruption insurance may
not adequately compensate us for losses that may occur. In addition, we rely on
third parties to securely store our archived data, house our web server and
network systems, and connect us to the Internet. A failure by any of these third
parties to provide these services satisfactorily could harm our business.
WE WOULD BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL.
If the security measures that we use to protect personal information are
ineffective, we may lose visitors and our business would be harmed. We rely on
security and authentication technology licensed from third parties. With this
technology, we perform real-time credit card authorization and verification. We
cannot predict whether new technological developments could allow these security
measures to be circumvented.
In addition, our software, databases and servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
may need to spend significant resources to protect against security breaches or
to alleviate problems caused by any breaches. We cannot assure that we can
prevent all security breaches.
WE FACE YEAR 2000 RISKS.
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, our business may be
seriously harmed. In particular, year 2000 problems could temporarily prevent us
from offering our goods and services. See "Management's Discussion and Analysis
of Financial Condition and Operating Results -- Year 2000 Readiness Disclosure."
RISKS RELATED TO GOVERNMENT REGULATION, CONTENT AND INTELLECTUAL PROPERTY
GOVERNMENT REGULATION MAY REQUIRE US TO CHANGE THE WAY WE DO BUSINESS.
Our business is subject to rapidly changing laws and regulations. Although
our operations are currently based in California, the United States government
and the governments of other states and foreign countries have attempted to
regulate activities on the Internet. Evolving areas of law that are relevant to
our business include privacy law, proposed encryption laws, content regulation
and sales and use tax. Because of this rapidly evolving and uncertain regulatory
environment, we cannot predict how these laws and regulations
11
<PAGE> 15
might affect our business. In addition, these uncertainties make it difficult to
ensure compliance with the laws and regulations governing the Internet. These
laws and regulations could harm us by subjecting us to liability or forcing us
to change how we do business. See "Business -- Government Regulation."
WE MAY HAVE LIABILITY FOR CONTENT.
We may be liable to third parties for content on our website and on the CDs
we distribute:
- if the music, text, graphics or other content on our website violates
their copyright, trademark, or other intellectual property rights;
- if our artists violate their contractual obligations to others by
providing content on our website; or
- if content we distribute is deemed obscene or defamatory.
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.
We attempt to minimize these types of liability by requiring
representations and warranties relating to our artists' ownership of and rights
to distribute and submit their content and by taking related measures to review
content on our website. However, we cannot assure you that these measures will
be successful or that we will not be found liable for content. Liability or
alleged liability could harm our business by damaging our reputation, requiring
us to incur legal costs in defense, exposing us to awards of damages and costs
and diverting management's attention away from our business. See
"Business -- Intellectual Property."
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE.
Our intellectual property includes our trademarks and copyrights,
proprietary software, and other proprietary rights. We believe that our
intellectual property is important to our success and our competitive position,
and we try to protect it. However, our efforts may be inadequate. We do not have
a registered trademark for the "MP3.com" name and may not be able to prevent
others from using "mp3" or "MP3.com." Use of the "MP3.com" name by others could
dilute our brand identity and confuse the market. In addition, our ability to
conduct our business may be harmed if others claim we violate their intellectual
property rights. For example, Sightsound.com, Inc. has asserted that many online
music providers, including MP3.com, violate patent rights that it allegedly owns
covering the sale of music over the Internet through digital downloads. If
successful, these claims, or similar claims by others, could seriously harm our
business by forcing us to cease using important intellectual property. Even if
unsuccessful, these claims could harm our business by damaging our reputation,
requiring us to incur legal costs and diverting management's attention away from
our business. See "Business -- Intellectual Property."
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK IS PARTICULARLY SUBJECT TO VOLATILITY BECAUSE OF THE INDUSTRY
WE ARE IN.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of such companies. These broad
market fluctuations could adversely affect the market price of our common stock.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
The net proceeds of this offering are not allocated for specific uses. Our
management can spend the proceeds from this offering in ways with which the
stockholders may not agree. We cannot predict that the proceeds will be invested
to yield a favorable return.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL %
OF OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of the outstanding MP3.com common stock will, in the aggregate,
beneficially own approximately % of our outstanding common
12
<PAGE> 16
stock. These stockholders would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors and
the approval of significant corporate transactions. This concentration of
ownership may also have the effect of delaying, deterring or preventing a change
in control of MP3.com and may make some transactions more difficult or
impossible to complete without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions:
- authorize the issuance of "blank check" preferred stock, which is
preferred stock that can be created and issued by the Board of Directors
without prior stockholder approval, with rights senior to those of common
stock;
- provide for a staggered Board of Directors, so that no more than two
directors could be replaced each year and it would take three successive
annual meetings to replace all directors;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the Board of Directors and for proposing matters that can be
acted upon by stockholders at a meeting.
OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between us and the representatives of the
underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. In addition, an active public
market for our common stock may not develop or be sustained after this offering.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. The dilution will be $ per share in the net tangible
book value of the common stock from the initial public offering price. If
additional shares are sold by the underwriters following exercise of their
over-allotment option, or if outstanding options or warrants to purchase shares
of common stock are exercised, there will be further dilution.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, assuming a public offering price of $ ,
we will have outstanding shares of common stock. All the shares
sold in this offering will be freely tradable. Of the remaining
shares of common stock outstanding after this offering, 29,250,000 shares will
be eligible for sale in the public market beginning 181 days after the date of
this prospectus. The remaining shares will become available at
various times thereafter upon the expiration of one-year holding periods. We
also intend to register up to 13,050,000 additional shares of our common stock
after this offering for sale pursuant to our equity plans.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "could," "may," "will," "should," "expect," "plan,"
"anticipate,"
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<PAGE> 17
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including the
risks described above and in other parts of this prospectus. These factors may
cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform them to actual results or to
changes in our expectations.
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<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately $
million (based upon an assumed initial public offering price of $ per
share) after deducting the underwriting discount and commissions and estimated
offering expenses ($ if the over-allotment option is exercised in
full).
We expect to use the net proceeds for general corporate purposes, including
working capital and capital expenditures, such as expansion of sales and
marketing activities and facilities expansion. The amounts we actually expend
for such working capital purposes may vary significantly and will depend on a
number of factors, including the amount of our future revenues and the other
factors described under "Risk Factors." Accordingly, our management will retain
broad discretion in the allocation of the net proceeds of this offering. A
portion of the net proceeds may also be used to acquire or invest in
complimentary businesses, technologies, product lines, content or products. We
have no current agreements or commitments with respect to any such acquisitions,
and we are not currently engaged in any negotiations with respect to any such
transaction. Pending such uses, the net proceeds of this offering will be
invested in short term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business condition and other factors that the board of
directors may deem relevant.
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<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- On an actual basis;
- On a pro forma basis after giving effect, upon the closing of the
offering, to (a) the conversion of 7,150,000 shares of convertible Series
A preferred stock outstanding as of March 31, 1999 into 10,725,000 shares
of common stock; (b) the conversion of 1,100,000 shares of convertible
Series A preferred stock issued during April 1999 into 1,650,000 shares
of common stock; (c) the conversion of 439,103 shares of convertible
Series B preferred stock issued during April 1999 into 658,654 shares of
common stock; (d) the exercise of warrants to purchase 658,654 shares of
common stock; and (e) the issuance of $2.5 million of common stock
(assuming an initial public offering price of $ per share)in a
private placement pursuant to an agreement with a strategic partner
entered into on May 12, 1999; and
- On a pro forma as adjusted basis, giving effect to our issuance of the
common stock offered hereby at an assumed offering price of $ per share
and the application of the net proceeds as described under "Use of
Proceeds."
This information should be read in conjunction with our financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------- PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -----------
<S> <C> <C> <C>
Long-term debt, less current portion(1)............. $ -- $ -- $ --
Stockholders' equity:
Convertible Preferred Stock, par value $0.001 per
share, authorized 9,500,000 actual and pro
forma, 15,000,000 pro forma as adjusted........
Series A, shares 8,150,000 authorized and
7,150,000 shares issued and outstanding,
actual; 8,250,000 shares authorized, none
issued and outstanding, pro forma
(unaudited); 8,250,000 shares authorized,
none issued and outstanding, pro forma as
adjusted..................................... 7,150 -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized and 31,695,000 shares issued and
outstanding, actual; shares issued
outstanding pro forma (unaudited); 200,000,000
shares authorized; and shares
issued and outstanding, pro forma as
adjusted(2).................................... 31,695
Additional paid-in capital........................ 16,159,195
Notes receivable from a stockholder............... (260,000) (260,000) (260,000)
Deferred compensation............................. (3,816,189) (3,816,189) (3,816,189)
Accumulated deficit............................... (1,762,534) (1,762,534) (1,762,534)
------------ ------------ -----------
Total stockholders' equity........................ 10,359,317
------------ ------------ -----------
Total capitalization...................... $ 10,359,317 $ $
============ ============ ===========
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements.
(2) Does not include 13,050,000 shares of common stock reserved for issuance
under our employee benefit plans, of which 2,757,750 shares were subject to
outstanding options as of March 31, 1999 at a weighted average exercise
price of $0.20 per share. See "Description of Capital Stock," "1998 Equity
Incentive Plan" and "Employee Stock Purchase Plan."
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<PAGE> 20
DILUTION
As of March 31, 1999, our pro forma net tangible book value, after giving
effect to conversion of our preferred stock, was approximately $10.4 million, or
$ per share of common stock. Pro forma net tangible book value represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to our sale of
common stock offered hereby at an assumed initial public offering price of
$ per share, and our receipt of the estimated net proceeds therefrom, our
pro forma net tangible book value as of March 31, 1999 would have been
approximately $ million, or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering............................................... $
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 45,387,309 % $15,848,321 % $0.35
New investors........................ % %
---------- ----- ----------- ------
Total...................... 100.0% $ $100.0%
========== ===== =========== ======
</TABLE>
The foregoing discussion and tables assume no exercise of stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 2,757,750 shares of common stock, with a
weighted average exercise price of $0.20 per share. No warrants to purchase
common stock were outstanding as of March 31, 1999, but warrants to purchase
118,557 shares of common stock were outstanding as of May 1, 1999. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new investors. See "Management -- 1998 Equity Incentive Plan,"
"Description of Capital Stock" and Notes 4 and 6 to Notes to Financial
Statements.
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<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
In the table below, we provide you with selected historical financial data.
We have prepared this information using financial statements for the period from
March 17, 1998 (inception) to December 31, 1998 and the three-month period ended
March 31, 1999. The financial statements for the period from March 17, 1998
(inception) to December 31, 1998 have been audited by Ernst & Young LLP,
independent auditors. The financial statements for the three-month period ended
March 31, 1999 have not been audited. We have prepared this unaudited
information on substantially the same basis as the audited financial statements
and included all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of the financial position and
results of operations for the period. When you read this selected historical
financial data, it is important that you read along with it the historical
financial statements and related notes as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this Prospectus. Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998
(INCEPTION) TO THREE MONTHS
DECEMBER 31, 1998 ENDED MARCH 31, 1999
----------------- --------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $1,162,438 $ 665,785
Cost of revenues......................................... 214,958 205,303
---------- -----------
Gross profit............................................. 947,480 460,482
Operating expenses:
Sales and marketing.................................... 79,328 523,278
Product development.................................... 395,213 305,046
General and administrative............................. 142,510 458,762
Amortization of deferred compensation.................. 550,197 651,683
---------- -----------
Total operating expenses....................... 1,167,248 1,938,769
---------- -----------
Loss from operations..................................... (219,768) (1,478,287)
Interest income (expense), net........................... (3,810) 73,291
---------- -----------
Loss before income taxes................................. (223,578) (1,404,996)
Provision for income taxes............................... 133,960 --
---------- -----------
Net loss................................................. $ (357,538) $(1,404,996)
========== ===========
Net loss per share(1):
Basic and diluted...................................... $ (0.01) $ (0.05)
========== ===========
Weighted average shares -- basic and diluted........... 26,182,785 27,537,067
========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 MARCH 31, 1999
------------ --------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 39,509 $ 9,327,149
Working capital............................................. 132,469 9,146,989
Total assets................................................ 463,355 11,245,608
Total stockholders' equity.................................. 194,706 10,359,317
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the net loss per share and the number of shares used in the
per share calculation.
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
The following discussion should be read in conjunction with our financial
statements and the notes thereto and the other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking information due
to factors discussed under "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music catalog. Our
website contains over 56,000 songs from over 11,000 artists, representing the
one of the largest collections of digital music available on the Internet.
Consumers can search, sample and download this music free of charge. We receive
revenue from the sale of online advertising on our website. We also sell CDs
online, both fully packaged albums created by our MP3.com artists (which we call
Digital Automatic Music or "DAM CDs") and albums we compile featuring the work
of multiple MP3.com artists (which we call "compilation CDs").
We were incorporated on March 17, 1998. During 1998, our operating
activities consisted largely of developing the infrastructure necessary to
download music on the Internet. At December 31, 1998, we had only eight
employees. This increased to 54 employees at March 31, 1999 and to 75 employees
at April 30, 1999. We shipped approximately 850 DAM CDs in the quarter ended
December 31, 1998, and approximately 6,100 DAM CDs in the quarter ended March
31, 1999.
Given our short operating history and our limited operations in 1998, we
believe that comparisons between any period in 1999 and the comparable period in
1998 would not be meaningful; therefore, these comparisons are not discussed
below.
RESULTS OF OPERATIONS
Net Revenues
To date, net revenues have consisted primarily of the sale of online
advertisements on our website, and to a lesser extent, the online sale of CDs
and music-related merchandise. Net revenues were $1,162,000 during 1998 and
$666,000 in the quarter ended March 31, 1999. The level of net revenues in the
first quarter of 1999 reflected increased banner and sponsorship advertisements
on our website.
Revenue from online advertising. To date, online advertising revenue has
consisted primarily of banner and sponsorship advertisements on our website. The
duration of our banner advertising commitments has ranged from one month to one
year. Sponsorship advertising contracts involve more integration with our
website, such as the placement of buttons that provide users with direct links
to the advertiser's website. Advertising revenue was $1,061,000 (91% of net
revenues) during 1998 and $560,000 (84% of net revenues) in the first quarter
1999. The increase in the level of advertising revenue in the first quarter of
1999 was primarily due to the expansion of our customer base, increased
awareness regarding MP3.com and the mp3 technology, and development and
expansion of our music content. As we develop and introduce new online programs,
products and services, we anticipate that revenue from banner advertising and
sponsorship advertising will decrease as a percentage of net revenues.
We recognize revenue on the sale of banner advertisement contracts as the
impression is delivered or displayed. We recognize revenue on the sale of
sponsorship advertisement contracts ratably over the period in which the
advertisement is displayed. In each case, revenue is only recognized if we have
no remaining significant obligations and the collection of the receivable is
probable. Our obligations typically include guarantees of a minimum number of
"impressions," or times that an advertisement appears in pages viewed
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by users of our website. In these circumstances, we recognize revenues at the
lesser of the ratio of impressions delivered over the guaranteed impressions or
the straight-line basis over the term of the agreement. To the extent minimum
guaranteed impressions are not met, we defer recognition of the corresponding
revenues until the remaining guaranteed impressions are delivered.
Revenue from online sales of CDs and other music-related merchandise. We
also derive revenue from the online sale of our compilation and DAM CDs and, to
a lesser extent, other music-related merchandise. Revenue from the online sale
of CDs and music-related merchandise was $101,000 (9% of net revenues) during
1998 and $106,000 (16% of net revenues) in the first quarter of 1999. Revenue
from online sales of CDs and music-related merchandise increased primarily due
to increased musical content available on our website and increased brand
awareness. In the future, if the number of visitors to our website continues to
grow and the quantity and quality of the musical content available continues to
increase, we expect that revenue from the online sale of CDs will constitute an
increasing portion of total net revenues. This revenue is recognized upon
shipment.
On May 12 1999, we entered into a three year agreement with Boutit, Inc.,
which also does business under the name "No Limit Records." Under this
agreement, we obtained certain rights to a number of No Limit master recordings.
Some of the artists represented by No Limit include Master P and Snoop Dogg,
along with other respected platinum-selling artists. No Limit artists also may
participate in our chatrooms, display MP3.com signs at concert performances,
hold concerts with MP3.com artists and cooperate with us on other promotional
activities. We will split with No Limit revenues generated under the agreement
at varying rates depending on the source of revenue. No Limit will also become a
stockholder of MP3.com at the closing of this offering. Pursuant to our
agreement, we will issue $2.5 million of our common stock (valued at the initial
public offering price) in a private placement concurrent with the closing of
this offering. We expect to amortize a $2.5 million charge over the term of the
agreement to reflect this issuance.
Cost of Revenues
Cost of revenues primarily represents certain website operations costs, CD
and merchandise fulfillment operations and artist royalties. Website operations
costs include Internet connectivity charges, networking costs and equipment
depreciation. CD and merchandise fulfillment operations costs primarily consist
of labor related costs, equipment depreciation, CD blanks, merchandise, shipping
and the allocation of certain facilities costs. In the future, cost of net
revenue also may include content acquisition cost.
Cost of revenues was $215,000 (19% of net revenues) during 1998 and
$205,000 (31% of net revenues) in the first quarter of 1999. The level of cost
of revenues increased, both in absolute dollar amounts and as a percentage of
net revenue, due primarily to increased depreciation expense associated with
increased investment in website and fulfillment related equipment, as well as
increases in CD and other music related merchandise sales (which typically have
lower associated gross margins). We anticipate that future gross margins will
fluctuate depending on changes in our revenue mix and the timing of our
investments in website and fulfillment operations.
Sales and Marketing
Sales and marketing expense consists primarily of direct marketing
expenses, promotional activities, salaries and commissions, costs related to
website editorial content and the allocation of certain facilities cost.
Sales and marketing expense was $79,000 (7% of net revenues) during 1998
and $523,000 (79% of net revenues) in the first quarter of 1999. The increase in
sales and marketing expense, both in absolute dollar amounts and as a percentage
of net revenue, was primarily due to new marketing programs and substantial
increases in sales and marketing personnel. We anticipate that overall sales and
marketing expense will increase significantly in the foreseeable future;
however, sales and marketing expense as a percentage of net revenues may
fluctuate depending on the timing of new marketing programs and addition of
sales and marketing personnel.
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In April 1999, we entered into an artist promotion consulting agreement
with Atlas/Third Rail Management, Inc., a leading Los Angeles-based creative
talent agency. The contract has a term of three years. Under the agreement,
Atlas/Third Rail will use its reasonable efforts to facilitate artist
promotions. One such promotion involves our sponsorship of Alanis Morissette and
Tori Amos' "5 1/2 Weeks" summer 1999 tour. In connection with the promotion
agreement, we granted Atlas/Third Rail warrants to purchase 658,654 shares of
our common stock exercisable at $0.33 per share. As a result of the grant, we
recorded deferred marketing costs of approximately $1.9 million. We will account
for these warrants in accordance with the fair value provisions of FAS 123 and
will amortize its value to sales and marketing expense as follows: approximately
$317,000 in the second quarter of 1999 (when the 5 1/2 Weeks tour was announced)
and approximately $1,583,000 in the third quarter of 1999 (when the 5 1/2 Weeks
tour is scheduled to occur). See "Business -- Sales and Marketing" and Note 6 of
Notes to Financial Statements.
In the future, we anticipate that we will enter into arrangements with
additional leading artists and creative talent agencies to secure their
promotional and marketing services and obtain certain rights to their music.
Future expenses may include costs related to promotional events, which will be
expensed to sales and marketing in the period the event is held. Proceeds from
these events, if any, will be credited against promotional expenses incurred.
Depending upon the terms and timing of promotional activities, substantial sales
and marketing expenses may be incurred in any quarterly or annual period.
Product Development
Product development expense consists primarily of compensation for our
product development staff, depreciation of computer equipment used for
development, supplies and the allocation of facilities costs. We expense product
development costs as they are incurred.
Product development expense was $395,000 (34% of net revenues) during 1998
and $305,000 (46% of net revenues) in the first quarter of 1999. The increase in
the level of product development expense, both in absolute dollar amounts and as
a percentage of net revenue, was primarily due to increased payroll and related
expenses associated with increased head count, increased computer equipment
depreciation related to increased capital expenditures, and expensed computer
supplies. We anticipate that overall product development expenses will increase
in the foreseeable future; however, product development expenses as a percentage
of net revenues may fluctuate depending on the level of future net revenues and
the timing of investments in product development and hiring.
General and Administrative
General and administrative expense consists primarily of salaries for
finance, legal and other administrative personnel, fees for outside consultants,
depreciation, an allocation of facilities related costs, insurance, legal and
accounting fees, and other overhead.
General and administrative expense was $143,000 (12% of net revenues)
during 1998 and $459,000 (69% of net revenues) in the first quarter of 1999. The
increase in general and administrative expense, both in absolute dollar amount
and as a percentage of net revenue, was primarily a result of increased finance
and administrative headcount, recruiting and relocation expenses related to
hiring our management team, increased legal and accounting expenses and
increased depreciation expense. We anticipate that overall general and
administrative expense will increase in the foreseeable future; however, general
and administrative expense as a percentage of net revenues may fluctuate
depending on the level of future net revenues and the timing of additional
investments in general and administrative infrastructure.
Amortization of Deferred Compensation
During 1998 and the quarter ended March 31, 1999, we recorded aggregate
deferred compensation of $728,000 and $4,290,000, respectively, in connection
with the grant of certain stock options which were granted at exercise prices
less than the deemed fair value on the grant date. We also expect to record
additional deferred compensation expense in the second quarter of 1999 to
reflect additional option grants at exercise prices less than the deemed fair
value of common stock on the grant date. The deferred
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compensation is being amortized over the vesting period of the options, which is
generally four years. Of the total deferred compensation, $550,000 was amortized
during 1998 and $652,000 was amortized in the first quarter of 1999. See Note 4
of Notes to Financial Statements.
Interest Income (Expense), Net
Net interest expense of $4,000 during 1998 resulted from interest incurred
on a capital lease, partially offset by interest income earned on cash balances.
Net interest income in the first quarter of 1999 of $73,000 was a result of an
increase in cash associated with approximately $10.9 million in net proceeds
from the Series A convertible preferred stock issuance, offset by interest
expense of approximately $8,000 related to a capital lease obligation.
Provision For Income Taxes
Despite the loss before income taxes of $224,000 in 1998, we recorded a
provision for income taxes of $134,000. The tax provision of $134,000 resulted
from the amortization of deferred compensation, described above, which is not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
To date, our operations have been financed from internally generated cash,
the sale of Series A and B convertible preferred stock in 1999 and, to a lesser
extent, capital equipment lease arrangements.
As of March 31, 1999, approximately $9,327,000 in cash and cash equivalents
was available. Additionally, a $3,000,000 line of credit with Imperial Bank with
a sublimit of $1,500,000 for equipment financing was available. Borrowings under
the line of credit accrue interest at the bank's prime rate plus 1% (8.75% as of
March 31, 1999). As of March 31, 1999, there were no amounts outstanding under
the line of credit and no amounts were borrowed during the first quarter of
1999. On April 30, 1999, we borrowed $1,234,000 under the bank's equipment
sublimit facility. This indebtedness requires monthly payments of interest only
through August 1999, at which time the outstanding principal amount will be
converted into a three year fully-amortizing term loan with the bank. See Note 6
of Notes to Financial Statements.
Net cash provided by operating activities during 1998 was approximately
$157,000 and consisted primarily of the following:
- net loss of approximately $358,000;
- amortization of deferred compensation of $550,000;
- an increase in accounts and unbilled receivables of approximately
$289,000; and
- an increase in accounts payable and accrued expenses of approximately
$130,000.
Net cash used in operating activities for first quarter of 1999 was
approximately $438,000. The uses of cash from operating activities consisted
primarily of the following:
- net loss of approximately $1,405,000;
- amortization of deferred compensation of $652,000;
- an increase in accounts receivable of approximately $107,000;
- an increase in prepaid expenses and other current assets of approximately
$243,000;
- an increase in accounts payable and accrued expenses of approximately
$558,000; and
- an increase in deferred revenue of approximately $68,000.
Cash used in investing activities during 1998 and the first quarter of 1999
was approximately $43,000 and $1,184,000, respectively, and consisted primarily
of property and equipment expenditures.
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Cash used in financing activities during 1998 was approximately $90,000,
and consisted of payments of notes payable and capital lease obligations. Net
cash provided by financing activities for the first quarter of 1999 was
approximately $10,909,000, and consisted primarily of the proceeds from the sale
of Series A preferred stock.
We have no material financial commitments other than obligations under our
credit facilities and operating leases. We expect to substantially increase
expenditures for applications including:
- computer equipment and furniture and fixtures associated with increased
head count and facility expansion;
- website computer equipment and increased head count for website
maintenance personnel;
- product fulfillment equipment, infrastructure and head count;
- bandwidth and networking equipment and infrastructure;
- increased head count related to sales and marketing efforts;
- equipment and increased headcount related to product development;
- increased promotion and branding efforts; and
- development and acquisition of content.
Capital requirements in any particular period will depend on the timing of
these expenditures.
To the extent our net revenues increase in the future, we anticipate
significant increases in our working capital requirements to finance higher
relative levels of associated accounts receivable, unbilled receivables and
other assets, offset by increases in accounts payable and other liabilities.
However, we do not expect the increases in accounts payable and other
liabilities will offset the increases in accounts receivable, unbilled
receivables and other assets.
We believe that our cash and cash equivalent balances, funds available
under our existing line of credit, and net proceeds from this proposed offering
will be sufficient to satisfy our cash requirements for at least the next 12
months. We intend to invest our cash in excess of current operating requirements
in short-term, interest-bearing, investment-grade securities.
We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products, content,
businesses or technologies. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced, our stockholders may experience additional
dilution and such securities may have rights, preferences or privileges senior
to those of our stockholders. There can be no assurance that additional
financing will be available or on terms favorable to us. If adequate funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
products or services or otherwise respond to competitive pressures could be
significantly limited. Our business may be harmed by such limitations.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in certain certificates of
deposit. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would not materially effect the fair value of interest sensitive financial
instruments at December 31, 1998 or March 31, 1999.
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YEAR 2000 READINESS DISCLOSURE
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely.
Since our business and, consequently, our hardware, telecommunications and
software systems are new, we believe most of these systems are already year 2000
ready and we do not expect internal year 2000 problems to materially affect us.
Nevertheless, because our business relies heavily on the Internet and on
computer and telecommunication systems, including those of our suppliers,
customers and other third parties, the year 2000 problem could seriously harm
us. Therefore, we established a year 2000 readiness team to assess the effect
that the year 2000 problem may have on us and to develop a year 2000 readiness
plan.
Our year 2000 team is evaluating our information technology systems,
including our computers and software applications, and our other technology
systems, such as our security systems and other equipment in which software is
embedded. As the team identifies critical hardware, telecommunications, software
and other technology systems that require modifications, replacements or
upgrades needed for year 2000 readiness, we plan to make the required
modifications, replacements or upgrades. We plan to complete this assessment by
September 1999. We believe our current products and services are year 2000
compliant.
We estimate that the costs of our year 2000 readiness efforts, including
any necessary modifications, upgrading or replacement of computer hardware or
software, will not exceed $100,000.
The team also is assessing how other parties' year 2000 problems could
affect us. Beginning in May 1999, we intend to contact parties who have material
relationships with us, including our Internet service providers, in order to
inquire as to their year 2000 readiness. Based upon the responses to these
inquiries, we will evaluate the extent to which these parties' year 2000
readiness, or lack of readiness, might impact our business.
If we or any third parties with whom we have a material relationship fail
to achieve year 2000 readiness, our business may be seriously harmed. In
particular, year 2000 problems could temporarily prevent us from offering our
goods and services. For example, because we communicate with our users almost
exclusively by computer over the Internet, our operations could be disrupted to
the extent year 2000 problems cause failures or malfunctions of computer or
telecommunications systems used by our artists, customers or Internet service
providers. This, in turn, could result in financial loss and damage to our
reputation. In addition, disputes could arise with our customers and other third
parties over damage caused by the failure of our products or services to be year
2000 compliant, some of which might result in legal liability. The need to
address problems caused by failure to achieve year 2000 readiness also could
divert our management, personnel and financial resources away from our core
business activities, preventing us from pursuing our business plan and
strategies.
Our year 2000 team is currently developing contingency plans to be
implemented if we encounter year 2000 problems. We expect to complete these
plans in September 1999. However, notwithstanding these plans and the other
efforts of our year 2000 team, we cannot assure you that we will be year 2000
ready, or that year 2000 problems will not adversely affect our business,
financial condition and results of operations.
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BUSINESS
OVERVIEW
MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music catalog. Our
website contains over 56,000 songs from over 11,000 artists, representing one of
the largest collections of digital music available on the Internet. Consumers
can search, sample and download music free of charge.
We receive revenue from online advertising, e-commerce and offline
sponsorships. To date, the majority of our revenues has been from the sale of
advertising space on our website. In addition, we sell CDs online, both
fully-packaged albums created by our MP3.com artists (which we call Digital
Automatic Music or "DAM CDs") and albums we compile featuring the work of
multiple MP3.com artists (which we call "compilation CDs"). We also receive
revenue from advertisers for their sponsorship of CD samplers, which are
distributed free of charge to consumers and contain collections of music from
MP3.com artists.
Our unique business model provides the following advantages for artists and
consumers:
- creates an easy and convenient way for consumers to listen to, download
and purchase music;
- dramatically lowers costs for artists to promote and distribute their
music;
- enables artists to reach a large number of consumers worldwide;
- enables consumers to discover local and lesser-known artists in ways they
cannot through traditional music retailers; and
- facilitates direct communication between fans and artists.
We believe that artists and consumers are drawn to MP3.com because they
have been historically underserved by the traditional music industry. We will
continue to introduce new products and services designed to meet their
entertainment, e-commerce, communications and information needs their needs.
MP3.com was incorporated in March 1998. During 1998, our operations
consisted largely of developing the infrastructure necessary to download music
on the Internet. Since the beginning of the year, our growth has been dramatic.
Headcount increased from eight employees on December 31, 1998, to 54 employees
on March 31, 1999, to 75 employees on April 30, 1999. Traffic to our website
increased over 20% from March to April 1999. In April 1999, we added over 80
artists and 600 new songs on average each day. During April 1999, our website
served over 50 million pageviews, 9 million song deliveries and 4.5 million
music searches.
INDUSTRY BACKGROUND
Recorded Music Industry
Music is one of the most popular forms of entertainment in the world. Music
is also big business. According to the Recording Industry Association of
America, or RIAA, worldwide sales of recorded music were $38.7 billion in 1998,
34% of which were in the U.S. Over 70 million consumers in the United States
purchased three or more pieces of pre-recorded music in the past six months
according to a 1999 Soundata study.
The music industry has remained relatively unchanged for many years.
Artists are generally required to sign exclusive contracts with record labels,
who in turn develop, distribute and promote their music. In addition, the major
record labels, as well as a few "independent labels," control to a large extent
the type and quantity of recorded music available to consumers.
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This existing system limits artists and consumers in the following ways:
- Few artists can sell enough music to cover the high distribution and
promotion costs. These costs include producing CDs and tapes, inventory
and retail chain management, as well as television, print and radio
promotions and public relations efforts.
- The majority of artists can only reach limited audiences due to finite
shelf space at retailers and limited airtime on radio and television
stations, thus limiting the choices available to consumers.
- In order to protect the record companies' investment, artists must
generally commit to multi-year, multi-album contracts. These contracts
typically give the record company rights to and control of the artist's
music.
- There is very little communication and exchange of information between
artists and consumers. For example, artists do not readily know who is
buying their music or how to contact them, and consumers often do not
have an opportunity to interact directly with their favorite artists.
Because of these limitations, the number of artists served by the existing
music distribution system is small compared to the universe of musicians with
commercial aspirations. According to a recent Gallup poll, over 25% of the U.S.
population over the age of twelve, or 53 million people, are active
music-makers. In addition, according to the National Association of Music
Merchants, approximately 62% of U.S. households contain an amateur musician.
These musicians represent a broad spectrum of artists including hobbyists,
amateurs, semi-professional and professional musicians.
The Internet
The Internet has emerged as a global platform that allows millions of
people to share information, communicate and conduct business. International
Data Corporation estimates that the number of Internet users worldwide will grow
from approximately 97 million users in 1998 to 320 million by the end of 2002.
The Internet has become an attractive medium for advertising and direct
marketing because the Internet allows for the collection of key demographic data
from consumers. Advertisers can better target specific groups based on customer
tastes and buying patterns on the Internet. Moreover, a sharp increase is
expected in online advertising and direct marketing over the Internet. For
example, Jupiter Communications estimates that the dollar volume of online
advertising will increase from $1.9 billion in 1998 to $7.7 billion in 2002 and
that online direct marketing will increase from $190 million in 1998 to $1.3
billion in 2002.
As users have come to realize the convenience of faster Internet
connections, many have upgraded from a 28.8 Kbps modem to a cable, xDSL or ISDN
modem. According to Jupiter Communications, the number of subscribers using
cable, xDSL or ISDN modems is projected to increase from one million in 1998 to
10.5 million in 2002.
Digital Music
In recent years, consumers have increasingly used their computers to play
music. Dataquest estimates that in 1998, 30% of U.S. households had multimedia
PCs with a sound card, speakers and either a CD-ROM or DVD-ROM drive. Consumers
can now play CDs on their computers with the ease and fidelity formerly
associated only with stereo systems.
However, music files can be very large. For example, a three minute song
can occupy more than thirty megabytes of storage. Storing and transferring audio
files can be expensive and slow. To address this problem, compression formats
have been developed. One of the first widely accepted standards for the
compression of music was mp3, adopted by the Moving Picture Experts Group. The
mp3 standard offers at least 10:1 compression and audio integrity at near-CD
quality. Mp3 playback is currently available on most operating environments such
as Microsoft Windows 95, Windows 98, Windows NT and MacOS, most major versions
of UNIX and many other operating environments. Free copies of mp3 playback
software are widely available on the Internet. Forrester Research, Inc.
estimates that there are over 50 million mp3-capable users today.
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Capitalizing on the growing popularity of mp3, Diamond Multimedia Systems,
Inc. introduced the Rio, the first commercially available mp3 portable player,
in November 1998. Over 250,000 units have been sold to date. Several other
manufacturers, including Creative Labs, Thompson Multimedia's RCA division, LG
Electronics and Samsung, have recently released or announced plans to sell
portable mp3 players.
The development of compression formats such as mp3 has made it practical to
transmit music over the Internet. However, until recently there have been few
legitimate sources of downloadable music on the Internet.
THE MP3.COM SOLUTION
We are pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this growing music catalog.
Our website contains over 56,000 songs from over 11,000 artists,
representing one of the largest collections of digital music available on the
Internet. Consumers can search, sample and download music free of charge. We
receive revenue from online advertising, e-commerce and offline sponsorships. To
date, the majority of our revenues has been from the sale of advertising space
on our website. In addition, we sell CDs online, both DAM CDs and compilation
CDs. We also receive revenue from advertisers for their sponsorship of CD
samplers, which are distributed free of charge to consumers and contain
collections of music from MP3.com artists.
We provide advantages to both artists and consumers:
Value to Artists
Distribution and Promotional Power. We offer our artists a distribution
model that allows them to upload and promote their music through their own
MP3.com webpage for no charge, control pricing of their music and achieve
superior economics through revenue sharing on sales of their DAM CDs. We believe
this high level of artist control from origination to final distribution is
extremely appealing to artists underserved by the traditional record industry.
Artists can have a fully-packaged CD available for sale to consumers within as
little as 48 hours of registration by using mp3 technology to digitize their
music. There are no set-up or monthly fees. To use our services, artists provide
at least one full length promotional song for consumers to download or "Instant
Play" (stream) free of charge. In addition, we empower artists by allowing them
to post additional songs on our website at their own discretion and to control
the promotion of their music by specifying music genres and geographical
classifications, adding or deleting music selections at any time and selecting
price points for their CDs. Artists can also achieve "point-to-point"
communications, enabling them to interact with and present music, messages and
other content to their fans.
Global and Local Exposure. Artists can use our website to reach a global
and growing base of consumers immediately upon uploading their music.
Little-known and local artists can immediately promote their music to a targeted
local audience while simultaneously reaching a broader worldwide audience. In
addition, subject to legal restrictions, internationally recognized artists can
promote their music to a global audience in a new way through concert
promotions, new song releases and direct contact with their fans. We facilitate
artist discovery by allowing users to browse the site alphabetically, through
geographical classifications from countries to local towns, or by music genre
and style. We also employ our own song ranking system to provide artists and
fans a daily list of the top songs, complete with links to the featured artists'
webpages. Our editorial content and special features, such as "artist of the
day" or "song of the day", offer additional promotional exposure for artists.
Access to Consumer Feedback and Statistics. Artists receive daily, detailed
information about how many people visited their webpage, how many people
listened to their songs, how many people downloaded their songs, and how many
CDs they sold during the day and over the past month. Artists can learn valuable
information about their fan base including geographical information. Our
aggregated data and demographic
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analyses allow us to offer artists sales, marketing and other information that
enables them to define, evaluate and connect with their fan base. Artists can
use this information, such as geographic and listener data, to determine which
of their songs receive the best reception, which genres are best suited for
their songs and how their music compares to other songs in the same genre or
region. This allows them to change their music selections or target promotional
events and marketing to their fans through our site.
Value to Consumers
Extensive Music Selection and Compelling Value. We offer consumers one of
the largest databases of musical content available on the Internet through our
expanding collection of artists. Consumers can listen to real-time or streaming
audio or download thousands of songs by MP3.com artists to their PCs for no
charge and purchase our DAM CDs at prices ranging from $5.99 to $10.00. We offer
consumers a broad selection of music available 24 hours a day from the
convenience of their home, school or office. Our music collection spans
approximately 270 categorized genres, including pop, rock, classical, country,
alternative, children's, easy listening, electronic, hip hop, rap, blues, jazz
and international. In addition, consumers can access songs from artists from all
50 states and approximately 100 foreign countries.
Personalized Music Experience. Consumers who visit our website are able to
find the music that interests them by searching our music collection by genre,
artist, style or location. As a result of our search capabilities, fans can
browse an increasing number of songs and choose to listen to or purchase only
those selections in which they are primarily interested. In addition, our
customers can register profiles by providing their zip code, e-mail address and
their music preferences that allow us to suggest new songs to them based upon
their preferences and prior purchases. We believe that our personalized approach
not only enhances the experience of visiting our website, but also increases the
time a consumer spends on MP3.com and encourages repeat visits.
Communications with Artists and Other Fans. We allow fans to contact
artists directly via e-mail and to communicate with one another through message
boards. In addition, artists can use their webpage to communicate directly with
their fans, advising them of concerts and new releases. Message boards allow
fans with common interests and preferences to be connected. Newcomers to our
website can receive general guidance from more experienced visitors in our
"General mp3 Questions" forum. Some of our other forums focus on music-related
software and hardware technology and industry news.
ACCOMPLISHMENTS TO DATE
We have created a broad-based music community including over 11,000 artists
and 120 independent labels that have posted more than 56,000 songs on MP3.com.
Since we began offering services, we have digitally delivered more than 21
million songs to consumers visiting our site. In April 1999:
- we added over 80 new artists and 600 new songs on average each day;
- our website served over 50 million pageviews, 9 million song deliveries
and 4.5 million music searches;
- we estimate that more than 250,000 consumers on average visited our
website and listened to more than 300,000 songs a day; and
- we sold on average over 175 DAM CDs per day.
We believe that large numbers of artists and consumers are drawn to MP3.com
because they have historically been underserved by the traditional music
industry. We will continue to introduce new products and services designed to
meet their entertainment, e-commerce, communications and information needs.
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STRATEGY
Our corporate mission is to be the leading online music company for artists
and consumers. Key elements of our strategy include:
Diversify Revenue Streams Across Advertising, E-Commerce and Direct
Marketing. Our strategy is to harvest the breadth and uniqueness of our music
community and our services to generate multiple commercially feasible revenue
streams. Our primary focus to date has been on building an advertising-based
model that offers advertisers the opportunity to target specific music fans
regionally and globally through different types of advertisements and
sponsorship options. We also have sold products such as DAM CDs, compilation CDs
and T-shirts from our website and intend to expand our e-commerce initiatives to
offer customized CDs, collectable products and other music-related merchandise.
Our content presentation will continue to focus on genre and geography, which
enables the collection of valuable consumer data. We believe our unique ability
to deliver large, demographically and geographically profiled audiences will be
a valuable asset in developing a variety of direct marketing, data mining and
advertising services.
Create the Largest Global Community of Artists by Providing Valuable and
Unique Services. A key component of our strategy is to continue to expand our
community of MP3.com artists so that we offer the largest group of global
artists online. As part of this effort, we intend to offer new promotional
services such as auto-e-mail notification of new music postings or other
material on MP3.com, regional calendars allowing artists to post online
performance dates and links to ticketing agencies allowing artists to distribute
tickets to their venues using online ticketing. We believe these specialized
services, combined with compelling economics, will allow us to continue to
increase the number of new MP3.com artists, as well as the loyalty among our
current artists. We believe that offering one of the largest global artist
communities is key to increasing the number of consumers on our website and thus
increasing our advertising and e-commerce opportunities.
Create a Unique and Robust Music-Based Experience for the Consumer. Our
strategy focuses on creating an unmatched experience for consumers by offering
one of the largest collections of music available online, a rich browsing
experience with multiple genre and geographical search classifications and a
cost and time efficient way to purchase music. We also plan to expand local,
regional, national and international coverage and increase editorials,
personalized news and advertising and customized CD sales. As bandwidth
availability continues to improve, we expect to deliver live concert series and
an increasing array of interactive multimedia experiences. We believe our
ability to create a personal, engaging experience will be critical in retaining
our customer base and increasing our audience in the future.
Build Brand Awareness. We plan to increase brand awareness through a
combination of online and offline advertising and promotional activities. We
have historically benefited from word-of-mouth and growing public awareness of
the mp3 format. Recently, we have promoted brand awareness through several
innovative and cost effective channels, including advocacy events, strategic
promotional alliances with established popular artists and our free CD sampler
program. We intend to achieve greater offline awareness by targeted radio,
television and magazine advertising, book publishing and new promotional
arrangements with established music talent and concert series. In addition, we
plan to build brand awareness in specific key demographic sectors through our
targeted free CD samplers in magazines, college tours, and syndicated radio. We
are also continuing to increase our online presence through banner advertising,
events, contests and e-mail promotions.
Expand Our International Presence. We believe we can dramatically increase
the number of our international artists and consumers through our use of the
Internet. Currently, artists from countries outside the U.S. represent
approximately 40% of our online artist community. Moreover, approximately 23% of
our DAM CD customers during April 1999 were from foreign countries. We believe
our multi-level geographical indexing capability, global reach and rankings are
significant attractions for our users. We intend to increase our international
presence by expanding local content and merchandising to selected international
regions. In addition, we also plan to offer foreign language content. We intend
to focus these efforts on Europe and Japan, in particular.
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Support New Technology Formats and Standards. We intend to support a
variety of leading audio compression formats. We currently offer music in both
the mp3 and RealAudio formats. To date, we have primarily utilized the mp3
format due to its high audio quality and status as a widely accepted open
standard. However, we believe our music library can be reconfigured to support
multiple compression formats. Our intention is to support standards that achieve
acceptance by the Internet community.
THE MP3.COM WEBSITE
The MP3.com website offers a variety of attractive benefits to artists and
consumers. We enhance our website frequently to address expressed needs of our
artists and consumers, and strive to continue to improve the user experience.
The following table describes some of the features of our website:
<TABLE>
<CAPTION>
FEATURES FOR ARTISTS
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Simple Sign-Up Online sign-up process. Typically less than 48 hours from
Procedure sign-up to sales.
- - Free Artist Webpage Customizable HTML template page that can be modified at any
time. Artists can add music, reviews, pictures, links,
lyrics, stories, biographies and more.
- - DAM CD Production and Artists can create a customized CD, set the price,
Distribution distribute globally and receive 50% of gross sales, with no
set-up or monthly fees.
- - Artist Message Board Forum for artists to share experiences, get advice and make
connections.
- - Dedicated Artist Provides technical support for artists.
Services Group
- - Ongoing Artists can track a variety statistics on visitors to their
Data-Intensive webpage.
Feedback
</TABLE>
<TABLE>
<CAPTION>
FEATURES FOR CONSUMERS
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Browsing by Genre Fans can browse 56,000+ songs by 11,000+ artists in 270
genres with spotlighted artists in each genre.
- - Top 40 Lists Daily and weekly listing of the best music as determined by
our own ranking system.
- - Geographical Listing Fans can find artists from around the world or in their home
town.
- - Alphabetical Listing Browse artists from "A 13th Guest" to "Zyklus II".
- - Specially Featured Stories and news about a selected artist each day.
Artists
- - Spotlight Artist of Artist featured in a particular genre each day.
the Day
- - Song of the Day One song from a particular artist each day.
- - Hot New mp3s Highlights new favorites.
- - Popularity Rankings Fans can find the most popular music in each genre or
region.
- - Searching Fans can search by artist name, song title, keywords genre
or style.
- - News Forums News and editorials relating to the online music world.
- - Review Section Interactive song review area.
- - Michael's Minute Leading column on industry trends written by Michael
Robertson, our Chairman and CEO.
- - Hardware and Software Lists and forums on technical information designed to help
fans get the most out of their online music experience. We
also provide links to purchase hardware and software
products.
- - mp3 for Beginners Newcomers to the site can learn about mp3 usage and online
music through instructions and community chat forums.
- - E-Commerce Fans can purchase T-shirts, DAM CDs and compilation CDs.
- - E-Mail Artists Fans can e-mail messages to their favorite artists directly.
- - Song Recommender Visitors can e-mail song and artist recommendations to their
friends.
- - Artists I Like Artists recommend other artists within the MP3.com community
to their fans.
</TABLE>
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PRODUCTS AND SERVICES
The following lists our current and future products and services:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
ADVERTISING NON-ADVERTISING
- -----------------------------------------------------------------------------------------------------------
ONLINE
ONLINE ADVERTISING E-COMMERCE
Website advertising: banners, portals, DAM CDs
buttons Compilation CDs
Website sponsorships Collectible CDs*
E-mail marketing* mp3-related software and T-shirts
Books and other music-related merchandise*
Concert streams*
- -----------------------------------------------------------------------------------------------------------
OFFLINE
OFFLINE SPONSORSHIPS
Sponsorship of CD samplers
Concert sponsorships*
- ----------------------------------------------------------
</TABLE>
* = in development
Online Advertising
We currently derive a substantial portion of our revenues from a diverse
portfolio of online advertising services. These services allow our advertisers
to maximize visibility for their products by placing them in specifically
targeted MP3.com categories, such as Artist Sign-Up, specific music genres, or
specific geographic locations. Advertisements may currently be purchased in two
primary ways:
Banners, Portals and Buttons. Banners, portals and buttons are graphic or
HTML elements. Banners are displayed at the top and bottom of each MP3.com
webpage. A banner is the largest graphic advertising product available and can
be displayed on any MP3.com webpage. Banners can also be displayed in specific
areas and typically carry a premium rate for such targeting. Portals are
generally smaller than banners and appear on the right-hand side of webpages in
selected categories. Buttons are generally smaller than both banners and portals
and appear on the left-hand side of webpages in selected categories. Prices of
each of these advertisements are based on target audience and desirability of
location. Pricing of banners, portals and buttons are generally based on a Cost
Per Thousand Impressions, or CPM, basis. "Impressions" are the number of times
an advertisement appears in pages viewed by users of our website.
Website Sponsorships. A sponsorship is an advertising plan that enables
sponsors' products to be associated with a specific MP3.com category, music
genre or geographic region. Premium sponsorships begin on our home page and
continue throughout the selected category. Category sponsorships begin on the
first page of the selected category and appear on all category-related pages.
Listing sponsorships allow advertisers to purchase preferred placement in
product listings. Prices of sponsorships are based on target audience and
desirability of location.
E-Commerce
Digital Automatic Music (DAM) CDs. DAM CDs are fully-packaged albums
created by our MP3.com artists. Prices are determined by the artists and are
between $5.99 and $10.00 per CD. Each CD contains
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multiple songs that are selected by the artists. The music contained on each CD
is in both mp3 and standard audio CD format, which means it can be listened to
on a computer with mp3 player software, a portable mp3 player or a standard CD
player. In addition, DAM CDs can contain multimedia features such as artist-
provided graphics, song lyrics, biographical information as well as an embedded
mp3 player. We produce and package DAM CDs ourselves and mail them to our
customers within one to two days, depending on when the order is placed.
Compilation CDs. Compilation CDs are albums we compile featuring the work
of multiple MP3.com artists. As with DAM CDs, the music contained on each CD is
in both mp3 and standard audio CD format. We produce and package the CDs
ourselves and mail them to our customers within one to two days.
Other Merchandise. We currently sell mp3 and other music-related software
and T-shirts on our website.
Offline Sponsorships
Sponsorship of CD Samplers. CD samplers are distributed free of charge to
consumers and contain paid advertising. Each CD sampler contains a large
selection of the most popular songs from our expanding roster of over 11,000
artists. In the future, the CD sampler may include video entertainment,
multimedia video game samples and interactive contests. The CD sampler allows
advertisers to target specific consumers by selectively placing advertisements,
game samples and video clips within the genres of the CD sampler. Different
versions of the CD sampler can be created to appeal to specific target
audiences. In May 1999, initial versions of the CD sampler were distributed
through our website, other independent websites and as inserts in consumer
magazines.
Future Products in Development
E-Mail Marketing. We intend to leverage our database to offer advertisers
the chance to send e-mail marketing messages to targeted audiences. Advertisers
can choose to market their products to potential customers using various
criteria our database tracks, including preferred artist or music genre,
geographic location, or any of the customized preferences users have entered
into their user profile.
Collectible CDs. We plan to pursue selected opportunities to obtain digital
distribution rights to music collections that we feel will be of interest to our
customers.
Books and Other Merchandise. We plan to offer mp3- and music-related books
and apparel and artist merchandise on our website.
Concert Streams. We plan to broadcast live concert streams on the MP3.com
website featuring headline and regional MP3.com artists. We may charge customers
a fee to view these concert streams on a "pay per view" basis.
Concert Sponsorships. We are organizing a series of concerts and festivals
featuring headliner bands and regional MP3.com bands. These promotional events
will highlight our artists and mp3-related exhibitions and technologies. We
intend to sell sponsorships to these events.
SALES AND MARKETING
We sell advertising and sponsorships through our internal, direct
advertising sales department. On April 30, 1999, our sales force consisted of
seven people located in our San Diego, California office. For our e-commerce
products, we depend on our website to attract consumers and encourage purchases.
We expect to hire additional sales personnel as demand increases.
Since our inception, our management team has focused on marketing and
public relations efforts. We believe much of the public awareness of MP3.com has
been generated by attendance at trade shows, industry forums and other events.
We have benefitted from frequent and high visibility media exposure both
nationally and locally. We have also used a combination of online and offline
advertising to generate awareness of our company and our website. One element of
our marketing efforts has been an Internet
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advertising banner campaign to attract new users to our website. Our Internet
advertising has been supplemented with traditional media advertising such as
print, radio and television. We also have a public relations team that is
focused on generating awareness of MP3.com both within the music industry and
among the general public.
We intend to generate additional brand awareness from specific promotional
activities and new products and services such as:
- Concert Tours. We are organizing a series of concerts and festivals
featuring headliner bands and regional MP3.com bands. These events will
highlight our artists and mp3-related exhibitions and technologies. To
offset the cost of organizing these events, we may sell tickets or charge
admission.
- mp3 Summit: In June 1999, we will hold our second mp3 Summit for industry
participants to showcase new trends for the online delivery of music.
- mp3 Book: Our chairman, Michael Robertson, is producing a book to educate
the general public about the benefits of digital music. The book is
expected to be published in the second half of 1999.
- Affiliate Program. We plan to enter into relationships with other
websites to place links on their sites to our website. This strategy is
intended to drive Internet traffic to MP3.com, generate electronic
commerce revenue, increase the appeal of MP3.com to advertisers and
improve the service we offer to artists by expanding the audience that
hears their music.
We have signed a three year consulting arrangement with Atlas/Third Rail
Management, Inc., a leading artist management group. We expect to leverage our
relationship with Atlas/Third Rail to attract more well-known artists to
MP3.com. Through that relationship, we expect to expose these artists to our
products and services and the benefits of digital music distribution. The first
such promotion involves our sponsorship of Alanis Morissette and Tori Amos'
"5 1/2 Weeks" Summer 1999 tour.
We have also entered into a three year agreement with Boutit, Inc., which
does business under the name "No Limit Records." Under this agreement, we
obtained certain rights to a number of No Limit master recordings. Some of the
artists represented by No Limit include Master P and Snoop Dogg, along with
other respected platinum artists. No Limit artists also may participate in our
chatrooms, display MP3.com signs at concert performances, hold concerts with
MP3.com artists and cooperate with us on other promotional activities. We will
split with No Limit revenues generated under the agreement at varying rates
depending on the source of revenue. No Limit will also become a stockholder of
MP3.com at the closing of this offering.
TECHNOLOGY INFRASTRUCTURE
Data Mining and Warehousing Activities
We maintain relational databases of all artists, music, e-commerce and
other end-user information. These databases are used to enhance the user
experience at our website and to provide us with valuable information for
marketing and sales activities. Our content databases make content available for
download, CD purchase, website ranking and cataloging, and are updated as
artists and users interact with our website. Our statistics databases maintain
traffic and site analysis information including page views, download counts, and
artist, song and CD rankings. Our customer and commerce databases, which are
firewalled for protection, contain customer information and transaction
histories.
Infrastructure
Our technology infrastructure is based on a diverse and redundant
architecture designed to be scalable, secure and reliable. Our software is a
combination of proprietary applications, third party database software and open
operating systems that support acquisition of content, management of that
content, publication of our website, downloads of music and media files,
production of CDs, registration and tracking of users, and reporting of
information for both internal and external use. We use software from Sun
Microsystems, Inc., Microsoft Corporation, RedHat Software, Inc., VERITAS
Software Corporation, VeriSign, Inc., Real
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Media, Inc. and The Apache Group. We run our software on platforms from leading
companies such as Intel Corporation, Sun Microsystems, Inc., Cisco Systems, Inc.
and Storage Technology Corporation.
During April 1999, our website served over 50 million page views, 9 million
song deliveries and 4.5 million music searches. We have designed our
infrastructure to allow each component to be independently scaled, usually by
purchasing additional readily-available hardware and software components, to
meet or exceed future capacity requirements.
Data Center & Hosting Facilities
Our network infrastructure and our website, e-commerce and database servers
are hosted in two data centers on two different backbone networks in two
different cities. Our website servers are hosted at AT&T CERFnet in San Diego,
CA and at Exodus Communications in Irvine, CA. Both CERFnet and Exodus maintain
suitable environmental conditions and redundant power sources and network
connectivity. Our e-commerce and database servers are located at our corporate
headquarters in San Diego, California.
Monitoring of all servers, networks and systems is performed on a
continuous basis. We employ numerous levels of firewall systems to protect our
databases, e-commerce servers, customer information and music archive. Backups
of all databases, data and media files are performed on a daily basis. Data
back-up tapes are archived at a remote location on a weekly basis.
OPERATIONS, FULFILLMENT AND CUSTOMER SUPPORT
Our operations are centered around a just-in-time fulfillment process which
ties together all of the proprietary and third-party software tools in our
system and allows us to avoid carrying inventory. We are currently capable of
producing approximately 1,200 DAM CDs per day, and our system is scalable to
accommodate higher volume. Additionally, we have developed database and
reporting systems that analyze the transaction information occurring in the
fulfillment center and provide flexible output reports for finance and
accounting purposes.
Orders for DAM CDs and other merchandise are received via our website,
queued up in our database and shipped in the order received. Once the order is
accepted, the fulfillment center sends a confirming e-mail to the customer and
the job is transmitted to the production facility. Fulfillment center personnel
assemble, package and ship the order to the customer, generally within one to
two days of the original order. Upon completion of the order, the fulfillment
center sends out an additional e-mail informing the customer of its status and
tracking number when applicable.
We are continually enhancing and refining our fulfillment system to handle
the increasing demand for DAM CDs. As a result of recent improvements, we can
now package CDs in jewel cases with color cover graphics that artists design.
Customer support personnel are also available six days a week during normal
business hours to respond to customer inquiries and requests presented via
e-mail or on our website.
COMPETITION
The market for the online promotion and distribution of music and
music-related products is competitive. Barriers to entry on the Internet are
relatively low, and we expect competition to increase significantly in the
future. We face competitive pressures from numerous actual and potential
competitors including:
- Providers of online music content such as GoodNoise Corporation, Launch
Media, Inc. and various private companies.
- Companies offering mp3 or other audio compression formats, such as those
of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft
Corporation, and RealNetworks, Inc. Some of these companies also offer
customers the ability to download music from their websites.
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- Online destination sites with greater resources than us such as online
music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
like America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos,
Inc. and Yahoo!, Inc.
- Traditional music industry companies, including BMG Entertainment, a unit
of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc. and
Universal Music Group, a unit of The Seagram Company Ltd. Certain of
these companies have recently entered the online commercial community and
are currently backing the SDMI security format.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, in May 1999, Microsoft Corporation and Sony Corporation announced an
agreement to pursue a number of cooperative activities. Sony has announced that
it will make its music content downloadable from the Internet using Microsoft's
multimedia software. In addition, Universal Music Group and BMG Entertainment
have announced a joint venture to form an online music store.
The bases of competition in the online music promotion and distribution
industry include the:
- quantity and variety of digital recorded music content;
- ability of consumers to search and sample music according to their
preferences;
- ease of downloading music;
- fidelity and quality of sound of the music; and
- ability to promote its website, both online and through traditional
marketing, concerts and strategic alliances.
We believe that MP3.com generally competes favorably with respect to these
bases. However, many of our existing and potential competitors have longer
operating histories, greater brand name recognition, larger consumer bases and
significantly greater financial, technical and marketing resources than we do.
We cannot assure you that websites maintained by our existing and potential
competitors will not be perceived by consumers, artists, talent management
companies and other music-related vendors or advertisers as being superior to
ours. We also cannot assure you that we will be able to maintain or increase our
website traffic levels, purchase inquiries and number of click-throughs on our
online advertisements or that competitors will not experience greater growth in
these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.
GOVERNMENT REGULATION
Our business is subject to rapidly changing laws and regulations. Although
our operations are currently based in California, the United States government
and the governments of other states and foreign countries have attempted to
regulate activities on the Internet. The following are some of the evolving
areas of law that are relevant to our business:
- Privacy Law. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to leverage our databases
to generate revenues.
- Encryption Laws. Certain record industry associations have lobbied the
federal government for laws requiring music transmitted over the Internet
to be digitally encrypted in order to track music rights and prevent
unauthorized use of copyrighted music. If such laws are adopted, we might
need to incur substantial costs to comply with these requirements or
change the way we do business.
- Content Regulation. Both foreign and domestic governments have adopted
and proposed laws governing the content of material transmitted over the
Internet. These include laws relating to obscenity, pornography, libel
and defamation. We could be subject to liability if content delivered by
us
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or placed on our website violates these regulations. See "Risk
Factors -- We may have liability for the content we deliver."
- Sales and Use Tax. We do not currently collect sales, use or other taxes
on the sale of goods and services on our website other than on sales in
California. However, states or foreign jurisdictions may seek to impose
tax collection obligations on companies like us that engage in online
commerce. If they do, these obligations could limit the growth of
electronic commerce in general and limit our ability to profit from the
sale of goods and services over the Internet.
Because of this rapidly evolving and uncertain regulatory environment, we
cannot predict how these laws and regulations might affect our business. In
addition, these uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do
business.
INTELLECTUAL PROPERTY
We may be liable to third parties for content on our website and the CDs we
distribute:
- if the music, text, graphics or other content on our website violates
their copyright, trademark, or other intellectual property rights;
- if our artists violate their contractual obligations to others by
providing content on our website; or
- if content we distribute is deemed obscene or defamatory.
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.
We attempt to minimize these types of liability by requiring
representations and warranties relating to our artists' ownership of and rights
to distribute and submit their content and by taking related measures to review
content on our website. For example, we require our artists to confirm that
their content does not infringe on any third-party copyrights, is not defamatory
or obscene, and that they have the right to provide their content and have
obtained all third-party consents necessary to do so. Artists also agree to
indemnify us against liability we might sustain due to the content they provide.
If we have good reason to suspect non-compliance with copyright or trademark
laws, we employ a system of verifying compliance through independent
investigation and cross-checking with our in-house musicologists. It is our
belief that the artist is responsible for the material he or she submits.
However, in the future, we could be found liable for content made available on
our website.
Although we have not experienced a material loss due to content-related
liability to date, we cannot assure you that our measures to limit this
liability will continue to be successful or that we will not be held liable for
our content. Liability or alleged liability could harm our business by damaging
our reputation, requiring us to incur legal costs and diverting management's
attention away from our business. Moreover, future claims may not be adequately
covered by our insurance.
Our intellectual property includes our trademarks and copyrights,
proprietary software, and other proprietary rights. We believe that our
intellectual property is important to our success and our competitive position
and we seek to protect it. However, our efforts may be inadequate. Although we
own the domain name "mp3.com" and have applied for federal trademark
registration for "mp3.com," we do not have any registered trademarks in "mp3" or
any variation of the term. Our trademark registration applications could be
denied for various reasons, including if the term "mp3" is found to be a
descriptive term. This could limit our ability to use and to keep others from
using the term "mp3" and further limit our ability to protect the "mp3.com"
domain name. Use of the "mp3.com" name by others could dilute our brand identity
and confuse the market.
In addition, third parties have claimed and may claim in the future that we
violate their intellectual property rights.
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For example, Sightsound.com, Inc. has asserted that many online music providers,
including MP3.com, violate patent rights that it allegedly owns covering the
sale of music over the Internet through digital downloads. We do not believe our
past or current method of operations conflicts with any of Sightsound.com's
patent rights. However, to the extent that such patent rights are valid and
enforceable and cover our activities, we may be required to pay damages, obtain
a license to Sightsound.com's patents or use non-infringing methods to
accomplish our activities with regard to digital downloads. It is possible that
a license from Sightsound.com would not be available on commercially acceptable
terms, or at all, or that we would be unable to provide digital downloads in a
non-infringing manner. If successful, Sightsound's claim, or claims by others
that we violate their intellectual property rights, could seriously harm our
business by forcing us to cease using important intellectual property. Even if
unsuccessful, these claims could harm our business by damaging our reputation,
requiring us to incur legal costs and diverting management's attention away from
our business. See "Risk Factors -- Our intellectual property protection may be
inadequate."
FACILITIES
Our principal administrative, marketing and product development facilities
are located in approximately 14,900 square feet of office space in San Diego,
California. The lease for this space expires in February 2001 and provides for a
single one-year renewal option. We will need to lease additional space within
the near future, and we have and will continue to search for appropriate
locations and facilities.
EMPLOYEES
As of April 30, 1999, we had 75 employees, including 41 in sales and
marketing, 21 in product development, and 13 in general administration. We
consider our relations with our employees to be good. We have never had a work
stoppage, and no employees are represented under collective bargaining
agreements. We believe that our future success will depend in part on our
continued ability to attract, integrate, retain and motivate highly qualified
personnel, and upon the continued service of our senior management and key
technical personnel. Competition for qualified personnel in our industry and
geographical location is intense, and we cannot assure you that we will be
successful in attracting, integrating, retaining and motivating a sufficient
number of qualified personnel to conduct our business in the future.
LEGAL PROCEEDINGS
We are not presently involved in any material legal proceedings.
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<PAGE> 41
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information about our directors,
executive officers and key employees as of May 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive Officers
Michael L. Robertson.................... 32 Chief Executive Officer and Chairman of the Board
Robin D. Richards....................... 42 President, Chief Operating Officer and Director
Paul L. H. Ouyang....................... 41 Chief Financial Officer and Executive Vice President
Steven G. Sheiner....................... 44 Executive Vice President, Sales and Marketing
Paul S. Alofs........................... 43 President of Strategic Business Units
Ronald D. Dotson........................ 41 Executive Vice President, Technology
Lawrence F. Probst III(1)............... 48 Director
Mark A. Stevens(1)(2)................... 39 Director
Theodore W. Waitt(1)(2)................. 36 Director
Key Employees
Joshua R. Beck.......................... 22 Chief Technical Officer
John R. Diaz............................ 49 Vice President of Industry Relations
Daniel K. O'Neill....................... 37 Vice President of Engineering
William P. Dow.......................... 34 Controller
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Michael L. Robertson founded MP3.com and has served as our Chief Executive
Officer and Chairman of the Board since March 1998. From September 1995 to March
1998, Mr. Robertson operated several websites that focused on merging search
technologies with commerce. From September 1995 to September 1996, Mr. Robertson
was President and Chief Executive Officer of Media Minds Inc., a developer of
digital picture software. From January 1994 to August 1995, Mr. Robertson was
President and Chief Executive Officer of MR Mac Software, a developer of
networking and security tools. Mr. Robertson received his Bachelor of Arts from
the University of California, San Diego.
Robin D. Richards has served as our President, Chief Operating Officer and
as one of our directors since January 1999. From October 1998 to January 1999 he
served as Managing Director of Tickets.com, Inc., an internet ticketing company.
From March 1986 to October 1997 he was a founder and President and Chief
Executive Officer of Lexi International, a teleservices company. Mr. Richards is
a director of Cash Technologies Inc., a publicly-held company that provides
solutions for coin and currency handling, cash management and e-commerce
transactions. Mr. Richards holds a Bachelor of Science from Michigan State
University.
Paul L. H. Ouyang has served as our Chief Financial Officer and Executive
Vice President since February 1999. From September 1998 to February 1999 he
served as Chief Financial Officer and Executive Vice President of Operations of
Tickets.com, Inc., an Internet ticketing company. From April 1998 to August
1998, Mr. Ouyang served as a consultant to UDP Inc., a company involved in
dental practices management. From November 1996 to March 1998, he served as
Chief Financial Officer and Executive Vice President for Cheap Tickets, Inc., a
ticket distribution company. From June 1994 to November 1996, Mr. Ouyang served
as the Managing Director of Corporate Finance at KPMG Peat Marwick LLP From
September 1982 to June 1994, Mr. Ouyang held various positions with J.P. Morgan
& Co., Incorporated ending with Vice President in Corporate Finance. Mr. Ouyang
holds a Bachelor of Arts from Amherst College and a Master in Business
Administration from the Wharton School of the University of Pennsylvania.
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<PAGE> 42
Steven G. Sheiner has served as our Executive Vice President, Sales and
Marketing since February 1999. From October 1997 to January 1999 he served as
Vice President Business Development at Aegis Communications, Inc., a
telecommunications company. From May 1995 to September 1997 he served as a
direct marketing consultant. From June 1987 to April 1995 he served as President
of Sheiner Direct Marketing & Advertising, Inc., a marketing firm. Mr. Sheiner
holds a Bachelor of Arts from Concordia University.
Paul S. Alofs has served as our President of Strategic Business Units since
May 1999. From July 1997 to May 1999 he served as General Manager and Executive
Vice President at the Disney Store, Inc., a wholly-owned subsidiary of the Walt
Disney Company. From October 1995 to June 1997, he served as President and
General Manager of BMG Music Canada, Inc., a music and entertainment company.
From November 1989 to October 1995 he served as President of HMV Canada, a music
retailer. Mr. Alofs holds a Bachelor of Commerce from the University of Windsor
and a Master in Business Administration from York University.
Ronald D. Dotson has served as our Executive Vice President, Technology
since May 1999. From August 1997 to April 1999, Mr. Dotson served as Director of
Engineering for Netscape Communications, Inc., an Internet software company.
From January 1994 to August 1997, he served as Chief Executive Officer for EOS,
a technical employment agency. Mr. Dotson also co-founded and served on the
board of advisors for Digital Style, an Internet software company. Mr. Dotson
received a Bachelor of Science, Master of Science and a Juris Doctor from
Williamette University.
Lawrence F. Probst III has served as one of our directors since April 1999.
Since May 1991, Mr. Probst has served as President and Chief Executive Officer
of Electronic Arts, Inc., a software company. Mr. Probst holds a Bachelor of
Science from the University of Delaware.
Mark A. Stevens has served as one of our directors since January 1999.
Since 1993 Mr. Stevens has been a general partner of Sequoia Capital, a venture
capital firm. Mr. Stevens is a director of Aspect Development, NVidia, Terayon
and several private companies. Mr. Stevens holds a Bachelor of Science, a
Bachelor of Arts, and a Master of Science from the University of Southern
California and a Master in Business Administration from the Harvard Business
School.
Theodore W. Waitt has served as one of our directors since March 1999.
Since February 1993, Mr. Waitt has served as the Chief Executive Officer and
Chairman of the Board of Gateway 2000, Inc., a manufacturer of personal
computers. Mr. Waitt attended the University of Iowa.
Joshua R. Beck has served as our Chief Technical Officer since April 1998.
From September 1996 to May 1998, Mr. Beck was a Senior System and Network
Engineer for Connectnet INS, Inc., a regional Internet service provider in
Southern California. From September 1995 to June 1996, Mr. Beck attended the
California Institute of Technology and from September 1996 to June 1998, Mr.
Beck attended the University of California, San Diego.
John R. Diaz has served as our Vice President of Industry Relations since
March 1999. Prior to joining MP3.com, Mr. Diaz was involved in freelance
television productions including the Bob Dylan 30th Anniversary Tribute, HBO's
Amnesty International, Rock in Rio II, Pink Floyd from Versailles and HBO's
Michael Jackson special from Bucharest. Prior to that, Mr. Diaz created the
concept for the acclaimed PBS series "On Tour" and served as the series'
producer.
Daniel K. O'Neill has served as our Vice President of Engineering since
March 1999. From July 1990 to March 1999, Mr. O'Neill held various technical and
management positions with Cadence Design Systems, Inc., a manufacturer of
semiconductor design automation equipment, serving most recently as a Senior
Member of the Consulting Staff. Mr. O'Neill holds a Bachelor of Science and a
Master of Science from Santa Clara University.
William P. Dow has served as our Controller since March 1999. From June
1997 to March 1999, Mr. Dow served as Vice President of Finance for Data Tree
Corporation, an information services company. From April 1995 to June 1997, Mr.
Dow served as Controller of GTI Corporation, a supplier of networking and
network-access products. From September 1988 to April 1995, Mr. Dow was employed
by
39
<PAGE> 43
PriceWaterhouseCoopers LLP, serving most recently as Audit Manager. Mr. Dow
holds a Bachelor of Science from San Diego State University and is a Certified
Public Accountant.
BOARD COMPOSITION
Upon the closing of this offering, in accordance with the terms of our
Restated Certificate, the terms of office of the Board of Directors will be
divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2000;
- Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2001; and
- Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2002.
Our Class I directors will be Messrs. Robertson and Stevens, our Class II
directors will be Messrs. Probst and Richards, and our Class III director will
be Mr. Waitt. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the board of directors may have the effect
of delaying or preventing changes in control or management of our company.
BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee. The audit committee consists of Mark A. Stevens and
Theodore W. Waitt. The audit committee makes recommendations to the board of
directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other services provided by our independent auditors
and reviews and evaluates our audit and control functions.
The compensation committee consists of Lawrence F. Probst III, Mark A.
Stevens and Theodore W. Waitt. The compensation committee makes recommendations
regarding our equity compensation plans and makes decisions concerning salaries
and incentive compensation for our employees and consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, we did not have a compensation committee. Michael L.
Robertson, our Chief Executive Officer, made all decisions concerning executive
compensation during 1998.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. All directors are eligible to participate in our 1998 Equity
Incentive Plan.
In March 1998, Lawrence F. Probst III was granted an option to purchase
75,000 shares of common stock at an exercise price of $0.33 per share. The
shares underlying this option vest over a four year period.
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<PAGE> 44
EXECUTIVE COMPENSATION
Except for Michael L. Robertson, all of our executive officers joined the
Company after December 31, 1998. Accordingly, information given below is only
for Mr. Robertson. The following table sets forth summary information concerning
compensation awarded to, earned by, or accrued for services rendered to us in
all capacities during the fiscal year ended December 31, 1998. The compensation
does not include medical, group life insurance or other benefits which are
available generally to all of our salaried employees and certain perquisites and
other personal benefits received which do not exceed the lesser of $50,000 or
10% of his salary and bonus as disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Michael L. Robertson........................................ $81,333
Chief Executive Officer
</TABLE>
EMPLOYMENT AGREEMENTS
On May 13, 1999, we entered into an Employment Agreement with Michael L.
Robertson, our Chief Executive Officer. This agreement has a four year term
commencing on January 20, 1999. It provides for an annual base salary of
$150,000 and for an annual performance bonus of up to $50,000. This agreement
further provides that Mr. Robertson can terminate his employment with us during
the term of the agreement only upon twelve months notice.
On January 6, 1999 we entered into a letter agreement with Robin D.
Richards, our President and Chief Operating Officer regarding the terms of his
employment. This agreement provides for an annual base salary of $240,000 and
for the grant of an incentive stock option under our 1998 Equity Incentive Plan
to purchase 2,437,500 shares of our common stock. Mr. Richards exercised his
option and was issued 2,437,500 shares of common stock on January 25, 1999.
These shares are subject to vesting over four years, but vesting will accelerate
as follows: (1) all of the unvested shares will vest if we terminate Mr.
Richards other than for "cause" (as defined in his agreement) at any time
following the effective date of this offering, (2) twenty percent of the
unvested shares will vest as of the effective date of this offering and (3) all
of the unvested shares will vest if we enter into certain change-in-control
transactions.
On February 19, 1999 we entered into a letter agreement with Paul L. H.
Ouyang, our Chief Financial Officer and Executive Vice President regarding the
terms of his employment. This agreement provides for an annual base salary of
$150,000 and for the grant of an incentive stock option under our 1998 Equity
Incentive Plan to purchase 480,000 shares of our common stock. The agreement
also provides that we will pay Mr. Ouyang six months severance if we terminate
his employment other than for "cause," as defined in the agreement, and that we
will reimburse Mr. Ouyang for certain expenses related to relocation not to
exceed $3,000 per month for a period of twelve months. Mr. Ouyang exercised his
option and was issued 480,000 shares of common stock on April 12, 1999. These
shares are subject to vesting over four years, but vesting will accelerate as
follows: (1) twenty percent of the unvested shares will vest as of the effective
date of this offering, (2) fifty percent of the unvested shares shall vest if
Mr. Ouyang resigns for "good reason," as defined in his agreement, and (3) all
of the unvested shares will vest if Mr. Ouyang's employment is terminated due to
death or disability, if we terminate Mr. Ouyang's employment without cause, or
if we enter into certain change-in-control transactions.
On January 29, 1999, we entered into a letter agreement with Steven G.
Sheiner, our Executive Vice President, Advertising & Marketing regarding the
terms of his employment. This agreement provides for an annual base salary of
$150,000 and a 3% commission on all sales of web ads that he produces. The
agreement also provides for the grant of an incentive stock option under our
1998 Equity Incentive Plan to purchase 375,000 shares of our common stock. The
shares underlying this option vest over a four year period and are subject to
accelerated vesting as follows: (1) ten percent of the unvested shares will vest
upon the close of this offering, and (2) all of the unvested shares will vest
upon an acquisition.
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<PAGE> 45
On April 27, 1999, we entered into a letter agreement with Paul S. Alofs,
our President of Strategic Business Units regarding the terms of his employment.
This agreement provides for an annual base salary of $200,000 and for the grant
of an incentive stock option under our 1998 Equity Incentive Plan to purchase
480,000 shares of our common stock. The shares underlying this option vest over
a four year period commencing on the earlier of the close of this offering or
April 27, 2000.
On May 3, 1999, we entered into a letter agreement with Ronald D. Dotson,
our Executive Vice President, Technology, regarding the terms of his employment.
This agreement provides for an annual base salary of $140,000 and the grant of
an incentive stock option under our 1998 Equity Incentive Plan to purchase
75,000 shares of our common stock. The shares underlying this option vest over a
four year period.
1998 EQUITY INCENTIVE PLAN
In December 1998, the board adopted and the stockholders approved our 1998
Equity Incentive Plan. The 1998 Plan was subsequently amended by the Board in
January 1999, and the amendments were approved by the stockholders in May 1999.
A total of 12,750,000 shares of common stock, as amended, has been authorized
for issuance under to the 1998 Plan. Pursuant to the 1998 Plan, shares subject
to stock awards that have expired or otherwise terminated without having been
exercised in full again become available for grant, but exercised shares
repurchased by us pursuant to a right of repurchase will not again become
available for grant.
The 1998 Plan permits the grant of options to our directors, officers, key
employees and consultants and certain of our advisors. Options may be either
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees or nonstatutory stock options. In addition, the 1998
Plan permits the grant of stock bonuses and rights to purchase restricted stock.
No person may be granted options covering more than 2,250,000 shares of common
stock in any calendar year.
The 1998 Plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1998 Plan to the
compensation committee. Subject to the limitations set forth in the 1998 Plan,
the administrator has the authority to select the eligible persons to whom award
grants are to be made, to designate the number of shares to be covered by each
award, to determine whether an option is to be an incentive stock option or a
nonstatutory stock option, to establish vesting schedules, to specify the
exercise price of options and the type of consideration to be paid upon exercise
and, subject to certain restrictions, to specify other terms of awards.
The maximum term of options granted under the 1998 Plan is ten years.
Incentive stock options granted under the 1998 Plan generally are
non-transferable. Nonstatutory stock options generally are nontransferable,
although the applicable option agreement may permit certain transfers. Options
generally expire three months after the termination of an optionholder's
service. However, if an optionholder is permanently disabled or dies during his
or her service, such person's options generally may be exercised up to 12 months
following disability or 18 months following death.
The exercise price of options granted under the 1998 Plan is determined by
the administrator in accordance with the guidelines set forth in the 1998 Plan.
The exercise price of an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the date of the grant. The exercise
price of a nonstatutory stock option cannot be less than 85% of the fair market
value of the common stock on the date of grant.
Options granted under the 1998 Plan vest at the rate determined by the
administrator and specified in the option agreement. The terms of any stock
bonuses or restricted stock purchase awards granted under the 1998 Plan will be
determined by the administrator. The purchase price of restricted stock under
any restricted stock purchase agreement will not be less than 85% of the fair
market value of our common stock on the date of grant. Stock bonuses and
restricted stock purchase agreements awarded under the 1998 Plan are generally
nontransferable, although the applicable award agreement may permit certain
transfers.
Upon certain changes in control in our ownership, all outstanding stock
awards under the 1998 Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity does not assume or
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<PAGE> 46
substitute such stock awards, then the vesting and exercisability of outstanding
awards will accelerate prior to the charge in control and such awards will
terminate to the extent not exercised prior to the change in control.
The board may amend or terminate the 1998 Plan at any time. Amendments will
generally be submitted for stockholder approval only to the extent required by
applicable law.
As of May 1, 1999, we had issued and outstanding under the 1998 Plan
options to purchase 2,955,900 shares of common stock. The per share exercise
prices of these options ranged from $0.11 to $1.00.
EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the board adopted and the stockholders approved the 1999
Employee Stock Purchase Plan. A total of 300,000 shares of common stock has been
authorized for issuance under the Purchase Plan. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, eligible employees will be able to
purchase common stock at a discount in periodic offerings. The Purchase Plan
will commence on the effective date of this offering.
Unless otherwise determined by the board, all employees are eligible to
participate in the Purchase Plan so long as they are employed by us (or a
subsidiary designated by the board) for at least 20 hours per week and are
customarily employed by us (or a subsidiary designated by the board) for at
least 5 months per calendar year.
Employees who participate in an offering may have up to 15% of their
earnings for the period of that offering withheld pursuant to the Purchase Plan.
The amount withheld is used at the end of the offering period to purchase shares
of common stock. The price paid for common stock at the end of an offering
period will equal the lower of 85% of the fair market value of the common stock
at the commencement date of that offering period or 85% of the fair market value
of the common stock on the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.
Upon certain changes in control in our ownership, the board has discretion
to provide that each right to purchase common stock will be assumed or an
equivalent right substituted by the successor corporation or the board may
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to such change in control transaction.
The board has the authority to amend or terminate the Purchase Plan;
provided, however, that no such action may adversely affect any outstanding
rights to purchase common stock. Amendments will generally be submitted for
stockholder approval only to the extent required by law.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our other employees and agents to the fullest extent permitted by
Delaware law, except with respect to certain proceedings initiated by such
persons. We are also empowered under our Bylaws to enter into indemnification
contracts with our directors and officers and to purchase insurance on behalf of
any person we are required or permitted to indemnify. Pursuant to this
provision, we have entered into indemnification agreements with each of our
directors and officers.
In addition, our Restated Certificate provides our directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to us or its stockholders, (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under Section 174 of the Delaware General Corporation Law or (d) for
any transaction from which the director derives an improper personal benefit.
The Restated Certificate will also provide that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
Restated Certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
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<PAGE> 47
CERTAIN TRANSACTIONS
The following is a description of transactions since our inception in March
1998 to which we have been a party, in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of our
capital stock had or will have a direct or indirect material interest, other
than our compensation arrangements with our executive officers which are
described under "Management."
In January 1999, we sold 7,150,000 shares of Series A preferred stock to
various investors at a purchase price of $1.54 per share, of which 6,224,675
were sold to entities affiliated with Sequoia Capital. Mark A. Stevens, one of
our directors, is either a managing member of the general partner or a general
partner of these entities. Upon the closing of our initial public offering, each
share of Series A preferred stock will automatically convert into one and
one-half shares of common stock.
In March 1999, we granted Lawrence Probst III, a director, an option to
purchase 75,000 shares of common stock under our 1998 Equity Incentive Plan.
This option has an exercise price of $0.33 per share and is subject to vesting
over a four-year period.
In April 1999, we sold 1,000,000 shares of Series A preferred stock to
Theodore W. Waitt, a director, at a purchase price of $2.00 per share. Also in
April 1999, we sold 100,000 shares of Series A preferred stock to Lawrence F.
Probst III, a director, at a purchase price of $2.00 per share.
On January 25, 1999, we loaned Robin D. Richards, our President and Chief
Operating Officer, $260,000, which he used to exercise an option to purchase
2,437,500 shares of common stock that was granted to him under our 1998 Equity
Incentive Plan. The loan, as amended, is a full recourse note secured by 187,500
shares of our common stock that bears interest at 4.64% and is due in January
2003.
All of the securities sold in these transactions were purchased at prices
equal to the fair market value of the securities, as determined by our board of
directors, on the date of issuance.
One of our directors, Theodore W. Waitt is Chief Executive Officer and
Chairman of the Board of Gateway 2000, Inc. From time to time we purchase
computer equipment from Gateway. As of April 30, 1999, we had spent
approximately $54,000 on Gateway 2000 computer equipment. We believe these
purchases were on terms no less favorable than those available in arm's-length
transactions with unaffiliated parties.
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<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for (1) each
person who beneficially owns more than five percent of the common stock; (2)
each of our directors; (3) our Chief Executive Officer; and (4) all directors
and executive officers as a group. Unless otherwise indicated, the address for
each person or entity named below is c/o MP3.com, Inc., 10350 Science Center
Drive, Building 14, San Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 46,320,684 shares of common stock outstanding as of May 1,
1999, as adjusted to reflect (1) the conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering and (2) the
exercise of all outstanding warrants to purchase common stock prior to this
offering.
The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of additional shares of our common stock, and up
to shares of common stock will be outstanding after the
completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES OUTSTANDING
BENEFICIALLY OWNED --------------------
------------------ BEFORE AFTER
NUMBER OFFERING OFFERING
------------------ -------- --------
<S> <C> <C> <C>
NAME AND ADDRESS OF BENEFICIAL OWNER
Michael L. Robertson...................................... 25,637,010 55.35%
Mark A. Stevens(1)........................................ 9,337,011 20.16
Sequoia Capital
3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
Robin D. Richards(2)...................................... 2,437,500 5.26
Theodore W. Waitt......................................... 1,500,000 3.24
Lawrence F. Probst III.................................... 150,000 * *
All directors and officers as a group (9 persons)(3)...... 39,805,240 85.72
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Includes:
- 8,462,134 shares held by Sequoia Capital VIII, which represents 18.27%
and %, respectively, of the total number of shares outstanding
before and after this offering;
- 107,376 shares held by Sequoia International Technology Partners VIII,
which represents less than 1% of the total number of shares outstanding
before and after this offering;
- 560,221 shares held by Sequoia International Technology Partners VIII(Q),
which represents 1.21% and %, respectively, of the total number of
shares outstanding before and after this offering;
- 186,739 shares held by CMS Partners LLC, which represents less than 1% of
the total number of shares outstanding before and after this offering and
- 20,541 shares held by Sequoia 1997, which represents less than 1% of the
total number of shares outstanding before and after this offering.
Mr. Stevens is a managing member of the general partner, or a partner, of
each of the above-listed investment funds, and shares investment and voting
power over these shares with the other managing members or general partners
of these funds, none of whom are affiliated with us. Mr. Stevens disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
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<PAGE> 49
(2) Includes 2,102,343 shares subject to repurchase by us as of May 1, 1999.
(3) Includes:
- shares listed in footnotes 1 and 2 above;
- 630,000 shares held by Paul L. H. Ouyang, of which 549,000 are subject to
a right of repurchase by us as of May 1, 1999; and
- 72,187 shares issuable upon exercise of options held by Steven G. Sheiner
issuable upon exercise of options exercisable within 60 days of May 1,
1999. Excludes 41,530 shares issuable upon exercise of options
exercisable upon consummation of this offering.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering and the filing of our
Restated Certificate, our authorized capital stock will consist of 200,000,000
shares of common stock, $0.001 par value per share, and 15,000,000 shares of
preferred stock, $0.001 par value per share. As of May 1, 1999, after giving
effect to the conversion of all outstanding preferred stock into common stock
upon the closing of this offering, there were outstanding 46,202,127 shares of
common stock held of record by 59 stockholders, options to purchase 2,957,250
shares of common stock and a warrant to purchase 118,557 shares of common stock.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences of outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 13,033,654 shares of common stock. See Notes 4 and
6 of Notes to Financial Statements for a description of the currently
outstanding preferred stock. Following the conversion, our Certificate of
Incorporation will be amended and restated to delete all references to these
shares of preferred stock. Under the Restated Certificate, the board has the
authority, without further action by stockholders, to issue up to 15,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon the preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and reduce the likelihood that such holders will receive
dividend payments and payments upon liquidation. The issuance could have the
effect of decreasing the market price of the common stock. The issuance of
preferred stock also could have the effect of delaying, deterring or preventing
a change in control of the. We have no present plans to issue any additional
shares of preferred stock.
WARRANTS
In April 1999, in conjunction with a consulting agreement with Atlas/Third
Rail Management, Inc., we issued a ten year warrant to purchase up to 658,654
shares of common stock at an exercise price of $0.33 per share. Atlas/Third Rail
subsequently transferred rights to purchase an aggregate of 540,097 shares of
common stock under this warrant to several of its affiliates. On April 30, 1999,
these affiliates exercised the warrants they held and received 540,097 shares of
common stock. A warrant to purchase the remaining 118,557 shares of common stock
is expected to be exercised prior to the closing of this offering.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Investors Rights Agreement dated April
12, 1999 between us and certain investors, the investors, holding an aggregate
of 12,042,309 shares of our common stock issued or issuable upon conversion of
the Series A and Series B preferred stock and upon exercise of warrants to
purchase common stock, have certain registration rights pertaining to the
securities they hold, at any time after 180 days following the closing of this
offering. If we propose to register any of our securities under the Securities
Act for our own account or the account of any of our stockholders other than
these holders of registrable shares, holders of such registrable shares are
entitled, subject to certain limitations and conditions, to notice of such
registration and are, subject to certain conditions and limitations, entitled to
include
47
<PAGE> 51
registrable shares in the offering therein, provided, among other conditions,
that the underwriters of any such offering have the right to limit the number of
shares included in such registration. In addition, commencing 180 days after the
effective date of the registration statement of which this prospectus is a part,
we may be required to prepare and file a registration statement under the
Securities Act at our expense if requested to do so by the holders of at least a
majority of the registrable shares, provided the reasonably expected aggregate
offering price will equal or exceed $5,000,000 including underwriting discounts
and commissions. We are required to use our best efforts to effect such
registration, subject to certain conditions and limitations. We are not
obligated to effect more than two of such stockholder-initiated registrations.
Further, holders of registrable securities may require us to file additional
registration statements on Form S-3, subject to certain conditions and
limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for us
and adversely affect any future equity or debt offerings.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware Law. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sale or other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. The statute could
have the effect of delaying, deferring or preventing a change in our control.
Charter and Bylaw Provisions
Our Restated Certificate provides that the board of directors, as of the
date of this prospectus, will be divided into three classes of directors, with
each class serving a staggered three-year term. The classification system of
electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us and may maintain the
composition of the board of directors, as the classification of the board of
directors generally increases the difficulty of replacing a majority of
directors. Our Restated Certificate provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any consent
in writing. In addition, our bylaws provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors, our
Chief Executive Officer, by the board of directors pursuant to a resolution
adopted by a majority of the total number of authorized directors, or by the
holders of 10% of our outstanding voting stock. Our Restated Certificate also
specifies that the authorized number of directors may be changed only by
resolution of the board of directors and does not permit cumulative voting for
directors, unless required under applicable California law. Under cumulative
voting, a minority stockholder holding a sufficient percentage of a class of
shares may be able to ensure the election of one or more directors; however, it
is expected that following the closing of the offering, cumulative voting will
not be available to our stockholders. These and other provisions contained in
our restated certificate and bylaws could delay or discourage certain types of
transactions involving an actual or potential change in control of us or our
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management or approve transactions that
stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
NASDAQ NATIONAL MARKET
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "MPPP."
48
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock (including shares issued upon exercise of outstanding options)
in the public market after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through sale of equity securities. As described below, no shares currently
outstanding will be available for sale immediately after this offering due to
certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment
option, no exercise of outstanding options or warrants and an initial public
offering price of $ . Of these shares, all shares sold in this
offering will be freely tradable without restriction under the Securities Act
unless purchased by "affiliates" of MP3.com as that term is defined in Rule 144
under the Securities Act. All of the remaining shares will be subject
to either (A) lock-up agreements providing that, with certain limited
exceptions, holders thereof will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our common stock or
any securities convertible into or exchangeable or exercisable for such shares
of common stock or publicly disclose an intention to make any such offer, sale,
pledge or disposal for a period of 180 days following the date of the final
prospectus for this offering, or (B) holding period requirements under Rule 144
under the Securities Act. Beginning 181 days after the date of this offering,
29,250,000 of these shares will be eligible for sale in the public market,
subject to certain volume limitations. The majority of the remaining shares
will become eligible for sale, subject to certain volume limitations, on
, 1999.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner, except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (A) 1% of the number of shares of common stock then outstanding
(which will equal approximately shares immediately after
this offering) or (B) the average weekly trading volume of the common stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about MP3.com. Under Rule 144(k), a person who is not deemed to have
been an affiliate of MP3.com at any time during the three months preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner, except an
affiliate), is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Rule 701 under the Securities Act permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of or
consultant to MP3.com who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares. However, all shares issued pursuant to
Rule 701 are subject to lock-up agreements and will only become eligible for
sale at the earlier of the expiration of (A) the 180-day lock-up agreements, or
(B) 90 days after the offering upon obtaining the prior written consent of
Credit Suisse First Boston Corporation.
Immediately after this offering, MP3.com intends to file a registration
statement under the Securities Act covering shares of common stock subject to
options outstanding under the 1998 Plan or reserved for issuance
49
<PAGE> 53
under the 1998 Plan and the Purchase Plan. Based on the number of shares subject
to outstanding options at March 31, 1999 and currently reserved for issuance
under all these plans, that registration statement would cover approximately
12,018,750 shares. That registration statement will automatically become
effective upon filing. Accordingly, shares registered under that registration
statement will, subject to Rule 144 volume limitations applicable to affiliates
of MP3.com, be available for sale in the open market immediately after the
180-day lock-up agreements expire. Also beginning 180 days after the date of
this offering, certain holders of shares of common stock will be entitled to
certain rights with respect to registration of such shares of common stock for
offer and sale to the public. See "Description of Capital Stock -- Registration
Rights."
50
<PAGE> 54
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc. and Charles Schwab &
Co., Inc. are acting as representatives, the following respective numbers of
shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
BancBoston Robertson Stephens Inc...........................
Charles Schwab & Co., Inc...................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid
by us................... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our officers and directors and certain other stockholders have
agreed not to offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in the case of issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.
51
<PAGE> 55
At the request of MP3.com, the underwriters have reserved up to
shares of common stock offered hereby for sale at the initial public offering
price to artists and customers of MP3.com, consultants, business associates and
certain other persons. As a result, the number of shares available for sale to
the general public will be reduced to the extent that such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares of
common stock offered hereby.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "MPPP."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include the following: the information set
forth in this prospectus and otherwise available to the representatives; market
conditions for initial public offerings; the history and the prospects for the
industry in which we will compete; the ability of our management; the prospects
for our future earnings; the present state of our development and our current
financial condition; the general condition of the securities markets at the time
of this offering; and the recent market prices of, and the demand for, publicly
traded common stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the securities to be higher than it would otherwise
be in the absence of such transactions. These transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
52
<PAGE> 56
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom British Columbia securities law applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any common stock
acquired by such purchaser pursuant to this offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
53
<PAGE> 57
LEGAL MATTERS
Cooley Godward LLP, San Diego, California will pass upon the validity of
the shares of common stock offered by this prospectus and certain other legal
matters. As of the date of this prospectus, certain members and associates of
Cooley Godward LLP beneficially own an aggregate of 48,701 shares of Series A
preferred stock (convertible into 73,051 shares of common stock) through an
investment partnership. O'Melveny & Myers LLP, Newport Beach, California will
pass upon certain legal matters for the underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and for the period from March 17, 1998
(inception) through December 31, 1998, as described in their report. We have
included our financial statements in our prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement,
omits certain information, exhibits, schedules and undertakings set forth in the
registration statement. For further information pertaining to us and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document referred to herein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
registration statement may be obtained from such offices upon the payment of the
fees prescribed by the SEC. In addition, registration statements and certain
other filings made with the commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system, including our registration statement
and all exhibits and amendments to our registration statement, are publicly
available through the commission's website at http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. Upon approval of the common stock for
listing on Nasdaq, such reports, proxy and information statements and other
information may also be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
54
<PAGE> 58
MP3.COM, INC.
INDEX TO FINANCIAL STATEMENTS
PERIOD FROM MARCH 17, 1998 (INCEPTION) TO DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Financial Statements
Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited)............................................... F-3
Statements of Operations for the period from March 17, 1998
(inception) to December 31, 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-4
Statements of Stockholders' Equity for the period from March
17, 1998
(inception) to December 31, 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-5
Statements of Cash Flows for the period from March 17, 1998
(inception) to December 31, 1998 and the three months
ended March 31, 1999 (unaudited).......................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 59
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MP3.com, Inc.
We have audited the accompanying balance sheet of MP3.com, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity and cash flows for the period from March 17, 1998 (inception) to December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MP3.com, Inc. at December
31, 1998, and the results of its operations and its cash flows for the period
from March 17, 1998 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
April 2, 1999,
except for the last paragraph of Note 6, as to which the date is
, 1999.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 6 to the financial
statements.
/s/ ERNST & YOUNG LLP
San Diego, California
May 14, 1999
F-2
<PAGE> 60
MP3.COM, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, STOCKHOLDERS'
1998 1999 EQUITY
------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 39,509 $ 9,327,149
Accounts receivable, net of allowance for doubtful
accounts of $56,615 and $76,500, respectively.... 292,818 400,201
Unbilled receivables................................ 64,726 58,905
Prepaid expenses and other current assets........... -- 242,960
--------- ------------
Total current assets........................ 397,053 10,029,215
Property and equipment, net of accumulated
depreciation........................................ 52,551 1,150,547
Other assets.......................................... 13,751 65,846
--------- ------------
Total assets................................ $ 463,355 $ 11,245,608
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 35,722 $ 613,579
Accrued severance................................... 52,500 --
Accrued expenses.................................... 17,693 84,663
Income taxes payable................................ 34,584 --
Deferred revenues................................... 15,145 83,585
Deferred income taxes............................... 94,511 94,511
Capital lease obligations........................... 14,429 5,888
--------- ------------
Total current liabilities................... 264,584 882,226
Deferred income taxes................................. 4,065 4,065
Commitments
Stockholders' equity:
Convertible preferred stock, par value $0.001 per
share, authorized 5,000,000 and 9,500,000 at
December 31, 1998 and March 31, 1999,
respectively; authorized 15,000,000 pro forma
(unaudited)......................................
Series A, authorized 5,000,000 and 8,150,000 at
December 31, 1998 and March 31, 1999,
respectively, 7,150,000 issued and outstanding
March 31, 1999; authorized 8,250,000, and none
issued and outstanding pro forma (unaudited)... -- 7,150 $ --
Common stock, par value $0.001 per share, authorized
50,000,000 at December 31, 1998 and March 31,
1999, issued and outstanding 29,250,000 and
31,695,000 at December 31, 1998 and March 31,
1999, respectively and authorized 200,000,000 and
42,420,000 issued and outstanding pro forma
(unaudited)...................................... 29,250 31,695 42,420
Additional paid in capital.......................... 701,064 16,159,195 16,155,620
Notes receivable from stockholder................... -- (260,000) (260,000)
Deferred compensation............................... (178,070) (3,816,189) (3,816,189)
Accumulated deficit................................. (357,538) (1,762,534) (1,762,534)
--------- ------------ ------------
Total stockholders' equity.................. 194,706 10,359,317 $ 10,359,317
--------- ------------ ============
$ 463,355 $ 11,245,608
========= ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 61
MP3.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17,
1998
(INCEPTION) TO THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $ 1,162,438 $ 665,785
Cost of revenues............................................ 214,958 205,303
----------- -----------
Gross profit................................................ 947,480 460,482
Operating expenses:
Sales and marketing....................................... 79,328 523,278
Product development....................................... 395,213 305,046
General and administrative................................ 142,510 458,762
Amortization of deferred compensation..................... 550,197 651,683
----------- -----------
Total operating expenses.......................... 1,167,248 1,938,769
----------- -----------
Loss from operations........................................ (219,768) (1,478,287)
Interest income (expense), net.............................. (3,810) 73,291
----------- -----------
Loss before income taxes.................................... (223,578) (1,404,996)
Provision for income taxes.................................. 133,960 --
----------- -----------
Net loss.................................................... $ (357,538) $(1,404,996)
=========== ===========
Historical net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.05)
=========== ===========
Weighted average shares -- basic and diluted.............. 26,182,785 27,537,067
=========== ===========
Pro forma net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.04)
=========== ===========
Weighted average shares -- basic and diluted.............. 36,907,785 38,262,067
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 62
MP3.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PREFERRED PREFERRED COMMON COMMON PAID IN FROM DEFERRED ACCUMULATED
SHARES STOCK SHARES STOCK CAPITAL STOCKHOLDER COMPENSATION DEFICIT
--------- --------- ---------- ------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
exchange for certain
assets and liabilities.... -- $ -- 26,178,750 $26,179 $ (26,179) $ -- $ -- $ --
Exercise of stock options... -- -- 3,071,250 3,071 (1,024) -- -- --
Deferred compensation
related to the grant of
stock options for common
stock..................... -- -- -- -- 728,267 -- (728,267) --
Amortization of deferred
compensation.............. -- -- -- -- -- -- 550,197 --
Net loss.................... -- -- -- -- -- -- -- (357,538)
--------- ------ ---------- ------- ----------- --------- ------------ -----------
Balance at December 31,
1998...................... -- -- 29,250,000 29,250 701,064 -- (178,070) (357,538)
Exercise of stock options in
exchange for notes
receivable from
stockholders
(unaudited)............... -- -- 3,168,750 3,169 334,831 (338,000) -- --
Repayment and cancellation
of note receivable from
stockholder (unaudited)... -- -- (723,750) (724) (77,276) 78,000 -- --
Issuance of Series A
preferred stock at $1.54
per share for cash, net of
issuance costs of $93,076
(unaudited)............... 7,150,000 7,150 -- -- 10,910,774 -- -- --
Deferred compensation
related to stock options
and restricted common
shares (unaudited)........ -- -- -- -- 4,289,802 -- (4,289,802) --
Amortization of deferred
compensation
(unaudited)............... -- -- -- -- -- -- 651,683 --
Net loss (unaudited)........ -- -- -- -- -- -- -- (1,404,996)
--------- ------ ---------- ------- ----------- --------- ------------ -----------
Balance at March 31, 1999
(unaudited)............... 7,150,000 $7,150 31,695,000 $31,695 $16,159,195 $(260,000) $ (3,816,189) $(1,762,534)
========= ====== ========== ======= =========== ========= ============ ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock in
exchange for certain
assets and liabilities.... $ --
Exercise of stock options... 2,047
Deferred compensation
related to the grant of
stock options for common
stock..................... --
Amortization of deferred
compensation.............. 550,197
Net loss.................... (357,538)
-----------
Balance at December 31,
1998...................... 194,706
Exercise of stock options in
exchange for notes
receivable from
stockholders
(unaudited)............... --
Repayment and cancellation
of note receivable from
stockholder (unaudited)... --
Issuance of Series A
preferred stock at $1.54
per share for cash, net of
issuance costs of $93,076
(unaudited)............... 10,917,924
Deferred compensation
related to stock options
and restricted common
shares (unaudited)........ --
Amortization of deferred
compensation
(unaudited)............... 651,683
Net loss (unaudited)........ (1,404,996)
-----------
Balance at March 31, 1999
(unaudited)............... $10,359,317
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
MP3.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998 THREE MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(357,538) $(1,404,996)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation.............................................. 9,999 33,689
Deferred income taxes..................................... 98,576 --
Amortization of deferred compensation..................... 550,197 651,683
Changes in operating assets and liabilities:
Accounts receivable.................................... (224,284) (107,383)
Unbilled receivables................................... (64,726) 5,821
Prepaid expenses and other current assets.............. -- (242,960)
Accounts payable....................................... 25,291 577,857
Deferred revenue....................................... 15,145 68,440
Accrued expenses....................................... 104,777 (20,114)
--------- -----------
Cash provided by (used in) operating activities............. 157,437 (437,963)
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (29,471) (1,131,685)
Other assets................................................ (13,751) (52,095)
--------- -----------
Cash used in investing activities........................... (43,222) (1,183,780)
FINANCING ACTIVITIES:
Payments of notes payable................................... (73,000) --
Payments under capital lease obligations.................... (18,650) (8,541)
Issuance of common stock.................................... 2,047 --
Net proceeds from issuance of Series A preferred stock...... -- 10,917,924
--------- -----------
Cash (used in) provided by financing activities............. (89,603) 10,909,383
--------- -----------
Increase in cash and cash equivalents....................... 24,612 9,287,640
Cash and cash equivalents at beginning of period............ 14,897 39,509
--------- -----------
Cash and cash equivalents at end of period.................. $ 39,509 $ 9,327,149
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................... $ 2,622 $ 8,217
========= ===========
Taxes paid.................................................. $ 800 $ 58,000
========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Property and equipment acquired under capital leases........ $ 33,079 $ --
========= ===========
Common stock issued for notes receivable.................... $ -- $ 338,000
========= ===========
Cancellation of stockholder notes receivable................ $ -- $ 78,000
========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 64
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 AND PERTAINING TO MARCH 31, 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MP3.com, Inc. (the "Company") is developing a revolutionary approach to the
promotion and distribution of music. The Company uses the Internet and data
compression technologies to enable artists to distribute and promote their music
and to enable consumers to conveniently access this music. Consumers can search,
sample and download certain music free of charge.
The Company, formerly ZCo Inc. ("ZCo"), was incorporated in Delaware and
commenced operations on March 17, 1998 (inception). At inception, the Company's
principal founder contributed certain personal assets and liabilities to the
Company. In exchange, the principal founder received 26,178,750 shares of the
Company's common stock. The assets and liabilities assumed by the Company were
recorded at carryover basis. There were no significant revenues and operations
related to the assets and liabilities transferred to the Company.
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.
INTERIM FINANCIAL DATA
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1999 are unaudited. The unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
results of operations for the interim period ended March 31, 1999 are not
necessarily indicative of the results which may be reported for any other
interim period or for the year ending December 31, 1999.
CONCENTRATION OF CREDIT RISKS
The Company sells its advertising related products and services to
customers primarily in music and consumer products industries. An allowance for
doubtful accounts is maintained based on the expected collectibility of accounts
receivable. The Company maintains a significant portion of its cash and cash
equivalents with one financial institution. The Company has not experienced any
significant losses on its cash and cash equivalents and accounts receivable.
Three customers accounted for 19.0%, 12.2%, and 10.3%, respectively, of net
revenues from March 17, 1998 (inception) to December 31, 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money market funds, and
certificates of deposit with maturities of three months or less when purchased.
The carrying value of these instruments approximates fair value. The Company
generally invests its excess cash in money market funds and certificates of
deposit with a financial institution with a strong credit rating. Such
investments are made in accordance with the Company's
F-7
<PAGE> 65
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investment policy, which establishes guidelines to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, unbilled receivables, accounts payable, accrued severance,
accrued expenses, income tax payable and capital lease obligations are carried
at cost, which approximates fair value because of the short-term maturity of
these instruments.
DEPRECIATION AND AMORTIZATION
Property and equipment is stated at historical cost and depreciated using
the straight-line method over the estimated useful lives of 3 to 5 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. The Company assesses
potential impairments to its long-lived assets when there is evidence that
events or changes in circumstances have made recovery of the asset's carrying
value unlikely. Should an impairment exist, the impairment loss would be
measured based on the excess of the carrying value of the asset over the asset's
fair value or discounted estimates of future cash flows. The Company has
identified no such impairment losses. Substantially all of the Company's
long-lived assets are located in the United States.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner and
sponsorship advertisements. To date, the duration of the Company's banner
advertising commitments has ranged from one month to one year. Sponsorship
advertising contracts involve more integration with the Company's website, such
as the placement of buttons that provide users with direct links to the
advertiser's website. Sponsorship advertisement contracts are recognized ratably
over the period in which the advertisement is displayed. Advertising revenues on
banner advertisement contracts are recognized as the impression is delivered or
displayed. In each case, revenue is recognized only if the Company has no
remaining significant obligations and collection of the resulting receivable is
probable. Company banner advertisement obligations typically include guarantees
of minimum number of "impressions" or times that an advertisement appears in
pages viewed by users of the Company's website. In these circumstances, the
Company recognizes revenues at the lesser of the ratio of impressions delivered
over the guaranteed impressions or the straight-line basis over the term of the
agreement. To the extent minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the remaining guaranteed
impressions are achieved.
Deferred revenue represents payments or billings in excess of revenue
recognized relating to banner and sponsorship advertising contracts. Unbilled
receivables represent revenues recognized in excess of billings related to
banner and sponsorship advertising agreements.
Revenues derived from the sale of CDs and music-related merchandise are
recognized upon shipment.
F-8
<PAGE> 66
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Website. Product
development costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and complies with
the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Under APB 25, compensation cost is recognized over the vesting
period based on the excess, if any, on the date of grant of the deemed fair
value of the Company's stock over the employee's exercise price. When the
exercise price of the employee stock options is less than the fair value price
of the underlying stock on the grant date, deferred stock compensation is
recognized and amortized to expense in accordance with FASB Interpretation No.
28 over the vesting period of the individual options, generally four years.
Options or stock awards issued to non-employees are valued using the fair value
method and expensed over the period services are provided.
NET LOSS PER SHARE AND PRO FORMA STOCKHOLDERS' EQUITY
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" ("SFAS 128") and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No.
128, basic net income (loss) per share is computed by dividing the net income
(loss) available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of unvested restricted
common shares, incremental common shares issuable upon the exercise of stock
options, and common shares issuable on assumed conversion of Series A preferred
stock, are included in diluted net income (loss) per share to the extent such
shares are dilutive. Common equivalent shares are not included in the
computation of dilutive net loss per share for the period March 17, 1998
(inception) to December 31, 1998 and the three months ended March 31, 1999
because the effect would be anti-dilutive.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public offering
(using the as-if-converted method). If the Company's initial public offering is
consummated, all of the convertible preferred stock outstanding as of the
closing date will automatically be converted into an aggregate of 10,725,000
shares of common stock based on the shares of convertible preferred stock
outstanding at March 31, 1999. Unaudited pro forma stockholders' equity at
December 31, 1998, as adjusted for the conversion of the convertible preferred
stock, is disclosed on the balance sheet.
Pursuant to SAB 98, common shares issued for nominal consideration, if any,
would be included in the per share calculations as if they were outstanding for
all periods presented. No such shares have been issued.
F-9
<PAGE> 67
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets for the computation of basic and diluted net loss
per share as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, THREE
1998 MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Numerator:
Net loss........................................ $ (357,538) $(1,404,996)
=========== ===========
Denominator:
Weighted average shares outstanding............. 26,199,931 31,285,417
Weighted average unvested common shares subject
to repurchase agreements..................... (17,146) (3,748,350)
----------- -----------
Denominator for basic and diluted calculation..... 26,182,785 27,537,067
=========== ===========
Net loss per share:
Basic and diluted............................... $ (0.01) $ (0.05)
=========== ===========
</TABLE>
Dilutive common stock equivalents include common stock options and
preferred stock as if converted and restricted stock subject to vesting.
Potentially dilutive securities total 17,146 and 15,195,067, for the period
March 17, 1998 (inception) to December 31, 1998 and the three months ended March
31, 1999, respectively, were excluded from historical and pro forma diluted
earnings per share because of their anti-dilutive effect.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Net income (loss) and other comprehensive income (loss),
including foreign currency translation adjustments, and unrealized gains and
losses on investments shall be reported, net of their related tax effect, to
arrive at comprehensive income. To date, there have been no differences between
the Company's net loss and its total comprehensive loss for the period from
March 17, 1998 (inception) to December 31, 1998.
SEGMENT INFORMATION
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires public companies to report financial and descriptive information about
their reportable operating segments. The Company identifies its operating
segments based on how management internally evaluates separate financial
information (if available), business activities and management responsibility.
The Company believes it operates in a single business segment and adoption of
this standard did not have a material impact on the Company's financial
statements. Through December 31, 1998, there have been no foreign operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") which provides
guidance on accounting for the costs of computer software developed or
F-10
<PAGE> 68
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company has adopted the
provisions of SOP 98-1 during the three months ended March 31, 1999 with no
material effect.
In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"). This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is effective
for fiscal years beginning after December 15, 1998. The Company has adopted the
provisions of SOP 98-5 during the three months ended March 31, 1999 with no
material effect.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following :
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Computer equipment............................ $53,079 $ 263,254
Software...................................... -- 272,834
Office furniture and equipment................ 9,471 548,736
Leasehold improvements........................ -- 109,411
------- ----------
62,550 1,194,235
Accumulated depreciation...................... (9,999) (43,688)
------- ----------
$52,551 $1,150,547
======= ==========
</TABLE>
3. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under
noncancellable operating and capital leases, expiring at various dates through
February 2001. Cost and accumulated depreciation of equipment under capital
leases at December 31, 1998 is $33,079 and $6,432, respectively. Depreciation of
equipment under capital leases are included in depreciation expense.
Future minimum annual lease payments under noncancellable operating and
capital leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Year ended December 31,
1999.......................................... $243,455 $15,015
2000.......................................... 260,235 --
2001.......................................... 21,915 --
-------- -------
Minimum lease payments.......................... $525,605 15,015
========
Less amounts representing interest.............. (586)
-------
Total present value of future minimum for
capital lease payments and current portion.... $14,429
=======
</TABLE>
Rent expense for the period from March 17, 1998 (inception) to December 31,
1998 totaled $9,560.
F-11
<PAGE> 69
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
CHANGES IN CAPITALIZATION
In December 1998, the Board of Directors authorized a 19,500-for-1 stock
split of all outstanding common stock. All share and per share information has
been retroactively restated to reflect the stock split.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock with a par
value of $0.001. As of December 31, 1998, there were no preferred stock issued
and outstanding. The Company's Board of Directors can fix or change the features
of preferred stock. See Note 6 "Recent Events".
STOCK OPTIONS
During 1998, the Company adopted the Founders Stock Option Plan (the
"Founders Plan") and the 1998 Equity Incentive Plan (the "Incentive Plan")
(collectively, the "Plans") for the granting of both incentive and non-qualified
stock options. Under the Plans, incentive stock options may be granted to
employees, directors, and officers of the Company and non-qualified stock
options may be granted to consultants, employees, directors, and officers of the
Company. Options granted under the Plans are for periods not to exceed ten
years, and must be issued at prices not less than 100% and 85%, for incentive
and nonqualified stock options, respectively, of the fair value of the stock on
the date of grant, as determined by the Board of Directors. Options granted to
stockholders who own greater than 10% of the outstanding stock are for periods
not to exceed five years and must be issued at prices not less than 110% of the
fair value of the stock on the date of grant, as determined by the Board of
Directors.
The Founders Plan reserved 3,071,250 shares of common stock for granting to
certain founders of the Company. During 1998, all of the shares reserved in the
Founders Plan were granted, and in December 1998 all of the shares were
exercised at $0.001 per share and are subject to certain restriction agreements.
Common shares obtained by an early exercise of unvested options are subject to
repurchase by the Company at the original exercise price and will vest according
to the respective option agreement. As of December 31, 1998, there were 585,000
shares vested and 2,486,250 shares were subject to repurchase by the Company.
The Incentive Plan reserved 12,750,000 shares of common stock, as amended,
for granting to employees and non-employees of the Company. Grants under the
Incentive Plan vest over four years with 25% on the first anniversary and
ratably monthly for the following 36 months. As of December 31, 1998, there were
no grants of Incentive Plan stock options.
F-12
<PAGE> 70
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes the Company's stock option activity for the
Plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE PRICE
GRANT SHARES PER SHARE
------------- ---------- ----------------
<S> <C> <C> <C>
Balance at March 17, 1998 (inception).............. -- -- --
Shares reserved.................................. 9,821,250 -- --
Shares granted................................... (3,071,250) 3,071,250 $0.001
Shares exercised................................. -- (3,071,250) $0.001
---------- ----------
Balance as of December 31, 1998.................... 6,750,000 -- --
Increase in shares available (unaudited)......... 3,000,000 -- --
Shares granted (unaudited)....................... (5,926,500) 5,926,500 $ 0.16
Shares exercised (unaudited)..................... -- (2,445,000) $ 0.11
Shares canceled (unaudited)...................... 723,750 (723,750) $ 0.11
---------- ----------
Balance as of March 31, 1999 (unaudited)........... 4,547,250 2,757,750 $ 0.20
========== ==========
</TABLE>
The weighted average grant date deemed fair value for options granted for
the period from March 17, 1998 (inception) to December 31, 1998 and the three
months ended March 31, 1999 were approximately $0.33 and $0.85, respectively.
The following table summarizes information about stock options outstanding
as of March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.11 1,327,500 9.14 $0.11 -- --
$0.22 571,500 9.53 $0.22 -- --
$0.33 858,750 10.00 $0.33 22,500 $0.33
</TABLE>
STOCK BASED COMPENSATION
The Company has recorded deferred compensation in connection with the
grants of certain stock options and the restriction of certain existing stock
options of $728,267 and $4,289,802, during the period from March 17, 1998
(inception) to December 31, 1998 and the three months ended March 31, 1999,
respectively.
Had compensation expense for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net loss would have
decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Net loss as reported........................................ $(357,538)
=========
Pro forma net loss under SFAS 123........................... $(357,129)
=========
Pro forma net loss per share, basic and diluted under SFAS
123....................................................... $ (0.01)
=========
Weighted average fair value of options granted.............. $ 0.33
=========
</TABLE>
F-13
<PAGE> 71
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma information is required by SFAS 123, and has been determined as
if the Company had accounted for its stock options under the fair value method
of that statement. The fair value of these options was estimated at the date of
grant using the minimum value method with the following weighted average
assumptions: risk free interest rate of 5.5%; an expected option life of five
years; and no annual dividends. The effect of applying SFAS 123 on 1998 pro
forma net loss as stated above is not necessarily representative of the effect
on reported net income (loss) for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years.
5. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", under which the
liability method is used to calculate deferred income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and income tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
The provision for income taxes as of December 31, 1998 is as follows:
<TABLE>
<S> <C>
Current:
Federal................................. $ 28,340
State................................... 7,044
--------
Total current................... 35,384
Deferred:
Federal................................. 76,954
State................................... 21,622
--------
Total deferred.................. 98,576
--------
Provision for income taxes................ $133,960
========
</TABLE>
Significant components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax liabilities:
Accrual to cash basis................. $ 96,975
Other, net............................ 1,601
----------
$ 98,576
==========
</TABLE>
6. RECENT EVENTS (UNAUDITED)
In January 1999, the Company issued 7,150,000 shares of Series A
convertible preferred shares at $1.54 per share for proceeds of approximately
$10.9 million. In April 1999, the Company issued 1.1 million shares of Series A
convertible preferred shares at $2.00 per share for proceeds of $2.2 million.
There were no issuance costs in connection with the proceeds of $2.2 million.
Each share of Series A preferred stock is convertible, at the option of the
preferred stockholder, into common stock at the rate of one share of preferred
stock to one and one-half share of common stock.
The holders of the Series A preferred stock are entitled to receive non
cumulative dividends at a rate of 8% of the issuance price per annum per share.
Preferred stock dividends are payable if and when the dividends are declared by
the Board of Directors. The holders of the Series A preferred stock are entitled
to
F-14
<PAGE> 72
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RECENT EVENTS (UNAUDITED) (CONTINUED)
receive liquidation preferences at the rate of $1.54 per share, prior and in
preference to any distribution of assets to common stockholders. Additionally,
holders of the Series A preferred stock have voting rights for each share of
common stock into which the preferred shares convert.
In February 1999, the Company obtained a line of credit with a bank for
$3,000,000 which expires in February 2000. Under the terms of the agreement,
advances bear interest at the bank's floating prime rate plus 1.0% (8.75% at
December 31, 1998 and March 31, 1999). The line of credit has a sub-limit by
which the Company may finance certain equipment purchases not to exceed
$1,500,000. Further, the line of credit agreement provides that any capital
equipment financing outstanding in August 1999 may be converted to a three year
term note. There are no compensating cash balance requirements and borrowings
under the line of credit are collateralized by substantially all of the
Company's assets. Under the line of credit, the Company is required to comply
with certain financial covenants. The Company was in compliance with all such
covenants on March 31, 1999. In April 1999, the Company drew $1,234,000 on the
line of credit.
In April 1999, the Company entered into an artist promotion consulting
agreement for the term of three years. Independent of the promotion agreement,
in April 1999, the Company entered into a Series B Preferred Stock Purchase
Agreement whereby the Company issued 439,103 shares of the Company's Series B
convertible preferred stock at $5.69 per share for total proceeds of
approximately $2.5 million. Holders of the Series B convertible preferred stock
have substantially the same rights and features as the holders of the Series A
convertible preferred stockholders. Additionally, the consultants were issued a
warrant for 658,654 shares of common stock exercisable at $0.33 per common share
of which 540,097 shares of common stock were exercised. The warrants expire upon
the earlier of (i) the closing of an initial public offering of the Company's
common stock, (ii) the sale or merger of the Company which results in a change
of control as defined, or (iii) or the closing for the sale of substantially all
of the Company's assets. The Company recorded deferred advertising of
approximately $1.9 million related to the warrants which will be amortized
during the year ended December 31, 1999.
In May 1999, the Company adopted an Employee Stock Purchase Plan (the
"ESPP"). Under the ESPP, employees of the Company who elect to participate may
purchase Common Stock at 85% of the lower of the fair market value of the common
stock on the commencement date or the ending date of each offering period. The
ESPP permits an enrolled employee to make contributions by having withheld from
his or her salary an amount between 1% and 15% of compensation to purchase
shares of common stock. The maximum number of shares that may be issued under
the ESPP is 300,000.
On May 12, 1999, the Company entered into a three year agreement with a
certain independent record label company. Under the terms of the agreement, the
Company obtained the exclusive rights to certain master music recordings and
arranged for other promotional events. In connection with the agreement, the
Company will issue in a private placement $2.5 million of the Company's common
stock at a price equal to the price issued to the public under an underwritten
initial public offering. The Company expects to amortize the $2.5 million charge
over the term of the arrangement. In the event the Company does not complete a
firm underwritten public offering within eight months of the date of the
agreement, the independent record label company can terminate the agreement.
In May 1999, the Company's Board of Directors authorized, subject to
stockholder approval, the restatement of the Company's certificate of
incorporation (the "Restated Certificate") to effect a three-for-two stock split
effective [ , 1999]. The Restated Certificate increased the authorized
common stock to 200,000,000 shares and increased the authorized preferred stock
to 15,000,000 shares. The preferred stock is "blank check preferred," which can
be created and issued by the Board of Directors without stockholder approval,
with rights senior to those of common stock. The accompanying financial
statements have been restated to reflect the three-for-two common stock split.
F-15
<PAGE> 73
INSIDE BACK COVER ARTWORK:
Image depicting the MP3.com logo with accompanying text that reads as follows:
Where the world comes for music.
We are also planning to affix to the inside of the back cover of the prospectus
a CD featuring the music of MP3.com artists.
<PAGE> 74
MP3 LOGO
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Registration fee............................................ $ 31,970
NASD filing fee............................................. 12,000
Nasdaq Stock Market Listing Application fee................. 95,000
Blue sky qualification fees and expenses.................... 10,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 150,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 41,030
--------
Total............................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Restated Certificate of Incorporation and Bylaws include
provisions to (i) eliminate the personal liability of its directors and officers
for monetary damages resulting from breaches of their fiduciary duty to the
extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware
(the "Delaware Law") and (ii) require the Registrant to indemnify its directors
and officers to the fullest extent permitted by Section 145 of the Delaware Law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the Delaware Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
stockholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Registrant or its stockholders, for improper
transactions between the director and the Registrant and for improper
distributions to stockholders and loans to directors and officers. The provision
also does not affect a director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE> 76
The Registrant has entered into indemnity agreements with each of its
directors and officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or an officer of the
Registrant or any of its affiliated enterprises, provided that such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The Registrant has an insurance policy covering the officers and directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception (March 17, 1998) the Registrant has sold and issued the
following unregistered securities:
(a) On March 18, 1998 the Registrant issued and sold 26,178,750 shares
of its common stock to Michael L. Robertson in exchange for certain assets
and liabilities having an aggregate net value of $17,452.50. The Registrant
relied on the exemption provided by Section 4(2) under the Securities Act.
(b) On December 31, 1998 the Registrant issued and sold 3,071,250 shares
of its common stock to three founding employees of the Registrant in
exchange for secured promissory notes, payable to the Registrant and
secured by the stock issued, in the aggregate amount of $2,047.50 pursuant
to the employees' exercise of incentive stock options granted to them under
the Registrant's Founders Stock Option Plan. The Registrant relied on the
exemption provided by Section 4(2) under the Securities Act.
(c) In January 1999 the Registrant issued and sold 3,168,000 shares of
its common stock to two employees of the Registrant in exchange for secured
promissory notes, payable to the Registrant and secured by the stock
issued, in the aggregate amount of $338,000 pursuant to the employees'
exercise of incentive stock options granted to them under the Registrant's
1998 Equity Incentive Plan. The Registrant relied on the exemption provided
by Rule 701 under the Securities Act.
(d) In January 1999 the Registrant repurchased 723,750 shares of its
common stock held by an employee of the Registrant in exchange for the
cancellation of $77,200.00 of indebtedness owed to the employee by the
Registrant. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.
(e) In January 1999 the Registrant issued and sold 7,150,000 shares of
its Series A Preferred Stock (convertible into 10,725,000 shares of common
stock) to certain accredited investors for an aggregate purchase price of
$11,011,000. The Registrant relied on the exemption provided by Section
4(2) under the Securities Act and Regulation D promulgated thereunder.
(f) On April 5, 1999 the Registrant issued and sold 1,000,000 shares of
its Series A Preferred Stock (convertible into 1,500,000 shares of common
stock) to certain accredited investors for an aggregate purchase price of
$2,000,000. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act and Regulation D promulgated thereunder.
(g) On April 12, 1999 the Registrant issued and sold 100,000 shares of
its Series A Preferred Stock (convertible into 150,000 shares of common
stock) to a certain accredited investor for an aggregate purchase price of
$200,000. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act and Regulation D promulgated thereunder.
II-2
<PAGE> 77
(h) On April 12, 1999, the Registrant issued and sold 930,000 shares of
its common stock for a purchase price of $201,200 to a consultant pursuant
to the consultant's exercise of a nonqualified stock option granted to the
consultant under the Registrant's 1998 Equity Incentive Plan. The
Registrant relied on the exemption provided by Rule 701 under the
Securities Act.
(i) On April 19, 1999, the Registrant issued and sold 3,375 shares of
its common stock to employees of the Registrant for an aggregate purchase
price of $1,125 pursuant to such employees' exercise of stock options
granted to them under the Registrant's 1998 Equity Incentive Plan. The
Registrant relied on the exemption provided by Rule 701 under the
Securities Act.
(j) On April 26, 1999, the Registrant issued a warrant to purchase up to
658,654 shares of its common stock to an accredited investor at an exercise
price of $0.33 per share. This warrant expires on April 26, 2002. In April
1999, the investor transferred 540,097 of the warrant shares to certain
affiliates of the investor which were then exercised in full. Upon the
closing of this offering, the warrant, for the remaining 118,557 shares
thereunder, will be automatically terminated unless otherwise exercised.
For the issuance of the warrants and the common stock issued upon exercise
thereto, the Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.
(k) On April 29, 1999, the Registrant issued and sold 439,103 shares of
its Series B Preferred Stock to certain accredited investors for an
aggregate purchase price of $2,498,519. Upon the closing of this offering,
the shares of Series B Preferred Stock will automatically convert into
658,654 shares of common stock. The Registrant relied on the exemption
provided by Section 4(2) under the Securities Act and Regulation D
promulgated thereunder.
(l) On April 30, 1999, the Registrant issued and sold 540,097 shares of
its common stock to certain of the Registrant's investors for an aggregate
purchase price of $180,037.50 pursuant to the exercise of warrants held by
such investors. The Registrant relied on the exemption provided by Section
4(2) of the Securities Act.
(m) On May 3, 1999, the Registrant issued and sold 450,000 shares of its
common stock for a purchase price of $1.00 to a consultant pursuant to the
consultant's exercise of a nonqualified stock option granted to the
consultant. The Registrant relied on the exemption provided by Section 4(2)
of the Securities Act.
(n) On May 12, 1999, the Registrant and Boutit, Inc., d/b/a No Limit
Records, entered into a strategic partnership pursuant to a binding
Memorandum of Agreement. Pursuant to this agreement, No Limit is bound to
provide website content to the Registrant and perform promotional and other
activities and the Registrant is required to issue $2.5 million of common
stock at the initial public offering price in a private placement
concurrent with the closing of this offering. The Registrant relied upon
the exemption provided by 4(2) under the Securities Act and Regulation D
promulgated thereunder.
(o) From time to time since its incorporation, the Registrant has issued
stock options to purchase shares of its common stock pursuant to the
Registrant's 1998 Equity Incentive Plan and Founders' Stock Option Plan.
With respect to these grants of options, exemption from registration was
unnecessary in that the transactions did not involve a "sale" of securities
as that term is used in Section 2(3) of the Securities Act.
The common stock amounts and per-share exercise prices in the descriptions
above reflect the three for two stock split of the Registrant's common stock
which will take place prior to the effectiveness of this offering. The
recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about the Registrant.
II-3
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.(1)
3.1 Restated Certificate of Incorporation, as currently in
effect.
3.2 Form of Restated Certificate of Incorporation, to be filed
and become effective prior to the closing of this offering.
3.3 Form of Restated Certificate of Incorporation, to be filed
and become effective upon the closing of this offering.
3.4 Bylaws, as currently in effect.
3.5 Form of Bylaws, as amended, to become effective upon the
closing of this offering.(1)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate.(1)
5.1 Opinion of Cooley Godward LLP.(1)
10.1 1998 Equity Incentive Plan, as amended (the "1998 Plan").
10.2 Form of Stock Option Agreement pursuant to the 1998 Plan.
10.3 1999 Employee Stock Purchase Plan and related offering
documents.(1)
10.4 Employment Agreement by and between the Company and Michael
L. Robertson dated as of May 13, 1999.
10.5 Letter Agreement regarding employment by and between the
Company and Robin D. Richards dated as of January 6, 1999.
10.6 Letter Agreement regarding employment by and between the
Company and Paul L. H. Ouyang dated as of February 19, 1999.
10.7 Letter Agreement regarding employment by and between the
Company and Steven G. Sheiner dated as of January 29, 1999.
10.8 Letter Agreement regarding employment by and between the
Company and Paul S. Alofs dated as of April 27, 1999.
10.9 Office lease by and between the Company and General Atomics
dated as of February 1, 1999.
10.10 Credit Agreement and related borrowing agreements by and
between the Company and Imperial Bank dated as of February
11, 1999.
10.11 Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
April 29, 1999.
10.12 Founder Stock Purchase Agreement by and between the Company
and Michael L. Robertson dated as of March 18, 1998.
10.13 Form of Indemnity Agreement between the Company and its
directors and officers.
10.14 Form of Music Submission Agreement.
10.15 Consulting Agreement by and between the Company and
Atlas/Third Rail Management, Inc. dated as of April 19,
1999.
10.16 Warrant Agreement by and between the Company and Atlas/Third
Rail Management, Inc, dated as of April 30, 1999.
10.17 Promissory Note from Robin D. Richards to the Company dated
as of January 25, 1999.(1)
10.18 Pledge Agreement from Robin D. Richards to the Company dated
as of January 25, 1999.(1)
10.19+ Memorandum of Agreement dated May 12, 1999 between the
Company and Boutit, Inc. d/b/a No Limit Records.(1)
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.20 Letter Agreement regarding employment by and between the
Company and Ronald D. Dotson dated as of May 3, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Reference is made to page II-7.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.(1)
24.1 Power of Attorney. Reference is made to page II-6.
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
(1) To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts.
All other schedules are omitted because they are not required, are not
applicable or the information is included in our financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) 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 the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
County of San Diego, State of California, on May 14, 1999.
By: /s/ MICHAEL L. ROBERTSON
------------------------------------
Michael L. Robertson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael L. Robertson, Robin D. Richards
and Paul L. H. Ouyang and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments, exhibits thereto and other
documents in connection therewith) to this Registration Statement and any
subsequent registration statement filed by the registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL L. ROBERTSON Chief Executive Officer and Director May 14, 1999
- ------------------------------------------ (Principal Executive Officer)
Michael L. Robertson
/s/ ROBIN D. RICHARDS President, Chief Operating Officer May 14, 1999
- ------------------------------------------ and Director
Robin D. Richards
/s/ PAUL L. H. OUYANG Chief Financial Officer and Executive Vice May 14, 1999
- ------------------------------------------ President (Principal Financial and
Paul L. H. Ouyang Accounting Officer)
/s/ LAWRENCE F. PROBST III Director May 14, 1999
- ------------------------------------------
Lawrence F. Probst III
/s/ MARK A. STEVENS Director May 14, 1999
- ------------------------------------------
Mark A. Stevens
/s/ THEODORE W. WAITT Director May 14, 1999
- ------------------------------------------
Theodore W. Waitt
</TABLE>
II-6
<PAGE> 81
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Historical Financial Data" and "Experts" and to the use of our report dated
April 2, 1999 (except for the last paragraph of Note 6, as to which the date is
, 1999) in the Registration Statement on Form S-1 and related
Prospectus of MP3.com, Inc. dated May 14, 1999.
Our audits also included the financial statement schedule of MP3.com, Inc.
for the period from March 17, 1998 (inception) to December 31, 1998 listed in
Item 16(b). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the restatement of the capital accounts described in Note 6 to the
financial statements.
/s/ ERNST & YOUNG LLP
San Diego, California
May 14, 1999
II-7
<PAGE> 82
MP3.COM, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------------
ADDITIONS DEDUCTIONS
------------------------- ----------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS ACCOUNTS- BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE WRITE-OFFS END OF PERIOD
- ---------------------------------------- ---------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the period March 17, 1998
(inception) to December 31, 1998:
Allowance for doubtful accounts....... $ -- $56,615 $ -- $ -- $56,615
</TABLE>
II-8
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement.(1)
3.1 Restated Certificate of Incorporation, as currently in
effect.
3.2 Form of Restated Certificate of Incorporation, to be filed
and become effective prior to the closing of this offering.
3.3 Form of Restated Certificate of Incorporation, to be filed
and become effective upon the closing of this offering.
3.4 Bylaws, as currently in effect.
3.5 Form of Bylaws, as amended, to become effective upon the
closing of this offering.(1)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate.(1)
5.1 Opinion of Cooley Godward LLP.(1)
10.1 1998 Equity Incentive Plan, as amended (the "1998 Plan").
10.2 Form of Stock Option Agreement pursuant to the 1998 Plan.
10.3 1999 Employee Stock Purchase Plan and related offering
documents.(1)
10.4 Employment Agreement by and between the Company and Michael
L. Robertson dated as of May 13, 1999.
10.5 Letter Agreement regarding employment by and between the
Company and Robin D. Richards dated as of January 6, 1999.
10.6 Letter Agreement regarding employment by and between the
Company and Paul L. H. Ouyang dated as of February 19, 1999.
10.7 Letter Agreement regarding employment by and between the
Company and Steven G. Sheiner dated as of January 29, 1999.
10.8 Letter Agreement regarding employment by and between the
Company and Paul S. Alofs dated as of April 27, 1999.
10.9 Office lease by and between the Company and General Atomics
dated as of February 1, 1999.
10.10 Credit Agreement by and between the Company and Imperial
Bank dated as of February 11, 1999.
10.11 Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
April 29, 1999.
10.12 Founder Stock Purchase Agreement by and between the Company
and Michael L. Robertson dated as of March 18, 1998.
10.13 Form of Indemnity Agreement between the Company and its
directors and officers.
10.14 Form of Music Submission Agreement.
10.15 Consulting Agreement by and between the Company and
Atlas/Third Rail Management, Inc. dated as of April 19,
1999.
10.16 Warrant Agreement by and between the Company and Atlas/Third
Rail Management, Inc, dated as of April 30, 1999.
10.17 Promissory Note from Robin D. Richards to the Company dated
as of January 25, 1999.(1)
10.18 Pledge Agreement from Robin D. Richards to the Company dated
as of January 25, 1999.(1)
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.19+ Memorandum of Agreement dated May 12, 1999 between the
Company and Boutit, Inc. d/b/a No Limit Records.(1)
10.20 Letter agreement regarding employment by and between the
Company and Ronald D. Dotson dated as of May 3, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Reference is made to page II-7.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.(1)
24.1 Power of Attorney. Reference is made to page II-6.
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
(1) To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
MP3.COM, INC.
Robin Richards and Steven Przesmicki hereby certify that:
ONE: The original name of this corporation was Zco Inc. and the date of
filing the original Certificate of Incorporation of this corporation with the
Secretary of State of the State of Delaware was March 17, 1998.
TWO: They are the duly elected and acting President and Secretary,
respectively, of MP3.com, Inc., a Delaware corporation.
THREE: The Restated Certificate of Incorporation, as amended, of this
corporation is hereby amended and restated in its entirety to read as follows:
I.
The name of the corporation is MP3.COM, INC. (the "Corporation" or the
"Company").
II.
The address of the registered office of the Corporation in the State of
Delaware is:
CorpAmerica, Inc.
30 Old Rudnick Lane
Dover, DE 19901
County of Kent
The name of the Corporation's registered agent at said address is
CorpAmerica, Inc.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is sixty-one million six
hundred thousand (61,600,000). Fifty-one million (51,000,000) shares shall be
Common Stock, each having a par value of one-tenth of one cent ($0.001) (the
"Common Stock"). Ten million six hundred thousand shares (10,600,000) shares
shall be Preferred Stock, each having a par value of one-tenth of one cent
($0.001) (the "Preferred Stock").
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B. Subject to the rights of the Preferred Stock set forth in Section
E.2(b)(vi) below, the number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares of Common Stock then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation (voting together on an as-if-converted basis).
C. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Restated Certificate of Incorporation, to fix or
alter the rights, preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of them; and to
increase or decrease the number of shares of any series prior or subsequent to
the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
D. Eight million two hundred fifty thousand (8,250,000) of the
authorized shares of Preferred Stock are hereby designated "Series A Preferred
Stock" (the "Series A Preferred"). Four hundred thirty-nine thousand one hundred
three (439,103) of the authorized shares of Preferred Stock are hereby
designated "Series B Preferred Stock" (the "Series B Preferred").
E. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred and Series B Preferred are as follows:
1. DIVIDEND RIGHTS.
(a) Subject to the right of any series of Preferred Stock that
may from time to time come into existence, the holders of Series A Preferred and
Series B Preferred, in preference to the holders of Common Stock, shall be
entitled to receive, when and as declared by the Board of Directors, but only
out of funds that are legally available therefor, cash dividends at the rate of
eight percent (8%) of the respective Original Issue Price (as defined below) per
annum per share on each outstanding share of Series A Preferred and Series B
Preferred (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares). The "Original Issue
Price" of (i) the Series A Preferred shall be one dollar and fifty-four cents
($1.54) per share and (ii) the Series B Preferred shall be five dollars and
sixty-nine cents ($5.69) per share. Such dividends shall be payable only when,
as and if declared by the Board of Directors and shall be non-cumulative.
(b) So long as any shares of Series A Preferred or Series B
Preferred shall be outstanding, no dividend, whether in cash or property, shall
be paid or declared, nor shall any other distribution be made, on the Common
Stock, nor shall any shares of Common Stock be purchased, redeemed, or otherwise
acquired for value by the Company (except for acquisitions of Common Stock by
the Company pursuant to agreements which permit the Company to repurchase such
shares upon termination of services to the Company or in exercise of the
Company's right of first refusal upon a proposed transfer) until all dividends
(set forth in Section 1(a) above) on the Series A Preferred and Series B
Preferred shall have been paid or declared and set apart. In the event dividends
are paid on any share of Common Stock, an
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additional dividend shall be paid with respect to all outstanding shares of
Series A Preferred and Series B Preferred in an amount equal per share (on an
as-if-converted to Common Stock basis) to the amount paid or set aside for each
share of Common Stock. The provisions of this Section 1(b) shall not, however,
apply to (i) a dividend payable in Common Stock, (ii) the acquisition of shares
of Common Stock in exchange for other shares of Common Stock, or (iii) any
repurchase of any outstanding securities of the Company that is unanimously
approved by the Company's Board of Directors.
2. VOTING RIGHTS.
(a) GENERAL RIGHTS. Except as otherwise provided herein or as
required by law, the Series A Preferred and the Series B Preferred shall be
voted equally with the Common Stock and not as a separate class, at any annual
or special meeting of stockholders of the Company, and may act by written
consent in the same manner as the Common Stock, in either case upon the
following basis: each holder of shares of Series A Preferred and Series B
Preferred, respectively, shall be entitled to such number of votes as shall be
equal to the whole number of shares of Common Stock into which such holder's
aggregate number of shares of Series A Preferred and Series B Preferred are
convertible (pursuant to Section 4 hereof) immediately after the close of
business on the record date fixed for such meeting or the effective date of such
written consent.
(b) SEPARATE VOTE OF SERIES A PREFERRED AND SERIES B
PREFERRED. Subject to the rights of any series of Preferred Stock which may from
time to time come into existence, for so long as at least a total of 500,000
shares of Series A Preferred and/or Series B Preferred (subject to adjustment
for any stock split, reverse stock split or other similar event affecting the
Series A Preferred and Series B Preferred) remain outstanding, in addition to
any other vote or consent required herein or by law, the vote or written consent
of the holders of at least a majority of the outstanding Series A Preferred and
Series B Preferred, voting together as a single class, shall be necessary for
effecting or validating the following actions:
(i) Any amendment, alteration, or repeal of any
provision of the Certificate of Incorporation of the Company (including any
filing of a Certificate of Designation) that alters or changes the voting
powers, preferences or other special rights, privileges or restrictions of the
Series A Preferred or Series B Preferred, or that otherwise adversely affects
the voting powers, preferences or other special rights, privileges or
restrictions of the Series A Preferred or Series B Preferred;
(ii) Any authorization or any designation, whether by
reclassification or otherwise, of any new class or series of stock or any other
securities convertible into equity securities of the Company ranking on a parity
with or senior to the Series A Preferred or Series B Preferred in right of
redemption, liquidation preference, voting or dividends, or any increase in the
authorized or designated number of any such new class or series;
(iii) Any agreement by the Company regarding an Asset
Transfer or Acquisition (each as defined in Section 3(c));
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(iv) Any voluntary dissolution or liquidation of the
Company;
(v) Any action that results in the payment or
declaration of a dividend on any shares of Common Stock or Preferred Stock
(other than a dividend payable solely in shares of Common Stock);
(vi) Any increase or decrease (other than by redemption
or conversion) in the authorized number of shares of Common Stock or Preferred
Stock; or
(vii) Any redemption or repurchase of Common Stock
(except for acquisitions of Common Stock by the Company (A) pursuant to
agreements which permit the Company to repurchase such shares upon termination
of services to the Company or (B) in exercise of the Company's right of first
refusal upon a proposed transfer).
(c) BOARD OF DIRECTORS. The Company shall not, without the
written consent or affirmative vote of (i) the holders of at least a majority of
the then outstanding Common Stock consenting or voting (as the case may be) as a
separate class and (ii) the holders of at least a majority of the then
outstanding Series A Preferred and Series B Preferred, each consenting or voting
(as the case may be) together as a class, increase the maximum number of
directors constituting the Board of Directors to a number in excess of five (5).
For so long as at least 5,500,000 shares of Series A Preferred remain
outstanding (subject to adjustment for any stock split, reverse stock split or
similar event affecting the Series A Preferred), the holders of Series A
Preferred, voting together as a separate class, shall be entitled to elect two
(2) members of the Company's Board of Directors (the "Series A Directors") at
each meeting or pursuant to each consent of the Company's stockholders for the
election of directors, and to remove from office such directors and to fill any
vacancy caused by the resignation, death or removal of such directors. For so
long as at least 3,575,000 but not more than 5,499,999 shares of Series A
Preferred remain outstanding (subject to adjustment for any stock split, reverse
stock split or similar event affecting the Series A Preferred), the holders of
Series A Preferred, voting together as a separate class, shall be entitled to
elect one (1) member of the Company's Board of Directors at each meeting or
pursuant to each consent of the Company's stockholders for the election of
directors, and to remove from office such director and to fill any vacancy
caused by the resignation, death or removal of such director. At any meeting (or
in a written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy (or the written consent) of the
holders of a majority of the then outstanding shares of Series A Preferred shall
constitute a quorum of the Series A Preferred for the election of directors to
be elected solely by the holders of the Series A Preferred. The holders of
Common Stock, voting together as a separate class, shall be entitled to elect
three (3) members of the Board of Directors at each meeting or pursuant to each
consent of the Company's stockholders for the election of directors, and to
remove from office such directors and to fill any vacancy caused by the
resignation, death or removal of such directors. At any meeting (or in a written
consent in lieu thereof) held for the purpose of electing directors, the
presence in person or by proxy (or the written consent) of the holders of a
majority of the then outstanding shares of Common Stock shall constitute a
quorum of the Common Stock for the election of directors to be elected solely by
the holders of the Common Stock. The holders of Common Stock, Series A Preferred
and Series B Preferred, voting together as a single class on an as-if-converted
basis, shall be entitled to elect all remaining members of the Board of
Directors at each meeting or pursuant to each consent of the
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Company's stockholders for the election of directors, and to remove from office
such directors and to fill any vacancy caused by the resignation, death or
removal of such directors. No person entitled to vote at an election for
directors may cumulate votes to which such person is entitled, unless, at the
time of such election, the Corporation is subject to Section 2115 of the
California General Corporation Law ("CGCL"). During such time or times that the
Corporation is subject to Section 2115(b) of the CGCL, every stockholder
entitled to vote at an election for directors may cumulate such stockholder's
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which such stockholder's
shares are otherwise entitled, or distribute the stockholder's votes on the same
principle among as many candidates as such stockholder desires. No stockholder,
however, shall be entitled to so cumulate such stockholder's votes unless (i)
the names of such candidate or candidates have been placed in nomination prior
to the voting and (ii) the stockholder has given notice at the meeting, prior to
the voting, of such stockholder's intention to cumulate such stockholder's
votes. If any stockholder has given proper notice to cumulate votes, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. Under cumulative voting, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
(d) REMOVAL.
(i) Subject to the rights of the holders of Common
Stock, Series A Preferred and Series B Preferred to remove certain directors
pursuant to Section 2(c) above, during such time or times that the Corporation
is subject to Section 2115(b) of the CGCL, the Board of Directors or any
individual director may be removed from office at any time without cause by the
affirmative vote of the holders of at least a majority of the outstanding shares
entitled to vote on such removal; provided, however, that unless the entire
Board is removed, no individual director may be removed when the votes cast
against such director's removal, or not consenting in writing to such removal,
would be sufficient to elect that director if voted cumulatively at an election
which the same total number of votes were cast (or, if such action is taken by
written consent, all shares entitled to vote were voted) and the entire number
of directors authorized at the time of such director's most recent election were
then being elected.
(ii) At any time or times that the Corporation is not
subject to Section 2115(b) of the CGCL, and subject to any limitations imposed
by law, Section 2(d)(i) above shall not apply and, subject to the rights of the
holders of Common Stock, Series A Preferred and Series B Preferred to remove
certain directors pursuant to Section 2(c) above, the Board of Directors or any
director may be removed from office at any time (a) with cause by the
affirmative vote of the holders of a majority of the voting power of all
then-outstanding shares of voting stock of the Corporation entitled to vote at
an election of directors or (b) without cause by the affirmative vote of the
holders of a majority of the voting power of all then-outstanding shares of
voting stock of the Corporation, entitled to vote at an election of directors.
3. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, before any distribution or payment
shall be made to the holders of Common Stock, subject to the rights of any
series of Preferred Stock that may from
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time to time come into existence, the holders of Series A Preferred and Series B
Preferred shall be entitled to be paid out of the assets of the Company an
amount per share of Series A Preferred and Series B Preferred, respectively,
equal to their respective Original Issue Price plus all declared and unpaid
dividends on the Series A Preferred and Series B Preferred, respectively (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) for each share of Series A Preferred and
Series B Preferred held by them. If, upon any such liquidation, distribution, or
winding up, the assets of the Company shall be insufficient to make payment in
full to all holders of Series A Preferred and Series B Preferred of the
liquidation preference set forth in this Section 3(a), subject to the rights of
any series of Preferred Stock that may from time to time come into existence,
then such assets shall be distributed among the holders of Series A Preferred
and Series B Preferred at the time outstanding, ratably in proportion to the
full amounts to which they would otherwise be respectively entitled.
(b) After the payment of the full liquidation preference of
the Series A Preferred and Series B Preferred as set forth in Section 3(a)
above, and any other distribution that may be required with respect to any
series of Preferred Stock that may from time to time come into existence, the
remaining assets of the Company legally available for distribution, if any,
shall be distributed ratably to the holders of the Common Stock.
(c) The following events shall be considered a liquidation
under this Section:
(i) any consolidation or merger of the Company with or
into any other corporation or other entity or person in which the stockholders
of the Company immediately prior to such consolidation or merger own less than
50% of the Company's voting power immediately after such consolidation or
merger, excluding any consolidation or merger effected exclusively to change the
domicile of the Company (an "Acquisition"); or
(ii) a sale of all or substantially all of the assets of
the Company (an "Asset Transfer").
(iii) In either of such events, if the consideration
received by this Corporation is other than cash, its value will be deemed its
fair market value as determined in good faith by the Board of Directors. Any
securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such quotation system over the thirty
(30) day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
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(3) If there is no active public market, the
value shall be the fair market value thereof, as determined by the Board of
Directors.
(B) The method of valuation of securities subject
to investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as determined by the Board of Directors.
4. CONVERSION RIGHTS.
The holders of the Series A Preferred and Series B Preferred
shall have the following rights with respect to the conversion of the Series A
Preferred and Series B Preferred into shares of Common Stock (the "Conversion
Rights"):
(a) OPTIONAL CONVERSION. Subject to and in compliance with the
provisions of this Section 4, any shares of Series A Preferred and Series B
Preferred may, at the option of the holder, be converted at any time into
fully-paid and nonassessable shares of Common Stock. The number of shares of
Common Stock to which a holder of Series A Preferred or Series B Preferred shall
be entitled upon conversion shall be the product obtained by multiplying the
"Series A Preferred Conversion Rate" or the "Series B Preferred Conversion
Rate," as applicable, then in effect (determined as provided in Section 4(b)) by
the respective number of shares of Series A Preferred or Series B Preferred
being converted.
(b) SERIES A PREFERRED AND SERIES B PREFERRED CONVERSION RATE.
The conversion rate in effect at any time for conversion of the Series A
Preferred (the "Series A Preferred Conversion Rate") and the Series B Preferred
(the "Series B Preferred Conversion Rate"), respectively, shall be the quotient
obtained by dividing the Original Issue Price of the Series A Preferred and the
Series B Preferred, respectively, by the "Series A Preferred Conversion Price"
and the "Series B Preferred Conversion Price," respectively, calculated as
provided in Section 4(c).
(c) SERIES A PREFERRED AND SERIES B PREFERRED CONVERSION
PRICE. The conversion price for the Series A Preferred and the Series B
Preferred, respectively, shall initially be the respective Original Issue Price
of the Series A Preferred (the "Series A Preferred Conversion Price") and the
Series B Preferred (the "Series B Preferred Conversion Price"). Such initial
Series A Preferred Conversion Price and Series B Preferred Conversion Price
shall be adjusted from time to time in accordance with this Section 4. All
references herein to the Series A Preferred Conversion Price and Series B
Preferred Conversion Price shall mean the Series A Preferred Conversion Price
and Series B Preferred Conversion Price, respectively, as so adjusted.
(d) MECHANICS OF CONVERSION. Each holder of Series A Preferred
or Series B Preferred who desires to convert the same into shares of Common
Stock pursuant to this Section 4 shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or any transfer agent for
the Series A Preferred and Series B Preferred, and shall give written notice to
the Company at such office that such holder elects to convert the same. Such
notice shall state the number of shares of Series A Preferred and Series B
Preferred being
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converted. Thereupon, the Company shall promptly issue and deliver at such
office to such holder a certificate or certificates for the number of shares of
Common Stock to which such holder is entitled and shall promptly pay (i) in cash
or, to the extent sufficient funds are not then legally available therefor, in
Common Stock (at the Common Stock's fair market value determined by the Board of
Directors as of the date of such conversion), any declared and unpaid dividends
on the shares of Series A Preferred and Series B Preferred being converted and
(ii) in cash (at the Common Stock's fair market value determined by the Board of
Directors as of the date of conversion) the value of any fractional share of
Common Stock otherwise issuable to any holder of Series A Preferred and Series B
Preferred, as applicable. Such conversion shall be deemed to have been made at
the close of business on the date of such surrender of the certificates
representing the shares of Series A Preferred and Series B Preferred to be
converted, and the person entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such shares of Common Stock on such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act of 1933, the conversion may, at the option of any holder
tendering Series A Preferred or Series B Preferred for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive
Common Stock upon conversion of such Series A Preferred or Series B Preferred
shall not be deemed to have converted such Series A Preferred or Series B
Preferred until immediately prior to the closing of such sale of securities.
(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. The term
"Original Issue Date" shall mean, with respect to the Series A Preferred,
January 21, 1999, and with respect to the Series B Preferred, the date the first
share of Series B Preferred is issued. If the Company shall at any time or from
time to time after the applicable Original Issue Date effect a subdivision of
the outstanding Common Stock without a corresponding subdivision of the
Preferred Stock, the Series A Preferred Conversion Price and Series B Preferred
Conversion Price, as applicable, in effect immediately before that subdivision
shall be proportionately decreased. Conversely, if the Company shall at any time
or from time to time after the Original Issue Date combine the outstanding
shares of Common Stock into a smaller number of shares without a corresponding
combination of the Preferred Stock, the Series A Preferred Conversion Price and
the Series B Preferred Conversion Price, as applicable, in effect immediately
before the combination shall be proportionately increased. Any adjustment under
this Section 4(e) shall become effective at the close of business on the date
the subdivision or combination becomes effective.
(f) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS.
If the Company at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, in each such event the Series A Preferred Conversion
Price and Series B Preferred Conversion Price, as applicable, that are then in
effect shall be decreased as of the time of such issuance or, in the event such
record date is fixed, as of the close of business on such record date, by
multiplying the Series A Preferred Conversion Price and the Series B Preferred
Conversion Price, as applicable, then in effect by a fraction (i) the numerator
of which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date, and (ii) the denominator of which is the total number of shares of
Common Stock
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issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution; provided, however, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Series A
Preferred Conversion Price and Series B Preferred Conversion Price, as
applicable, shall be recomputed accordingly as of the close of business on such
record date and thereafter the Series A Preferred Conversion Price and Series B
Preferred Conversion Price, as applicable, shall be adjusted pursuant to this
Section 4(f) to reflect the actual payment of such dividend or distribution.
(g) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If at any time or from time to time after the applicable Original
Issue Date, the Common Stock issuable upon the conversion of the Series A
Preferred and Series B Preferred is changed into the same or a different number
of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than an Acquisition or Asset Transfer as
defined in Section 3(c) or a subdivision or combination of shares or stock
dividend or a reorganization, merger, consolidation or sale of assets provided
for elsewhere in this Section 4), in any such event each holder of Series A
Preferred and Series B Preferred, as applicable, shall have the right thereafter
to convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or other change
by holders of the maximum number of shares of Common Stock into which such
shares of Series A Preferred and Series B Preferred could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein or with respect to such other
securities or property by the terms thereof.
(h) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the applicable Original Issue
Date, there is a capital reorganization of the Common Stock (other than an
Acquisition or Asset Transfer as defined in Section 3(c) or a recapitalization,
subdivision, combination, reclassification, exchange or substitution of shares
provided for elsewhere in this Section 4), as a part of such capital
reorganization, provision shall be made so that the holders of the Series A
Preferred and Series B Preferred, as applicable, shall thereafter be entitled to
receive upon conversion of the Series A Preferred and Series B Preferred, as
applicable, the number of shares of stock or other securities or property of the
Company to which a holder of the number of shares of Common Stock deliverable
upon conversion would have been entitled on such capital reorganization, subject
to adjustment in respect of such stock or securities by the terms thereof. In
any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of Series
A Preferred and Series B Preferred, as applicable, after the capital
reorganization to the end that the provisions of this Section 4 (including
adjustment of the Series A Preferred Conversion Price and Series B Preferred
Conversion Price then in effect and the number of shares issuable upon
conversion of the Series A Preferred and Series B Preferred) shall be applicable
after that event and be as nearly equivalent as practicable.
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(i) SALE OF SHARES BELOW SERIES A PREFERRED CONVERSION PRICE
OR SERIES B PREFERRED CONVERSION PRICE.
(i) If at any time or from time to time after the
applicable Original Issue Date, the Company issues or sells, or is deemed by the
express provisions of this Section 4(i) to have issued or sold, Additional
Shares of Common Stock (as defined in Section 4(i)(iv) below), other than as a
dividend or other distribution on any class of stock as provided in Section 4(f)
above, and other than a subdivision or combination of shares of Common Stock as
provided in Section 4(e) above, for an Effective Price (as defined in Section
4(i)(iv) below) less than the then effective Series A Preferred Conversion Price
or Series B Preferred Conversion Price, as applicable, then and in each such
case the then existing Series A Preferred Conversion Price or Series B Preferred
Conversion Price, as applicable, shall be reduced, as of the opening of business
on the date of such issue or sale, to a price determined by multiplying the
Series A Preferred Conversion Price or Series B Preferred Conversion Price, as
applicable, by a fraction (i) the numerator of which shall be (A) the number of
shares of Common Stock deemed outstanding (as defined below) immediately prior
to such issue or sale, plus (B) the number of shares of Common Stock which the
aggregate consideration received (as defined in Section 4(i)(ii) by the Company
for the total number of Additional Shares of Common Stock so issued would
purchase at such Series A Preferred Conversion Price or Series B Preferred
Conversion Price, as applicable, and (ii) the denominator of which shall be the
number of shares of Common Stock deemed outstanding (as defined below)
immediately prior to such issue or sale plus the total number of Additional
Shares of Common Stock so issued. For the purposes of the preceding sentence,
the number of shares of Common Stock deemed to be outstanding as of a given date
shall be the sum of (A) the number of shares of Common Stock actually
outstanding, (B) the number of shares of Common Stock into which the then
outstanding shares of Series A Preferred and Series B Preferred could be
converted if fully converted on the day immediately preceding the given date,
and (C) the number of shares of Common Stock which could be obtained through the
exercise or conversion of all other rights, options and convertible securities
outstanding on the day immediately preceding the given date.
(ii) For the purpose of making any adjustment required
under this Section 4(i), the consideration received by the Company for any issue
or sale of securities shall (A) to the extent it consists of cash, be computed
at the net amount of cash received by the Company after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Company in connection with such issue or sale but without deduction of
any expenses payable by the Company, (B) to the extent it consists of property
other than cash, be computed at the fair value of that property as determined in
good faith by the Board of Directors, and (C) if Additional Shares of Common
Stock, Convertible Securities (as defined in Section 4(i)(iii)) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of the Company for a consideration which covers both, be computed as the
portion of the consideration so received that may be reasonably determined in
good faith by the Board of Directors to be allocable to such Additional Shares
of Common Stock, Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under
this Section 4(i), if the Company issues or sells (i) stock or other securities
convertible into,
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Additional Shares of Common Stock (such convertible stock or securities being
herein referred to as "Convertible Securities") or (ii) rights or options for
the purchase of Additional Shares of Common Stock or Convertible Securities and
if the Effective Price of such Additional Shares of Common Stock is less than
the Series A Preferred Conversion Price or Series B Preferred Conversion Price,
as applicable, in each case the Company shall be deemed to have issued at the
time of the issuance of such rights or options or Convertible Securities the
maximum number of Additional Shares of Common Stock issuable upon exercise or
conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such rights or options or
Convertible Securities, plus, in the case of such rights or options, the minimum
amounts of consideration, if any, payable to the Company upon the exercise of
such rights or options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof; provided that if in the case of
Convertible Securities the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; provided
further that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated using
the increased minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible Securities. No
further adjustment of the Series A Preferred Conversion Price and the Series B
Preferred Conversion Price, as applicable, as adjusted upon the issuance of such
rights, options or Convertible Securities, shall be made as a result of the
actual issuance of Additional Shares of Common Stock on the exercise of any such
rights or options or the conversion of any such Convertible Securities. If any
such rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the Series A
Preferred Conversion Price and the Series B Preferred Conversion Price, as
applicable, as adjusted upon the issuance of such rights, options or Convertible
Securities shall be readjusted to the Series A Preferred Conversion Price and
the Series B Preferred Conversion Price, as applicable, which would have been in
effect had an adjustment been made on the basis that the only Additional Shares
of Common Stock so issued were the Additional Shares of Common Stock, if any,
actually issued or sold on the exercise of such rights or options or rights of
conversion of such Convertible Securities, and such Additional Shares of Common
Stock, if any, were issued or sold for the consideration actually received by
the Company upon such exercise, plus the consideration, if any, actually
received by the Company for the granting of all such rights or options, whether
or not exercised, plus the consideration received for issuing or selling the
Convertible Securities, whether or not converted, plus the consideration, if
any, actually received by the Company (other than by cancellation of liabilities
or obligations evidenced by such Convertible Securities) on the conversion of
such Convertible Securities, provided that such readjustment shall not apply to
prior conversions of Series A Preferred and Series B Preferred.
11.
<PAGE> 12
(iv) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Company or deemed to be issued pursuant to
this Section 4(i), other than (A) shares of Common Stock issued upon conversion
of the Series A Preferred or Series B Preferred, (B) up to 6,500,000 shares of
Common Stock and/or options, warrants or other Common Stock purchase rights, and
the Common Stock issued pursuant to such options, warrants or other rights (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like) after the Original Issue Date to employees, officers or directors of,
or consultants or advisors to the Company or any subsidiary pursuant to stock
purchase or stock option plans or other arrangements that are approved by the
Board, (C) shares of Common Stock issued pursuant to the exercise of options,
warrants or convertible securities outstanding as of the Original Issue Date,
(D) shares of Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options, warrants
or other rights, issued for consideration other than cash pursuant to a merger,
consolidation, acquisition or similar business combination approved by the Board
(which approval must include the vote of at least one Series A Director), (E)
shares of Common Stock issued pursuant to any equipment leasing or loan
arrangement, or debt financing from a bank or similar financial or lending
institution approved by the Board (which approval must include the vote of at
least one Series A Director), (F) shares of Common Stock issued in connection
with strategic transactions involving the Company and other entities, including
joint ventures, manufacturing, marketing or distribution arrangements or
technology transfer or development arrangements approved by the Board (which
approval must include the vote of at least one Series A Director) and (G) shares
of Common Stock issued in connection with those certain warrant(s) to purchase
an aggregate of 439,103 shares of Common Stock issued on April ___, 1999.
References to Common Stock in the subsections of this clause (iv) above shall
mean all shares of Common Stock issued by the Company or deemed to be issued
pursuant to this Section 4(i). The "Effective Price" of Additional Shares of
Common Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold by the Company under this Section 4(i), into the aggregate consideration
received, or deemed to have been received by the Company for such issue under
this Section 4(i), for such Additional Shares of Common Stock.
(j) CERTIFICATE OF ADJUSTMENT. In each case of an adjustment
or readjustment of the Series A Preferred Conversion Price or Series B Preferred
Conversion Price for the number of shares of Common Stock or other securities
issuable upon conversion of the Series A Preferred or Series B Preferred, if the
Series A Preferred and Series B Preferred is then convertible pursuant to this
Section 4, the Company, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of Series A
Preferred and Series B Preferred, as applicable, at the holder's address as
shown in the Company's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (i) the consideration received
or deemed to be received by the Company for any Additional Shares of Common
Stock issued or sold or deemed to have been issued or sold, (ii) the Series A
Preferred Conversion Price at the time in effect, (iii) the number of Additional
Shares of Common Stock and (iv) the type and amount, if any, of other property
which at the time would be received upon conversion of the Series A Preferred
and Series B Preferred, as applicable.
12.
<PAGE> 13
(k) NOTICES OF RECORD DATE. Upon (i) any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any Acquisition (as defined in Section 3(c)) or
other capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company with or into any other corporation, or any Asset
Transfer (as defined in Section 3(c)), or any voluntary or involuntary
dissolution, liquidation or winding up of the Company, the Company shall mail to
each holder of Series A Preferred and Series B Preferred at least ten (10) days
prior to the record date specified therein (or such shorter period approved by a
majority of the outstanding Series A Preferred and Series B Preferred, voting
together as a single class) a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up is expected to become
effective, and (C) the date, if any, that is to be fixed as to when the holders
of record of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such Acquisition, reorganization, reclassification,
transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or
winding up.
(l) AUTOMATIC CONVERSION.
(i) Each share of Series A Preferred and Series B
Preferred shall automatically be converted into shares of Common Stock, based on
the then-effective Series A Preferred Conversion Rate and Series B Preferred
Conversion Rate, respectively, (A) at any time upon the affirmative election of
the holders of at least a majority of the outstanding shares of the Series A
Preferred and the Series B Preferred, voting together as a single class, or (B)
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Company in which (i) in the case of the Series A Preferred, the per share price
is at least $2.00 (as adjusted for stock splits, dividends, recapitalizations
and the like) and, in the case of the Series B Preferred, is at least $8.54 (as
adjusted for stock splits, dividends, recapitalizations and the like), and (ii)
the gross cash proceeds to the Company (before underwriting discounts,
commissions and fees) are at least $15,000,000. Upon such automatic conversion,
any declared and unpaid dividends shall be paid in accordance with the
provisions of Section 4(d).
(ii) Upon the occurrence of either of the events
specified in Section 4(l)(i) above, the outstanding shares of Series A Preferred
and/or Series B Preferred, as applicable, shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; provided, however, that the Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Series A Preferred
and/or Series B Preferred are either delivered to the Company or its transfer
agent as provided below, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates. Upon the occurrence of such
automatic
13.
<PAGE> 14
conversion of the Series A Preferred and/or Series B Preferred, the holders of
Series A Preferred and/or Series B Preferred, as applicable, shall surrender the
certificates representing such shares at the office of the Company or any
transfer agent for the Series A Preferred and Series B Preferred. Thereupon,
there shall be issued and delivered to such holder promptly at such office and
in its name as shown on such surrendered certificate or certificates, a
certificate or certificates for the number of shares of Common Stock into which
the shares of Series A Preferred and/or Series B Preferred, as applicable,
surrendered were convertible on the date on which such automatic conversion
occurred, and any declared and unpaid dividends shall be paid in accordance with
the provisions of Section 4(d).
(m) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred and Series B Preferred.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A Preferred and Series B Preferred
by a holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of any
fractional share, the Company shall, in lieu of issuing any fractional share,
pay cash equal to the product of such fraction multiplied by the Common Stock's
fair market value (as determined by the Board of Directors) on the date of
conversion.
(n) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred and Series B Preferred, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred and Series B
Preferred. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Series A Preferred and Series B Preferred, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(o) NOTICES. Any notice required by the provisions of this
Section 4 shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed telex
or facsimile if sent during normal business hours of the recipient; if not, then
on the next business day, (iii) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid, or (iv)
one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Company.
(p) PAYMENT OF TAXES. The Company will pay all taxes (other
than taxes based upon income) and other governmental charges that may be imposed
with respect to the issue or delivery of shares of Common Stock upon conversion
of shares of Series A Preferred and Series B Preferred, excluding any tax or
other charge imposed in connection with any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series A Preferred and Series B Preferred so converted were registered.
14.
<PAGE> 15
(q) NO DILUTION OR IMPAIRMENT. Without the consent of the
holders of then outstanding Series A Preferred and Series B Preferred as
required under Section 2(b), the Company shall not amend its Restated
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or take
any other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
and Series B Preferred against dilution or other impairment.
5. NO REISSUANCE OF SERIES A PREFERRED AND SERIES B PREFERRED.
No share or shares of Series A Preferred and Series B
Preferred acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued.
V.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. This Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the CGCL) for breach of duty to the Corporation
and its stockholders through bylaw provisions or through agreements with the
agents, or through stockholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject, at any
time or times that the Corporation is subject to Section 2115(b) of the CGCL, to
the limits on such excess indemnification set forth in Section 204 of the CGCL.
C. Any repeal or modification of this Article V shall only be
prospective and shall not effect the rights under this Article V in effect at
the time of the alleged occurrence of any action or omission to act giving rise
to liability.
VI.
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. Subject to Section E.2(c)
of Article IV above, the number of directors which shall constitute the whole
Board of Directors shall be fixed by the Board of Directors in the manner
provided in the Bylaws.
B. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the stockholders entitled to
vote. The Board of Directors shall also have the power to adopt, amend or repeal
Bylaws.
15.
<PAGE> 16
C. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
VII.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this reservation.
* * * *
FOUR: This Restated Certificate of Incorporation has been duly approved
by the Board of Directors of this Corporation.
FIVE: This Restated Certificate of Incorporation has been duly adopted
in accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware by the Board of Directors and the
stockholders of the Corporation. The total number of outstanding shares entitled
to vote or act by written consent was twenty-one million one hundred thirty
thousand (21,130,000) shares of Common Stock and eight million two hundred fifty
thousand (8,250,000) shares of Series A Preferred Stock. A majority of the
outstanding shares of Common Stock approved this Restated Certificate of
Incorporation by written consent in accordance with Section 228 of the General
Corporation Law of the State of Delaware and written notice of such was given by
the Corporation in accordance with said Section 228.
16.
<PAGE> 17
IN WITNESS WHEREOF, MP3.COM, INC. has caused this Restated Certificate
of Incorporation to be signed by its President and the Secretary in San Diego,
California this 26th day of April 1999.
MP3.COM, INC.
/s/ ROBIN RICHARDS
-------------------------------------
ROBIN RICHARDS,
President and Chief Operating Officer
/s/ STEVEN M. PRZESMICKI
-------------------------------------
STEVEN M. PRZESMICKI,
Secretary
17.
<PAGE> 1
EXHIBIT 3.2
RESTATED CERTIFICATE OF INCORPORATION
OF
MP3.COM, INC.
Robin Richards and Steven M. Przesmicki hereby certify that:
ONE: The original name of this corporation was Zco Inc. and the date
of filing the original Certificate of Incorporation of this corporation with the
Secretary of State of the State of Delaware was March 17, 1998.
TWO: They are the duly elected and acting President and Secretary,
respectively, of MP3.com, Inc., a Delaware corporation.
THREE: The Restated Certificate of Incorporation, as amended, of this
corporation is hereby amended and restated in its entirety to read as follows:
I.
The name of the corporation is MP3.COM, INC. (the "Corporation" or
the "Company").
II.
The address of the registered office of the Corporation in the State
of Delaware is:
CorpAmerica, Inc.
30 Old Rudnick Lane
Dover, DE 19901
County of Kent
The name of the Corporation's registered agent at said address is
CorpAmerica, Inc.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is two hundred fifteen
million (215,000,000). Two hundred million (200,000,000) shares shall be Common
Stock, each having a par value of one-tenth of one cent ($0.001) (the "Common
Stock"). Fifteen million (15,000,000) shares shall be Preferred Stock, each
having a par value of one-tenth of one cent ($0.001) (the "Preferred Stock").
B. Effective at the time of filing with the Secretary of State of the
State of Delaware of this Restated Certificate of Incorporation (the "Effective
Time"), each share of the
1.
<PAGE> 2
Corporation's Common Stock, par value $0.001 per share, issued and outstanding
or held in treasury at the Effective Time shall, automatically and without any
action on the part of the respective holders thereof, be split into and become
one and one-half (1.5) shares of Common Stock, par value $0.001 per share, of
the Corporation. No fractional shares will be issued and, in lieu thereof, any
holder of less than one share of Common Stock shall be entitled to receive cash
for such holder's fractional share based on the fair market value per share as
of the Effective Time as determined by the Board of Directors.
C. Subject to the rights of the Preferred Stock set forth in Section
F.2(b)(vi) below, the number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares of Common Stock then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation (voting together on an as-if-converted basis).
D. The Preferred Stock may be issued from time to time in one or more
series. Except as provided below with respect to the Series A Preferred and
Series B Preferred, as such terms are defined below, the Board of Directors is
hereby authorized, by filing a certificate (a "Preferred Stock Designation")
pursuant to the Delaware General Corporation Law, to fix or alter from time to
time the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions of any wholly
unissued series of Preferred Stock, and to establish from time to time the
number of shares constituting any such series or any of them; and to increase or
decrease the number of shares of any series subsequent to the issuance of shares
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be decreased in
accordance with the foregoing sentence, the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
E. Eight million two hundred fifty thousand (8,250,000) of the
authorized shares of Preferred Stock are hereby designated "Series A Preferred
Stock" (the "Series A Preferred"). Four hundred thirty-nine thousand one hundred
three (439,103) of the authorized shares of Preferred Stock are hereby
designated "Series B Preferred Stock" (the "Series B Preferred").
F. The rights, preferences, privileges, restrictions and other
matters relating to the Series A Preferred and Series B Preferred are as
follows:
1. DIVIDEND RIGHTS.
(a) Subject to the right of any series of Preferred Stock that
may from time to time come into existence, the holders of Series A Preferred and
Series B Preferred, in preference to the holders of Common Stock, shall be
entitled to receive, when and as declared by the Board of Directors, but only
out of funds that are legally available therefor, cash dividends at the rate of
eight percent (8%) of the respective Original Issue Price (as defined below) per
annum per share on each outstanding share of Series A Preferred and Series B
Preferred (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares). The "Original Issue
Price" of (i) the Series A Preferred shall be one dollar and fifty-four cents
($1.54) per share and (ii) the Series B Preferred shall be five dollars and
sixty-nine cents ($5.69) per share. Such dividends shall be payable only when,
as and if declared by the Board of Directors and shall be non-cumulative.
2.
<PAGE> 3
(b) So long as any shares of Series A Preferred or Series B
Preferred shall be outstanding, no dividend, whether in cash or property, shall
be paid or declared, nor shall any other distribution be made, on the Common
Stock, nor shall any shares of Common Stock be purchased, redeemed, or otherwise
acquired for value by the Company (except for acquisitions of Common Stock by
the Company pursuant to agreements which permit the Company to repurchase such
shares upon termination of services to the Company or in exercise of the
Company's right of first refusal upon a proposed transfer) until all dividends
(set forth in Section 1(a) above) on the Series A Preferred and Series B
Preferred shall have been paid or declared and set apart. In the event dividends
are paid on any share of Common Stock, an additional dividend shall be paid with
respect to all outstanding shares of Series A Preferred and Series B Preferred
in an amount equal per share (on an as-if-converted to Common Stock basis) to
the amount paid or set aside for each share of Common Stock. The provisions of
this Section 1(b) shall not, however, apply to (i) a dividend payable in Common
Stock, (ii) the acquisition of shares of Common Stock in exchange for other
shares of Common Stock, or (iii) any repurchase of any outstanding securities of
the Company that is unanimously approved by the Company's Board of Directors.
2. VOTING RIGHTS.
(a) GENERAL RIGHTS. Except as otherwise provided herein or as
required by law, the Series A Preferred and the Series B Preferred shall be
voted equally with the Common Stock and not as a separate class, at any annual
or special meeting of stockholders of the Company, and may act by written
consent in the same manner as the Common Stock, in either case upon the
following basis: each holder of shares of Series A Preferred and Series B
Preferred, respectively, shall be entitled to such number of votes as shall be
equal to the whole number of shares of Common Stock into which such holder's
aggregate number of shares of Series A Preferred and Series B Preferred are
convertible (pursuant to Section 4 hereof) immediately after the close of
business on the record date fixed for such meeting or the effective date of such
written consent.
(b) SEPARATE VOTE OF SERIES A PREFERRED AND SERIES B PREFERRED.
Subject to the rights of any series of Preferred Stock which may from time to
time come into existence, for so long as at least a total of 500,000 shares of
Series A Preferred and/or Series B Preferred (subject to adjustment for any
stock split, reverse stock split or other similar event affecting the Series A
Preferred and Series B Preferred) remain outstanding, in addition to any other
vote or consent required herein or by law, the vote or written consent of the
holders of at least a majority of the outstanding Series A Preferred and Series
B Preferred, voting together as a single class, shall be necessary for effecting
or validating the following actions:
(i) Any amendment, alteration, or repeal of any provision
of the Certificate of Incorporation of the Company (including any filing of a
Certificate of Designation) that alters or changes the voting powers,
preferences or other special rights, privileges or restrictions of the Series A
Preferred or Series B Preferred, or that otherwise adversely affects the voting
powers, preferences or other special rights, privileges or restrictions of the
Series A Preferred or Series B Preferred;
3.
<PAGE> 4
(ii) Any authorization or any designation, whether by
reclassification or otherwise, of any new class or series of stock or any other
securities convertible into equity securities of the Company ranking on a parity
with or senior to the Series A Preferred or Series B Preferred in right of
redemption, liquidation preference, voting or dividends, or any increase in the
authorized or designated number of any such new class or series;
(iii) Any agreement by the Company regarding an Asset
Transfer or Acquisition (each as defined in Section 3(c));
(iv) Any voluntary dissolution or liquidation of the
Company;
(v) Any action that results in the payment or declaration
of a dividend on any shares of Common Stock or Preferred Stock (other than a
dividend payable solely in shares of Common Stock);
(vi) Any increase or decrease in the authorized number of
shares of Common Stock or Preferred Stock; or
(vii) Any redemption or repurchase of Common Stock (except
for acquisitions of Common Stock by the Company (A) pursuant to agreements which
permit the Company to repurchase such shares upon termination of services to the
Company or (B) in exercise of the Company's right of first refusal upon a
proposed transfer).
(c) BOARD OF DIRECTORS. The Company shall not, without the
written consent or affirmative vote of (i) the holders of at least a majority of
the then outstanding Common Stock consenting or voting (as the case may be) as a
separate class and (ii) the holders of at least a majority of the then
outstanding Series A Preferred and Series B Preferred, each consenting or voting
(as the case may be) together as a class, increase the maximum number of
directors constituting the Board of Directors to a number in excess of five (5).
For so long as at least 5,500,000 shares of Series A Preferred remain
outstanding (subject to adjustment for any stock split, reverse stock split or
similar event affecting the Series A Preferred), the holders of Series A
Preferred, voting together
4.
<PAGE> 5
as a separate class, shall be entitled to elect two (2) members of the Company's
Board of Directors (the "Series A Directors") at each meeting or pursuant to
each consent of the Company's stockholders for the election of directors, and to
remove from office such directors and to fill any vacancy caused by the
resignation, death or removal of such directors. For so long as at least
3,575,000 but not more than 5,499,999 shares of Series A Preferred remain
outstanding (subject to adjustment for any stock split, reverse stock split or
similar event affecting the Series A Preferred), the holders of Series A
Preferred, voting together as a separate class, shall be entitled to elect one
(1) member of the Company's Board of Directors at each meeting or pursuant to
each consent of the Company's stockholders for the election of directors, and to
remove from office such director and to fill any vacancy caused by the
resignation, death or removal of such director. At any meeting (or in a written
consent in lieu thereof) held for the purpose of electing directors, the
presence in person or by proxy (or the written consent) of the holders of a
majority of the then outstanding shares of Series A Preferred shall constitute a
quorum of the Series A Preferred for the election of directors to be elected
solely by the holders of the Series A Preferred. The holders of Common Stock,
voting together as a separate class, shall be entitled to elect three (3)
members of the Board of Directors at each meeting or pursuant to each consent of
the Company's stockholders for the election of directors, and to remove from
office such directors and to fill any vacancy caused by the resignation, death
or removal of such directors. At any meeting (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy (or the written consent) of the holders of a majority of the then
outstanding shares of Common Stock shall constitute a quorum of the Common Stock
for the election of directors to be elected solely by the holders of the Common
Stock. The holders of Common Stock, Series A Preferred and Series B Preferred,
voting together as a single class on an as-if-converted basis, shall be entitled
to elect all remaining members of the Board of Directors at each meeting or
pursuant to each consent of the Company's stockholders for the election of
directors, and to remove from office such directors and to fill any vacancy
caused by the resignation, death or removal of such directors. No person
entitled to vote at an election for directors may cumulate votes to which such
person is entitled, unless, at the time of such election, the Corporation is (i)
subject to Section 2115 of the California General Corporation Law ("CGCL") and
(ii) not a "listed" corporation or ceases to be a "listed" corporation under
Section 301.5 of the CGCL. During this time, every stockholder entitled to vote
at an election for directors may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder desires. No stockholder, however,
shall be entitled to so cumulate such stockholder's votes unless (i) the names
of such candidate or candidates have been placed in nomination prior to the
voting and (ii) the stockholder has given notice at the meeting, prior to the
voting, of such stockholder's intention to cumulate such stockholder's votes. If
any stockholder has given proper notice to cumulate votes, all stockholders may
cumulate their votes for any candidates who have been properly placed in
nomination. Under cumulative voting, the candidates receiving the highest number
of votes, up to the number of directors to be elected, are elected.
(d) REMOVAL.
(i) Subject to the rights of the holders of Common Stock,
Series A Preferred and Series B Preferred to remove certain directors pursuant
to Section 2(c) above, during such time or times that the Corporation is subject
to Section 2115(b) of the CGCL, the Board of Directors or any individual
director may be removed from office at any time without cause by the affirmative
vote of the holders of at least a majority of the outstanding shares entitled to
vote on such removal; provided, however, that unless the entire Board is
removed, no individual director may be removed when the votes cast against such
director's removal, or not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively at an election which the
same total number of votes were cast (or, if such action is taken by written
consent, all shares entitled to vote were voted) and the entire number of
directors authorized at the time of such director's most recent election were
then being elected.
(ii) At any time or times that the Corporation is not
subject to Section 2115(b) of the CGCL, and subject to any limitations imposed
by law, Section 2(d)(i) above shall not apply and, subject to (i) the rights of
the holders of Common Stock, Series A Preferred and Series B Preferred to remove
certain directors pursuant to Section 2(c) above, and (ii) Section V A.3(b)
below, the Board of Directors or any director may be removed from office
5.
<PAGE> 6
at any time (a) with cause by the affirmative vote of the holders of a majority
of the voting power of all then-outstanding shares of voting stock of the
Corporation entitled to vote at an election of directors or (b) without cause by
the affirmative vote of the holders of a majority of the voting power of all
then-outstanding shares of voting stock of the Corporation, entitled to vote at
an election of directors.
3. LIQUIDATION RIGHTS.
(a) Upon any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, before any distribution or payment
shall be made to the holders of Common Stock, subject to the rights of any
series of Preferred Stock that may from time to time come into existence, the
holders of Series A Preferred and Series B Preferred shall be entitled to be
paid out of the assets of the Company an amount per share of Series A Preferred
and Series B Preferred, respectively, equal to their respective Original Issue
Price plus all declared and unpaid dividends on the Series A Preferred and
Series B Preferred, respectively (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares) for each share of Series A Preferred and Series B Preferred held by
them. If, upon any such liquidation, distribution, or winding up, the assets of
the Company shall be insufficient to make payment in full to all holders of
Series A Preferred and Series B Preferred of the liquidation preference set
forth in this Section 3(a), subject to the rights of any series of Preferred
Stock that may from time to time come into existence, then such assets shall be
distributed among the holders of Series A Preferred and Series B Preferred at
the time outstanding, ratably in proportion to the full amounts to which they
would otherwise be respectively entitled.
(b) After the payment of the full liquidation preference of the
Series A Preferred and Series B Preferred as set forth in Section 3(a) above,
and any other distribution that may be required with respect to any series of
Preferred Stock that may from time to time come into existence, the remaining
assets of the Company legally available for distribution, if any, shall be
distributed ratably to the holders of the Common Stock.
(c) The following events shall be considered a liquidation
under this Section:
(i) any consolidation or merger of the Company with or into
any other corporation or other entity or person in which the stockholders of the
Company immediately prior to such consolidation or merger own less than 50% of
the Company's voting power immediately after such consolidation or merger,
excluding any consolidation or merger effected exclusively to change the
domicile of the Company (an "Acquisition"); or
(ii) a sale of all or substantially all of the assets of
the Company (an "Asset Transfer").
(iii) In either of such events, if the consideration
received by this Corporation is other than cash, its value will be deemed its
fair market value as determined in good faith by the Board of Directors. Any
securities shall be valued as follows:
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(a) securities not subject to investment letter or other
similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such quotation system over the thirty (30)
day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value shall be
the fair market value thereof, as determined by the Board of Directors.
(b) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a stockholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market value
determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as determined by the Board of Directors.
4. CONVERSION RIGHTS.
The holders of the Series A Preferred and Series B Preferred
shall have the following rights with respect to the conversion of the Series A
Preferred and Series B Preferred into shares of Common Stock (the "Conversion
Rights"):
(a) OPTIONAL CONVERSION. Subject to and in compliance with the
provisions of this Section 4, any shares of Series A Preferred and Series B
Preferred may, at the option of the holder, be converted at any time into
fully-paid and nonassessable shares of Common Stock. The number of shares of
Common Stock to which a holder of Series A Preferred or Series B Preferred shall
be entitled upon conversion shall be the product obtained by multiplying the
"Series A Preferred Conversion Rate" or the "Series B Preferred Conversion
Rate," as applicable, then in effect (determined as provided in Section 4(b)) by
the respective number of shares of Series A Preferred or Series B Preferred
being converted.
(b) SERIES A PREFERRED AND SERIES B PREFERRED CONVERSION RATE.
The conversion rate in effect at any time for conversion of the Series A
Preferred (the "Series A Preferred Conversion Rate") and the Series B Preferred
(the "Series B Preferred Conversion Rate"), respectively, shall be the quotient
obtained by dividing the Original Issue Price of the Series A Preferred and the
Series B Preferred, respectively, by the "Series A Preferred Conversion Price"
and the "Series B Preferred Conversion Price," respectively, calculated as
provided in Section 4(c).
(c) SERIES A PREFERRED AND SERIES B PREFERRED CONVERSION PRICE.
The conversion price for the Series A Preferred and the Series B Preferred,
respectively, shall initially be the respective Original Issue Price of the
Series A Preferred (the "Series A Preferred Conversion Price") and the Series B
Preferred (the "Series B Preferred Conversion Price"). Such
7.
<PAGE> 8
initial Series A Preferred Conversion Price and Series B Preferred Conversion
Price shall be adjusted from time to time in accordance with this Section 4. All
references herein to the Series A Preferred Conversion Price and Series B
Preferred Conversion Price shall mean the Series A Preferred Conversion Price
and Series B Preferred Conversion Price, respectively, as so adjusted.
(d) MECHANICS OF CONVERSION. Each holder of Series A Preferred
or Series B Preferred who desires to convert the same into shares of Common
Stock pursuant to this Section 4 shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or any transfer agent for
the Series A Preferred and Series B Preferred, and shall give written notice to
the Company at such office that such holder elects to convert the same. Such
notice shall state the number of shares of Series A Preferred and Series B
Preferred being converted. Thereupon, the Company shall promptly issue and
deliver at such office to such holder a certificate or certificates for the
number of shares of Common Stock to which such holder is entitled and shall
promptly pay (i) in cash or, to the extent sufficient funds are not then legally
available therefor, in Common Stock (at the Common Stock's fair market value
determined by the Board of Directors as of the date of such conversion), any
declared and unpaid dividends on the shares of Series A Preferred and Series B
Preferred being converted and (ii) in cash (at the Common Stock's fair market
value determined by the Board of Directors as of the date of conversion) the
value of any fractional share of Common Stock otherwise issuable to any holder
of Series A Preferred and Series B Preferred, as applicable. Such conversion
shall be deemed to have been made at the close of business on the date of such
surrender of the certificates representing the shares of Series A Preferred and
Series B Preferred to be converted, and the person entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such shares of Common Stock on such date. If
the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as amended, (the "Securities
Act") the conversion may, at the option of any holder tendering Series A
Preferred or Series B Preferred for conversion, be conditioned upon the closing
with the underwriters of the sale of securities pursuant to such offering, in
which event the person(s) entitled to receive Common Stock upon conversion of
such Series A Preferred or Series B Preferred shall not be deemed to have
converted such Series A Preferred or Series B Preferred until immediately prior
to the closing of such sale of securities.
(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. The term
"Original Issue Date" shall mean, with respect to the Series A Preferred,
January 21, 1999, and with respect to the Series B Preferred, April 29, 1999. If
the Company shall at any time or from time to time after the applicable Original
Issue Date effect a subdivision of the outstanding Common Stock without a
corresponding subdivision of the Preferred Stock, the Series A Preferred
Conversion Price and Series B Preferred Conversion Price, as applicable, in
effect immediately before that subdivision shall be proportionately decreased.
Conversely, if the Company shall at any time or from time to time after the
applicable Original Issue Date combine the outstanding shares of Common Stock
into a smaller number of shares without a corresponding combination of the
Preferred Stock, the Series A Preferred Conversion Price and the Series B
Preferred Conversion Price, as applicable, in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 4(e) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
8.
<PAGE> 9
(f) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If
the Company at any time or from time to time after the applicable Original Issue
Date makes, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, in each such event the Series A Preferred
Conversion Price and Series B Preferred Conversion Price, as applicable, that
are then in effect shall be decreased as of the time of such issuance or, in the
event such record date is fixed, as of the close of business on such record
date, by multiplying the Series A Preferred Conversion Price and the Series B
Preferred Conversion Price, as applicable, then in effect by a fraction (i) the
numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (ii) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Series A Preferred Conversion Price and Series B Preferred
Conversion Price, as applicable, shall be recomputed accordingly as of the close
of business on such record date and thereafter the Series A Preferred Conversion
Price and Series B Preferred Conversion Price, as applicable, shall be adjusted
pursuant to this Section 4(f) to reflect the actual payment of such dividend or
distribution.
(g) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If at any time or from time to time after the applicable Original Issue Date,
the Common Stock issuable upon the conversion of the Series A Preferred and
Series B Preferred is changed into the same or a different number of shares of
any class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than an Acquisition or Asset Transfer as defined in Section
3(c) or a subdivision or combination of shares or stock dividend or a
reorganization, merger, consolidation or sale of assets provided for elsewhere
in this Section 4), in any such event each holder of Series A Preferred and
Series B Preferred, as applicable, shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the maximum number of shares of Common Stock into which such shares
of Series A Preferred and Series B Preferred could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein or with respect to such other
securities or property by the terms thereof.
(h) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the applicable Original Issue
Date, there is a capital reorganization of the Common Stock (other than an
Acquisition or Asset Transfer as defined in Section 3(c) or a recapitalization,
subdivision, combination, reclassification, exchange or substitution of shares
provided for elsewhere in this Section 4), as a part of such capital
reorganization, provision shall be made so that the holders of the Series A
Preferred and Series B Preferred, as applicable, shall thereafter be entitled to
receive upon conversion of the Series A Preferred and Series B Preferred, as
applicable, the number of shares of stock or other securities or property of the
Company to which a holder of the number of shares of Common Stock deliverable
upon conversion would have been entitled on such capital reorganization, subject
to adjustment in respect of such stock or securities by the terms thereof. In
any such case,
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<PAGE> 10
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of Series A Preferred
and Series B Preferred, as applicable, after the capital reorganization to the
end that the provisions of this Section 4 (including adjustment of the Series A
Preferred Conversion Price and Series B Preferred Conversion Price then in
effect and the number of shares issuable upon conversion of the Series A
Preferred and Series B Preferred) shall be applicable after that event and be as
nearly equivalent as practicable.
(i) SALE OF SHARES BELOW SERIES A PREFERRED CONVERSION PRICE OR
SERIES B PREFERRED CONVERSION PRICE.
(i) If at any time or from time to time after the
applicable Original Issue Date, the Company issues or sells, or is deemed by the
express provisions of this Section 4(i) to have issued or sold, Additional
Shares of Common Stock (as defined in Section 4(i)(iv) below), other than as a
dividend or other distribution on any class of stock as provided in Section 4(f)
above, and other than a subdivision or combination of shares of Common Stock as
provided in Section 4(e) above, for an Effective Price (as defined in Section
4(i)(iv) below) less than the then effective Series A Preferred Conversion Price
or Series B Preferred Conversion Price, as applicable, then and in each such
case the then existing Series A Preferred Conversion Price or Series B Preferred
Conversion Price, as applicable, shall be reduced, as of the opening of business
on the date of such issue or sale, to a price determined by multiplying the
Series A Preferred Conversion Price or Series B Preferred Conversion Price, as
applicable, by a fraction (i) the numerator of which shall be (A) the number of
shares of Common Stock deemed outstanding (as defined below) immediately prior
to such issue or sale, plus (B) the number of shares of Common Stock which the
aggregate consideration received (as defined in Section 4(i)(ii) by the Company
for the total number of Additional Shares of Common Stock so issued would
purchase at such Series A Preferred Conversion Price or Series B Preferred
Conversion Price, as applicable, and (ii) the denominator of which shall be the
number of shares of Common Stock deemed outstanding (as defined below)
immediately prior to such issue or sale plus the total number of Additional
Shares of Common Stock so issued. For the purposes of the preceding sentence,
the number of shares of Common Stock deemed to be outstanding as of a given date
shall be the sum of (A) the number of shares of Common Stock actually
outstanding, (B) the number of shares of Common Stock into which the then
outstanding shares of Series A Preferred and Series B Preferred could be
converted if fully converted on the day immediately preceding the given date,
and (C) the number of shares of Common Stock which could be obtained through the
exercise or conversion of all other rights, options and convertible securities
outstanding on the day immediately preceding the given date.
(ii) For the purpose of making any adjustment required
under this Section 4(i), the consideration received by the Company for any issue
or sale of securities shall (A) to the extent it consists of cash, be computed
at the net amount of cash received by the Company after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Company in connection with such issue or sale but without deduction of
any expenses payable by the Company, (B) to the extent it consists of property
other than cash, be computed at the fair value of that property as determined in
good faith by the Board of Directors, and (C) if Additional Shares of Common
Stock, Convertible Securities (as defined in Section 4(i)(iii)) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
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<PAGE> 11
assets of the Company for a consideration which covers both, be computed as the
portion of the consideration so received that may be reasonably determined in
good faith by the Board of Directors to be allocable to such Additional Shares
of Common Stock, Convertible Securities or rights or options.
(iii) For the purpose of the adjustment required under this
Section 4(i), if the Company issues or sells (i) stock or other securities
convertible into, Additional Shares of Common Stock (such convertible stock or
securities being herein referred to as "Convertible Securities") or (ii) rights
or options for the purchase of Additional Shares of Common Stock or Convertible
Securities and if the Effective Price of such Additional Shares of Common Stock
is less than the Series A Preferred Conversion Price or Series B Preferred
Conversion Price, as applicable, in each case the Company shall be deemed to
have issued at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable upon
exercise or conversion thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the Company for the issuance of such rights
or options or Convertible Securities, plus, in the case of such rights or
options, the minimum amounts of consideration, if any, payable to the Company
upon the exercise of such rights or options, plus, in the case of Convertible
Securities, the minimum amounts of consideration, if any, payable to the Company
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion thereof; provided that if in the
case of Convertible Securities the minimum amounts of such consideration cannot
be ascertained, but are a function of antidilution or similar protective
clauses, the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; provided
further that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated using
the increased minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible Securities. No
further adjustment of the Series A Preferred Conversion Price and the Series B
Preferred Conversion Price, as applicable, as adjusted upon the issuance of such
rights, options or Convertible Securities, shall be made as a result of the
actual issuance of Additional Shares of Common Stock on the exercise of any such
rights or options or the conversion of any such Convertible Securities. If any
such rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the Series A
Preferred Conversion Price and the Series B Preferred Conversion Price, as
applicable, as adjusted upon the issuance of such rights, options or Convertible
Securities shall be readjusted to the Series A Preferred Conversion Price and
the Series B Preferred Conversion Price, as applicable, which would have been in
effect had an adjustment been made on the basis that the only Additional Shares
of Common Stock so issued were the Additional Shares of Common Stock, if any,
actually issued or sold on the exercise of such rights or options or rights of
conversion of such Convertible Securities, and such Additional Shares of Common
Stock, if any, were issued or sold for the consideration actually received by
the Company upon such exercise, plus the consideration, if any, actually
received by the Company for the granting of all
11.
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such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities, whether or not
converted, plus the consideration, if any, actually received by the Company
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) on the conversion of such Convertible Securities,
provided that such readjustment shall not apply to prior conversions of Series A
Preferred and Series B Preferred.
(iv) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Company or deemed to be issued pursuant to
this Section 4(i), other than (A) shares of Common Stock issued upon conversion
of the Series A Preferred or Series B Preferred, (B) up to 6,500,000 shares of
Common Stock and/or options, warrants or other Common Stock purchase rights, and
the Common Stock issued pursuant to such options, warrants or other rights (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like) after the Original Issue Date to employees, officers or directors of,
or consultants or advisors to the Company or any subsidiary pursuant to stock
purchase or stock option plans or other arrangements that are approved by the
Board, (C) shares of Common Stock issued pursuant to the exercise of options,
warrants or convertible securities outstanding as of the Original Issue Date,
(D) shares of Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options, warrants
or other rights, issued for consideration other than cash pursuant to a merger,
consolidation, acquisition or similar business combination approved by the Board
(which approval must include the vote of at least one Series A Director), (E)
shares of Common Stock issued pursuant to any equipment leasing or loan
arrangement, or debt financing from a bank or similar financial or lending
institution approved by the Board (which approval must include the vote of at
least one Series A Director), (F) shares of Common Stock issued in connection
with strategic transactions involving the Company and other entities, including
joint ventures, manufacturing, marketing or distribution arrangements or
technology transfer or development arrangements approved by the Board (which
approval must include the vote of at least one Series A Director) and (G) shares
of Common Stock issued in connection with those certain warrant(s) to purchase
an aggregate of 439,103 shares of Common Stock issued on April 29, 1999.
References to Common Stock in the subsections of this clause (iv) above shall
mean all shares of Common Stock issued by the Company or deemed to be issued
pursuant to this Section 4(i). The "Effective Price" of Additional Shares of
Common Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold by the Company under this Section 4(i), into the aggregate consideration
received, or deemed to have been received by the Company for such issue under
this Section 4(i), for such Additional Shares of Common Stock.
(j) CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or
readjustment of the Series A Preferred Conversion Price or Series B Preferred
Conversion Price for the number of shares of Common Stock or other securities
issuable upon conversion of the Series A Preferred or Series B Preferred, if the
Series A Preferred and Series B Preferred is then convertible pursuant to this
Section 4, the Company, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of Series A
Preferred and Series B Preferred, as applicable, at the holder's address as
shown in the Company's books. The certificate shall set
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forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (i) the
consideration received or deemed to be received by the Company for any
Additional Shares of Common Stock issued or sold or deemed to have been issued
or sold, (ii) the Series A Preferred Conversion Price at the time in effect,
(iii) the number of Additional Shares of Common Stock and (iv) the type and
amount, if any, of other property which at the time would be received upon
conversion of the Series A Preferred and Series B Preferred, as applicable.
(k) NOTICES OF RECORD DATE. Upon (i) any taking by the Company
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any Acquisition (as defined in Section 3(c)) or
other capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company with or into any other corporation, or any Asset
Transfer (as defined in Section 3(c)), or any voluntary or involuntary
dissolution, liquidation or winding up of the Company, the Company shall mail to
each holder of Series A Preferred and Series B Preferred at least ten (10) days
prior to the record date specified therein (or such shorter period approved by a
majority of the outstanding Series A Preferred and Series B Preferred, voting
together as a single class) a notice specifying (A) the date on which any such
record is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
Acquisition, reorganization, reclassification, transfer, consolidation, merger,
Asset Transfer, dissolution, liquidation or winding up is expected to become
effective, and (C) the date, if any, that is to be fixed as to when the holders
of record of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such Acquisition, reorganization, reclassification,
transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or
winding up.
(l) AUTOMATIC CONVERSION.
(i) Each share of Series A Preferred and Series B Preferred
shall automatically be converted into shares of Common Stock, based on the
then-effective Series A Preferred Conversion Rate and Series B Preferred
Conversion Rate, respectively, (A) at any time upon the affirmative election of
the holders of at least a majority of the outstanding shares of the Series A
Preferred and the Series B Preferred, voting together as a single class, or (B)
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act, covering the
offer and sale of Common Stock for the account of the Company in which (i) in
the case of the Series A Preferred, the per share price is at least $2.00 (as
adjusted for stock splits, dividends, recapitalizations and the like) and, in
the case of the Series B Preferred, the per share price is at least $8.54 (as
adjusted for stock splits, dividends, recapitalizations and the like), and (ii)
the gross cash proceeds to the Company (before underwriting discounts,
commissions and fees) are at least $15,000,000. Upon such automatic conversion,
any declared and unpaid dividends shall be paid in accordance with the
provisions of Section 4(d).
(ii) Upon the occurrence of either of the events specified
in Section 4(l)(i) above, the outstanding shares of Series A Preferred and/or
Series B Preferred, as applicable, shall be converted automatically without any
further action by the holders of such
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<PAGE> 14
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; provided, however, that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the certificates evidencing
such shares of Series A Preferred and/or Series B Preferred are either delivered
to the Company or its transfer agent as provided below, or the holder notifies
the Company or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the Company to indemnify
the Company from any loss incurred by it in connection with such certificates.
Upon the occurrence of such automatic conversion of the Series A Preferred
and/or Series B Preferred, the holders of Series A Preferred and/or Series B
Preferred, as applicable, shall surrender the certificates representing such
shares at the office of the Company or any transfer agent for the Series A
Preferred and Series B Preferred. Thereupon, there shall be issued and delivered
to such holder promptly at such office and in its name as shown on such
surrendered certificate or certificates, a certificate or certificates for the
number of shares of Common Stock into which the shares of Series A Preferred
and/or Series B Preferred, as applicable, surrendered were convertible on the
date on which such automatic conversion occurred, and any declared and unpaid
dividends shall be paid in accordance with the provisions of Section 4(d).
(m) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred and Series B Preferred.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A Preferred and Series B Preferred
by a holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of any
fractional share, the Company shall, in lieu of issuing any fractional share,
pay cash equal to the product of such fraction multiplied by the Common Stock's
fair market value (as determined by the Board of Directors) on the date of
conversion.
(n) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred and Series B Preferred, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred and Series B
Preferred. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Series A Preferred and Series B Preferred, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(o) NOTICES. Any notice required by the provisions of this
Section 4 shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed telex
or facsimile if sent during normal business hours of the recipient; if not, then
on the next business day, (iii) five (5) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid, or (iv)
one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All notices
shall be addressed to each holder of record at the address of such holder
appearing on the books of the Company.
14.
<PAGE> 15
(p) PAYMENT OF TAXES. The Company will pay all taxes (other
than taxes based upon income) and other governmental charges that may be imposed
with respect to the issue or delivery of shares of Common Stock upon conversion
of shares of Series A Preferred and Series B Preferred, excluding any tax or
other charge imposed in connection with any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series A Preferred and Series B Preferred so converted were registered.
(q) NO DILUTION OR IMPAIRMENT. Without the consent of the
holders of then outstanding Series A Preferred and Series B Preferred as
required under Section 2(b), the Company shall not amend its Restated
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or take
any other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
and Series B Preferred against dilution or other impairment.
5. NO REISSUANCE OF SERIES A PREFERRED AND SERIES B PREFERRED.
No share or shares of Series A Preferred and Series B Preferred
acquired by the Corporation by reason of redemption, purchase, conversion or
otherwise shall be reissued.
V.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. 1. The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of Directors. The number
of directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2.
(a) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act, covering the offer and sale of
Common Stock to the public (the "Initial Public Offering"), the directors shall
be divided into three classes designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three years. At the second annual meeting of
stockholders following the Initial Public Offering, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders following
the Initial Public Offering, the term of office of the
15.
<PAGE> 16
Class III directors shall expire and Class III directors shall be elected for a
full term of three years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting. During such
time or times that the Corporation is subject to Section 2115(b) of the
California General Corporation Law ("CGCL"), this Section A.2(a) of this Article
V shall be effective and applicable only when the Corporation is a "listed"
corporation within the meaning of Section 301.5 of the CGCL.
(b) In the event that the Corporation (i) is subject to Section
2115(b) of the CGCL AND (ii) is not a "listed" corporation or ceases to be a
"listed" corporation under Section 301.5 of the CGCL, Section A.2(a) of this
Article V shall not apply and all directors shall be shall be elected at each
annual meeting of stockholders to hold office until the next annual meeting.
(c) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the Corporation (i) is subject to Section 2115(b) of the CGCL AND (ii)
is not a "listed" corporation or ceases to be a "listed" corporation under
Section 301.5 of the CGCL. During this time, every stockholder entitled to vote
at an election for directors may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit. No stockholder,
however, shall be entitled to so cumulate such stockholder's votes unless (i)
the names of such candidate or candidates have been placed in nomination prior
to the voting and (ii) the stockholder has given notice at the meeting, prior to
the voting, of such stockholder's intention to cumulate such stockholder's
votes. If any stockholder has given proper notice to cumulate votes, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. Under cumulative voting, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
3.
(a) During such time or times that the Corporation is subject
to Section 2115(b) of the CGCL, the Board of Directors or any individual
director may be removed from office at any time without cause by the affirmative
vote of the holders of at least a majority of the outstanding shares entitled to
vote on such removal; provided, however, that unless the entire Board is
removed, no individual director may be removed when the votes cast against such
director's removal, or not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively at an election which the
same total number of votes were cast (or, if such action is taken by written
consent, all shares entitled to vote were voted) and the entire number of
directors authorized at the time of such director's most recent election were
then being elected.
16.
<PAGE> 17
(b) Subject to any limitations imposed by law, if the
Corporation is not subject to Section 2115(b) of the CGCL, then (i) at any time
after the Initial Public Offering, Section A.3(a) above shall no longer apply
and removal shall be as provided in Section 141(k) of the DGCL, and (ii) at any
time prior to the Initial Public Offering, removal shall be as provided in
Section IV F.2 (d)(ii) above.
4.
(a) Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders (except as stockholders may have such
rights as described below). Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
director for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
DGCL.
(c) At any time or times that the Corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office, where the number of such directors voting to fill,
such vacancy who have been elected by stockholders shall constitute less than a
majority of the directors then in office, then
(i) Any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(ii) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the voting
17.
<PAGE> 18
stock of the Corporation entitled to vote. The Board of Directors shall also
have the power to adopt, amend, or repeal Bylaws.
2. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws or by written consent of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public Offering, provided following the
closing of the Initial Public Offering no action shall be taken by the
stockholders by written consent.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
VI.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. This Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the CGCL) for breach of duty to the
Corporation and its shareholders through bylaw provisions or through agreements
with the agents, or through shareholder resolutions, or otherwise, in excess of
the indemnification otherwise permitted by Section 317 of the CGCL, subject, at
any time or times the Corporation is subject to Section 2115(b) to the limits on
such excess indemnification set forth in Section 204 of the CGCL.
C. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in paragraph
B. of this Article VII, and all rights conferred upon the stockholders herein
are granted subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the voting stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
18.
<PAGE> 19
FOUR: This Restated Certificate of Incorporation has been duly
approved by the Board of Directors of this Corporation.
FIVE: This Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware by the Board of Directors and
the stockholders of the Corporation. The total number of outstanding shares
entitled to vote or act by written consent with respect to this Restated
Certificate of Incorporation were _____________shares of Common Stock and
________shares of Preferred Stock. A majority of the outstanding shares of
Common Stock and a majority of the outstanding shares of Preferred Stock
approved this Restated Certificate of Incorporation by written consent in
accordance with Section 228 of the General Corporation Law of the State of
Delaware and written notice of such was given by the Corporation in accordance
with said Section 228.
19.
<PAGE> 20
IN WITNESS WHEREOF, MP3.COM, INC. has caused this Restated
Certificate of Incorporation to be signed by its President and the Secretary in
San Diego, California this ____ day of _____1999.
MP3.COM, INC.
------------------------------------------
ROBIN RICHARDS,
President and Chief Operating Officer
------------------------------------------
STEVEN M. PRZESMICKI,
Secretary
20.
<PAGE> 1
EXHIBIT 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
MP3.COM, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies as follows:
1. The name of the Corporation is MP3.com, Inc.
2. The original name of this Corporation was Zco Inc. and the date of
filing the original Certificate of Incorporation of this Corporation with the
Secretary of State of the State of Delaware was March 17, 1998.
3. The Amended and Restated Certificate of Incorporation of this
Corporation, in the form attached hereto as Exhibit A, has been duly adopted by
the Board of Directors and by the stockholders of the corporation in accordance
with Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
4. The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and hereby incorporated
by reference.
IN WITNESS WHEREOF, MP3.com, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed by its President and Chief Operating
Officer and attested to by its Secretary this ____ day of ____________, 1999.
-------------------------------------
Robin Richards
President and Chief Operating Officer
ATTEST:
- -------------------------------------
Steven M. Przesmicki
Secretary
1.
<PAGE> 2
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MP3.COM, INC.
I.
The name of this corporation is MP3.COM, INC.
II.
The address of the registered office of the corporation in the State of
Delaware is CorpAmerica, Inc., 30 Old Rudnick Lane, City of Dover, County of
Kent, 19901 and the name of the registered agent of the corporation in the State
of Delaware at such address is CorpAmerica, Inc.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is two hundred fifteen
million (215,000,000) shares. Two hundred million (200,000,000) shares shall be
Common Stock, each having a par value of one-tenth of one cent ($0.001). Fifteen
million (15,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($0.001).
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1.
<PAGE> 3
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. 1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2.
a. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
assuming the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "1933
Act"), covering the offer and sale of Common Stock to the public (the "Initial
Public Offering"), the directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Initial Public
Offering, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third annual
meeting of stockholders following the Initial Public Offering, the term of
office of the Class III directors shall expire and Class III directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
During such time or times that the corporation is subject to Section 2115(b) of
the California General Corporation Law ("CGCL"), this Section A.2.a of this
Article V shall become effective and be applicable only when the corporation is
a "listed" corporation within the meaning of Section 301.5 of the CGCL.
b. In the event that the corporation (i) is subject to
Section 2115(b) of the CGCL AND (ii) is not a "listed" corporation or ceases to
be a "listed" corporation under Section 301.5 of the CGCL, Section A. 2. a. of
this Article V shall not apply and all directors shall be shall be elected at
each annual meeting of stockholders to hold office until the next annual
meeting.
c. No person entitled to vote at an election for directors
may cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation (i) is subject to Section 2115(b) of the CGCL AND (ii)
is not a "listed" corporation or ceases to be a "listed" corporation under
Section 301.5 of the CGCL. During this time, every stockholder entitled to vote
at an election for directors may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or
2.
<PAGE> 4
distribute the stockholder's votes on the same principle among as many
candidates as such stockholder thinks fit. No stockholder, however, shall be
entitled to so cumulate such stockholder's votes unless (i) the names of such
candidate or candidates have been placed in nomination prior to the voting and
(ii) the stockholder has given notice at the meeting, prior to the voting, of
such stockholder's intention to cumulate such stockholder's votes. If any
stockholder has given proper notice to cumulate votes, all stockholders may
cumulate their votes for any candidates who have been properly placed in
nomination. Under cumulative voting, the candidates receiving the highest number
of votes, up to the number of directors to be elected, are elected.
Notwithstanding the foregoing provisions of this section, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
3.
a. During such time or times that the corporation is
subject to Section 2115(b) of the CGCL, the Board of Directors or any individual
director may be removed from office at any time without cause by the affirmative
vote of the holders of at least a majority of the outstanding shares entitled to
vote on such removal; provided, however, that unless the entire Board is
removed, no individual director may be removed when the votes cast against such
director's removal, or not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively at an election which the
same total number of votes were cast (or, if such action is taken by written
consent, all shares entitled to vote were voted) and the entire number of
directors authorized at the time of such director's most recent election were
then being elected.
b. At any time or times that the corporation is not
subject to Section 2115(b) of the CGCL and subject to any limitations imposed by
law, Section A. 3. a. above shall no longer apply and removal shall be as
provided in Section 141(k) of the DGCL.
4.
a. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders (except as stockholders may have such
rights as described below). Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
director for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified.
3.
<PAGE> 5
b. If at the time of filling any vacancy or any newly
created directorship, the directors then in office shall constitute less than a
majority of the whole board (as constituted immediately prior to any such
increase), the Delaware Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in offices as aforesaid, which election shall be governed by Section 211 of
the DGCL.
c. At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office who have been elected by stockholders shall constitute
less than a majority of the directors then in office, then
(i) Any holder or holders of an aggregate of
five percent (5%) or more of the total number of shares at the time outstanding
having the right to vote for those directors may call a special meeting of
stockholders; or
(ii) The Superior Court of the proper county
shall, upon application of such stockholder or stockholders, summarily order a
special meeting of stockholders, to be held to elect the entire board, all in
accordance with Section 305(c) of the CGCL. The term of office of any director
shall terminate upon that election of a successor.
B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the voting stock of the corporation entitled to
vote. The Board of Directors shall also have the power to adopt, amend, or
repeal Bylaws.
1. The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
2. No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws, or by written consent of stockholders in accordance
with the Bylaws prior to the closing of the Initial Public Offering, provided
following the closing of the Initial Public Offering no action shall be taken by
the stockholders by written consent.
3. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
4.
<PAGE> 6
B. This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the CGCL) for breach of duty to the corporation
and its shareholders through bylaw provisions or through agreements with the
agents, or through shareholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject, at any
time or times the corporation is subject to Section 2115(b) to the limits on
such excess indemnification set forth in Section 204 of the CGCL.
C. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the voting stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the voting stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
5.
<PAGE> 1
EXHIBIT 3.4
AMENDED & RESTATED BYLAWS
OF
MP3.COM, INC.
(A DELAWARE CORPORATION)
ADOPTED: DECEMBER 30, 1998
AMENDED: JANUARY 18, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I OFFICES........................................................................ 1
Section 1. Registered Office..................................................... 1
Section 2. Other Offices......................................................... 1
ARTICLE II CORPORATE SEAL................................................................ 1
Section 3. Corporate Seal........................................................ 1
ARTICLE III STOCKHOLDERS' MEETINGS....................................................... 1
Section 4. Place of Meetings..................................................... 1
Section 5. Annual Meeting........................................................ 1
Section 6. Special Meetings...................................................... 3
Section 7. Notice of Meetings.................................................... 3
Section 8. Quorum................................................................ 3
Section 9. Adjournment and Notice of Adjourned Meetings.......................... 4
Section 10. Voting Rights........................................................ 4
Section 11. Joint Owners of Stock................................................ 4
Section 12. List of Stockholders................................................. 5
Section 13. Action Without Meeting............................................... 5
Section 14. Organization......................................................... 6
ARTICLE IV DIRECTORS..................................................................... 6
Section 15. Number and Term of Office............................................ 6
Section 16. Powers............................................................... 6
Section 17. Term of Directors.................................................... 6
Section 18. Vacancies............................................................ 7
Section 19. Resignation.......................................................... 8
Section 20. Removal.............................................................. 8
Section 21. Directors' Meetings.................................................. 8
(a) Annual Meetings....................................................... 8
(b) Regular Meetings...................................................... 9
(c) Special Meetings...................................................... 9
(d) Telephone Meetings.................................................... 9
(e) Notice of Meetings.................................................... 9
(f) Waiver of Notice...................................................... 9
Section 22. Quorum and Voting.................................................... 9
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 23. Action Without Meeting............................................... 10
Section 24. Fees and Compensation................................................ 10
Section 25. Committees........................................................... 10
(a) Executive Committee................................................... 10
(b) Other Committees...................................................... 10
(c) Term.................................................................. 10
(d) Meetings.............................................................. 11
Section 26. Organization......................................................... 11
ARTICLE V OFFICERS....................................................................... 11
Section 27. Officers Designated.................................................. 11
Section 28. Tenure and Duties of Officers........................................ 12
(a) General............................................................... 12
(b) Duties of Chairman of the Board of Directors.......................... 12
(c) Duties of President................................................... 12
(d) Duties of Vice Presidents............................................. 12
(e) Duties of Secretary................................................... 12
(f) Duties of Chief Financial Officer..................................... 13
Section 29. Delegation of Authority.............................................. 13
Section 30. Resignations......................................................... 13
Section 31. Removal.............................................................. 13
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION................................................................... 13
Section 32. Execution of Corporate Instruments................................... 13
Section 33. Voting of Securities Owned by the Corporation........................ 14
ARTICLE VII SHARES OF STOCK.............................................................. 14
Section 34. Form and Execution of Certificates................................... 14
Section 35. Lost Certificates.................................................... 15
Section 36. Transfers............................................................ 15
Section 37. Fixing Record Dates.................................................. 15
Section 38. Registered Stockholders.............................................. 16
</TABLE>
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(CONTINUED)
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ARTICLE VIII OTHER SECURITIES OF THE CORPORATION......................................... 16
Section 39. Execution of Other Securities........................................ 16
ARTICLE IX DIVIDENDS..................................................................... 17
Section 40. Declaration of Dividends............................................. 17
Section 41. Dividend Reserve..................................................... 17
ARTICLE X FISCAL YEAR.................................................................... 17
Section 42. Fiscal Year.......................................................... 17
ARTICLE XI INDEMNIFICATION............................................................... 17
Section 43. Indemnification of Directors, Executive Officers, Other Officers,
Employees and Other Agents........................................... 17
(a) Directors and Executive Officers...................................... 17
(b) Other Officers, Employees and Other Agents............................ 18
(c) Expenses.............................................................. 18
(d) Enforcement........................................................... 18
(e) Non-Exclusivity of Rights............................................. 19
(f) Survival of Rights.................................................... 19
(g) Insurance............................................................. 19
(h) Amendments............................................................ 19
(i) Saving Clause......................................................... 19
(j) Certain Definitions................................................... 20
ARTICLE XII NOTICES...................................................................... 20
Section 44. Notices.............................................................. 20
(a) Notice to Stockholders................................................ 20
(b) Notice to Directors................................................... 21
(c) Affidavit of Mailing.................................................. 21
(d) Time Notices Deemed Given............................................. 21
(e) Methods of Notice..................................................... 21
(f) Failure to Receive Notice............................................. 21
(g) Notice to Person with Whom Communication Is Unlawful.................. 21
(h) Notice to Person with Undeliverable Address........................... 21
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(CONTINUED)
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ARTICLE XIII Amendments.................................................................. 22
Section 45. Amendments........................................................... 22
ARTICLE XIV Right Of First Refusal....................................................... 22
Section 46. Right of First Refusal............................................... 22
ARTICLE XV Loans To Officers............................................................. 25
Section 47. Loans to Officers.................................................... 25
ARTICLE XVI Miscellaneous................................................................ 25
Section 48. Annual Report........................................................ 25
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AMENDED & RESTATED BYLAWS
OF
MP3.COM, INC.
(A DELAWARE CORPORATION)
ADOPTED: DECEMBER 30, 1998
AMENDED: JANUARY 18, 1999
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware, as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal office of the corporation required
to be maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.
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(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be: (A)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (B) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (C) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation not later than the close
of business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as
a proponent to a stockholder proposal. Notwithstanding the foregoing, in order
to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholders' meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.
(c) For purposes of this Section 5, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
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SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation
may be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors shall fix. At any time or times that the
corporation is subject to Section 2115(b) of the California General Corporation
Law ("CGCL"), stockholders holding five percent (5%) or more of the outstanding
shares shall have the right to call a special meeting of stockholders as set
forth in Section 18(c)(i) herein.
(b) If a special meeting is properly called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person or
persons properly requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall be
construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
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chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast in all matters other
than the election of directors, the affirmative vote of a majority of shares
present in person or represented by proxy at the meeting and entitled to vote on
the subject matter shall be the act of the stockholders. Except as otherwise
provided by statute, the Certificate of Incorporation or these Bylaws, directors
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Where a separate vote by a class or classes or series is required,
except where otherwise provided by the statute or by the Certificate of
Incorporation or these Bylaws, a majority of the outstanding shares of such
class or classes or series, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and, except where otherwise provided by statute or by the Certificate of
Incorporation or these Bylaws, the affirmative vote of the majority (plurality,
in the case of the election of directors) of the votes cast by the holders of
shares of such class or classes or series shall be the act of such class or
classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes,
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but the vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or may apply to the Delaware Court of
Chancery for relief as provided in the Delaware General Corporation Law, Section
217(b). If the instrument filed with the Secretary shows that any such tenancy
is held in unequal interests, a majority or even-split for the purpose of
subsection (c) shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
(b) Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the earliest dated consent delivered to the corporation in the
manner herein required, written consents signed by a sufficient number of
stockholders to take action are delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given in accordance with
Section 228 of the Delaware General Corporation Law.
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SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the
Board of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by a
majority in interest of the stockholders entitled to vote, present in person or
by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to
such rules and regulations of the Board of Directors, if any, the chairman of
the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are necessary, appropriate or convenient for the proper conduct of the
meeting, including, without limitation, establishing an agenda or order of
business for the meeting, rules and procedures for maintaining order at the
meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized
and constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed, subject to Section E.2(c) of
Article IV of the Certificate of Incorporation (or any successor provision), by
the Board of Directors from time to time.
Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. TERM OF DIRECTORS.
(a) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances and,
subject to Section E.2(c) of Article IV of the Certificate of Incorporation (or
any successor provision), directors shall be elected at each annual meeting of
stockholders for a term of one year. Each director shall serve until his
successor is duly elected and qualified or until his death, resignation or
removal. No decrease in
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the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
(b) No person entitled to vote at an election for directors
may cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115(b) of the CGCL. During such
time or times that the corporation is subject to Section 2115(b) of the CGCL,
every stockholder entitled to vote at an election for directors may cumulate
such stockholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
such stockholder's shares are otherwise entitled, or distribute the
stockholder's votes on the same principle among as many candidates as such
stockholder thinks fit. No stockholder, however, shall be entitled to so
cumulate such stockholder's votes unless (a) the names of such candidate or
candidates have been placed in nomination prior to the voting and (b) the
stockholder has given notice at the meeting, prior to the voting, of such
stockholder's intention to cumulate such stockholder's votes. If any stockholder
has given proper notice to cumulate votes, all stockholders may cumulate their
votes for any candidates who have been properly placed in nomination. Under
cumulative voting, the candidates receiving the highest number of votes, up to
the number of directors to be elected, are elected.
SECTION 18. VACANCIES.
(a) Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in the Board of Directors shall be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
Delaware General Corporation Law
(c) At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy, the directors
then in office who have been elected by stockholders shall constitute less than
a majority of the directors then in office, then
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(i) any holder or holders of an aggregate of five
percent (5%) or more of the total number of shares at the time outstanding
having the right to vote for those directors may call a special meeting of
stockholders; or
(ii) the Superior Court of the proper county shall,
upon application of such stockholder or stockholders, summarily order a special
meeting of the stockholders, to be held to elect the entire board, all in
accordance with Section 305(c) of the CGCL, the term of office of any director
shall terminate upon that election of a successor.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL.
(a) Subject to any limitations imposed by applicable law (and
assuming the corporation is not subject to Section 2115 of the CGCL), the Board
of Directors or any director may be removed from office at any time (i) with
cause by the affirmative vote of the holders of a majority of the voting power
of all then-outstanding shares of voting stock of the corporation entitled to
vote at an election of directors or (ii) without cause by the affirmative vote
of the holders of a majority of the voting power of all then-outstanding shares
of voting stock of the corporation, entitled to vote at an election of
directors.
(b) During such time or times that the corporation is subject
to Section 2115(b) of the CGCL, the Board of Directors or any individual
director may be removed from office at any time without cause by the affirmative
vote of the holders of at least a majority of the outstanding shares entitled to
vote on such removal; provided, however, that unless the entire Board is
removed, no individual director may be removed when the votes cast against such
director's removal, or not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively at an election which the
same total number of votes were cast (or, if such action is taken by written
consent, all shares entitled to vote were voted) and the entire number of
directors authorized at the time of such director's most recent election were
then being elected.
SECTION 21. DIRECTORS' MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an annual
meeting of the Board of Directors shall be necessary and
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such meeting shall be held for the purpose of electing officers and transacting
such other business as may lawfully come before it.
(b) REGULAR MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may be
held at any time or date and at any place within or without the State of
Delaware which has been designated by the Board of Directors and publicized
among all directors. No formal notice shall be required for a regular meeting of
the Board of Directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, facsimile, telegraph or telex, or
by electronic mail or other electronic means, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, postage prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time, a quorum of the Board of Directors shall
consist of a majority of the exact number of directors fixed from time to time
by the Board of Directors in accordance with the Certificate of Incorporation;
provided, however, at any meeting, whether a quorum be present or otherwise, a
majority of the
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directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
(b) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different vote
be required by law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to stockholders for approval,
or (ii) adopting, amending or repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to
time, appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall any such committee have the powers denied to
the Executive Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to any requirements of any
outstanding series of Preferred Stock, the provisions of subsections (a) or (b)
of this Bylaw may at any time increase or decrease the
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number of members of a committee or terminate the existence of a committee. The
membership of a committee member shall terminate on the date of his death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, (if a director) or, in the absence of any such person, a chairman of
the meeting chosen by a majority of the directors present, shall preside over
the meeting. The Secretary, or in his absence, any Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one
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or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and
such other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the officers
of the corporation shall be fixed by or in the manner designated by the Board of
Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman
of the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is present.
Unless some other officer has been elected Chief Executive Officer of the
corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume
and perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any committee
thereof requiring notice. The Secretary shall perform all other duties given him
in these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform
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other duties commonly incident to his office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order of
the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller to assume and perform the duties
of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
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All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
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SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the Delaware General Corporation Law.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall, subject to applicable law, not be more than sixty (60) nor less than
ten (10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
(b) In order that the corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which date shall not be more than ten (10) days
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. Any stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date. If no record date has been fixed by the Board of
Directors within ten (10) days of the date on which such a request is received,
the record date for determining stockholders entitled to
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consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not more than
sixty (60) days prior to such action. If no record date is fixed, the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer
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who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation and applicable law, if any, may be declared by the Board of
Directors pursuant to law at any regular or special meeting. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the Certificate of Incorporation and applicable law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person unless (i) such indemnification is expressly
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required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or any other applicable
law or (iv) such indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have power to indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law or any other
applicable law. The Board of Directors shall have the power to delegate the
determination of whether indemnification shall be given to any such person to
such officers or other persons as the Board of Directors shall determine.
(c) EXPENSES. The corporation shall advance to any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director or
executive officer, of the corporation, or is or was serving at the request of
the corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Bylaw, no advance shall be made by the corporation to an officer of
the corporation (except by reason of the fact that such officer is or was a
director of the corporation, in which event this paragraph shall not apply) in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative, if a determination is reasonably and promptly made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to the proceeding, or (ii) if such quorum is not obtainable,
or, even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, that the facts known to the
decision-making party at the time such determination is made demonstrate clearly
and convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law
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or any other applicable law for the corporation to indemnify the claimant for
the amount claimed. In connection with any claim by an officer of the
corporation (except in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such officer is or
was a director of the corporation) for advances, the corporation shall be
entitled to raise a defense as to any such action clear and convincing evidence
that such person acted in bad faith or in a manner that such person did not
believe to be in or not opposed to the best interests of the corporation, or
with respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. Neither the failure of
the corporation (including its Board of Directors, independent legal counsel or
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law or any other applicable law, nor an actual determination
by the corporation (including its Board of Directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Bylaw shall not be exclusive of any other right which such person
may have or hereafter acquire under any applicable statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation or any other applicable law, upon
approval by the Board of Directors, may purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law. If this Section
43 shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
executive officer to the full extent under applicable law.
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(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed
and shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the giving of
testimony in, any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed
and shall include, without limitation, court costs, attorneys' fees, witness
fees, fines, amounts paid in settlement or judgment and any other costs and
expenses of any nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(5) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and
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duly deposited in the United States mail, postage prepaid, and addressed to his
last known post office address as shown by the stock record of the corporation
or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to
any director may be given by the method stated in subsection (a), or by
overnight delivery service, facsimile, telex or telegram, except that such
notice other than one which is delivered personally shall be sent to such
address as such director shall have filed in writing with the Secretary, or, in
the absence of such filing, to the last known post office address of such
director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the name
and address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of
time within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and
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all notices of meetings or of the taking of action by written consent without a
meeting to such person during the period between such two consecutive annual
meetings, or (ii) all, and at least two, payments (if sent by first class mail)
of dividends or interest on securities during a twelve-month period, have been
mailed addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken or
held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, these Bylaws may be amended or repealed and new Bylaws adopted by the
stockholders entitled to vote. The Board of Directors shall also have the power,
if such power is conferred upon the Board of Directors by the Certificate of
Incorporation, to adopt, amend, or repeal Bylaws (including, without limitation,
the amendment of any Bylaw setting forth the number of Directors who shall
constitute the whole Board of Directors).
ARTICLE XIV
RIGHT OF FIRST REFUSAL
SECTION 46. RIGHT OF FIRST REFUSAL. No stockholder shall sell, assign,
pledge, or in any manner transfer any of the shares of stock of the corporation
or any right or interest therein, whether voluntarily or by operation of law, or
by gift or otherwise, except by a transfer which meets the requirements
hereinafter set forth in this bylaw:
(a) If the stockholder desires to sell or otherwise transfer
any of his shares of stock, then the stockholder shall first give written notice
thereof to the corporation. The notice shall name the proposed transferee and
state the number of shares to be transferred, the proposed consideration, and
all other terms and conditions of the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the
corporation shall have the option to purchase all (but not less than all) of the
shares specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the stockholder, the
corporation shall have the option to purchase a lesser portion of the shares
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares, and that is not
otherwise exempted from the provisions of this Section 46, the price shall be
deemed to be the fair market value of the stock at such time as determined in
good faith by the Board of Directors. In the event the corporation elects to
purchase all of the shares
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or, with consent of the stockholder, a lesser portion of the shares, it shall
give written notice to the transferring stockholder of its election and
settlement for said shares shall be made as provided below in paragraph (d).
(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect
to acquire any of the shares of the transferring stockholder as specified in
said transferring stockholder's notice, the Secretary of the corporation shall
so notify the transferring stockholder and settlement thereof shall be made in
cash within thirty (30) days after the Secretary of the corporation receives
said transferring stockholder's notice; provided that if the terms of payment
set forth in said transferring stockholder's notice were other than cash against
delivery, the corporation and/or its assignee(s) shall pay for said shares on
the same terms and conditions set forth in said transferring stockholder's
notice.
(e) In the event the corporation and/or its assignees(s) do
not elect to acquire all of the shares specified in the transferring
stockholder's notice, said transferring stockholder may, within the sixty-day
period following the expiration of the option rights granted to the corporation
and/or its assignees(s) herein, transfer the shares specified in said
transferring stockholder's notice which were not acquired by the corporation
and/or its assignees(s) as specified in said transferring stockholder's notice.
All shares so sold by said transferring stockholder shall continue to be subject
to the provisions of this bylaw in the same manner as before said transfer.
(f) Anything to the contrary contained herein notwithstanding,
the following transactions shall be exempt from the provisions of this bylaw:
(1) A stockholder's transfer of any or all shares
held either during such stockholder's lifetime or on death by will or intestacy
to such stockholder's immediate family or to any custodian or trustee for the
account of such stockholder or such stockholder's immediate family or to any
limited partnership of which the shareholder, members of such shareholder's
immediate family or any trust for the account of such shareholder or such
shareholder's immediate family will be the general of limited partner(s) of such
partnership. "Immediate family" as used herein shall mean spouse, lineal
descendant, father, mother, brother, or sister of the stockholder making such
transfer.
(2) A stockholder's bona fide pledge or mortgage of
any shares with a commercial lending institution, provided that any subsequent
transfer of said shares by said institution shall be conducted in the manner set
forth in this bylaw.
(3) A stockholder's transfer of any or all of such
stockholder's shares to the corporation or to any other stockholder of the
corporation.
(4) A stockholder's transfer of any or all of such
stockholder's shares to a person who, at the time of such transfer, is an
officer or director of the corporation.
(5) A corporate stockholder's transfer of any or all
of its shares pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of
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shares or capital reorganization of the corporate stockholder, or pursuant to a
sale of all or substantially all of the stock or assets of a corporate
stockholder.
(6) A corporate stockholder's transfer of any or all
of its shares to any or all of its stockholders.
(7) A transfer by a stockholder which is a limited or
general partnership to any or all of its partners or former partners.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this bylaw, and there
shall be no further transfer of such stock except in accord with this bylaw.
(g) The provisions of this bylaw may be waived with respect to
any transfer either by the corporation, upon duly authorized action of its Board
of Directors, or by the stockholders, upon the express written consent of the
owners of a majority of the voting power of the corporation (excluding the votes
represented by those shares to be transferred by the transferring stockholder).
This bylaw may be amended or repealed either by a duly authorized action of the
Board of Directors or by the stockholders, upon the express written consent of
the owners of a majority of the voting power of the corporation.
(h) Any sale or transfer, or purported sale or transfer, of
securities of the corporation shall be null and void unless the terms,
conditions, and provisions of this bylaw are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate on
either of the following dates, whichever shall first occur:
(1) On December 1, 2008; or
(2) Upon the date securities of the corporation are
first offered to the public pursuant to a registration statement filed with, and
declared effective by, the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended.
(j) The certificates representing shares of stock of the
corporation shall bear on their face the following legend so long as the
foregoing right of first refusal remains in effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION
AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE
CORPORATION."
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ARTICLE XV
LOANS TO OFFICERS
SECTION 47. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE XVI
MISCELLANEOUS
SECTION 48. ANNUAL REPORT.
(a) Subject to the provisions of paragraph (b) of this Bylaw,
the Board of Directors shall cause an annual report to be sent to each
stockholder of the corporation not later than one hundred twenty (120) days
after the close of the corporation's fiscal year. Such report shall include a
balance sheet as of the end of such fiscal year and an income statement and
statement of changes in financial position for such fiscal year, accompanied by
any report thereon of independent accounts or, if there is no such report, the
certificate of an authorized officer of the corporation that such statements
were prepared without audit from the books and records of the corporation. When
there are more than 100 stockholders of record of the corporation's shares, as
determined by Section 605 of the CGCL, additional information as required by
Section 1501(b) of the CGCL shall also be contained in such report, provided
that if the corporation has a class of securities registered under Section 12 of
the 1934 Act, that Act shall take precedence. Such report shall be sent to
stockholders at least fifteen (15) days prior to the next annual meeting of
stockholders after the end of the fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of
record of the corporation's shares, the requirement of sending of an annual
report to the stockholders of the corporation is hereby expressly waived.
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EXHIBIT 10.1
MP3.COM, INC.
1998 EQUITY INCENTIVE PLAN
ADOPTED DECEMBER 30, 1998
APPROVED BY STOCKHOLDERS DECEMBER 30, 1998
AMENDED BY THE STOCKHOLDERS JANUARY 19, 1999
AMENDED BY THE BOARD ON MAY 13, 1999
TERMINATION DATE: DECEMBER 29, 2008
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means MP3.com, Inc., a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the
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term "Consultant" shall not include either Directors of the Company who are not
compensated by the Company for their services as Directors or Directors of the
Company who are merely paid a director's fee by the Company for their services
as Directors.
(h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in THE WALL STREET JOURNAL or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
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(iii) Prior to the Listing Date, the value of the Common Stock
shall be determined in a manner consistent with Section 260.140.50 of Title 10
of the California Code of Regulations.
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(q) "NON-EMPLOYEE DIRECTOR" means a Director of the Company who either
(i) is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant or
in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K promulgated
pursuant to the Securities Act ("Regulation S-K")), does not possess an interest
in any other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(s) "OFFICER" means (i) before the Listing Date, any person designated
by the Company as an officer and (ii) on and after the Listing Date, a person
who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(t) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(u) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(w) "OUTSIDE DIRECTOR" means a Director of the Company who either (i) is
not a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the
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Company or an "affiliated corporation" receiving compensation for prior services
(other than benefits under a tax qualified pension plan), was not an officer of
the Company or an "affiliated corporation" at any time and is not currently
receiving direct or indirect remuneration from the Company or an "affiliated
corporation" for services in any capacity other than as a Director or (ii) is
otherwise considered an "outside director" for purposes of Section 162(m) of the
Code.
(x) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
(y) "PLAN" means this MP3.com, Inc. 1998 Equity Incentive Plan.
(z) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(aa) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(bb) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.
(cc) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(dd) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive stock pursuant to a Stock Award; and the number of shares with respect
to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
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(iii) To amend the Plan or a Stock Award as provided in Section
12.
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan to
a Committee or Committees of one or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED.
At such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee may consist solely of two or more Outside Directors, in
accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (i) delegate to a committee of one or
more members of the Board who are not Outside Directors the authority to grant
Stock Awards to eligible persons who are either (1) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (2) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or) (ii)
delegate to a committee of one or more members of the Board who are not
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Stock Awards shall not exceed in the aggregate eight million five hundred
thousand (8,500,000) shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full (or vested in the case of Restricted Stock), the
stock not acquired under such Stock Award shall revert to and again become
available for issuance under the Plan. If any Common Stock acquired pursuant to
the exercise of an Option shall for any reason be repurchased by the Company
under an unvested share repurchase option provided under the Plan, the stock
repurchased by the Company under such repurchase option shall not revert to and
again become available for issuance under the Plan.
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(c) SOURCE OF SHARES. The stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may
be granted only to Employees. Stock Awards other than Incentive Stock Options
may be granted to Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS. No Ten Percent Stockholder shall be
eligible for the grant of an Incentive Stock Option unless the exercise price of
such Option is at least one hundred ten percent (110%) of the Fair Market Value
of the Common Stock at the date of grant and the Option is not exercisable after
the expiration of five (5) years from the date of grant.
Prior to the Listing Date, no Ten Percent Stockholder shall be
eligible for the grant of a Nonstatutory Stock Option unless the exercise price
of such Option is at least one hundred ten percent (110%) of the Fair Market
Value of the Common Stock at the date of grant.
Prior to the Listing Date, no Ten Percent Stockholder shall be
eligible for a restricted stock award unless the purchase price of the
restricted stock is at least one hundred percent (100%) of the Fair Market Value
of the Common Stock at the date of grant.
(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, no employee shall be eligible to
be granted Options covering more than one million (1,000,000) shares of the
Common Stock during any calendar year. This subsection 5(c) shall not apply
prior to the Listing Date and, following the Listing Date, this subsection 5(c)
shall not apply until (i) the earliest of: (1) the first material modification
of the Plan (including any increase in the number of shares reserved for
issuance under the Plan in accordance with Section 4); (2) the issuance of all
of the shares of Common Stock reserved for issuance under the Plan; (3) the
expiration of the Plan; or (4) the first meeting of stockholders at which
Directors of the Company are to be elected that occurs after the close of the
third calendar year following the calendar year in which occurred the first
registration of an equity security under Section 12 of the Exchange Act; or (ii)
such other date required by Section 162(m) of the Code and the rules and
regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option. The provisions of separate Options
need not be identical, but each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each
of the following provisions:
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(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option
may be granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution for
another option in a manner satisfying the provisions of Section 424(a) of the
Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Nonstatutory Stock Option granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. The exercise price of
each Nonstatutory Stock Option granted on or after the Listing Date shall be not
less than eighty-five percent (85%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, a Nonstatutory Stock Option may be granted with an exercise price
lower than that set forth in the preceding sentence if such Option is granted
pursuant to an assumption or substitution for another option in a manner
satisfying the provisions of Section 424(a) of the Code.
(d) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by (1) delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Participant or (3) in any
other form of legal consideration that may be acceptable to the Board; provided,
however, that at any time that the Company is incorporated in Delaware, payment
of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing provisions of this
subsection 6(e), the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
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(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option granted prior to the Listing Date shall not be transferable except by
will or by the laws of descent and distribution and shall be exercisable during
the lifetime of the Optionholder only by the Optionholder. A Nonstatutory Stock
Option granted on or after the Listing Date shall be transferable to the extent
provided in the Option Agreement. If the Nonstatutory Stock Option does not
provide for transferability, then the Nonstatutory Stock Option shall not be
transferable except by will or by the laws of descent and distribution and shall
be exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing provisions of this subsection 6(f), the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments which may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares as to which an Option may be exercised.
(h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the
foregoing subsection 6(g), Options granted prior to the Listing Date shall
provide for vesting of the total number of shares at a rate of at least twenty
percent (20%) per year over five (5) years from the date the Option was granted,
subject to reasonable conditions such as continued employment. However, in the
case of such Options granted to Officers, Directors or Consultants, the Option
may become fully exercisable, subject to reasonable conditions such as continued
employment, at any time or during any period established by the Company; for
example, the vesting provision of the Option may provide for vesting of less
than twenty percent (20%) per year of the total number of shares subject to the
Option.
(i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous Service (or
such longer or shorter period specified in the Option Agreement, which, for
Options granted prior to the Listing Date, shall not be less than thirty (30)
days, unless such termination is for cause), or (ii) the expiration of the term
of the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate.
(j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Option shall terminate on the earlier of (i) the expiration of the
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term of the Option set forth in subsection 6(a) or (ii) the expiration of a
period of three (3) months after the termination of the Optionholder's
Continuous Service during which the exercise of the Option would not be in
violation of such registration requirements.
(k) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement, which, for Options granted prior to the Listing Date, shall
not be less than six (6) months) or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.
(l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise the Option as of the date of death) by the
Optionholder's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option upon
the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within
the period ending on the earlier of (1) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement, which, for Options granted prior to the Listing Date, shall not be
less than six (6) months) or (2) the expiration of the term of such Option as
set forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.
(m) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option.
Subject to the "Repurchase Limitation" in subsection 10(h), any unvested shares
so purchased may be subject to an unvested share repurchase option in favor of
the Company or to any other restriction the Board determines to be appropriate.
(n) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in
subsection 10(h), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares acquired by the Optionholder pursuant to the exercise of the
Option.
(o) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal following receipt of notice from the Optionholder of
the intent to transfer all or any part of the shares exercised pursuant to the
Option. Except as expressly provided in this subsection 6(o), such right of
first refusal shall otherwise comply with any applicable provisions of the
Bylaws of the Company.
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(p) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares equal to the
number of shares surrendered as part or all of the exercise price of such
Option; (ii) have an expiration date which is the same as the expiration date of
the Option the exercise of which gave rise to such Re-Load Option; and (iii)
have an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option
shall be subject to the same exercise price and term provisions heretofore
described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under subsection 4(a) and
the "Section 162(m) Limitation" on the grants of Options under subsection 5(c)
and shall be subject to such other terms and conditions as the Board may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:
(i) CONSIDERATION. A stock bonus shall be awarded in
consideration for past services actually rendered to the Company for its
benefit.
(ii) VESTING. Subject to the "Repurchase Limitation" in
subsection 10(h), shares of Common Stock awarded under the stock bonus agreement
may, but need not, be subject to a share repurchase option in favor of the
Company in accordance with a vesting schedule to be determined by the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to
the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may reacquire any or all of the
shares of Common Stock held by the
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Participant which have not vested as of the date of termination under the terms
of the stock bonus agreement.
(iv) TRANSFERABILITY. For a stock bonus award made before the
Listing Date, rights to acquire shares under the stock bonus agreement shall not
be transferable except by will or by the laws of descent and distribution and
shall be exercisable during the lifetime of the Participant only by the
Participant. For a stock bonus award made on or after the Listing Date, rights
to acquire shares under the stock bonus agreement shall be transferable by the
Participant only upon such terms and conditions as are set forth in the stock
bonus agreement, as the Board shall determine in its discretion, so long as
stock awarded under the stock bonus agreement remains subject to the terms of
the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) PURCHASE PRICE. Subject to the provisions of subsection 5(b)
regarding Ten Percent Stockholders, the purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. For restricted stock
awards made prior to the Listing Date, the purchase price shall not be less than
eighty-five percent (85%) of the stock's Fair Market Value on the date such
award is made or at the time the purchase is consummated. For restricted stock
awards made on or after the Listing Date, the purchase price shall not be less
than eighty-five percent (85%) of the stock's Fair Market Value on the date such
award is made or at the time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of stock acquired pursuant
to the restricted stock purchase agreement shall be paid either: (i) in cash at
the time of purchase; (ii) at the discretion of the Board, according to a
deferred payment or other arrangement with the Participant; or (iii) in any
other form of legal consideration that may be acceptable to the Board in its
discretion; provided, however, that at any time that the Company is incorporated
in Delaware, then payment of the Common Stock's "par value," as defined in the
Delaware General Corporation Law, shall not be made by deferred payment.
(iii) VESTING. Subject to the "Repurchase Limitation" in
subsection 10(h), shares of Common Stock acquired under the restricted stock
purchase agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to
the "Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of
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Common Stock held by the Participant which have not vested as of the date of
termination under the terms of the restricted stock purchase agreement.
(v) TRANSFERABILITY. For a restricted stock award made before the
Listing Date, rights to acquire shares under the restricted stock purchase
agreement shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant. For a restricted stock award made on or after the
Listing Date, rights to acquire shares under the restricted stock purchase
agreement shall be transferable by the Participant only upon such terms and
conditions as are set forth in the restricted stock purchase agreement, as the
Board shall determine in its discretion, so long as stock awarded under the
restricted stock purchase agreement remains subject to the terms of the
restricted stock purchase agreement.
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any stock issued or issuable pursuant to any such
Stock Award. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue and
sell stock upon exercise of such Stock Awards unless and until such authority is
obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares subject
to such Stock Award unless and until such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.
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(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant or other holder of Stock Awards any right to continue to serve
the Company or an Affiliate in the capacity in effect at the time the Stock
Award was granted or shall affect the right of the Company or an Affiliate to
terminate (i) the employment of an Employee with or without notice and with or
without cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring stock under any Stock Award, (i) to give
written assurances satisfactory to the Company as to the Participant's knowledge
and experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring the stock
subject to the Stock Award for the Participant's own account and not with any
present intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be
inoperative if (iii) the issuance of the shares upon the exercise or acquisition
of stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (iv) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means (in addition to the Company's
right to withhold from any compensation paid to the Participant by the Company)
or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares from the shares of the Common Stock
otherwise issuable to the participant as a result of the exercise or acquisition
of stock under the Stock Award; or (iii) delivering to the Company owned and
unencumbered shares of the Common Stock.
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(g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent
required by Section 260.140.46 of Title 10 of the California Code of
Regulations, the Company shall deliver financial statements to Participants at
least annually. This subsection 10(g) shall not apply to key Employees whose
duties in connection with the Company assure them access to equivalent
information.
(h) REPURCHASE LIMITATION. The terms of any repurchase option shall be
specified in the Stock Award and may be either at Fair Market Value at the time
of repurchase or at not less than the original purchase price. To the extent
required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations, any repurchase option contained in a Stock Award
granted prior to the Listing Date to a person who is not an Officer, Director or
Consultant shall be upon the terms described below:
(i) FAIR MARKET VALUE. If the repurchase option gives the Company
the right to repurchase the shares upon termination of employment at not less
than the Fair Market Value of the shares to be purchased on the date of
termination of Continuous Service, then (i) the right to repurchase shall be
exercised for cash or cancellation of purchase money indebtedness for the shares
within ninety (90) days of termination of Continuous Service (or in the case of
shares issued upon exercise of Stock Awards after such date of termination,
within ninety (90) days after the date of the exercise) or such longer period as
may be agreed to by the Company and the Participant (for example, for purposes
of satisfying the requirements of Section 1202(c)(3) of the Code regarding
"qualified small business stock") and (ii) the right terminates when the shares
become publicly traded.
(ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives the
Company the right to repurchase the shares upon termination of Continuous
Service at the original purchase price, then (i) the right to repurchase at the
original purchase price shall lapse at the rate of at least twenty percent (20%)
of the shares per year over five (5) years from the date the Stock Award is
granted (without respect to the date the Stock Award was exercised or became
exercisable) and (ii) the right to repurchase shall be exercised for cash or
cancellation of purchase money indebtedness for the shares within ninety (90)
days of termination of Continuous Service (or in the case of shares issued upon
exercise of Options after such date of termination, within ninety (90) days
after the date of the exercise) or such longer period as may be agreed to by the
Company and the Participant (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code regarding "qualified small
business stock").
(i) RIGHTS UNDER STOCKHOLDERS AGREEMENT. Upon receipt of a Stock Award,
each Participant shall, automatically and without further action on the part of
the Participant, (i) be deemed to be a party to, a signatory of and bound by the
Stockholders Agreement, dated January 20, 1999, between the Company and the
Stockholders listed therein (the "Stockholders Agreement") and (ii) be deemed to
be a "Securityholder" for all purposes under the Stockholders Agreement. All
Options granted pursuant to the Plan and Common Stock issued pursuant to the
exercise of Options under the Plan shall be deemed "Common Stock Equivalents"
and "Common Stock," respectively, under the Stockholders Agreement.
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11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. Except for that certain 19,500-to-1
split of the Company's Common stock to be effected on or about December 31,
1998, if any change is made in the stock subject to the Plan, or subject to any
Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of securities subject to the Plan pursuant to subsection 4(a) and the
maximum number of securities subject to award to any person pursuant to
subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted
in the class(es) and number of securities and price per share of stock subject
to such outstanding Stock Awards. The Board, the determination of which shall be
final, binding and conclusive, shall make such adjustments. (The conversion of
any convertible securities of the Company shall not be treated as a transaction
"without receipt of consideration" by the Company.)
(b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company other than in an Acquisition (as defined below), then
such Stock Awards shall be terminated if not exercised (if applicable) prior to
such event, unless such outstanding Stock Awards are assumed by a subsequent
purchaser.
(c) CHANGE IN CONTROL.
(i) For the purposes of this Section 11, "Acquisition" shall mean
(1) any consolidation or merger of the Company with or into any other
corporation or other entity or person in which the stockholders of the Company
prior to such consolidation or merger own less than fifty percent (50%) of the
Company's voting power immediately after such consolidation or merger, excluding
any consolidation or merger effected exclusively to change the domicile of the
Company; or (2) a sale of all or substantially all of the assets of the Company.
(ii) In the event the Company undergoes an Acquisition; then: any
surviving corporation or acquiring corporation shall assume any Stock Awards
outstanding under the Plan or shall substitute similar stock awards (including
an award to acquire the same consideration paid to the stockholders in the
transaction described in this subsection 11(c)) for those outstanding under the
Plan.
(iii) In the event any surviving corporation or acquiring
corporation in an Acquisition refuses to assume such Stock Awards or to
substitute similar stock awards for those outstanding under the Plan, then with
respect to (1) Stock Awards held by Participants whose Continuous Service has
not terminated prior to such event, the vesting of such Stock Awards (and, if
applicable, the time during which such Stock Awards may be exercised) shall be
accelerated and made fully exercisable at least thirty (30) days prior to the
closing of the Acquisition (and the Stock Awards terminated if not exercised
prior to the closing of such
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Acquisition), and (2) any other Stock Awards outstanding under the Plan, such
Stock Awards shall be terminated if not exercised prior to the closing of the
Acquisition.
(iv) In the event the Company undergoes an Acquisition and the
surviving corporation or acquiring corporation does assume such Stock Awards (or
substitutes similar stock awards for those outstanding under the Plan), then,
with respect to each Stock Award held by persons then performing services as
Employees or Directors, the vesting of each such Stock Award (and, if
applicable, the time during which such Stock Award may be exercised) shall be
accelerated and such Stock Award shall become fully vested and exercisable, if
any of the following events occurs within one (1) month before or eighteen (18)
months after the effective date of the Acquisition: (1) the service to the
Company or an Affiliate of the Employee or Director holding such Stock Award is
terminated without Cause (as defined below); (2) the Employee holding such Stock
Award terminates his or her service to the Company or an Affiliate due to the
fact that the principal place of the performance of the responsibilities and
duties of the Employee is changed to a location more than fifty (50) miles from
such Employee's existing work location without the Employee's express consent
(not applicable to Directors); or (3) the Employee holding such Stock Award
terminates his or her service to the Company or Affiliate due to the fact that
there is a material reduction in such Employee's responsibilities and duties
without the Employee's express consent (not applicable to Directors).
(v) For the purposes of this Section 11(c), "Cause" means an
individual's misconduct, including but not limited to: (1) conviction of any
felony or any crime involving moral turpitude or dishonesty, (2) participation
in a fraud or act of dishonesty against the Company, (3) conduct that, based
upon a good faith and reasonable factual investigation and determination by the
Board, demonstrates your gross unfitness to serve, or (4) intentional, material
violation of any contract with the Company or any statutory duty to the Company
that is not corrected within thirty (30) days after written notice thereof.
Physical or mental disability shall not constitute "Cause."
(vi) The acceleration of vesting provided for under this Section
11(c) may be limited in certain circumstances as follows: If any such
acceleration (the "Benefit") would (i) constitute a "parachute payment" within
the meaning of Section 280G of the Code and (ii) but for such acceleration, be
subject to the excise tax imposed by Section 4999 of the Code, then such Benefit
shall be reduced to the extent necessary so that no portion of the Benefit would
be subject to such excise tax, as determined in good faith by the Company;
provided, however, that if, in the absence of any such reduction (or after such
reduction), such Employee believes that the Benefit or any portion thereof (as
reduced, if applicable) would be subject to such excise tax, the Benefit shall
be reduced (or further reduced) to the extent determined by such Employee in his
or her discretion so that the excise tax would not apply. If, notwithstanding
any such reduction (or in the absence of such reduction), the Internal Revenue
Service ("IRS") determines that such Employee is liable for the excise tax as a
result of the Benefit, then such Employee shall be obligated to return to the
Company, within thirty (30) days of such determination by the IRS, a portion of
the Benefit sufficient such that none of the Benefit retained by such Employee
constitutes a "parachute payment" within the meaning of Section 280G of the Code
that is subject to the excise tax.
16
<PAGE> 17
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.
17
<PAGE> 1
EXHIBIT 10.2
MP3.COM, INC.
STOCK OPTION GRANT NOTICE
(1998 EQUITY INCENTIVE PLAN)
MP3.com, Inc. (the "Company"), pursuant to its 1998 Equity Incentive Plan (the
"Plan"), hereby grants to Optionholder an option to purchase the number of
shares of the Company's Common Stock set forth below. This option is subject to
all of the terms and conditions as set forth herein and in the Stock Option
Agreement, the Plan and the Notice of Exercise, all of which are attached hereto
and incorporated herein in their entirety.
Optionholder: _____________________________________
Date of Grant: _____________________________________
Vesting Commencement Date: _____________________________________
Number of Shares Subject to Option: _____________________________________
Exercise Price Per Share: _____________________________________
Expiration Date: _____________________________________
TYPE OF GRANT: [ ] Incentive Stock Option [ ] Nonstatutory Stock Option
EXERCISE SCHEDULE: [ ] Same as Vesting Schedule [ ] Early Exercise Permitted
VESTING SCHEDULE: [1/4th of the shares vest one year after the Vesting
Commencement Date. 1/48th of the shares vest monthly
thereafter over the next three years.]
PAYMENT: By one or a combination of the following items (described in
the Stock Option Agreement):
[By cash or check]
[Pursuant to a Regulation T Program if the Shares are
publicly traded]
[By delivery of already-owned shares if the Shares are
publicly traded]
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) options previously granted
and delivered to Optionholder under the Plan, and (ii) the following agreements
only:
OTHER AGREEMENTS:
----------------------------------------
----------------------------------------
MP3.COM, INC. OPTIONHOLDER:
By:
---------------------------------- ----------------------------------------
ROBIN RICHARDS Signature
PRESIDENT
Date: Date:
------------------------------- ----------------------------------
ATTACHMENTS: Stock Option Agreement, 1998 Equity Incentive Plan, Notice of
Exercise
<PAGE> 2
ATTACHMENT I
STOCK OPTION AGREEMENT
<PAGE> 3
MP3.COM, INC.
1998 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)
Pursuant to the Stock Option Grant Notice ("Grant Notice") and this
Stock Option Agreement, MP3.com, Inc. (the "Company") has granted you an option
under its 1998 Equity Incentive Plan (the "Plan") to purchase the number of
shares of the Company's Common Stock indicated in the Grant Notice at the
exercise price indicated in the Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option
will vest as provided in the Grant Notice, provided that vesting will cease upon
the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares subject to
your option and your exercise price per share referenced in the Grant Notice may
be adjusted from time to time for Capitalization Adjustments, as provided in the
Plan.
3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in the
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of this option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover
first vested shares and then the earliest vesting installment of unvested
shares;
(b) any shares so purchased from installments which have not
vested as of the date of exercise shall be subject to the purchase option in
favor of the Company as described in the Company's form of Early Exercise Stock
Purchase Agreement;
(c) you shall enter into the Company's form of Early Exercise
Stock Purchase Agreement with a vesting schedule that will result in the same
vesting as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as
provided in the Plan, to the extent that the aggregate Fair Market Value
(determined at the time of grant) of stock with respect to which your option
plus all other incentive stock options you hold are exercisable for the first
time by you during any calendar year (under all plans of the Company and its
Affiliates) exceeds one hundred thousand dollars ($100,000), the options or
portions thereof that exceed
1
<PAGE> 4
such limit (according to the order in which they were granted) shall be treated
as nonstatutory stock options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner PERMITTED BY THE GRANT
NOTICE, which may include one or more of the following:
(a) In the Company's sole discretion at the time your option
is exercised and provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve Board
which, prior to the issuance of Common Stock, results in either the receipt of
cash (or check) by the Company or the receipt of irrevocable instructions to pay
the aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock that either have been held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or were not acquired, directly or indirectly from the Company, that are
owned free and clear of any liens, claims, encumbrances or security interests,
and that are valued at Fair Market Value on the date of exercise. "Delivery" for
these purposes, in the sole discretion of the Company at the time your option is
exercised, shall include delivery to the Company of your attestation of
ownership of such shares of Common Stock in a form approved by the Company.
Notwithstanding the foregoing, your option may not be exercised by tender to the
Company of Common Stock to the extent such tender would constitute a violation
of the provisions of any law, regulation or agreement restricting the redemption
of the Company's stock.
5. WHOLE SHARES. Your option may only be exercised for whole shares.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, your option may not be exercised unless the shares issuable
upon exercise of your option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act. The exercise of your option must also comply with other
applicable laws and regulations governing the option, and the option may not be
exercised if the Company determines that the exercise would not be in material
compliance with such laws and regulations.
7. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous
Service for any reason other than Disability or death, provided that if during
any part of such three (3) month period the option is not exercisable solely
because of the condition set forth in paragraph 6, the option shall not expire
until the earlier of the Expiration Date or until it shall have been
2
<PAGE> 5
exercisable for an aggregate period of three (3) months after the termination of
your Continuous Service;
(b) twelve (12) months after the termination of your
Continuous Service due to Disability;
(c) eighteen (18) months after your death if you die either
during your Continuous Service or within three (3) months after your Continuous
Service terminates;
(d) the Expiration Date indicated in the Grant Notice; or
(e) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of the option and
ending on the day three (3) months before the date of the option's exercise, you
must be an employee of the Company or an Affiliate, except in the event of your
death or your Disability. The Company has provided for extended exercisability
of your option under certain circumstances for your benefit, but cannot
guarantee that your option will necessarily be treated as an "incentive stock
option" if you provide services to the Company or an Affiliate as a Consultant
or Director or if you exercise your option more than three (3) months after the
date your employment with the Company or an Affiliate terminates.
8. EXERCISE.
(a) You may exercise the vested portion of your option (and
the unvested portion of your option if the Grant Notice so permits) during its
term by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition
to any exercise of your option, the Company may require you to enter an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares are subject at the time of exercise, or (3) the disposition of shares
acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising
your option you agree that you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise of your option that occurs within two (2) years after
the date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
(d) By exercising your option you agree that the Company (or a
representative of the underwriters) may, in connection with the first
underwritten registration of the offering of
3
<PAGE> 6
any securities of the Company under the Securities Act, require that you not
sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same
economic effect as a sale, any shares of Common Stock or other securities of the
Company held by you, for a period of time specified by the underwriter(s) (not
to exceed one hundred eighty (180) days) following the effective date of the
registration statement of the Company filed under the Securities Act. You
further agree to execute and deliver such other agreements as may be reasonably
requested by the Company and/or the underwriter(s) which are consistent with the
foregoing or which are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to your Common Stock until the end of such period.
9. TRANSFERABILITY. Your option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
10. RIGHT OF FIRST REFUSAL. Vested shares that are received upon
exercise of your option are subject to any right of first refusal that may be
described in the Company's bylaws in effect at such time the Company elects to
exercise its right.
11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
12. WITHHOLDING OBLIGATIONS.
(a) At the time your option is exercised, in whole or in part,
or at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option.
(b) Upon your request and subject to approval by the Company,
in its sole discretion, and compliance with any applicable conditions or
restrictions of law, the Company may withhold from fully vested shares of Common
Stock otherwise issuable to you upon the exercise of your option a number of
whole shares having a Fair Market Value, determined by the Company as of the
date of exercise, not in excess of the minimum amount of tax required to be
withheld by law. If the date of determination of any tax withholding obligation
is deferred to a date later than the date of exercise of your option, share
withholding pursuant to the preceding
4
<PAGE> 7
sentence shall not be permitted unless you make a proper and timely election
under Section 83(b) of the Code, covering the aggregate number of shares of
Common Stock acquired upon such exercise with respect to which such
determination is otherwise deferred, to accelerate the determination of such tax
withholding obligation to the date of exercise of your option. Notwithstanding
the filing of such election, shares shall be withheld solely from fully vested
shares of Common Stock determined as of the date of exercise of your option that
are otherwise issuable to you upon such exercise. Any adverse consequences to
you arising in connection with such share withholding procedure shall be your
sole responsibility.
(c) Your option is not exercisable unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares or release such shares from any escrow provided for herein.
13. NOTICES. Any notices provided for in your option or the Plan shall
be given in writing and shall be deemed effectively given upon receipt or, in
the case of notices delivered by the Company to you, five (5) days after deposit
in the United States mail, postage prepaid, addressed to you at the last address
you provided to the Company.
14. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of your
option, and is further subject to all interpretations, amendments, rules and
regulations which may from time to time be promulgated and adopted pursuant to
the Plan. In the event of any conflict between the provisions of your option and
those of the Plan, the provisions of the Plan shall control.
15. RIGHTS UNDER STOCKHOLDERS AGREEMENT. As evidenced by your execution
of the Grant Notice, you agree that you shall, automatically and without further
action on your part, (i) be deemed to be a party to, a signatory of and bound by
the Stockholders Agreement, dated January 21, 1999, between the Company and the
Stockholders listed therein, a copy of which is attached as Attachment IV to the
Grant Notice (the "Stockholders Agreement"), and (ii) be deemed to be a
"Securityholder" for all purposes under the Stockholders Agreement. Your option
and any shares of Common Stock issued pursuant to the exercise of your option
shall be deemed a "Common Stock Equivalent" and "Common Stock," respectively,
under the Stockholders Agreement.
5
<PAGE> 8
ATTACHMENT II
1998 EQUITY INCENTIVE PLAN
<PAGE> 9
ATTACHMENT III
NOTICE OF EXERCISE
<PAGE> 10
NOTICE OF EXERCISE
MP3.com, Inc.
P.O. Box 910091
San Diego, CA 92191-0091 Date of Exercise: _______________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option (check one): Incentive [ ] Nonstatutory [ ]
Stock option dated: _____________
Number of shares as
to which option is
exercised: _____________
Certificates to be
issued in name of: _____________
Total exercise price: $____________
Cash payment delivered
herewith: $____________
Value of ________ shares of
MP3.com, Inc. common
stock delivered herewith(1): $____________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the 1998 Equity Incentive Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any of the
shares of Common Stock issued upon exercise of this option that occurs within
two (2) years after the date of grant of this option or within one (1) year
after such shares of Common Stock are issued upon exercise of this option.
- -------------------
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
1.
<PAGE> 11
I hereby make the following certifications and representations with
respect to the number of shares of Common Stock of the Company listed above (the
"Shares"), which are being acquired by me for my own account upon exercise of
the Option as set forth above:
I acknowledge that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and are deemed to
constitute "restricted securities" under Rule 701 and "control securities" under
Rule 144 promulgated under the Securities Act. I warrant and represent to the
Company that I have no present intention of distributing or selling said Shares,
except as permitted under the Securities Act and any applicable state securities
laws.
I further acknowledge that I will not be able to resell the Shares for
at least ninety days (90) after the stock of the Company becomes publicly traded
(i.e., subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the
Shares subject to the provisions of the Option shall have endorsed thereon
appropriate legends reflecting the foregoing limitations, as well as any legends
reflecting restrictions pursuant to the Company's Articles of Incorporation,
Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative
of the underwriters) in connection with the first underwritten registration of
the offering of any securities of the Company under the Securities Act, I will
not sell or otherwise transfer or dispose of any shares of Common Stock or other
securities of the Company during such period (not to exceed one hundred eighty
(180) days) following the effective date of the registration statement of the
Company filed under the Securities Act as may be requested by the Company or the
representative of the underwriters. I further agree that the Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such period.
Very truly yours,
By:
-----------------------------------
Name:
-----------------------------------
2.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
BY AND BETWEEN
MP3.COM
AND
MICHAEL ROBERTSON
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Employment................................................................... 1
2. Loyal And Conscientious Performance; Noncompetition.......................... 2
3. Compensation Of Executive.................................................... 2
4. Termination.................................................................. 3
5. Confidential And Proprietary Information; Nonsolicitation.................... 4
6. Assignment And Binding Effect................................................ 4
7. Notices...................................................................... 4
8. Choice of Law................................................................ 5
9. Integration.................................................................. 5
10. Amendment.................................................................... 5
11. Waiver....................................................................... 5
12. Severability................................................................. 5
13. Interpretation; Construction................................................. 6
14. Representations And Warranties............................................... 6
15. Litigation Costs............................................................. 6
16. Counterparts................................................................. 6
17. Arbitration.................................................................. 6
18. Injunctive Relief............................................................ 7
19. Trade Secrets Of Others...................................................... 7
20. Advertising Waiver........................................................... 7
</TABLE>
i.
<PAGE> 3
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of May 13, 1999, by and between MP3.COM (the "Company"), and
MICHAEL ROBERTSON ("Executive"). The Company and Executive are hereinafter
collectively referred to as the "Parties," and individually referred to as a
"Party."
RECITALS
A. The Company desires assurance of the continued association and
services of Executive in order to retain Executive's experience, skills,
abilities, background and knowledge, and is willing to engage Executive's
services on the terms and conditions set forth in this Agreement.
B. Executive desires to continue in the employ of the Company, and is
willing to continue such employment on the terms and conditions set forth in
this Agreement.
AGREEMENT
In consideration of the foregoing Recitals and the mutual promises and
covenants herein contained, and for other good and valuable consideration, the
Parties, intending to be legally bound, agree as follows:
1. EMPLOYMENT.
1.1 The Company hereby employs Executive, and Executive hereby accepts
employment by the Company, upon the terms and conditions set forth in this
Agreement for the period commencing January 20, 1999 (the "Hire Date") and
ending December 31, 2002. Notwithstanding anything herein to the contrary,
either Party may terminate Executive's employment under this Agreement at any
time, with or without cause, subject to the terms and conditions of Section 4
herein.
1.2 Executive shall have the title of Chief Executive Officer of the
Company and shall serve in such other capacity or capacities as the Company may
from time to time prescribe. Executive shall report to the Board of Directors.
1.3 Executive shall do and perform all services, acts or things
necessary or advisable to manage and conduct the business of the Company and
which are normally associated with the position of Chief Executive Officer,
consistent with the Bylaws of the Company and as required by the Company's Board
of Directors.
1.4 The employment relationship between the Parties shall be governed by
the policies and practices established by the Board of Directors, except that
when the terms of this Agreement differ from or are in conflict with the
Company's policies or practices, this Agreement shall control.
1.
<PAGE> 4
1.5 Unless the Parties otherwise agree in writing, during the term of
this Agreement, Executive shall perform the services he is required to perform
pursuant to this Agreement at the Company's offices, located in San Diego, or at
any other place at which the Company maintains an office; provided, however,
that the Company may from time to time require Executive to travel temporarily
to other locations in connection with the Company's business.
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.
2.1 During his employment by the Company, Executive shall devote his
full business energies, interest, abilities and productive time to the proper
and efficient performance of his duties under this Agreement.
2.2 Except with the prior written consent of the Company's Board of
Directors, Executive will not, during his employment by the Company, engage in
competition with the Company, either directly or indirectly, in any manner or
capacity, as adviser, principal, agent, partner, officer, director, employee,
member of any association or otherwise, in any phase of the business of
developing, manufacturing and marketing of products which are in the same field
of use or which otherwise compete with the products or proposed products of the
Company.
2.3 Except as permitted herein, Executive agrees not to acquire, assume
or participate in, directly or indirectly, any position, investment or interest
known by him to be adverse or antagonistic to the Company, its business or
prospects, financial or otherwise. Ownership by Executive, as a passive
investment, of less than one percent (1%) of the outstanding shares of capital
stock of any corporation with one or more classes of its capital stock listed on
a national securities exchange or publicly traded in the over-the-counter market
shall not constitute a breach of this paragraph.
3. COMPENSATION OF EXECUTIVE.
3.1 The Company shall pay Executive a base salary of $150,000 per year
(the "Base Salary"), payable in semi-monthly payments in accordance with Company
policy. Such salary shall be prorated for any partial year of employment on the
basis of a 365-day fiscal year.
3.2 Executive's compensation may be changed from time to time by mutual
agreement of Executive and the Company.
3.3 Executive shall be eligible for an annual performance bonus of up to
$50,000 payable at the sole discretion of the Company's Board of Directors.
3.4 All of Executive's compensation shall be subject to customary
withholding taxes and any other employment taxes as are commonly required to be
collected or withheld by the Company.
3.5 Executive shall, in accordance with Company policy and the terms of
the applicable plan documents, be eligible to participate in benefits under any
Company benefit plan
2.
<PAGE> 5
or arrangement which may be in effect from time to time and made available to
its executive or key management employees.
4. TERMINATION.
4.1 TERMINATION. Executive's employment with the Company may be
terminated under the following conditions:
4.1.1 DEATH OR DISABILITY. Executive's employment with the
Company shall terminate effective upon the date of Executive's death or
"Complete Disability."
4.1.1.1 COMPLETE DISABILITY. "Complete Disability" shall
mean the inability of Executive to perform Executive's duties under this
Agreement because Executive has become permanently disabled within the meaning
of any policy of disability income insurance covering employees of the Company
then in force. In the event the Company has no policy of disability income
insurance covering employees of the Company in force when Executive becomes
disabled, the term "Complete Disability" shall mean the inability of Executive
to perform Executive's duties under this Agreement by reason of any incapacity,
physical or mental, which the Board, based upon medical advice or an opinion
provided by a licensed physician acceptable to the Board, determines to have
incapacitated Executive from satisfactorily performing all of Executive's usual
services for the Company during the foreseeable future. Based upon such medical
advice or opinion, the determination of the Board shall be final and binding and
the date such determination is made shall be the date of such complete
disability for purposes of this Agreement.
4.1.2 TERMINATION BY THE COMPANY. The Company may terminate
Executive's employment under this Agreement at any time and for any reason by
delivery of written notice of such termination to the Executive. Any notice of
termination given pursuant to this Section 4.1.2 shall effect termination as of
the date specified in such notice or, in the event no such date is specified, on
the last day of the month in which such notice is delivered or deemed delivered
as provided in Section 7 below.
4.1.3 TERMINATION BY EXECUTIVE. Executive may terminate his
employment under this Agreement upon twelve (12) months notice to the Company
for any reason by delivery of a written notice of such termination to the
Company. Any notice of termination given pursuant to this Section 4.1.3 shall
effect termination as of the date specified in such notice or, in the event no
date is specified, on the last day of the month in which such notice is
delivered or deemed delivered as provided in Section 7 below.
4.2 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES. Executive's
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.
3.
<PAGE> 6
5. CONFIDENTIAL AND PROPRIETARY INFORMATION; NONSOLICITATION.
5.1 Executive agrees to continue to abide by the Proprietary Information
and Inventions Agreement that he executed upon commencement of employment with
the Company, a copy of which is attached hereto as Exhibit A.
5.2 Executive recognizes that his employment with the Company will
involve contact with information of substantial value to the Company, which is
not old and generally known in the trade, and which gives the Company an
advantage over its competitors who do not know or use it, including but not
limited to, techniques, designs, drawings, processes, inventions, developments,
equipment, prototypes, sales and customer information, and business and
financial information relating to the business, products, practices and
techniques of the Company, (hereinafter referred to as "Confidential and
Proprietary Information"). Executive will at all times regard and preserve as
confidential such Confidential and Proprietary Information obtained by Executive
from whatever source and will not, either during his employment with the Company
or thereafter, publish or disclose any part of such Confidential and Proprietary
Information in any manner at any time, or use the same except on behalf of the
Company, without the prior written consent of the Company.
5.3 While employed by the Company and for one (1) year thereafter, the
Executive agrees that in order to protect the Company's Confidential and
Proprietary Information from unauthorized use, that Executive will not, either
directly or through others, solicit or attempt to solicit any employee,
consultant or independent contractor of the Company to terminate his or her
relationship with the Company in order to become an employee, consultant or
independent contractor to or for any other person or business entity; or the
business of any customer, vendor or distributor of the Company which, at the
time of termination or one (1) year immediately prior thereto, was doing
business with the Company or listed on Company's customer, vendor or distributor
list.
6. ASSIGNMENT AND BINDING EFFECT.
6.1 This Agreement shall be binding upon and inure to the benefit of
Executive and Executive's heirs, executors, personal representatives, assigns,
administrators and legal representatives. Because of the unique and personal
nature of Executive's duties under this Agreement, neither this Agreement nor
any rights or obligations under this Agreement shall be assignable by Executive.
This Agreement shall be binding upon and inure to the benefit of the Company and
its successors, assigns and legal representatives.
7. NOTICES.
7.1 All notices or demands of any kind required or permitted to be given
by the Company or Executive under this Agreement shall be given in writing and
shall be personally delivered (and receipted for) or mailed by certified mail,
return receipt requested, postage prepaid, addressed as follows:
4.
<PAGE> 7
7.1.1 If to the Company:
Attn: Chairman of the Board of Directors
P.O. Box 910091
San Diego, CA 92191-0091
7.1.2 If to Executive:
Michael Robertson
5437 Panoramic Lane
San Diego, CA 92121
Any such written notice shall be deemed received when personally delivered or
three (3) days after its deposit in the United States mail as specified above.
Either Party may change its address for notices by giving notice to the other
Party in the manner specified in this section.
8. CHOICE OF LAW.
8.1 This Agreement is made in San Diego, California. This Agreement
shall be construed and interpreted in accordance with the laws of the State of
California.
9. INTEGRATION.
9.1 This Agreement contains the complete, final and exclusive agreement
of the Parties relating to the terms and conditions of Executive's employment.
This Agreement supersedes and terminates all prior oral and written employment
agreements or arrangements between the Parties, including the Offer Letter dated
January 20, 1999 and the Stock Restriction Agreement dated January 21, 1999.
This Agreement does not supersede or alter in any way the terms and conditions
of the Founder Stock Agreement dated March 18, 1998.
10. AMENDMENT.
10.1 This Agreement cannot be amended or modified except by a written
agreement signed by Executive and the Company.
11. WAIVER.
11.1 No term, covenant or condition of this Agreement or any breach
thereof shall be deemed waived, except with the written consent of the Party
against whom the wavier in claimed, and any waiver or any such term, covenant,
condition or breach shall not be deemed to be a waiver of any preceding or
succeeding breach of the same or any other term, covenant, condition or breach.
12. SEVERABILITY.
12.1 The finding by a court of competent jurisdiction of the
unenforceability, invalidity or illegality of any provision of this Agreement
shall not render any other provision of this
5.
<PAGE> 8
Agreement unenforceable, invalid or illegal. Such court shall have the authority
to modify or replace the invalid or unenforceable term or provision with a valid
and enforceable term or provision which most accurately represents the parties'
intention with respect to the invalid or unenforceable term or provision.
13. INTERPRETATION; CONSTRUCTION.
13.1 The headings set forth in this Agreement are for convenience of
reference only and shall not be used in interpreting this Agreement. This
Agreement has been drafted by legal counsel representing the Company, but
Executive has been encouraged, and has consulted with, his own independent
counsel and tax advisors with respect to the terms of this Agreement. The
Parties acknowledge that each Party and its counsel has reviewed and revised, or
had an opportunity to review and revise, this Agreement, and the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.
14. REPRESENTATIONS AND WARRANTIES.
14.1 Executive represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing each
of the terms and covenants contained in this Agreement, and that his execution
and performance of this Agreement will not violate or breach any other
agreements between Executive and any other person or entity.
15. LITIGATION COSTS.
15.1 Should any litigation, arbitration, or administrative action be
commenced between the parties or their personal representatives concerning any
provision of this Agreement or the rights and duties of any person in relation
to this agreement, the party or parties prevailing in such action shall be
entitled, in addition to such other relief as may be granted to a reasonable sum
as and for that party's attorney's fees in such litigation which shall be
determined by the court, arbitrator, or administrative agency, in such action or
in a separate action brought for that purpose.
16. COUNTERPARTS.
16.1 This Agreement may be executed in two counterparts, each of which
shall be deemed an original, all of which together shall contribute one and the
same instrument.
17. ARBITRATION.
17.1 To ensure rapid and economical resolution of any disputes which may
arise under this Agreement, Executive and the Company agree that any and all
disputes or controversies of any nature whatsoever, arising from or regarding
the interpretation, performance, enforcement or breach of this Agreement shall
be resolved by confidential, final and binding arbitration (rather than trial by
jury or court or resolution in some other forum) to the fullest extent permitted
by law. Any arbitration proceeding pursuant to this Agreement shall be conducted
by the American
6.
<PAGE> 9
Arbitration Association ("AAA") in San Diego under the then existing AAA
arbitration rules. If for any reason all or part of this arbitration provision
is held to be invalid, illegal, or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not effect any other portion of this arbitration provision
or any other jurisdiction, but this provision will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable part
or parts of this provision had never been contained herein, consistent with the
general intent of the parties insofar as possible.
18. INJUNCTIVE RELIEF.
18.1 Executive is obligated under this Agreement to render services and
comply with covenants of a special, unique, unusual and extraordinary character,
thereby giving this Agreement peculiar value, so that the loss of such service
or violation by Executive of this Agreement, including, but not limited to, the
Proprietary Information and Inventions Agreement, could not reasonably or
adequately be compensated in damages in an action at law. Therefore,
notwithstanding Section 17 herein, in addition to any other remedies or
sanctions provided by law, whether criminal or civil, and without limiting the
right of the Company and successors or assigns to pursue all other legal and
equitable rights available to them, the Company shall have the right during
Executive's employment hereunder (or thereafter with respect to obligations
continuing after the termination of this Agreement) to compel specific
performance hereof by Executive or to obtain temporary and permanent injunctive
relief against violations hereof by Executive, including, but not limited to
violations of the Proprietary Information and Inventions Agreement, and, in
furtherance thereof, to apply to any court with jurisdiction over the Parties to
enforce the provisions hereof.
19. TRADE SECRETS OF OTHERS.
19.1 It is the understanding of both the Company and Executive that
Executive shall not divulge to the Company and/or its subsidiaries any
confidential information or trade secrets belonging to others, including
Executive's former employers, nor shall the Company and/or its affiliates seek
to elicit from Executive any such information. Consistent with the foregoing,
Executive shall not provide to the Company and/or its affiliates, and the
Company and/or its affiliates shall not request, any documents or copies of
documents containing such information.
20. ADVERTISING WAIVER.
20.1 Executive agrees to permit the Company and/or its affiliates, and
persons or other organizations authorized by the Company and/or its affiliates,
to use, publish and distribute advertising or sales promotional literature
concerning the products of the Company and/or its affiliates, or the machinery
and equipment used in the manufacture thereof, in which Executive's name and/or
pictures of Executive taken in the course of Executive's provision of services
to the Company and/or its affiliates, appear. Executive hereby waives and
releases any claim or right Executive may otherwise have arising out of such
use, publication or distribution.
7.
<PAGE> 10
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
MP3.COM
By: /s/ Paul Ouyang
-------------------------------
Its: CFO
------------------------------
Dated: May 13, 1999
----------------------------
EXECUTIVE:
/s/ MICHAEL ROBERTSON
- ----------------------------------
MICHAEL ROBERTSON
Dated: May 13, 1999
----------------------------
8.
<PAGE> 11
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 1
EXHIBIT 10.5
MP3.COM, INC.
January 6, 1999
Robin Richards
- --------------------
- --------------------
RE: EMPLOYMENT TERMS
Dear Robin:
MP3.com, Inc., a Delaware corporation, (the "Company") is pleased to offer you
the position of Chief Operating Officer and President, on the following terms.
You will serve as Chief Operating Officer and President and will be responsible
for such duties as are normally associated with such position or as otherwise
determined by the Chief Executive Officer of the Company. You will report to
Michael Robertson, the Chief Executive Officer of the Company. You will work at
our facility located in San Diego. Of course, the Company may change your
position, duties, and work location from time to time as it deems necessary.
You will become a member of the Board of Directors of the Company, with full
voting powers, and the current Directors of the Company intend to take whatever
action may be required in order to have you appointed or elected to the Board.
You acknowledge, however, that Board membership is not a condition of your
employment, and you may be removed from the Board at any time in accordance with
the Bylaws of the Company. Removal from the Board shall not constitute
termination of your employment relationship.
Your compensation will be $20,000 per month, less payroll deductions and all
required withholdings. You will be paid semi-monthly and you will be eligible
for standard benefits, such as medical insurance, sick leave, vacations and
holidays, according to standard Company policy as may be adopted by the Company
from time to time. Details about these benefits will be provided in an Employee
Handbook and in Summary Plan Descriptions, which will be prepared by the Company
and made available for your review in due course. Your cash compensation will
accrue and will not be actually issued to you until after the closing of the
currently pending venture capital financing involving Sequoia Capital, or upon
the closing of a similar financing deal in the event that the Sequoia financing
fails to close.
Upon commencement of employment with the Company pursuant to this letter, and
subject to approval by the Company's Board of Directors, you will be granted an
Incentive Stock
<PAGE> 2
Robin Richards
January 5, 1999
Page 2
Option to purchase one million six hundred twenty-five thousand (1,625,000)
shares of the Common Stock of the Company under the Company's 1998 Equity
Incentive Plan (the "Plan"). This number of shares is based on a calculation of
five percent (5%) of the thirty-two million five hundred thousand (32,500,000)
shares which will be actually issued or reserved after the anticipated closing
of Sequoia Capital financing. If the Sequoia Capital financing fails to close
and the capitalization of the company is altered in connection with a
substantially similar replacement financing, the number of shares to be issued
to you, and the vesting schedule described below, will be adjusted to maintain
your equity interest at five percent. The exercise price per share of the
Incentive Stock Option will be equal to the fair market value of the Common
Stock on the date you commence your employment with the Company, as determined
in good faith by the Company's Board of Directors. The current fair market value
of the Common Stock of the Company is estimated to be approximately $.16 per
share.
The shares of Common Stock subject to your Incentive Stock Option will be
subject to vesting over four years so long as you continue to be employed with
the Company, according to the following schedule: one hundred sixty-two thousand
five hundred (162,500) of such shares will vest on the date you commence
employment with the Company pursuant to this letter; an additional thirty
thousand four hundred sixty-nine (30,469) of such shares will vest as of the end
of each monthly period thereafter, except for the last vesting date, on which
thirty thousand four hundred fifty-seven (30,457) of such shares will vest. In
addition to the foregoing, in the event your employment with the Company is
terminated by the Company for any reason, the vesting of your option will be
accelerated such that, in addition to the number of shares that have vested
pursuant to the schedule above as of the date of such termination, ten percent
(10%) of the then unvested shares will vest as of the date of such termination.
Further, upon completion of the Company's initial public offering, in addition
to the number of shares that have vested pursuant to the schedule above as of
the date of such offering, twenty percent (20%) of the then unvested shares will
vest as of the date of such offering. Additionally, all of your unvested shares
shall vest upon a merger, reverse merger, or sale of substantially all of the
assets of the Company.
The specific terms and conditions of your Incentive Stock Option to purchase
shares of the Common Stock of the Company will be set forth in an Incentive
Stock Option Agreement between you and the Company. Such agreement shall be in
substantially the form approved by the Board of Directors of the Company for use
with the Plan, modified as necessary to appropriately reflect the provisions
outlined above, and will be executed after you commence your employment with the
Company.
As a Company employee, you will be expected to abide by Company rules and
regulations, and acknowledge in writing that you have read the Company's
Employee Handbook (once
<PAGE> 3
Robin Richards
January 5, 1999
Page 3
it has been made available to you). As a condition of employment, you will be
required to sign and comply with a Proprietary Information and Inventions
Agreement, a copy of which is attached hereto as Exhibit A, which, among other
things, prohibits unauthorized use or disclosure of Company proprietary
information.
Normal working hours are from 8:30 a.m. to 5:30 p.m., Monday through Friday. As
an exempt salaried employee, you will be expected to work additional hours as
required by the nature of your work assignments.
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company. Likewise, the Company may
terminate your employment at any time and for any reason whatsoever, with or
without cause or advance notice. This at-will employment relationship cannot be
changed except in a writing signed by a Company officer.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement between you and the Company. As required by law, this
offer is subject to satisfactory proof of your right to work in the United
States.
Please sign and date this letter, and return it to me as soon as possible if you
wish to accept employment at the Company under the terms described above. If you
accept our offer, we would like you to commence your employment with us on
_______________________.
<PAGE> 4
Robin Richards
January 5, 1999
Page 4
We look forward to your favorable reply and to a productive and enjoyable work
relationship.
Sincerely,
MP3.COM, INC.
By: /s/ MICHAEL ROBERTSON
--------------------------------
Michael Robertson
Chief Executive Officer
ACCEPTED BY:
/s/ ROBIN RICHARDS
- ------------------------------------
Robin Richards
1/6/99 Start Date 1/11/99
- ------------------------------------
Date
<PAGE> 5
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 1
EXHIBIT 10.6
[MP3.COM, INC. LETTERHEAD]
February 19, 1999
Paul L. H. Ouyang
1838 San Pasqual Street
Pasadena, California 91107
RE: EMPLOYMENT TERMS
Dear Paul:
MP3.com, Inc., a Delaware corporation, (the "Company") is pleased to offer you
the position of Chief Financial Officer and Executive Vice President, on the
following terms.
You will serve as Chief Financial Officer and Executive Vice President, and will
be responsible for such duties as are normally associated with such positions or
as otherwise determined by the President of the Company, including, but not
limited to, responsibility in the areas of finance, accounting, human resources
and risk management and planning for the Company. You will report to Robin
Richards, the President of the Company. You will work at our facility located in
San Diego.
Your salary will be $12,500 per month, less payroll deductions and all required
withholdings. The Company may in its discretion increase your salary, but it may
not reduce your salary. Your salary will be paid semi-monthly. You shall be
entitled to participate in all incentive, savings and retirement plans,
practices, policies and programs maintained or sponsored by the Company from
time to time for the benefit of its employees generally or its executive
officers generally. You will be eligible for standard benefits, such as medical
insurance, sick leave, vacations and holidays to the extent applicable generally
to other executive officers of the Company. Details about these benefits will be
provided in an Employee Handbook and in Summary Plan Descriptions, which will be
prepared by the Company and made available for your review in due course.
Notwithstanding the foregoing, so long as you continue to be employed with the
Company, the Company will reimburse you for general living expenses, including,
without limitation, rent and utilities, not to exceed $3,000 per month, for a
period of twelve (12) months in connection with your relocation to San Diego;
provided, however, that you will be required to submit proper documentation to
the satisfaction of the President of the Company in order to qualify for such
reimbursement.
You shall be entitled to receive prompt reimbursement for all reasonable
employment expenses incurred by you in accordance with the policies, practices
and procedures as in effect generally with respect to other executive officers
of the Company.
<PAGE> 2
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company. Likewise, the Company may
terminate your employment at any time and for any reason whatsoever, with or
without cause or advance notice. This at-will employment relationship cannot be
changed except in a writing signed by a Company officer. If the Company
terminates your employment without cause at any time, or if you resign with
"good reason," the Company will pay you, as severance compensation, an amount
equal to six (6) months of your base salary, subject to standard payroll
deductions and withholdings. If you resign without good reason or your
employment is terminated for cause, all compensation and benefits will cease
immediately, and you will receive no severance benefits. For purposes of this
letter agreement, the definition of "cause" shall be limited to the occurrence
of any of the following events: (i) an act of dishonesty by you intended to
result in your gain or personal enrichment which causes material harm to the
reputation of the Company or its affiliates; (ii) your personally engaging in
illegal conduct which causes material harm to the reputation of the Company or
its affiliates; (iii) your being convicted or found liable for a felony,
misdemeanor or gross misdemeanor relating to an act of dishonesty or fraud
against, or a misappropriation of property belonging to, the Company or its
affiliates; (iv) your engagement in substance abuse which substantially impairs
your ability to perform the duties and obligations of your employment or causes
material harm to the reputation of the Company; (v) your personally engaging in
any act of moral turpitude that causes material harm to the reputation of the
Company; (vi) your commencement of employment with another employer while you
are an employee of the Company without the prior consent of the Board of
Directors; or (vii) your incurable material breach of any element of the
Company's Proprietary Information and Inventions Agreement, including without
limitation, your theft or other misappropriation of the Company's proprietary
information. Physical or mental disability shall not constitute "cause." For
purposes of this letter agreement "good reason" shall mean (a) a material
reduction in your salary or benefits, or (b) the Company fails to perform or
breaches its obligations under any other material provision of this letter
agreement and does not correct such failure or breach (if correctable) within
thirty days following notice thereof by you to the Company. Upon any termination
of employment, you shall be entitled to any compensation earned but unpaid
through the date of termination as well as any benefits due or amounts payable
under any plan or program maintained or sponsored by the Company.
Upon commencement of employment with the Company pursuant to this letter (the
"Commencement Date"), you will be granted an Incentive Stock Option to purchase
320,000 shares of the Common Stock of the Company under the Company's 1998
Equity Incentive Plan (the "Plan"). The exercise price per share of the
Incentive Stock Option will be equal to the fair market value of the Common
Stock on the date you commence your employment with the Company, as determined
in good faith by the Company's Board of Directors. The current fair market value
of the Common Stock of the Company is estimated to be approximately $.16 per
share.
The shares of Common Stock subject to your Incentive Stock Option will be
subject to vesting over four years so long as you continue to be employed with
the Company, according to the following schedule: thirty-two thousand (32,000)
of such shares will vest as of the Commencement Date; an additional six thousand
(6,000) shares shall vest at the end of each month thereafter. In addition to
the foregoing, in the event your employment with the Company is terminated due
to death or disability (the latter of which shall mean your permanent and total
2.
<PAGE> 3
disability within the meaning of Section 221(e)(3) of the Internal Revenue Code
of 1986, as amended), the vesting of your option shall be immediately
accelerated in full. Further, upon the effective date of the Company's first
firm commitment underwritten public offering of its Common Stock registered
under the Securities Act, an additional twenty percent (20%) of the shares
subject to your option that have not vested as of such date will vest as of the
effective date. If your employment is terminated by the Company without cause at
any time, the vesting of your option shall be immediately accelerated in full.
If you resign with good reason at any time, an additional fifty percent (50%) of
the shares subject to your option that have not vested as of such date will vest
upon your resignation. Finally, in the event the Company enters into a
definitive agreement for (i) a consolidation or merger of the Company with or
into any other corporation or other entity or person in which the stockholders
of the Company prior to such consolidation or merger own less than fifty percent
(50%) of the Company's voting power immediately after such consolidation or
merger, excluding any consolidation or merger effected exclusively to change the
domicile of the Company, or (ii) a sale of all or substantially all of the
assets of the Company, then the vesting of your option shall be immediately
accelerated in full.
The specific terms and conditions of your Incentive Stock Option will be set
forth in an Incentive Stock Option Agreement between you and the Company. Such
agreement shall be in substantially the form approved by the Board of Directors
of the Company for use with the Plan, modified as necessary to appropriately
reflect the provisions outlined above, and will be executed after you commence
your employment with the Company pursuant to this letter.
As a Company employee, you will be expected to abide by Company rules and
regulations, and acknowledge in writing that you have read the Company's
Employee Handbook (once it has been made available to you). As a condition of
employment, you will be required to sign and comply with a Proprietary
Information and Inventions Agreement, a copy of which is attached hereto as
Exhibit A, which, among other things, prohibits unauthorized use or disclosure
of Company proprietary information.
The Company shall pay your reasonable expenses for legal counsel engaged by you
in connection with the preparation, negotiation and execution of this letter
agreement.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement between you and the Company. As required by law, this
offer is subject to satisfactory proof of your right to work in the United
States.
Please sign and date this letter, and return it to me as soon as possible if you
wish to accept employment at the Company under the terms described above. If you
accept our offer, we would like you to commence your employment with us no later
than February 28, 1999 with the understanding that up until March 8, 1999, you
will permitted to (i) perform services for the Company outside of the San Diego
area on less than a full-time basis, and (ii) fulfill any prior obligations or
commitments that you may have to Tickets.com, Inc.
3.
<PAGE> 4
We look forward to your favorable reply and to a productive and enjoyable work
relationship.
Sincerely,
MP3.COM, INC.
By: /s/ ROBIN RICHARDS
------------------------------
Name: Robin Richards
------------------------------
Title: President
------------------------------
ACCEPTED BY:
/s/ PAUL L. H. OUYANG
- ------------------------------------
Paul L. H. Ouyang
2/19/99
- ------------------------------------
Date
4.
<PAGE> 5
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 1
EXHIBIT 10.7
MP3.COM, INC.
P.O. Box 910091
San Diego, CA 92191
January 29, 1999
Steven Sheiner
c/o MP3.com, Inc.
3550 General Atomics Ct., Bldg 14
San Diego, CA. 92121
RE: EMPLOYMENT TERMS
Dear Steve:
MP3.com, Inc., a Delaware corporation (the "Company"), is pleased that you have
accepted our offer to join the Company as Vice President, Advertising &
Marketing. The terms of your employment are set forth below.
You began serving the Company as Vice President, Advertising & Marketing on
January 25, 1999 (your "Commencement Date") and are responsible for such duties
as are normally associated with such position or as otherwise determined by the
President of the Company. You report to Robin Richards, the President of the
Company. You work at our facility located in San Diego. Of course, the Company
may change your position, duties, and work location from time to time as it
deems necessary.
Your compensation is $12,500 per month, less payroll deductions and all required
withholdings. You are paid semi-monthly and you are eligible for standard
benefits, such as medical insurance, sick leave, vacations and holidays,
according to standard Company policy as may be adopted by the Company from time
to time. Details about these benefits will be provided in an Employee Handbook
and in Summary Plan Descriptions, which will be prepared by the Company and made
available for your review in due course. The Company may modify your
compensation and benefits from time to time as it deems necessary.
In addition to the salary outlined above, you will be entitled to a 3%
commission on all "Sales" of Web ads that you produce for the Company. For
purposes of this paragraph, "Sale" and "Sales" means all sums actually received
by the Company from sales and licenses of Web ads while you are an employee of
the Company. In no event will you be entitled to receive any commission with
respect to any Sales generated or paid to the Company following any termination
of your employment with the Company. Commissions earned as a result of Sales of
Web ads shall accrue as of the end of each calendar quarter ("Quarter") in which
sums from such Sale(s) are received. Within 45 days of the end of each Quarter,
the Company will deliver to you the amount of the
<PAGE> 2
Steven Sheiner
January 29, 1999
Page 2
commission payable with respect to Sales occurring in such Quarter together with
a reasonably detailed statement of the basis for the computation of the amount
of such commission.
The Company's Board of Directors has granted you an Incentive Stock Option to
purchase 250,000 shares of the Common Stock of the Company under the Company's
1998 Equity Incentive Plan (the "Plan"). The exercise price per share of your
Incentive Stock is $0.16. The shares of Common Stock subject to your Incentive
Stock Option are subject to vesting over four years so long as you continue to
be employed with the Company, according to the following schedule: (i) 25,000 of
the shares subject to the grant shall be fully vested as of your Commencement
Date; (ii) an additional 15,625 of such shares shall vest as of the first day of
each quarter immediately following the Commencement Date; and (iii) an
additional 4,514 of such shares shall vest as of the end of each monthly period
thereafter, except for the last vesting date, on which 4,510 of such shares
shall vest. Also, upon completion of the Company's initial public offering, in
addition to the number of shares that have vested pursuant to the schedule above
as of the date of such offering, ten percent (10%) of the then unvested shares
will vest as of the date of such offering. Further, all of the unvested shares
subject to your Incentive Stock Option shall vest upon an Acquisition (as
defined in the Plan).
The specific terms and conditions of your Incentive Stock Option will be set
forth in an Incentive Stock Option Agreement between you and the Company. This
agreement is being prepared and will be delivered to you shortly.
As a Company employee, you are expected to abide by Company rules and
regulations, and acknowledge in writing that you have read the Company's
Employee Handbook (once it has been made available to you). As a condition of
employment, you are required to sign and comply with a Proprietary Information
and Inventions Agreement, a copy of which is attached hereto as Exhibit A,
which, among other things, prohibits unauthorized use or disclosure of Company
proprietary information.
Normal working hours are from 8:30 a.m. to 5:30 p.m., Monday through Friday. As
an exempt salaried employee, you are expected to work additional hours as
required by the nature of your work assignments.
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company in writing no later than two
weeks prior to the date of such termination. Likewise, the Company may terminate
your employment at any time and for any reason whatsoever, with or without cause
or advance notice. This at-will employment relationship cannot be changed except
in a writing signed by a Company officer.
<PAGE> 3
Steven Sheiner
January 29, 1999
Page 3
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement between you and the Company. As required by law, your
employment with the Company is subject to satisfactory proof of your right to
work in the United States.
Please sign and date this letter, and return it to me as soon as possible if the
foregoing accurately sets forth the terms of your employment with the Company.
Sincerely,
MP3.COM, INC.
By: /s/ Robin Richards
--------------------------------
Robin Richards
President
ACCEPTED BY:
/s/ Steven Sheiner
- ------------------------------------
Steven Sheiner
1-29-99
- ------------------------------------
Date
<PAGE> 4
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 1
EXHIBIT 10.8
MP3.COM, INC.
P.O. Box 910091
San Diego, CA 92191
April 23, 1999
Paul Alofs
1334 South El Molino Avenue
Pasadena, CA 91106
RE: EMPLOYMENT TERMS
Dear Paul:
MP3.com, Inc., a Delaware corporation, (the "Company") is pleased to offer you
the position of President of Strategic Business Units, on the following terms.
You will serve as President of Strategic Business Units, and will be responsible
for such duties as are normally associated with such positions or as otherwise
determined by the President of the Company, including, but not limited to,
responsibility in the areas of SBU's, internal operations, profit/loss
management, artist services, international operations strategy and fulfillment
operations. You will report to Robin Richards, the President and Chief Operating
Officer of the Company. You will work at our facility located in San Diego.
Your salary will be $16,666.67 per month, less payroll deductions and all
required withholdings. Your salary will be paid bi-weekly. You shall be entitled
to participate in all incentive, savings and retirement plans, practices,
policies and programs maintained or sponsored by the Company from time to time
for the benefit of its employees generally or its executive officers generally.
You will be eligible for standard benefits, such as medical insurance, sick
leave, vacations and holidays to the extent applicable generally to other
executive officers of the Company. Details about these benefits will be provided
in an Employee Handbook and in Summary Plan Descriptions, which will be prepared
by the Company and made available for your review in due course.
In addition to your salary, so long as you continue to be employed with the
Company, the Company will reimburse you for general living expenses, including,
without limitation, rent and utilities, not to exceed $2,250 per month, for a
period of twelve (12) months in connection with your relocation to San Diego;
provided, however, that you will be required to submit proper documentation to
the satisfaction of the President of the Company in order to qualify for such
reimbursement.
Upon commencement of employment with the Company pursuant to this letter (the
"Commencement Date"), you will be granted an Incentive Stock Option to purchase
330,000
<PAGE> 2
shares of the Common Stock of the Company under the Company's 1998 Equity
Incentive Plan (the "Plan"). The exercise price per share of the Incentive Stock
Option will be equal to the fair market value of the Common Stock on the date
you commence your employment with the Company, as determined in good faith by
the Company's Board of Directors. The current fair market value of the Common
Stock of the Company is estimated to be approximately $1.00 per share. The
Company intends to grant the Incentive Stock Option to you in reliance upon the
exemption provided by Rule 701 under the Securities Act of 1933, as amended.
However, as you know, the Company cannot guarantee the availability of such
exemption.
The shares of Common Stock subject to your Incentive Stock Option will be
subject to vesting over four years so long as you continue to be employed with
the Company, according to the following schedule: sixty-six thousand (66,000) of
such shares will vest as of the earlier of (i) the effective date of the
Company's first firm commitment underwritten public offering of its Common Stock
registered under the Securities Act or (ii) the one-year anniversary of the
Commencement Date (either (i) or (ii), as applicable, being the "Initial Vesting
Date"); an additional five thousand five hundred (5,500) shares shall vest at
the end of each month following the Initial Vesting Date.
The specific terms and conditions of your Incentive Stock Option will be set
forth in an Incentive Stock Option Agreement between you and the Company. Such
agreement shall be in substantially the form approved by the Board of Directors
of the Company for use with the Plan, modified as necessary to appropriately
reflect the provisions outlined above, and will be executed after you commence
your employment with the Company pursuant to this letter.
As a Company employee, you will be expected to abide by Company rules and
regulations, and acknowledge in writing that you have read the Company's
Employee Handbook (once it has been made available to you). As a condition of
employment, you will be required to sign and comply with a Proprietary
Information and Inventions Agreement, a copy of which is attached hereto as
Exhibit A, which, among other things, prohibits unauthorized use or disclosure
of Company proprietary information.
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company. Likewise, the Company may
terminate your employment at any time and for any reason whatsoever, with or
without cause or advance notice. This at-will employment relationship cannot be
changed except in a writing signed by a Company officer.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement between you and the Company. As required by law, this
offer is subject to satisfactory proof of your right to work in the United
States.
Please sign and date this letter, and return it to me as soon as possible if you
wish to accept employment at the Company under the terms described above. If you
accept our offer, we would like you to commence your employment with us as soon
as practicable.
2.
<PAGE> 3
We look forward to your favorable reply and to a productive and enjoyable work
relationship.
Sincerely,
MP3.COM, INC.
By: /s/ Robin Richards
---------------------------------
Name: Robin Richards
-------------------------------
Title: President
------------------------------
ACCEPTED BY:
/s/ Paul Alofs
- ------------------------------------
Paul Alofs
April 27, 1999
- ------------------------------------
Date
3.
<PAGE> 4
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 1
EXHIBIT 10.9
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -- GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
February 1, 1999, is made by and between General Atomics ("LESSOR") and MP3.com
(formerly ZCO, Inc.) ("LESSEE"), (collectively the "PARTIES," or individually a
"PARTY"). Refer to Paragraph 49
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 10350 Science Center Drive, located in
the City of San Diego, County of San Diego, State of California, with zip code
92121, as outlined on Exhibits A&B attached hereto ("PREMISES"). The "BUILDING"
is that certain building containing the Premises and generally described as
(describe briefly the nature of the Building): Building 14 of the General
Atomics Industrial Center. In addition to Lessee's rights to use and occupy the
Premises as hereinafter specified, Lessee shall have non-exclusive rights to the
Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but
shall not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center. The Premises, the
Building, the Common Areas, the land upon which they are located, along with all
other buildings and improvements thereon, are herein collectively referred to as
the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: Refer to Par. 50 unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and no reserved vehicle parking spaces ("RESERVED
PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: 2 years and -0- months ("ORIGINAL TERM") commencing March 1,
1999 ("COMMENCEMENT DATE") and ending Feb. 28, 2001 ("EXPIRATION DATE"). (Also
see Paragraph 3.)
1.4 EARLY POSSESSION: Refer to Exhibit C ("EARLY POSSESSION DATE").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $Refer to Ex. C per month ("BASE RENT"), payable on the
1st day of each month commencing February 1, 1999 (Also see Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Ex. C, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ Exhibit C as Base Rent for the
period of one month.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Refer to Ex. C
percent (_____%) ("LESSEE'S SHARE") as determined by [ ] prorata square footage
of the Premises as compared to the total square footage of the Building or [X]
other criteria as described in Addendum Ex. C.
1.7 SECURITY DEPOSIT: $ Refer to Exhibit C ("SECURITY DEPOSIT"). (Also
see Paragraph 5.)
1.8 PERMITTED USE: Office and dry Laboratories in accordance with the
City of San Diego Scientific Research Zoning("PERMITTED USE") (Also see
Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph
8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): Refer
to Paragraph 51
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 61, and Exhibits A through G, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems, and loading doors, if any, in the Premises, other than
those constructed by Lessee, shall be in good operating condition on the
Commencement Date. If a non-compliance with said warranty exists as of the
Commencement Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the Commencement
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. Refer to Par. 52
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the date improvements
were installed. Lessor further warrants to Lessee that Lessor has no knowledge
of any claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist with
regard to the Premises as of the Commencement Date. Said warranties shall not
apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a))
made or to be made by Lessee. If the Premises do not comply with said
warranties, Lessor shall, except as otherwise provided in this Lease, promptly
after receipt of written notice from Lessee given within six (6) months
following the Commencement Date and setting forth with specificity the nature
and extent of such non-compliance, take such action, at Lessor's expense, as may
be
Initials: ________
________
MULTI-TENANT GROSS
(C)1993 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
PAGE 1 OF 13
<PAGE> 2
reasonable or appropriate to rectify the non-compliance. Lessor makes no
warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises
under Applicable Laws (as defined in Paragraph 2.4). Refer to Par. 53
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Lessor to satisfy itself with respect to the condition of
the Premises (including, but not limited to, the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the
Common Areas designated from time to time by Lessor for parking. Lessee shall
not use more parking spaces than said number. Said parking spaces shall be used
for parking by vehicles no larger than full-size passenger automobiles or
pick-up trucks, herein called "PERMITTED SIZE VEHICLES." Vehicles other than
Permitted Size Vehicles shall be parked and loaded or unloaded as directed by
Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by
Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to
or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 COMMON AREAS -- DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS -- LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center. Refer to Exhibit D
2.10 COMMON AREAS -- Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor may,
in the exercise of sound business judgment, deem to be appropriate. Refer to
Paragraph 54
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Date but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including, but not limited to, the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession
of the Premises to Lessee by the Early Possession Date, if one is specified in
Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement
Date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease, or the obligations of Lessee
hereunder, or extend the term hereof, but in such case, Lessee shall not, except
as otherwise provided herein, be obligated to pay rent or perform any other
obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
Parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate by invoice to Lessee. Refer to Exhibit C
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
Initials: _______
_______
MULTI-TENANT GROSS
(C)1993 - AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
PAGE 2 OF 13
<PAGE> 3
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as
defined in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph
8.1).
(vii) The cost of insurance carried by Lessor with respect
to the Common Areas.
(viii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises, or neighboring properties to any meaningful risk
of contamination or damage or expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its consent
to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including,
but not limited to, the installation (and, at Lessor's option, removal on or
before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements) and/or
the deposit of an additional Security Deposit under Paragraph 5 hereof. Refer to
Paragraph 55.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including, but not limited to, all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
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termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including,
but not limited to, matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including,
but not limited to, permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDERS") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including, but not limited to, Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair, including, without limiting
the generality of the foregoing, all Lessee installed equipment or facilities
specifically serving the Premises, such as supplementary heating, air
conditioning, ventilating, electrical, lighting facilities, fixtures, interior
walls, interior surfaces of exterior walls, ceilings, floors, windows, doors,
plate glass, and skylights, but excluding any items which are the responsibility
of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in
good order, condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations, replacements or
renewals when necessary to keep the Premises and all improvements thereon or a
part thereof in good order, condition and state of repair. Refer to Paragraph
56.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the Lessee installed heating, air conditioning and
ventilation system for the Premises.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) central plumbing, heating, air conditioning, ventilating,
electrical, lighting, facilities, fire hose connections, or other automatic fire
extinguishing system including fire alarm and/or smoke detection systems and
equipment, fire hydrants, parking lots, walkways, parkways, driveways,
landscaping, fences, signs and utility systems serving the Common Areas and all
parts thereof, as well as providing the services Lessor shall not be obligated
to paint the exterior or interior surfaces of exterior walls nor shall Lessor be
obligated to maintain, repair or replace windows, doors or plate glass of the
Premises. Lessee expressly waives the benefit of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Building, Industrial Center or Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Refer to Paragraph 57.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor, in an
amount equal to one and one-half times the amount of such contested lien claim
or demand, indemnifying Lessor against liability for the same, as required by
law for the holding of the Premises free from the effect of such lien or claim.
In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs
in participating in such action if Lessor shall decide it is to its best
interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
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<PAGE> 5
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. INSURANCE; INDEMNITY.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender or included in the Base
Premium), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, Insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
maintain insurance coverage on all of Lessee's personal property, Trade Fixtures
and Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage
with a deductible not to exceed $1,000 per occurrence. The proceeds from any
such insurance shall be used by Lessee for the replacement of personal property
and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility
Installations. Upon request from Lessor, Lessee shall provide Lessor with
written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand. Lessee's insurance policies shall name
Lessor as additional insured.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of
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<PAGE> 6
any of the foregoing matters, Lessee, upon notice from Lessor, shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom. Refer to
Paragraph 58.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent (50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is fifty percent (50%) or more of
the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations
and Utility Installations and Trade Fixtures) immediately prior to such damage
or destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the event, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may, at Lessor's option, either
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate this
Lease, Lessee shall have the right within ten (10) days after the receipt of
such notice to give written notice to Lessor of Lessee's commitment to pay for
the repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or satisfactory
assurance thereof within thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense, repair such damage as soon as reasonably possible
and this Lease shall continue in full force and effect. If Lessee fails to
exercise such option and provide such funds or assurance during such period,
then this Lease shall terminate as of the date set forth in the first sentence
of this Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "COMMENCE" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
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9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may, at
Lessor's option, either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000, whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2(a), applicable to the Industrial Center.
10.2 REAL PROPERTY TAX DEFINITIONS.
(a) As used herein, the term "REAL PROPERTY TAXES" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including, but not limited to, a change in the ownership of the Industrial
Center or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
10.3 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all utilities and services supplied
to the Premises, including, but not limited to, electricity, telephone,
water/sewer, gas and cleaning of the Premises, together with any taxes thereon.
If any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d). Refer to Paragraph 59 and Exhibit C.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Any fixed rental adjustments scheduled during the remainder of the
Lease term shall be increased in the same ratio as the new rental bears to the
Base Rent in effect immediately prior the adjustment specified in Lessor's
Notice.
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(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including, but not limited to, the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent
applicable to the portion of the Premises which is the subject of the proposed
assignment or sublease, whichever is greater, as reasonable consideration for
Lessor's considering and processing the request for consent. Lessee agrees to
provide Lessor with such other or additional information and/or documentation as
may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease.
A "BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Operating
Expenses, or any other monetary payment required to be made by Lessee hereunder
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection required under Paragraph
7.1(b), (iii) the rescission of an unauthorized assignment or subletting per
Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the
subordination or non-subordination of this Lease per Paragraph 30, (vi) the
guaranty of the performance of Lessee's obligations under this Lease if required
under Paragraphs 1.11 and 37, (vii) the execution of any document requested
under Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following written
notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's
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assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee, given to Lessor by Lessee, was materially false.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may, at its
option (but without obligation to do so), perform such duty or obligation on
Lessee's behalf, including, but not limited to, the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be due
and payable by Lessee to Lessor upon invoice therefor. If any check given to
Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee (as defined in Paragraph 13.1), with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and that portion of any leasing commission paid by Lessor in connection with
this Lease applicable to the unexpired term of this Lease. The worth at the time
of award of the amount referred to in provision (iii) of the immediately
preceding sentence shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank
District in which the Premises are located at the time of award plus one percent
(1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach
of this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraphs
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and recover the rent as it becomes due, provided Lessee has the right to sublet
or assign, subject only to reasonable limitations. Lessor and Lessee agree that
the limitations on assignment and subletting in this Lease are reasonable. Acts
of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this Lease,
shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be
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entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above Lessee's share of
the legal and other expenses incurred by Lessor in the condemnation matter,
repair any damage to the Premises caused by such condemnation authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.
15. BROKERS' FEES
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "TENANCY STATEMENT" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee shall deliver to any
potential lender or purchaser designated by Lessor such financial statements of
Lessee and as may be reasonably required by such lender or purchaser, including,
but not limited to, Lessee's financial statements for the past three (3) years.
All such financial statements shall be received by Lessor and such lender or
purchaser in confidence and shall be used only for the purposes herein set
forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate charged by the largest state chartered bank in the state in which the
Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between the
Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding including the Sublease Agreement
dated July 1, 1998, and the Letter Agreement dated January 13, 1999 shall be
effective. Lessor and Lessee each represents and warrants that it has made, and
is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of monies or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
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26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the state in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent. Refer to Paragraph 60.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including, but not
limited to, architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including, but not
limited to, consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
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any particular condition to Lessor's consent shall not preclude the impositions
by Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
38. QUIET POSSESSION. Upon payment by Lessee of the Rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or the right of first
offer to lease other property of Lessor; Refer to Paragraph 61.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of separate Default under Paragraph 13.1 during
the twelve (12) month period immediately preceding the exercise of the Option,
whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
Exhibit A -- Site Map
Exhibit B -- Space Summary with Floor Plans
Exhibit C -- Summary of Term, Rent, Security Deposit, Operating Expenses and
Utilities
Exhibit D -- Rules & Regulations
Exhibit E -- Notice of Policy Regulating Asbestos Containing Materials
Exhibit F -- Work Letter Agreement
Exhibit G -- Landlord Consent and Estoppel Certificate
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The Parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: San Diego Executed at: San Diego
on: 2/24/99 on: __________________________________
By LESSOR: By LESSEE:
General Atomics MP3.com
______________________________________ ______________________________________
By: /s/ ROBERT H. DALRY By: /s/ ROBIN RICHARDS
Name Printed: Robert H. Dalry Name Printed: Robin Richards
Title: Director Facilities Title: President and COO
By:___________________________________ By:___________________________________
Name Printed:_________________________ Name Printed:_________________________
Title:________________________________ Title:________________________________
Address:______________________________ Address:______________________________
______________________________________ ______________________________________
Telephone: (619) 455-2130 Telephone: (619) 558-9390 Ext. 101
Facsimile: (619) 455-4375 Facsimile: (619) 558-9220
BROKER: BROKER:
Executed at:__________________________ Executed at:__________________________
on:___________________________________ on:___________________________________
By:___________________________________ By:___________________________________
Name Printed:_________________________ Name Printed:_________________________
Title:________________________________ Title:________________________________
Address:______________________________ Address:______________________________
______________________________________ ______________________________________
Telephone: (___)______________________ Telephone: (___)______________________
Facsimile: (___)______________________ Facsimile: (___)______________________
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
South Flower Street, Suite 600, Los Angeles, California 90017 (213)
687-8777.
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ADDENDUM
49. INSERT TO PARAGRAPH 1.1, PARTIES:
As used herein, "Lease" means "Sublease," "Lessor" means "Sublessor" and
"Lessee" means "Sublessee."
50. INSERT TO PARAGRAPH 1.2(b), PARKING:
The number of parking spaces provided with the Premises is based on three spaces
per one-thousand square feet of subleased space. In the event an agency of
jurisdiction places restrictions on allowed onsite parking spaces provided by
the Lessor, the Lessee shall be responsible for implementing provisions to
restrict parking to that stipulated in this paragraph of the Sublease Agreement,
or to reimburse the Lessor in full for the cost and expenses for payment of
penalties, fees or upgrades needed to accommodate Lessee's excess parking above
the number of spaces designated herein.
51. INSERT TO PARAGRAPH 1.10(a), REAL ESTATE BROKERS:
Lessee represents and warrants to Lessor that it has not engaged a broker,
finder, or other person who would be entitled to any commission or fees in
respect to the negotiation, execution or delivery of this Letter Agreement, or
Sublease Agreement and shall indemnify and hold harmless Lessor against any
loss, cost, liability, or expense incurred by Lessor as a result of any claim
asserted by any broker, finder, or other person on the basis of any arrangements
made or alleged to have been made by or on behalf of Lessee.
52. INSERT TO PARAGRAPH 2.2, CONDITION OF PREMISES:
The space is offered "as-is," cleaned, unfurnished and in good working
condition. Lessee shall be responsible for furnishing its Premises with the
needed fixtures, furnishings and equipment.
53. INSERT TO PARAGRAPH 2.3, COMPLIANCE WITH COVENANTS, RESTRICTIONS AND
BUILDING CODE:
Lessee agrees to accept the Premises subject to a Master Lease and all
applicable zoning, municipal, county, state and federal laws, ordinances, and
regulations governing and relating to the use of the Premises. Lessor warrants
that it is not in default of the Master Lease, and the provisions of the Master
Lease are in full force and effect. Refer to Exhibit G.
54. INSERT TO PARAGRAPH 2.10. , COMMON AREA - CHANGES:
Lessee acknowledges that the Private Access Drive connecting Building 14 to
Science Center Drive will close off vehicular access to the General Atomics
Industrial Center. Concurrent with opening the Building 14 Private Access Drive,
parking at Building 14 will be restricted to those occupying the Building 14
complex. Refer to Exhibit F for details related to this agreement.
55. INSERT TO PARAGRAPH 6.2, HAZARDOUS SUBSTANCES:
55.1 Lessee shall not use the Premises for processing, storage or production
of "Hazardous Substances" (as defined below). "Hazardous Substance" means (a)
any substance that is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous, and is, or becomes,
regulated by any government authority, department, commission, board, agency or
instrumentality of the United States, the State of California or any political
subdivision thereof; (b) any other substance, the presence of which requires
investigation or remediation under any federal, state or local statute,
regulation, ordinance, order, action of common law; and (c) any additional
substances or materials that at such time are classified or considered hazardous
or toxic under the Laws of California or any other applicable Laws relating to
the Premises.
55.2 Lessor and its representative agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same for
"Hazardous Substances" as defined above, showing the same to prospective
purchasers, lenders, or lessees, and making such alterations, repairs,
improvements or additions to the Premises or to the Industrial Center as Lessor
may deem necessary or desirable,
55.3 Hazardous Substances used by Lessee shall be the responsibility of
Lessee, and Lessee shall dispose of such Hazardous Substances in accordance with
all applicable laws and regulations, in accordance with Lessor's Accepted
Practices, and in a safe and reasonable manner, both during the term of the
Sublease, when required or appropriate, but in no event later than the date that
the Sublease is terminated.
-16-
<PAGE> 15
56. INSERT TO PARAGRAPH 7.1, LESSEE'S OBLIGATIONS:
56.1 Lessee agrees to conduct day-to-day operations of the Premises in a
manner to preserve the integrity of building structures and its systems
including, fire barriers, heating, air-conditioning and ventilation systems and
other installed utilities. Specifically, Lessee agrees to keep windows closed at
all times and exterior doors closed except for passage.
56.2 Lessees' obligations to maintain plumbing, heating, ventilating and
air-conditioning systems, electrical and lighting facilities and equipment
within the Premises is interpreted to include Lessee's machinery, equipment, or
fixtures that the Lessee has or will install during its tenancy. Machinery,
equipment or fixtures installed by the Lessee, are considered by the Lessor as
serving the function of supplementing Lessee's specific use of the Premises, is
determined by the Lessor as the Lessee's obligation under this section of the
Lease.
56.3 Lessees' Premises are served by Lessor's central heating, ventilation
and air-conditioning (HVAC) systems. Lessor shall operate equipment and systems
needed to supply conditioned air to the interior spaces weekdays between the
hours of 7:OOAM to 7:OOPM (12 hours per day), except on National Holidays and
during scheduled outages or breakdowns the Lessor shall adjust the hours of
operations at the request of the Lessee and pass through the related power usage
costs to the Lessee. Costs for the provision to allow the Lessee to control
hours of operation shall be to the sole cost and expense of the Lessee, and
utility usage beyond the said twelve hour operating period shall be charged to
the Lessee as Extraordinary Operating Expense.
57. INSERT TO PARAGRAPH 7.3, UTILITY INSTALLATIONS, TRADE FIXTURES,
ALTERATIONS:
57.1. Alterations, improvements, additions or Utility Installations by the
Lessee shall be performed by licensed and insured construction or service
companies having qualified craft workers possessing the proper qualifications
and training for performing the work. Alterations, improvements, additions or
Utility installations shall be performed by contractors for which Lessor has
given Lessee its consent. Firms engaged in performing services for the Lessor,
under Blanket Order Service Agreements, are pre-qualified to perform services
for the Lessee.
57.2. On occasion, certain building systems and utilities have been modified
or altered by individuals or companies that do not possess the knowledge,
qualifications, license and insurance coverage to engage in these services.
Modifications or alterations to building structures, systems or Utility
Installations including fire walls, doors, electrical, plumbing, heating,
ventilation and air conditioning, or other common area utilities, by providers,
(particularly those not holding a license, having the proper insurance coverage,
or possessing adequate training and qualifications), could cause damage to
Lessee's business and to that of others.
57.3. Unplanned utility interruptions such as those caused by abnormal weather
conditions, earthquakes, fires, construction mishaps, or Industrial Center plant
equipment failures, may result in extended utility outages that could affect the
Lessee's business operations. Restoration of services through connection to
standby equipment such as portable electric generators, portable
air-conditioning chillers, or other Industrial Center Systems, could require
outages extending beyond a 24-hour period.
58. INSERT TO PARAGRAPH 8.8, EXEMPTION OF LESSOR FROM LIABILITY:
Except for planned outages conducted by the Lessor for altering or maintaining
its Buildings or private service systems of the Industrial Center, Lessee agrees
that the Lessee shall be responsible for making any necessary provisions that
may be required for any standby utility services considered critical to Lessee's
operations, or use of the Premises, in the event electrical power, air, water,
sewer, gas, telephone or other Lessor supplied services are interrupted.
59. INSERT TO PARAGRAPH 11, UTILITIES;
59.1. Lessee agrees to pay its Prorata share of electricity, gas and
water/sewer based on size of the Premises. The Prorata share shall be determined
as stipulated in Exhibit C. Utility consumption for supplying the Lessee's
supplementary equipment shall be audited and charged to the Lessee as an
Extraordinary Utility Operating Expense. It the Lessee chooses, metering can be
installed at the Lessee expense to measure Extraordinary power consumption to be
used as the measurement for calculating this Extraordinary Operating Expense.
-17-
<PAGE> 16
59.2 If the Lessee elects to use the Lessor's telephone, then the Lessee
shall pay for installation, moves, changes and monthly services attributable to
Lessee, including all toll charges. Charges for service and equipment are
subject to reasonable annual increases but shall not exceed the standard amounts
charged to other tenants in the Industrial Center, for such services and
equipment. Parties agree that the 1999 Calendar Year equipment and service costs
shall be in accordance with the following schedule:
<TABLE>
<CAPTION>
CATEGORY OF SERVICE INSTALLATION COST MONTHLY COST
- ------------------- ----------------- ------------
<S> <C> <C>
Fax or Modem Extension $70 $18
PBX Line (Multi-Line capability) $70 $18
Basic Service Fee (Includes adds, moves and changes) $20 N/A
TELEPHONE, SETS AND FEATURES
Installation
SL-1 Set 2500,2554, etc $20 $ 5
10 Key Add-on Module * $ 2
20 Key Add-on Module * $ 4
Speakerphone * $ 6
Digit Display * $ 6
2008 Digital 8-Button Telephone Set $20 $ 8
2616 Digital 16-Button Telephone Set with Display $20 $17
Speaker phone (HFA) * $ 1
22 Key Add-on Module * $ 7
Programmable features at no cost at time of installation
Appearance of an Additional Extension $ 2
Headset (all units are modular) Cost N/C
VOICEMAIL
With 7 minutes storage-10 day retention $20 $ 8
Additional 5 minutes of storage * $ 3
Pager out call * $ 2
</TABLE>
* APPLY BASIC SERVICE FEE (WAIVED IF WORK PERFORMED AT INSTALLATION)
Parties agree that reasonable annual adjustments, the same as applied to other
Industrial Center Tenants, can be made without prior notice effective January of
each calendar year. In the event that the Lessee deems the adjustments are
unreasonable, then the Lessee shall have the option to give the Lessor sixty day
notice, install its own PBX, and have the Lessor's systems removed. The cost and
expense of the conversion shall be borne by the Lessee.
Charges for telephone rental, services, and toll calls. Prorata share, and
Extraordinary Utilities, shall be invoiced monthly by Lessor, and shall be due
and payable by Lessee in accordance with Paragraph 21 of the Agreement.
60. INSERT TO PARAGRAPH 30.2, ATTORNMENT:
Upon request of Master Lessor, or on behalf of the Industrial Center Owner,
Lessee shall subordinate its interest in the Lease and the Premises to the
encumbrance instruments of any Real Property loans made to Lessor or Owner.
Losses shall attorn to any purchaser at any foreclosure sale, or to any grantee
or transferee designated in any deed given in lieu of foreclosure. Lessee shall
execute a subordination agreement and any other documents required by any lender
of Master Lessor to accomplish the purposes of this Section.
61. INSERT TO PARAGRAPH 39, OPTIONS: All Terms and Conditions of this Lease
shall apply to the following Options except where specifically modified by the
respective Option.
6.1.1 Option to Extend: Lessor grants to the Lessee the Option to extend the
Term of the Agreement for one, one-year period on the following terms and
conditions: (1) The provisions of Paragraph 39, including the provision relating
to default of the Lessee, set forth in Paragraph 39.4 shall apply; (2) Lessee
gives Lessor written notice of the exercise of this Option to Extend the Term a
minimum of three months prior to end of the term preceding the extension; (3)
Rent starting the first month of each Extended Term shall be as noted in Exhibit
C.
61.2 Right-of-First-Offer: Subject to the general guidelines delineated in
Exhibit F of this Agreement, Lessor grants to the Lessee the
Right-of-First-Offer to lease the Space Block designated EXPANSION, on the
following terms and conditions: (1) Lessee gives Lessor written notice of its
expressed interest in leasing the EXPANSION Space Block; (2) the Lessor agrees
to offer the EXPANSION Space Block for lease and to commit funding required to
construct the required Common Area Improvements for safe access and egress; (3)
the Right-of-First-Offer shall mature into a Must-Take Option starting the first
day of the second lease year, March 1, 2000, unless there is agreement by the
Parties to rearrange the Lessee Premises to allow common toilet facility access
so the Lessor can lease the EXPANSION Space Block to another Tenant; and, (4)
Rent and Operating Expenses shall be at the same rate as for the space under the
Lessee's then current Possession.
-18-
<PAGE> 17
GENERAL ATOMICS TORREY PINES MESA
[MAP]
SITE MAP
Exhibit A
<PAGE> 18
[FLOOR PLAN]
Exhibit B
Page 1 of 4
<PAGE> 19
[FLOOR PLAN]
Exhibit B
Page 2 of 4
<PAGE> 20
MP3.COM (FORMERLY ZCO)
SPACE SUMMARY
<TABLE>
<CAPTION>
FIRST-IN (EFFECTIVE JULY 1, 1998) CUMULATIVE TOTAL SF
--------------------------------- -------------------
Bldg. Room Use
No. No. Code SF
--- --- ---- --
<S> <C> <C> <C> <C> <C>
14 156 Office 468
14 156A Office 130
14 156B Office 122
14 156C Office 123
14 156D Office 92
Subtotal 935
20% Common 187
-----
TOTAL 1,122 TOTAL 1,122
</TABLE>
<TABLE>
<CAPTION>
ADDED #1 (EFFECTIVE JANUARY 18, 1999)
-------------------------------------
Bldg. Room Use
No. No. Code SF
--- --- ---- --
<S> <C> <C> <C> <C> <C>
14 248A Office 95
14 248B Office 82
14 250 Office 136
14 251 Office 92
14 252 Office 536
14 252A Office 62
14 253 Office 125
14 254 Office 95
14 255 Office 95
14 256 Office 87
14 257 Office 86
14 258 Office 95
14 259 Office 90
14 260 Office 87
14 261 Office 87
14 262 Office 93
14 263 Office 124
14 263A Office 128
14 263B Office 173
14 263C Office 143
14 264 Office 59
14 264A Office 95
14 264B Office 127
14 264C Office 91
14 266 Office 236
14 267 Office 288
14 267A Office 22
14 268 Office 122
14 H250 Corridor 639
-----
Subtotal 4,190
10% Common 419
-----
TOTAL 4,609 TOTAL 5,731
</TABLE>
<TABLE>
<CAPTION>
SURRENDERED (EFFECTIVE FEBRUARY 28, 1999)
-----------------------------------------
Bldg. Room Use
No. No. Code SF
--- --- ---- --
<S> <C> <C> <C> <C> <C>
14 156 Office 468
14 156A Office 130
14 156B Office 122
14 156C Office 123
14 156D Office 92
Subtotal 935
20% Common 187
-----
TOTAL 1,122 TOTAL 4,609
</TABLE>
Exhibit B
Page 3 of 4
<PAGE> 21
<TABLE>
<CAPTION>
ADDED #2 (EFFECTIVE MARCH 1, 1999) CUMULATIVE TOTAL SF
---------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
Bldg. Room Use Current
No. No. Code SF
----- ---- ------ -------
14 200 Office 182
14 201 Office 133
14 203 Office 132
14 204 Office 88
14 205 Office 89
14 206 Office 89
14 207 Office 88
14 208 Office 90
14 209 Office 89
14 210 Office 1,513
14 211 Office 90
14 212 Office 124
14 213 Office 192
14 214 Office 469
14 214A Office 102
14 214B Office 103
14 214C Office 104
14 2140 Office 104
14 214E Office 107
14 214F Office 95
14 214G Office 95
14 214H Office 102
14 214I Office 105
14 215 Office 230
14 216 Office 158
14 217 Office 277
14 218 Office 138
14 219 Office 132
14 220 Office 190
14 221 Office 150
14 222 Office 75
14 280A Office 88
14 280B Office 90
14 280C Office 136
14 281A Office 141
14 281B Office 90
14 281C Office 182
14 290 Office 1,555
14 H210 Corridor 1,051
14 H280 Corridor 158
14 H290 Corridor 237
------
Subtotal 9,363
10% Common 936
------
TOTAL 10,299 TOTAL 14,908
</TABLE>
Exhibit B
Page 4 of 4
<PAGE> 22
INSERT TO PARAGRAPH 1.3 TERM, 1.5 AND 4.1 BASE RENT
ORIGINAL TERM: For the purpose of the Agreement, the Lease Commencement Date is
established as March 1, 1999. Rent and Operating Expenses shall commence with
Possession of the different Space Blocks. Except for the FIRST-IN Space Block,
for which the Lessee has opted to vacate, the Expiration Date for all other
Space Blocks shall be coterminous, or February 28, 2001. The Possession Date
for the various Space Blocks comprising the Lessee's Premises is as follows:
<TABLE>
<CAPTION>
SPACE BLOCK POSSESSION DATE
----------- ------------------------------
<S> <C>
FIRST-IN July 01 1998
ADDED #1 January 18 1999
ADDED #2 March 01 1999
EXPANSION Date of Substantial Completion
</TABLE>
RENTAL SCHEDULE:
Base Rent comprising the components of NNN and CAM (CAM designated as Standard
Operating Expenses) shall be increased by four cents ($0.04) per square foot
and, one cent ($0.01) per square foot, respectively. The following table
summarized the Rent, and Standard Operating Expense Payments that shall be paid
by the Lessee during the Original and Option Terms. The first month's Rent
shall be due and payable to the Lessor prior to the Lessee taking Possession of
the respective Space.
<TABLE>
<CAPTION>
ELEMENT MONTHLY LEASE RATE & RENT
------- --------------------------------
ORIGINAL TERM OPTION
-------------------- ------
YR.#1 YR.#2 YR.#1
------ ----- ------
<S> <C> <C> <C>
NNN Rate/sf. $1.20/sf $1.24 $1.28
CAM Charges (Std. Op.Exp.)/sf $0.22 $0.23 $0.24
Leasehold Improvements $0.00 $0.00 $0.00
Janitorial Lessee Lessee Lessee
Utilities (power, gas, water/sewer) Prorate/meter same same
Total Rate per Square Foot $1.42 $1.47 $1.52
Monthly Rent (First-in - 1,122sf) $ -- $ -- $ --
Monthly Rent (Added #1 - 4,609sf) $ 6,545 $ 6,775 $ 7,006
Monthly Rent (Added #2 - 10,299sf) $14,625 $15,140 $15,654
------- ------- -------
Monthly Rent (Total - 14,908sf) $21,170 $21,915 $22,660
</TABLE>
INSERT TO PARAGRAPHS 1.7 AND 5. SECURITY DEPOSIT
A Security Deposit in the amount equivalent to one month's Rent, two month's
Utility Expenses, and accrued Non-Building Standard Restoration Costs shall be
paid by the Lessee, and shall be on record with the Lessor to secure payments.
The amount of Security Deposit Due shall be paid prior to Lessee's Possession of
respective Space Block.
<TABLE>
<CAPTION>
SECURED PAYMENT AMOUNT
--------------- ------
<S> <C>
One Month's Rent $21,170
Two Month's Utility Expenses: (14,908sf. x $0.20/sf. x 2/mos.) $ 5,963
Non-Building Standard Restoration Costs $24,589
TOTAL SECURITY DEPOSIT REQUIRED: $51,722
Less Security Deposit on Record $18,981
-------
Security Deposit Due $32,741
</TABLE>
The Lessee acknowledges that the Lessor will require Non-Building Standard
improvements installed by the Lessee be restored to the Building Standard
Condition of the Premises prior to Lessee's Possession. The Lessee shall pay the
Lessor a Security Deposit in the amount sufficient to secure payment for
services to restore the Premises. Any portion of the Non-Building Standard
Restoration Costs Security Deposit not used shall be refunded to the Lessee once
the final cost for Restoration has been determined. Refer to Page 7, Exhibit F
for the Added Space Block #1 Restoration Cost Summary.
Concurrent with the annual increase in Monthly Rent, and without prior notice,
the Security Deposit shall be adjusted in direct relation to the Monthly Rent,
and Utility Expenses (as calculated above), and the increase shall be paid by
the Lessee upon receipt of an invoice from the Lessor. Additionally, the amount
of Security Deposit to secure payment of Non-Building Standard Restoration shall
be adjusted, from time to time, as the Lessor deems justified.
Exhibit C
Page 1 of 3
<PAGE> 23
INSERT TO PARAGRAPH 4.2. OPERATING EXPENSES
Lessee shall pay for cost of maintenance and repair of its fixtures,
furnishings and equipment; maintenance and repair of electrical or other
services from Building point of connection to Tenant fixtures, and for
supplemental equipment installed specifically by Lessee application and use.
Lessee shall also pay for locksmith service, telephone installation, adds,
moves, and changes and for cost for toll calls. Lessee shall initiate the
needed job orders to engage services and pay for said services pursuant to
Paragraph 7.0 of this Sublease Agreement. Following are the provisions for
payment of Services and Operating Expenses under terms of the Sublease
Agreement. Standard Operating Expenses are included in the CAM Element of Rent.
Other Operating Expenses are not included in the NNN or CAM Elements of Rent
and shall be invoiced separately at the time these expenses are determined.
<TABLE>
<CAPTION>
STANDARD OTHER
OPERATING OPERATING
SERVICE OR UTILITY EXPENSES EXPENSES NOTE
------------------ -------- -------- ----
<S> <C> <C> <C>
Taxes x 1
Insurance x 2
Parking Lots, Roadways & Walkways x
Landscape Maintenance x
Building and Utility Maintenance x 3
Trash Collection x
Property Management x
Telecommunications Services x
Utilities:
Electricity, Ordinary x
Natural Gas x
Water/Sewer x
Electricity, Extraordinary x 4
Security Services-Standard x 5
Security Access Control & Keys x 7
Mail Pickup and Delivery x 5
Use of Central Conference Rooms x 5&9
Use of Outdoor Recreational Facility x 5
Use of Central Cafeteria x 5&7
Janitorial: 6
Common Area x x
Lessee Space x
Lessee may obtain the following services through separate agreement with the
Lessor. Payment shall be made under the same terms and conditions as for
Operating Expenses:
Signage-Interior x 7
Use of Corporate Fitness Center x 5&7
Contractor Services x 7&8
</TABLE>
Notes:
1. Covers Real Property Taxes. Does not cover personal property taxes.
2. Covers Lessor's insurance only. Does not cover Lessee's coverage for its
fixtures and liability, or for loss of business.
3. Covers maintenance and repairs of normal building equipment and utilities.
Does not cover maintenance and repairs of special telecommunications or
equipment installed on behalf of the Lessee to maintain supplemental
equipment such as air conditioning or Lessee's fixtures.
4. Cost for extraordinary utilities shall be passed through at cost charged to
Lessor. Example: Cost to operate Building HVAC outside the hours of 7:00
A.M. to 7:00 P.M. Monday through Friday (excluding national holidays) as
requested by the Lessee.
5. Access or use or services are provided as an amenity but are subject to
change or termination by Lessor with thirty days advanced notice to the
Lessee.
6. Lessor shall make provisions for its own cleaning service of the captive
portion of its Premises. In addition, the Lessee shall share in the cost
for custodial services for the second floor north toilet rooms, second
floor north common corridor, and the north stairway. The Lessor will
invoice the Lessee monthly for this cost based on a reasonable amount
established using the cleaning standard schedule in Exhibit F.
7. Same cost as charged to other Tenant Employees.
8. Available at Lessor's cost plus 15%.
9. Parties agree that location, size and features of conference rooms can be
changed upon Lessor providing Lessee 30 days advanced notice of said
change.
Exhibit C
Page 2 of 3
<PAGE> 24
INSERT TO PARAGRAPH 11. UTILITIES
ELECTRICITY
Electric power is purchased from a supplier, distributed to the Industrial
Center by San Diego Gas & Electric, and metered at one location of the
Industrial Center. Buildings 13 and 14 are separately submetered. Prorata
electric power costs shall be calculated using data taken from submeters as
follows:
<TABLE>
<S> <C> <C>
Building 14 leased gsf x Building 13 Billing Period Cost
-------------------------
Building 13 gsf (Note #1)
14,908 gsf (Note #2) x Building 13 Billing Period Cost
------------------------
64,071 gsf
</TABLE>
Note #1: Building 13 gsf is used because it is fully occupied and it is
under similar use. Building 14 is partly vacant for lease to
others and usage will vary with Building occupancy.
WATER/SEWER
Water is supplied to the Industrial Center from four separate city water meter
stations. Sewer charges are based on water consumption. The Industrial Center
is comprised of Buildings on three separate parcels, one Genesee Properties and
two Hopkins Properties. The gross square footage in the Industrial Center is
506, 164. Prorated water/sewer costs shall be calculated as follows:
<TABLE>
<S> <C> <C>
Building 14 leased gsf x Billing Period Charges
----------------------------
Total Industrial Center gsf
14,908 gsf x Billing Period Charges
------------------------
509,164 gsf
</TABLE>
NATURAL GAS
Natural gas is purchased from a natural gas supplier and distributed to the
Industrial Center by San Diego Gas & Electric. Prorata natural gas costs shall
be calculated using the total Industrial Center floor area, the same as used
for water/sewer, and shall be determined as follows:
<TABLE>
<S> <C> <C>
Building 14 Leased gsf x Billing Period
---------------------------- (Na. Gas Cost + Transport Cost)
Total Industrial Center gsf
14,908 gsf x Billing Period Charges
------------------------
509,164 gsf
</TABLE>
Exhibit C
Page 3 of 3
<PAGE> 25
GENERAL ATOMICS RULES & REGULATIONS
ATTACHED AND MADE A PART OF THIS LEASE
1. Lessor agrees that Lessee is entitled to, and shall have the quiet
enjoyment of the Premises described in the Sublease Agreement.
2. During the term of the Sublease Agreement, Lessee shall provide Lessor
the names and home telephone numbers of two Lessee employees that can be
contacted by the Lessor for emergencies during Lessee's non-business
hours.
3. Lessor shall provide Lessee a minimum 24-hour advanced notice of any
inspection by the Lessor, Owner, Lender, insurance carriers and
respective agents.
4. During the warranty period, Lessee shall give Lessor prompt notice of
any accidents to or defects in the water pipes, gas pipes, electric
system, lights and fixtures, heating and cooling apparatus or any other
service equipment.
5. Any service piping, ducts, electric conduits, telephone wiring and
antennas exterior to the Building, or boring, cutting of exterior walls,
floor or roof shall not be permitted, except with the written consent of
Lessor.
6. Lessee's identification sign(s) shall be subject to prior approval by
Lessor. Guidelines for Building exterior signage is available from the
Lessor upon request.
7. Lessee shall not install blinds, shades, awnings or other form of inside
or outside window covering, or window ventilators or similar devices
without the prior written consent of Lessor.
8. Lessee shall maintain Premises in a clean and safe condition. Trash
shall be placed in appropriate disposal containers at locations
designated by Lessor for pick-up and disposal by a service contractor of
the Lessor.
9. Lessee and Lessee's employees shall not obstruct the sidewalks,
driveways, or other common areas and shall use the same only as a means
of passage, access and parking; all materials, fixtures, furnishings and
equipment shall be stored inside the Building. Outside storage at the
Premises is prohibited.
10. The water closets, urinals and other plumbing shall be used for the
purpose for which they were constructed and no rubbish, newspapers or
other substances of any kind shall be thrown into them. Lessee shall not
mark, install screws or drill into, or in any way deface the exterior
walls, stone, metal work, doors and windows of the Building.
11. Lessee and Lessee's agent and employees shall not play any musical
instrument, including radio and television, in a loud or objectionable
manner, or make or permit any improper noises in the Building, or
interfere in any way with other Industrial Center Lessees or those
having business with them.
12. Lessee shall not conduct any auction, or sell goods, wares or
merchandise on the Premises.
13. Lessor will not be responsible for loss of or damage to any fixtures,
furnishings or personal property from any cause.
14. Although Lessor may have given Lessee approval to use the name of the
Industrial Center in connection with any business on the property,
Lessor shall have the right to prohibit any advertising by any agent
which in Lessor's opinion, tends to impair the reputation of the
Building or its desirability as a Building for offices and laboratories,
and upon written notice from Lessor, Lessee shall refrain from or
discontinue such advertising.
15. No cooking shall be done or permitted by Lessee on the Premises, except
in areas specifically designed for the purpose, without the consent of
Lessor, nor shall the Premises be used for the storage of merchandise,
for washing clothes, for keeping of pets, for lodging or for any
improper, objectionable or immoral purposes.
16. Lessee shall not disturb, solicit or canvass any occupant of the
Industrial Center and shall cooperate to prevent same.
17. From time to time it may become advantageous to make amendments to this
list which are in the best interests of both Lessor and Lessee and which
are not inconsistent with the Sublease Agreement. Lessor reserves the
right to make such amendments by giving notice to Lessee.
Exhibit D
Page 1 of 1
<PAGE> 26
GENERAL ATOMICS
ASBESTOS NOTIFICATION
JANUARY 1999
From: LICENSING, SAFETY AND NUCLEAR COMPLIANCE (LSNC)
TO: EMPLOYEES AND OCCUPANTS, VIA INTERCOMPANY MEMO
General Atomics, in compliance with California Health and Safety Code 25915 et
seq., is required to give written notice of the presence of asbestos containing
materials to all employees. This notification applies to the entire General
Atomics site at 3550 General Atomics Court, which includes facilities at 3483
Dunhill Street, and 11222 Flintkote Avenue.
Prior to 1979, asbestos was used extensively in the building industry throughout
the United States as thermal insulation, fireproofing, and in structural support
materials. At General Atomics, asbestos has been used to insulate hot water and
steam pipes and ventilation ducts. It may be found in some attics and mechanical
rooms, in floor and ceiling tiles and window wall panels, some roofing material,
and core material in certain fire doors.
The mere presence of asbestos in a building does not necessarily mean that a
health hazard exists. Asbestos containing materials are not a health threat
unless asbestos fibers become airborne and are inhaled. In areas where the
asbestos is bonded or encapsulated and properly maintained, such as in the
materials listed above, there is very little or no risk to health.
Accordingly, it is important not to disturb asbestos containing materials.
General Atomics policy restricts work on asbestos containing materials to
certified asbestos contractors who are properly trained and equipped. Moving,
drilling, cutting, or otherwise disturbing such materials can pose a health risk
and should not be attempted by untrained personnel. Employees should immediately
notify LSNC if they observe materials that they suspect contain asbestos and
which are not properly maintained.
LSNC maintains records of asbestos sampling and air monitoring results performed
during the course of asbestos abatement work. Employees may contact LSNC, Letty
Alfonso at extension 2016, Paul Englert at extension 2466, or Keith Asmussen at
extension 2823, if they have questions or concerns regarding asbestos.
Exhibit E
Page 1 of 1
<PAGE> 27
WORK LETTER AGREEMENT
The work letter Agreement is written to complement the Form Sublease and its
Addenda; it expands and elaborates on the Form Sublease with no conflict
intended. In the event of a conflict, the Form Sublease and Addenda take
precedence.
I. PREMISES
In addition to the ADDED #1 Space Block, which the Lessee will retain. the
Lessor will deliver to the Lessee second floor space shown on the Floor Plan,
page 2 of the Exhibit B, designated ADDED #2. The Lessee has taken Possession of
the ADDED #2 Space Block subject to terms included in this Amendment. The
EXPANSION Space Block may be included as part of the Lessee's Premises subject
to an amendment to this Agreement.
II. ALTERATIONS AND UTILITY INSTALLATIONS
ADDED SPACE BLOCKS #1 & #2: The existing physical floor arrangement and Utility
Installations will be used to the practical extent.
A. The Lessor will install demising doors to secure the Added #2 Space Block.
B. The Lessee will install certain Tenant Improvements and Utility Installations
prior to and after Possession, typical of those identified for Added Space Block
#1, in the Restoration Cost Summary, Page 7, of this Exhibit.
C. Any change in physical layout, appearance, colors, and general decor, not
matching the existing improvements will be identified by the Lessor as
Non-Building Standard, and the Lessee will be required to restore the Premises
to the condition existing prior to the Lessee's Possession.
D. The Lessor will make minor repairs, clean, and inspect all building systems
serving the Premises, including HVAC, lighting, power and communications, to
ascertain the building systems are in good working condition.
E. The Lessee will identify the desired Utility Installations, including
telecommunications and security access controls, and submit approved job orders
to the Lessor with appropriate signatures authorizing the expenditures for
installation and rental.
EXPANSION SPACE: If the ROFO Option Is exercised at the election of the Lessee,
then the Parties will cooperate to convert the space for the Lessee's specific
use while providing a Common Corridor for safe and reasonable access to other
tenant spaces.
The build out will be separated into two distinct parts, one for the Lessor's
Common Corridor, and one for the Lessee specified improvements ("Tenant
Improvements"), both together identified as ("Leasehold Improvements"). The
build out will be accomplished concurrently but will be paid for separately, the
Common Corridor Improvements to the account of the Lessor, and the Tenant
Improvements to the account of the Lessee.
The PARTIES will cooperate to accomplish the following:
F. Select a team to prepare a space plan and construction documents for the
Leasehold Improvements.
G. Obtain competitive bids for the Leasehold Improvements, separating the costs
into two respective separate accounts.
H. Make application and obtain permits as required from the City of San Diego.
I. Allocate costs for the design based on the design effort required, and
building permits based on the value of the respective installed improvements.
The attributable costs are those associated with:
1. Collecting as-built information to support the design task.
2. Preparing Leasehold Improvement working drawings and specifications,
for reproducing design documents, and for permit processing.
3. Assessments for permits and fees needed to construct the Leasehold
Improvements.
4. Special inspections required as a condition of the building permits.
Exhibit F
Page 1 of 7
<PAGE> 28
J. Select contractors and award separate contracts for the Common Area and
Tenant Improvements comprising of the following work tasks:
1. Installation of structures, walls, insulation, ceilings, doorways,
and those building features needed to provide working space in the space
production and administrative spaces.
2. Installation of mechanical, plumbing and services to support
administrative and production areas. This includes heating, ventilation, air
conditioning, exhaust systems; distribution and waste piping for potable water,
sewer and natural gas.
3. Installation of electrical equipment and services to distribute
commercial or standby electrical power to production equipment, lighting; wiring
and connections for standard communications, special data communications,
standard life safety, fire detection alarm, and for process or security alarms.
4. Installation of doors, door hardware, suspended ceilings, electrical
trim, mechanical trim, floor covering and painting.
The LESSEE will be responsible for the following:
K. Select and pay for a design consultant to prepare a Space Plan for the
Lessee's Premises acceptable to the Parties.
L. Select design consultants for specifying and selecting the interior
special features, finishes and furnishings.
M. Overview the installation of the Tenant Improvements.
N. Make payment of design consultants, contractors, agencies and others
that provide labor, materials and services toward installation of the
Tenant Improvements.
O. Make Payment of a supplemental Security Deposit to the Lessor for the
expressed purpose of restoring the Expansion Premises at the end of the
Lessee's Term.
The LESSOR will be responsible for the following:
P. At its own discretion, Lessor may file a "Notice of Non-Responsibility"
giving notice to all material suppliers and contractors that the Lessor
is not responsible for payment of contracted services related to the
Lessee's Tenant Improvements.
Q. Perform a design review of the construction documents to ascertain that
the design is consistent with this Agreement, and making a determination
if the installed improvements are of Building Standard or Non-Building
Standard design and construction.
R. Identity Non-Building Standard improvements and obtain a budgetary
estimate for supplemental Restoration Security Deposit required by the
Lessor to secure payment for restoration.
S. Perform routine inspections of the construction area to confirm that the
installations are in accordance with the plans and specifications, and
acceptable construction quality standards are being maintained during
construction.
T. Perform routine Inspections to ascertain construction progress is being
made in a manner considerate of other Building Tenants.
U. Make progress payments for design, permits, construction and inspections
of the Common Area Improvements.
V. Prepare a Sublease Amendment to memorialize Leasehold Improvement
Substantial Completion and to include other minor changes deemed
appropriate and necessary.
The following guidelines will apply to the Lessor's portion of the Leasehold
Improvements:
W. The Lessor will require bidders to submit quotes in a CSI format that
can be used for cost control and verification during the Leasehold
Improvement Project.
X. Costs and expenses for the Common Area Improvements are to be separate
from the Lessee's Tenant Improvements.
Exhibit F
Page 2 of 7
<PAGE> 29
Y. Supporting information for payment will include a summary of the cost to
complete, percent completed, accompanied by conditional or unconditional
mechanics lien releases executed by the performing contractor(s).
Z. Upon Substantial Completion of the Leasehold Improvements, defined as the
date the City of San Diego grants interim or final approval to occupy the
Expansion Space Block, the Parties will develop a punch-list of items needing
correction or additional work. Punch-list corrections will be completed within
30 days, and prior to final payment to the contractors by Lessee and Lessor.
III. FINANCING
FIRST-IN SPACE BLOCKS #1 & #2: The Parties agree to the following scope of work
and financial responsibility required to prepare the Premises for the Lessee's
use. The Lessee agrees to reimburse the Lessor an amount not to exceed that
shown below for the Lessee specified alterations to be invoiced by the Lessor.
Work outside the scope of this Work Letter will be approved and paid for by the
Lessee prior to installation. The Lessee may elect to directly engaged the
services of contractors for Lessee Specified Alterations subject to payment of
supplemental Security Deposit by the Lessee to cover restoration costs and the
Lessee's use of Lessor approved contractors to make the Alterations.
<TABLE>
<CAPTION>
COST ELEMENT PAYMENT BY ESTIMATE
- ------------ ---------- -------------------
<S> <C> <C> <C>
LESSOR SPECIFIED ALTERATIONS
Reroute and Terminate Telcom.Cable Lessor $ 5,000 Complete
Install Demising Door Locks Lessor $13,000 Partial Complete
Inspection, Repairs and Cleaning Lessor $ 2,000 Partial Complete
LESSEE SPECIFIED ALTERATIONS
Move/Install Walls, Ceilings, Doors Lessee $ -- $10,000
------- -------
Total $20,000 $10,000
</TABLE>
Any Improvements made by the Lessee, and designated by the Lessor as
Non-Building Standard shall be subject to restoration by the Lessee at the end
of Term, as described in Sublease Paragraph 7.4. The Restoration Cost Summary,
Page 7 lists the estimates for restoration of Non-Building Standard changes
made through February 28, 1999.
EXPANSION SPACE BLOCK: Subject to the exercise of the Right-of-first-Offer
Option, Parties agree to cooperate to install improvements for the Expansion
Space Block wherein the Lessor will pay for those improvements needed for the
Common Area Corridor, and the Lessee will pay for those Tenant Improvements
needed for the Lessee's working space. Following is a budgetary estimate for
these Leasehold Improvements:
<TABLE>
<CAPTION>
ESTIMATE
------------------
COST ELEMENT LESSOR LESSEE
------------ ------ ------
<S> <C> <C>
Payment By:
LESSOR SPECIFIED ALTERATIONS
Design, Permit and Install Fire Rated Corridor $110,000 $ --
Design, Permit and Install Exterior Exit Stairway $ 65,000 $ --
LESSEE SPECIFIED ALTERATIONS
Design, Permit and Install Tenant Improvements - 5,685sf @ $40/sf. $ -- $225,000
-------- --------
TOTAL $175,000 $225,000
</TABLE>
IV. TENANT FIXTURES AND EQUIPMENT
Except the Lessor's built-in cabinets located in Rooms 222, 268, the Premises
is offered by the Lessor and is accepted by the Lessee in an unfurnished
condition. The Lessee is responsible for the following:
A. Furnish the Premises as needed with desks, tables, chairs, computers, FAX,
copiers, files and audio visual.
B. Furnish the Premises with tenant fixtures and equipment needed for the
conduct of business.
C. Make selection of the telephone/data service provider and issue orders to
have installed a telephone/data system, whichever system the Lessee selects.
D. Engage the services of outside providers as required to purchase, relocate,
move, install and setup equipment listed in A and B above
E. Issue orders to the Lessor's Security Department to have door locks
installed as needed within the Lessee's Premises.
F. Issue orders to an outside contractor to install badge security access on
intrusion alarms it a security system is needed by the Lessee.
Exhibit F
Page 3 of 7
<PAGE> 30
G. Select a custodial service provider to supply and clean the Lessee Premises
and reimburse the Lessor for its share of the North Building Common Area.
H. Agree to the amount to be reimbursed to the Lessor for half shares of Common
Area cleaning of the north toilet rooms, stairway and corridor.
V. SCHEDULE
The Lessor agrees to allow Lessee Possession of the Added Space Blocks #1 and
#2 on condition that the Lessee not expand beyond the boundaries of the
improved Space Blocks. Completion of Alterations to the EXPANDED Space Block is
contingent upon execution of the Sublease Amendment, completion of Construction
Documents, permits, construction, and final approval by the City of San Diego.
The Actual Date for Possession of the respective Space Blocks is recorded in
Exhibit C of this Agreement.
<TABLE>
<CAPTION>
MILESTONES ADDED SPACE DATE
- ---------------------- ------------
<S> <C>
Complete Draft Lease February 18 1999
Execute Lease Agreement February 26 1999
</TABLE>
If the Parties agree to install Leasehold Improvements in the EXPANDED Space
Blocks then the planning shall be executed in a manner to allow a Standard
Track Schedule in preference to a Fast Track Schedule. Following are the
estimated Standard Track task durations that will allow competitive bidding for
design and construction tasks.
<TABLE>
<CAPTION>
MILESTONES--EXPANSION SPACE DURATION - WEEKS
- --------------------------- -------------------
Minimum Maximum
------- -------
<S> <C> <C>
Select Design Team Two Four
Complete Construction Documents Four Six
Building Permit Approval/Contract Awards Four Six
Install Leasehold Improvements Six Eight
Punch List Items Two Four
---- -----
Range 18 28
</TABLE>
VI. BUILDING 14 COMMON AREA CHANGES
The Lessor has previously advised the Lessee of planned changes to the Building
Access, parking and visitor reception. Following are the objectives for
operation and use of the Building 14 Complex Common Area. Parties acknowledge
that changes may be required from time to time, as described in Paragraph 2.7
of this Agreement.
A. Provisions by LESSOR:
1. Vehicular access to Building 14 will be provided from Science Center Drive
and closed off from the ("Remainder Industrial Center").
2. Alternate emergency vehicle access, and non-routine service access, will be
provided to the Building 14 Complex via use of locked gates separating Building
14 and 15 east access road.
3. Pedestrian access between the Building 14 Complex and the Remainder
Industrial Center will remain unchanged.
4. Internet Products Incorporated (PI), a Building 14 Tenant, will provide the
Lobby Reception Service for all Building 14 Tenant Companies similar to the
function the Lessor performs through its Building 1 Reception Lobby, except
that IPI will operate the Security Access and Control System (SACS) only during
IPI's normal business hours, including the lunch period, ("Operating Hours").
5. Lessor will operate the SACS remotely from Building 1 Security Station
during IPI's Non-Operating Hours.
6. IPI will have nonexclusive use of the Lobby, and will not provide clerical
or mail service to other Building 14 Tenants.
7. Visitor parking is provided near the north and south building entrances;
disability parking is provided at the southeast corner of Building 14.
8. A turnaround and loading zone are provided for light freight truck delivery
at the south entrance to the Building 14 near access to the Building elevator.
9. As a means to control parking at the Remainder Industrial Center, all
Building 14 Tenant employees will be assigned a colored picture badge distinct
from those used for the Remainder Industrial Center. All Building 14 Tenant
employees will register vehicles with GA Security, be assigned numbered decals,
and will affix the decals on the vehicles at designated locations.
Exhibit F
Page 4 of 7
<PAGE> 31
B. Provision by LESSEE: The Lessee will cooperate with the Lessor, and other
Building 14 Tenants, to restrict access to the Building 14 Complex, and
Remainder Industrial Center, to those employees, suppliers, shippers,
customers, contractors and invitees having a business needs for said access to
the Lease Premises. The Lessee agrees to the following:
1. Routinely provide IPI and Lessor Security names of MP3.com contacts, or
employee phone numbers, to assist with receiving visitors, badging visitors,
and providing visitor directions to the MP3.com Premises.
2. Assist Lessor to regulate parking at the Building 14 Complex within the
permitted parking and access/egress restrictions.
3. Notify and advise organizations serving MP3.com (FedEx, UPS, etc.) of the
new street address, 10350 Science Center Drive, Suite 210, once the Private
Access Road is put into operation.
4. Arrange for direct US Mail pickup and deliveries by the Postal Service, or
by courier, at 10350 Science Center Drive, Suite 210, once the Lessor has
installed the US Postal Service Equipment.
5. Pay for repair of damages to the SACS System caused by MP3.com Tenant
employees, suppliers, shippers, customers, contractors and invitees.
6. Register Lessee employees with Lessor's Security Department for issuance
of security badges and vehicle decals.
7. Wear and display the GA Security Badge when present at the Building 14
Complex or Remainder Industrial Center.
8. Affix vehicle decals to employee vehicles accessing and parking at the
Building 14 Complex.
VII. LESSEE OBLIGATIONS DURING TENANCY
ROUTINE AND PERIODIC CLEANING: Pursuant to the Lessee's obligations stipulated
in Paragraph 7.0 of this Sublease Agreement, the Lessee will perform routine
and periodic cleaning of the offices, Lobby, Production Area, dedicated
corridors serving the Lessee's offices and the shared corridors and toilet
rooms first and second floor north on the following minimum frequencies. The
following standards are established to maintain a neat, clean facility, to
avoid infestation of rodents and pests, and to control fire hazards.
<TABLE>
<CAPTION>
ACTIVITY FREQUENCY
-------- ---------
<S> <C> <C>
OFFICES/LABS
------------
Empty Trash Daily
Empty Recycle Bi-Weekly
Vacuum Weekly
Spot Clean Carpet Weekly
Wipe and Clean Door Hardware/Sw Plates Monthly
Dust Baseboards Monthly
Dust window shades Monthly
Carpet Extraction Cleaned Quarterly
Clean Window Interior Surfaces Quarterly
TOILET ROOMS
------------
Wet Mop Floors Daily
Clean and Disinfect Fixtures Daily
Clean Mirrors Daily
Stock Supplies Daily
Empty Trash Daily
Spot Clean Doors, Frames and Pulls Daily
Clean Privacy Partitions/Doors Weekly
Spot Clean Walls Weekly
Clean Dispensers Weekly
Strip and Wax Floors Quarterly
LOBBY/CORRIDORS/LUNCH ROOMS/COFFEE MESS
---------------------------------------
Wet Mop or vacuum Daily
Empty Trash Daily
Empty Recycle Daily
Arrange and Clean Reading Tables Daily
Clean Desks, Tables and Counters Daily
Vacuum/Clean Chairs Weekly
Dust Baseboards Monthly
Dust Picture Frames Monthly
STAIRWELL
---------
Vacuum Daily
Clean Handrails Weekly
Clean Baseboard Monthly
Spot Clean Walls Monthly
</TABLE>
Exhibit F
Page 5 of 7
<PAGE> 32
VIII, LESSEE OBLIGATIONS TO SURRENDER PREMISES
The Parties acknowledge that the Leasehold improvements on Lessee Specified
Alterations to be installed by the Lessee will be of no value to the Lessor,
or to successor tenants, and the Lessee unless agreed otherwise, will pay to
remove the improvements at the end of Term. A summary account for restoration
will be set aside as part of the Lessee's Security Deposit to be paid to the
Lessor by the Lessee from time to time as deemed appropriate by the Lessor. At
the time the improvement or alteration is installed, a contractor's estimate
will be submitted to the Lessor as the basis for calculating the Security
Deposit due and payable by the Lessee. The Lessee will pay the Security Deposit
when invoiced by the Lessor with appropriate backup date supporting the
Security Deposit assessment.
CHECKLIST: Not withstanding the subject of restoration covered above, the
following expands on the obligations of Lessee related to the Surrender of the
Premises at the end of Tenancy, pursuant to Paragraph 7.4 of the Sublease
Agreement. Prior to the Lessor's acceptance of part or all of the Premises, the
Parties will make inspections to ascertain the said Premises are in a condition
acceptable to the Lessor, a condition existing at the time the Lessee took
Possession, normal wear accepted.
<TABLE>
<CAPTION>
BUILDING LOCATION: ----------------------------------------------------
OFFICES LESSOR LESSEE DATE
- ----------------------- --------------- -------------------- -----------
<S> <C> <C> <C>
Furnishings removed _______________ ____________________ ___________
Fixtures removed _______________ ____________________ ___________
Trash removed _______________ ____________________ ___________
Telephones disconnected _______________ ____________________ ___________
Services stripped/safe off _______________ ____________________ ___________
Fixture inventory completed _______________ ____________________ ___________
Fixtures and equip. cleaned _______________ ____________________ ___________
Special telecom cable removed _______________ ____________________ ___________
Walls/minor repairs completed _______________ ____________________ ___________
Carpet extraction cleaned _______________ ____________________ ___________
Ventilation balanced _______________ ____________________ ___________
Lessor signage left in place _______________ ____________________ ___________
Restoration completed _______________ ____________________ ___________
Lessee signage removed/repaired _______________ ____________________ ___________
Key locks changed _______________ ____________________ ___________
SUCCESSOR TENANT CONSENT (IF APPLICABLE)
First inspection _______________ ____________________ ___________
Ownership transfer completed _______________ ____________________ ___________
Final inspection _______________ ____________________ ___________
DATE: TURNOVER AND ACCEPTANCE _______________ ____________________ ___________
</TABLE>
Exhibit F
Page 6 of 7
<PAGE> 33
MP3.COM - RESTORATION COST SUMMARY
PERIOD ENDING FEBRUARY 28, 1999
PROJECT: BUILDING 14 ESTIMATOR: L.W. Smith
<TABLE>
<CAPTION>
ESTIMATED
ROOM NO. CONTRACTOR COST REMARKS
-------- ---------- ---- -------
<S> <C> <C> <C> <C>
ADDED SPACE BLOCK #1
Replace walls, doors, and ceiling 256-257 Good & Roberts $1,611
Replace hallway carpet and topset base H250 Astra Flooring $5,000
Replace tile 223 Astra Flooring $2,100
Replace carpet 252 Astra Flooring $1,450
Replace corridor ceiling tile and grid H250 Good & Roberts $1,354
Remove and replace corridor accent H250 Good & Roberts $683
Remove raised floor and glass door 252 Good & Roberts $1,390
Repair wall 263 Good & Roberts $646
Paint corridor walls H250 McMurray Painting $720
Paint corridor doors and frames H250 McMurray Painting $600
Paint new walls 256-257 McMurray Painting $150
Remove fire suppression system 252 Parsons $1,000
Remove a/c system 252 Jackson & Blanc $1,200
Remove electric panel and underfloor circuits 252 Chula Vista Electric $1,250
Remove track lighting in corridor H250 Chula Vista Electric $300
Replace corridor fire sprinkler heads H250 Jackson & Blanc $800
Replace corridor lights H250 Chula Vista Electric $2,100
-------
SUBTOTAL $22,354
CONTINGENCY - 10% $2,235
=======
TOTAL $24,589
</TABLE>
ADDED SPACE BLOCK #2
None to Date
EXPANSION SPACE BLOCK
None to Date
<PAGE> 34
LANDLORD CONSENT AND ESTOPPEL CERTIFICATE
This Landlord Consent and Estoppel Certificate is being executed by
Genesee Properties Inc. ("Master Lessor"), by General Atomics ("Sublessor"),
and by MP3.com in reference to the following facts:
RECITALS
Master Lessor has entered into a certain lease dated August 1, 1991,
pursuant to which Master Lessor has leased to Sublessor certain premises
("Master Premises") as described therein, which premises include those certain
premises known as Building 14 of the General Atomics Industrial Center located
at 3550 General Atomics Court, San Diego, California 92121. Pursuant to
sublease ("Sublease"), between General Atomics ("Sublessor") and ("MP3.com"),
dated as February 1, 1999, Sublessor has subleased certain premises ("Subleased
Premises") to MP3.com at Building 14, consisting of approximately 14,908sf, on
the terms and conditions set forth therein.
NOW, THEREFORE, in consideration of the Sublease and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Consent: Master Lessor hereby consents to the sublease of the
Subleased Premises by Sublessor to MP3.com and certifies that nothing contained
in the Sublease violates or conflicts in any material respect with the
provisions of the Master Lease.
2. Use: Master Lessor and Sublessor hereby represent and warrant to
MP3.com that MP3.com intended use of the Subleased Premises as contemplated in
the Sublease are permitted by the Master Lease and that no further approvals of
Master Lessor are required in connection with the Sublease.
3. Term; No Default: Master Lessor and Sublessor represent and warrant
that the terms of the Master Lease unless amended or extended, will expire on
February 21, 2001; that neither party is in default under the Master Lease; and
that no event has occurred and no condition exists which, with the giving of
notice or the lapse of time or both, will constitute a default under the Master
Lease.
4. Reliance: The parties acknowledge that this Certificate has been
requested by and will be provided to and is intended to be benefit and be
relied upon by MP3.com in connection with its performance under the Sublease,
and for execution of subsequent Sublease amendments.
5. Compliance with Master Lessor: Sublessor hereby covenants, for the
benefit of MP3.com to keep and maintain the Master Lease in full force and
effect throughout the terms of the Master Lease.
6. Covenant of Master Lessor: MP3.com agrees that in the event of
termination of the Master Lease, MP3.com shall attorn to Master Lessor as the
Lessor. In the event Master Lessor notifies MP3.com in writing that Sublessor
is in default of the Master Lease or that the Master Lease has terminated and
therefore instructs MP3.com to make all lease payments directly to Master
Lessor, MP3.com agrees to follow such instructions. Master Lessor shall
indemnify and hold MP3.com harmless against any actions by Sublessor in
following such instructions. Master Lessor and MP3.com each agree that they
will recognize and be bound by the Sublease provided MP3.com is not in default
of such Sublease should Sublessor cease being the tenant of Master Lessor with
respect to the Subleased Premises.
7. Lease: This Consent and Estoppel Certificate is attached as Exhibit G
of a true, correct and complete copy of the Sublease Agreement, dated February
1, 1999. The Master Lease between the Master Lessor and Sublessor is in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of this
_____ day of ______, 1999.
<TABLE>
<S> <C> <C>
MASTER LESSOR: SUBLESSOR: SUBLESSEE:
GENESEE PROPERTIES, INC. GENERAL ATOMICS MP3.com
Signature:______________ Signature:______ Signature:_______________
Gary Jackson John E. Jones Robin Richards
President Sr. VP, Administration President and COO
</TABLE>
Exhibit G
Page 1 of 1
<PAGE> 1
EXHIBIT 10.10
CREDIT AGREEMENT
This Credit Agreement ("Agreement") is made and entered into on February 11,
1999, by and between MP3.COM, INC., a Delaware corporation ("Borrower"), and
Imperial Bank, a California banking corporation ("Bank").
Subject to the terms and conditions of this Agreement, any security agreement(s)
executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor
of Bank, or any other agreements executed in conjunction therewith
(collectively, the "Loan Documents"), Bank shall make the loans and/or advances
(individually a "Loan" and collectively "Loans") referred to below to Borrower.
In consideration of mutual covenants and conditions hereof, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.01 REVOLVING CREDIT COMMITMENT.
(a) REVOLVING LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, provided that no Event of Default or any event which upon notice and
the lapse of time would be an Event of Default then has occurred and is
continuing, Bank shall, upon Borrower's request, make advances ("Revolving
Loans") to Borrower, for general corporate purposes, in an amount not to exceed
$3,000,000 (the "Revolving Line of Credit"), with a sublimit to be used to
finance capital equipment expenditures, in an amount not to exceed $1,500,000
(the "Equipment Sublimit"), and a $50,000 sublimit for credit cards, in each
case, until February 10, 2000 (the "Revolving Line of Credit Maturity Date").
Revolving Loans may be repaid and reborrowed, provided that all outstanding
principal and accrued interest on the Revolving Loans shall be payable in full
on the Revolving Credit Maturity Date.
(b) EQUIPMENT DRAWS. Equipment draws made under the Equipment Sublimit shall be
converted to term loans evidenced by term notes, which shall provide for equal
principal payments plus interest as follows:
(i) On the date that is 6 months from the date hereof, all
Revolving Loans made under the Equipment Sublimit that are then-outstanding
shall be converted to a term loan which shall be evidenced by a 36 month term
note; and
(ii) On the date that is 12 months from the date hereof, all
Revolving Loans made under the Equipment Sublimit that are then-outstanding
shall be converted to a term loan which shall be evidenced by a 30 month term
note.
1
<PAGE> 2
Equipment draws made under the Equipment Sublimit may include up
to 100% of invoice value excluding soft costs, freight, and sales taxes. No
more than 25% of the Equipment Sublimit may be used for software purchases.
Each equipment advance shall require a detailed schedule of
equipment purchases and other expenses associated with each draw-down.
(c) REVOLVING NOTE. The interest rate, principal and interest payments, maturity
date and certain other terms of the Revolving Loan will be contained in a
promissory note dated the date of this agreement, as such may be amended or
replaced from time to time.
(d) LATE CHARGE. If any installment payment, interest payment, principal payment
or principal balance due under the Revolving Line of Credit is delinquent ten
(10) or more days, Borrower agrees to pay Bank a late charge in the amount of
five percent (5%) of the payment so due and unpaid, in addition to the payment;
but nothing in this paragraph is to be construed as any obligation on the part
of the Bank to accept payment of any payment past due or less than the total
unpaid principal balance after maturity. All payments, at Bank's sole
discretion, shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
(e) DEFAULT RATE. If an Event of Default occurs hereunder, then during the
continuance thereof at the Bank's option, the interest rate shall be five
percent (5%) per year in excess of the rate otherwise applicable.
(f) INTEREST CALCULATIONS. The term "Prime Rate" shall mean the rate that the
Bank has announced as its prime lending rate, which shall vary concurrently with
any change in the Prime Rate. Interest based on the Prime Rate shall vary
concurrently with any change in the Prime Rate. All interest shall be computed
at the rate specified in any note on the basis of the actual number of days
during which the principal balance of the corresponding Loans are outstanding
divided by 360, which shall for interest computation purposes be considered one
(1) year.
1.02 LOAN FEE. In addition to any other amounts due, or to become due,
concurrent with the execution hereof, in connection with the Revolving Line of
Credit, Borrower shall pay to Bank a loan fee of Seven Thousand Five Hundred and
No/100 Dollars ($7,500.00).
1.03 DOCUMENTATION FEE, COSTS AND EXPENSES. In addition to any other amounts
due, or to become due, concurrently with the execution hereof, Borrower agrees
to pay to Bank a documentation fee in the amount of $250, and all other costs
and expenses incurred by the Bank in the preparation of this Agreement, the
other Loan Documents and the perfection of any security interest granted to Bank
by Borrower.
1.04 COLLATERAL. Borrower shall grant or cause to be granted to Bank a first
priority (other than security interests or other liens in deposit accounts and
proceeds thereof in favor of depository institutions) lien on any and all
personal property assets of Borrower which is assigned
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or hereafter is assigned to Bank as security or in which Bank now has or
hereafter acquires a security interest or pursuant to the terms of any security
agreement, an intellectual property security agreement or otherwise as security
for all of Borrower's obligations to Bank.
1.05 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all interest,
fees, costs, and/or expenses due under this Agreement by charging Borrower's
demand deposit account number 38-051-008 with Bank, or any other demand deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such demand deposit account to pay all such
sums when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.
2. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
2.01 EXISTENCE AND RIGHTS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of Delaware, without
limit as to the duration of its existence. Borrower has the power and adequate
authority to make and carry out this Agreement. Borrower has no investment in
any other business entity unless specified in writing to Bank.
2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement and the Loan Documents are duly authorized and do not require the
consent or approval of any governmental body or other regulatory authority; are
not in contravention of or in conflict with any law or regulation or any term or
provision of Borrower's charter/certificate of incorporation, by-laws, or
similar document as the case may be, and this Agreement is the valid, binding
and legally enforceable obligation of Borrower in accordance with its terms;
subject only to bankruptcy, insolvency or similar laws affecting creditors
rights generally and general equitable principles.
2.03 NO CONFLICT. The execution, delivery and performance of this Agreement and
the Loan Documents are not in contravention of or in conflict with any
agreement, indenture or undertaking to which Borrower is a party or by which it
or any of its property may be bound or affected, and do not cause any lien,
charge or other encumbrance to be created or imposed upon any such property by
reason thereof.
2.04 LITIGATION. Except as disclosed in writing to Bank by Borrower, there is no
litigation or other proceeding pending or threatened against or affecting
Borrower which if determined adversely to Borrower or its interest would have a
material adverse effect on the financial condition of Borrower, and Borrower is
not in default with respect to any order, writ, injunction, decree or demand of
any court or other governmental or regulatory authority.
2.05 FINANCIAL CONDITION. The financial information of Borrower as of January
25, 1999, a copy of which has heretofore been delivered to Bank by Borrower, and
all other
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statements and data submitted in writing by Borrower to Bank in connection with
this request for credit are true and correct, and said financial information
fairly presents the financial condition of Borrower as of the date thereof.
Since such date there have been no material adverse changes in the financial
condition or business of Borrower. Borrower has no knowledge of any liabilities,
contingent or otherwise, at such date not reflected in said financial
information, and Borrower has not entered into any special commitments or
substantial contracts which have not been previously disclosed to Bank in
writing, other than in the ordinary and normal course of its business, which may
have a materially adverse effect upon its financial condition, operations or
business as now conducted.
2.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are
not subject to any liens or encumbrances other than Permitted Liens. The term
"Permitted Liens" means: (a) any Liens existing on the Closing Date and
disclosed in Schedule 2.06; (b) liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings; (c) liens imposed by law, such as
materialmen's, mechanics, carriers', landlords', workmen's, and repairmen's
liens and other similar liens arising in the ordinary course of business; (d)
liens (other than liens imposed under ERISA), pledges or deposits in connection
with workmen's compensation, unemployment insurance or social security
obligations, provided in each case that the obligation secured is not overdue;
(e) liens to secure the performance of bids, trade contracts, leases, surety or
appeal bonds and other obligations of like nature incurred in the ordinary
course of business; (f) liens (i) upon or in property acquired or held by
Borrower to secure the purchase price of such property or indebtedness incurred
solely for the purpose of financing the acquisition of such property, or (ii)
existing on such property at the time of its acquisition, provided that the lien
is confined solely to the property so acquired and improvements thereon, and the
proceeds of such property; (g) liens on equipment or software leased by Borrower
pursuant to an operating or capital lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such equipment or software; (h) leases or
subleases and licenses and sublicenses granted to others in the ordinary course
of Borrower's business not interfering in any material respect with the business
of Borrower; (i) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property; (j) liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods; (k) liens constituting rights of set-off of a
customary nature or banker's liens with respect to amounts on deposit, whether
arising by operation of law or by contract, in connection with arrangements
entered into with banks in the ordinary course of business; (l) liens on assets
(including proceeds thereof and accessions thereto) that existed at the time
such assets were acquired by Borrower provided that such liens are not granted
in contemplation of or in connection with the acquisition of such asset by
Borrower, (m) liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default hereunder, and (n) liens in
favor of Lender created pursuant to this Agreement.
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2.07 TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
2.09 REGULATION U. None of the proceeds of any Loan shall be used to purchase or
carry margin stock (as defined within Regulation U of the Board of Governors of
the Federal Reserve system).
2.10 ERISA. All defined benefit pension plans as defined in the Employees
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
2.11 YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable, have
reviewed the areas within their operations and business which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the Year 2000 Problem and have made related appropriate inquiry of
material suppliers and vendors, and based on such review and program, the Year
2000 Problem will not have a material adverse effect upon its financial
condition, operations or business as now conducted. "Year 2000 Problem" means
the possibility that any computer applications or equipment used by Borrower may
be unable to recognize and properly perform date sensitive functions involving
certain dates prior to and any dates on or after December 31, 1999.
3. CONDITIONS PRECEDENT TO LOAN.
Prior to Bank being obligated to make any Loan pursuant to this
Agreement, Bank must receive all of the following, each of which must be in form
and substance satisfactory to Bank:
3.01 PROMISSORY NOTE. Original, executed promissory note.
3.02 SECURITY AGREEMENT. Original, executed security agreement covering the
personal property collateral securing the Loans.
3.03 FINANCING STATEMENT. Financing statement(s) executed by Borrower.
3.04 INSURANCE. Borrower shall have delivered to Bank evidence of insurance
coverage required pursuant to the Agreement to Provide Insurance executed by
Borrower, in form, substance, amounts, covering risks and issued by companies
satisfactory to Bank, and where required by Bank, with loss payable endorsements
in favor of Bank.
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3.05 ORGANIZATIONAL DOCUMENTS. Copies of the charter/certificate of
incorporation, or similar document as the case may be, of the Borrower.
3.06 AUTHORIZATIONS. Certified copies of all action taken by the Borrower to
authorize the execution. delivery and performance of the Loan Documents.
3.07 GOOD STANDING. Good standing certificates from the appropriate secretary of
state of the state in which the Borrower is organized and in each state in which
it is required to be qualified to do business.
3.08 ADDITIONAL DOCUMENTS. Such other documents as Bank may reasonably deem
necessary.
4. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under borrowings, or
other indebtedness, or so long as Bank has any obligation to extend credit to
Borrower it will, unless Bank shall otherwise consent in writing:
4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair (ordinary wear and
tear excepted); conduct its business in an orderly manner without voluntary
interruption and, if a corporation or partnership, maintain and preserve its
existence.
4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for purposes specified
in Section 1 of this Agreement
4.03 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment, and as required by that Agreement to Provide Insurance executed by
Borrower, with the Bank to be shown as Lenders Loss Payee on such policies.
4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate proceedings in
such manner as not to cause any materially adverse effect upon its financial
condition or the loss of any right of redemption from any sale thereunder; and
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(b) It shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting practice) deemed by it to be adequate
with respect thereto.
4.05 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles on a basis consistently
maintained; permit Bank's representatives to have access to, and to examine its
properties, books and records at all reasonable times and upon reasonable notice
during normal business hours; and furnish Bank:
(a) MONTHLY FINANCIAL STATEMENT. If there are no outstanding Loans, no financial
reporting will be required. Financial reporting will be required twenty (20)
days prior to and during any period of borrowings. When financial reporting is
required, as soon as available and in any event within thirty (30) days after
the close of each month, a balance sheet, profit and loss statement and
reconciliation of Borrowers capital balance accounts as of the close of such
period and covering operations for the portion of Borrower's fiscal year ending
on the last day of such period, all in reasonable detail and reasonably
acceptable to Bank, in accordance with generally accepted accounting principles
on a basis consistently maintained by Borrower and certified by an appropriate
officer of Borrower;
(b) ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within
one hundred twenty (120) days after and as of the close of each fiscal year of
Borrower, a report of audit of Borrower, all in reasonable detail, audited by an
unqualified certified public accountant selected by Borrower and reasonably
acceptable to Bank, in accordance with generally accepted accounting principles
on a basis consistently maintained by Borrower and certified by an appropriate
officer of Borrower;
(c) OFFICER'S CERTIFICATE. Within thirty (30) days after the end of each month
and fiscal year of Borrower, a certificate of the chief financial officer or
president of Borrower, stating that Borrower has performed and observed each and
every covenant contained in this Agreement to be performed by it and that no
event has occurred and no condition then exists which constitutes an Event of
Default hereunder or would constitute such an Event of Default upon the lapse of
time or upon the giving of notice and the lapse of time specified herein; or, if
any such event has occurred or any such condition exists, specifying the nature
thereof;
(d) AUDIT REPORTS. Promptly after the receipt thereof by Borrower, copies of any
detailed audit reports submitted to Borrower by independent accountants in
connection with each annual or interim work on the accounts of Borrower made by
such accountants;
(e) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND REPORTS.
Promptly after the same are available, copies of all such proxy statements,
financial statements and reports as Borrower or any subsidiary shall send to its
members or stockholders as appropriate, if any, and copies of all reports which
Borrower or any subsidiary may file with the Securities and Exchange Commission;
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(f) BOARD OF DIRECTORS MEETING MINUTES. Within thirty (30) days following the
date of each meeting of Borrower's Board of Directors (which shall meet each
month), a copy of the minutes for such meeting, certified by the Secretary of
Borrower; and
(g) OTHER INFORMATION. Such other information relating to the affairs of
Borrower as the Bank reasonably may request from time to time.
4.06 MINIMUM LIQUIDITY. Minimum Liquidity (defined as cash and cash equivalents
plus net accounts receivable) measured monthly the greater of:
(a) two (2) times current liabilities and all bank debt; or
(b) six (6) months cash burn measured on a two (2) month rolling average basis
(most recently ended two-month period multiplied by three). Cash burn is defined
as prior period cash (and equivalents) minus current period cash (and
equivalents) that have been adjusted for any changes to cash as a result of
financial debt, stock, paid-in capital & minority interest (equipment purchases
financed by the Revolving Line of Credit to have neutral effect on cash burn).
4.07 CURE PERIOD. If at any time Borrower fails to satisfy the financial
covenants in Sections 4.04, 4.05 and 4.06 above, Borrower shall have 30 days
within which to satisfy such covenants, after which time Borrower shall then be
in default if such covenants are not then met; provided, however that such
30-day cure period shall be available to Borrower only twice in any 12 month
period.
4.08 ERISA. Cause all defined benefit pension plans, as defined in ERISA, of
Borrower to, at all times, meet the minimum funding standards of Section 302 of
ERISA, and ensure that no Reportable Event or Prohibited Transaction, as defined
in ERISA, will occur with respect to any such plan.
4.09 LAWS. At all times comply with, or cause to be complied with, all laws,
statutes, rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Borrower's business.
4.10 GAAP. Compliance with all financial covenants shall be calculated based on
generally accepted accounting principles applied on a consistent basis as
maintained by Borrower.
4.11 YEAR 2000 COMPLIANT. Borrower shall perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors whose
compliance is likely to be material to Borrower's business, become Year 2000
Compliant in a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all Borrower's systems and
adopting a detailed plan, with itemized budget, for the remediation, monitoring
and testing of such systems. As used in this paragraph, "Year 2000 Compliant"
shall mean, in regard to any
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entity, that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial condition of
such entity, will properly perform date sensitive functions before, during and
after the year 2000. Borrower shall, immediately upon request, provide to Agent
such certifications or other evidence of Borrower's compliance with the terms of
this paragraph as Bank may from time to time require.
4.12 OPERATING ACCOUNTS. Maintain all primary accounts and banking relationship
with the Bank.
4.13 NOTICES. Promptly notify Bank in writing of (i) the occurrence of any Event
of Default hereunder or any event which upon notice and lapse of time would be
an Event of Default; (ii) all litigation affecting Borrower where the amount in
controversy is $250,000 or more; any substantial dispute which may exist between
Borrower and any governmental regulatory body or law enforcement authority; any
change in Borrower's name or principal place of business; or any other matter
which has resulted or might, with reasonable likelihood, result in a material
adverse change in Borrower's financial condition or operations.
5. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, or so long as Bank has
any obligation to extend credit to Borrower, it will not, without Bank's written
consent:
5.01 TYPE OF BUSINESS; MANAGEMENT; CHANGE IN CONTROL. Engage in any business
other than the businesses currently engaged in by Borrower and businesses
related or ancillary thereto; make any change in its executive management
(defined as, for purposes of this paragraph, as the Chief Executive Officer and
the Chief Financial Officer); or permit there to occur a change in ownership of
an aggregate of more than 50% of any equity interests of Borrower having voting
rights for the election of directors in any transaction or series of
transactions (other than in connection with any offering of equity securities by
Borrower).
5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than Loans from the Bank except
obligations now existing as shown in the financial statement dated December 31,
1998, excluding those obligations being refinanced by Bank, and other than the
Permitted Indebtedness or sell or transfer, either with or without recourse, any
accounts or notes receivable or any moneys due or to become due. The term
"Permitted Indebtedness" means (a) Indebtedness secured by a lien described in
subsection (c) of the definition of "Permitted Liens" provided the principal
amount of such indebtedness does not exceed the lesser of the cost or fair
market value of the property financed; (b) indebtedness to trade creditors In
the ordinary course of business; (c) prepaid royalties and deferred revenue in
connection with prepaid support services; (d) other indebtedness existing on the
date hereof described in Schedule 5.02; (e) endorsements for collection or
deposit in the ordinary course of business; and (f) extensions, renewals,
refundings, refinancings, modifications, amendments and restatements of any of
the items of Permitted Indebtedness described in subsections (a) through (d)
above, provided that the
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principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon Borrower.
5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or assume any
mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now
owned or hereafter acquired by it, other than Permitted Liens.
5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity or make any investment in the securities of any
person or other entity; or guarantee or otherwise become liable upon the
obligation of any person or other entity, in each case except for permitted
Investments. The term "Permitted Investments" means (a) marketable direct
obligations issued or unconditionally guaranteed by the United States of America
or any agency or any State or other subdivision thereof maturing within two (2)
years from the date of acquisition thereof; (b) corporate commercial paper,
corporate notes and bonds, master notes, medium term notes, bankers acceptances,
certificates of deposit and repurchase agreements which, if short term, have a
minimum credit rating of A-1 or P-1 or, if long term, have a minimum credit
rating of A by Standard & Poor's Ratings Group, a division of The McGraw Hill
Company, or Moody's Investors Service, Inc.; and non-diversified short duration
mutual funds with an average credit rating of at least A- and a duration not to
exceed 1.5 years; (c) certificates of deposit maturing no more than one (1) year
from the date of investment therein; (d) trade credit extended in the ordinary
course of Borrower's business; (e) investments received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business; (f) investments consisting of (i)
compensation of employees, officers and directors of Borrower, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, (iii) loans to employees, officers or directors
relating to the purchase of equity securities of Borrower, and (iv) other loans
to officers and employees approved by the board of directors of Borrower,
provided, however, that investments pursuant to clauses (ii) through (iv) do not
exceed $500,000 in the aggregate.
5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business and
except for property that is worn out, obsolete or is no longer useful in
Borrower's business; or sell, lease, assign, or transfer any substantial part of
its business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same.
5.06 DIVIDENDS AND DISTRIBUTIONS. Declare or pay any cash dividend or make any
other cash distribution on any of its capital stock now outstanding or hereafter
issued or purchase, redeem or retire any of such stock other than in dividends
or distributions payable in Borrower's capital stock, except for the repurchase,
whether for cash or otherwise, of Borrower's capital stock from officers,
directors, employees or consultants of Borrower upon termination of their
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employment with or rendering of service to Borrower and except for cash
dividends to shareholders in an amount necessary to pay their income tax
resulting from their ownership in Borrower.
6. EVENTS OF DEFAULT
The occurrence of any of the following events of default ("Events of Default")
shall, at Bank's option, terminate Bank's commitment to lend and make all sums
of principal and interest then remaining unpaid on all Borrower's indebtedness
to Bank immediately due and payable, all without demand, presentment or notice,
all of which are hereby expressly waived:
6.01 Failure to Pay. Failure to pay any installment of principal or of interest
on any indebtedness of Borrower to Bank within five (5) days of its due date.
6.02 Breach of Covenant. Failure of Borrower to perform any other term or
condition of this Agreement or any Loan Document binding upon Borrower,
provided, however, that no Event of Default will have occurred if, except for
the provisions of Section 4.07 and Article 5, Borrower has performed or complied
with such term or condition within thirty (30) days of the date required for
such performance.
6.03 Breach of Warranty. Any of Borrower's representations or warranties made
herein or any statement or certificate at any time given in writing pursuant
hereto or in connection herewith shall be false or misleading in any respect.
6.04 Insolvency; Receiver or Trustee. Borrower shall become insolvent; or admit
its inability to pay its debts as they mature; or make an assignment for the
benefit of creditors; or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business.
6.05 Judgments, Attachments. Any money judgment in excess of $250,000, writ or
warrant of attachment, or similar process shall be entered or filed against
Borrower or any of its assets and shall remain unvacated, unbonded or unstayed
for a period of thirty (30) days or in any event later than five (5) days prior
to the date of any proposed sale thereunder.
6.06 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall not be dismissed within sixty (60) days thereafter.
6.07 Cessation of Business. Borrower shall voluntarily suspend its business.
6.08 Adverse Change. Any change which, in the reasonable opinion of Bank, is
materially adverse to the financial condition of Borrower or any Guarantor; or
which materially impairs the prospect of Borrower's payment or performance
hereunder or under any other agreement or instrument with Bank.
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6.09 Other Defaults. Borrower shall commit or do or fail to commit or do any act
or thing which would constitute a payment default or give rise to a lender's
right to accelerate the maturity of payment obligations, in each case pursuant
to the terms of any other agreement, document or instrument executed or to be
executed by it concerning the obligation to pay money if the aggregate amount of
such obligation is $50,000 or more.
6.10 Advances. Notwithstanding anything to the contrary contained herein, Bank
shall have no duty to make advances while any event of default exists
notwithstanding any cure period provided for herein (other than as provided in
Section 4.07 above).
7. MISCELLANEOUS PROVISIONS
7.01 Failure or Indulgence Not Waiver. No failure or delay on the part of Bank
or any holder of notes issued hereunder, in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement or any note(s) issued in connection with
a Loan that Bank may make hereunder, are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
7.02 Counterparts; Entire Agreement This Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Agreement, and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersedes any prior agreements, written or oral, with respect thereto.
7.03 Attorney's Fees. Borrower will pay promptly to Bank without demand after
notice, with interest thereon from the date of expenditure at the rate
applicable to the Loan, reasonable attorneys' fees and all costs and expenses
paid or incurred by Bank in collecting or compromising the Loan after the
occurrence of an Event of Default, whether or not suit is filed. If suit is
brought to enforce any provision of this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
7.04 Additional Remedies. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.05 Inurement The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of Borrower.
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7.06 Applicable Law. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the state of California, to the jurisdiction of whose
courts the parties hereby agree to submit.
7.07 Offset. In addition to and not in limitation of all rights of offset that
Bank or other holder of the Loan may have under applicable law, Bank or other
holder of any note issued hereunder shall, upon the occurrence of any Event of
Default, have the right to appropriate and apply to the payment of the Loan any
and all balances, credits, deposits, accounts or monies of Borrower then or
thereafter with Bank or other holder, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank to
Borrower.
7.08 Severability. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.09 Time of the Essence. Time is hereby declared to be of the essence of this
Agreement and of every part hereof.
7.10 Accounting. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
7.11 Reference Provision.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any security agreement executed by Borrower in favor of Bank or any
note executed by Borrower in favor of Bank or any other agreement or instrument
issued in favor of Bank by Borrower (collectively in this Section, the
"Agreement") which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "Claim Date" (defined as the date on which a
party subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or San Diego County if none
(the "Court"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently
13
<PAGE> 14
enacted Rule). Each party shall have one peremptory challenge pursuant to CCP
Section 170.6. The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the date of selection of the referee and (b) try
any and all issues of law or fact and report a statement of decision upon them,
if possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the state of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding. All
proceedings and hearings conducted before the referee, except for trial, shall
be conducted without a court reporter except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee. The
party making such a request shall have the obligation to arrange for and pay for
the court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
(c) The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the state of California. The rules
of evidence applicable to proceedings at law in the state of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for appointment of
a referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by the reference procedure herein
described will be resolved and determined by arbitration. The arbitration will
be conducted by a retired judge of the Court, in
14
<PAGE> 15
accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
7.12 This Agreement may be modified only by a writing signed by all parties
hereto.
This Agreement is executed on behalf of the parties by duly authorized officers
as of the date first above written.
IMPERIAL BANK MP3.COM, INC.
("BANK") ("BORROWER")
By: [SIGNATURE ILLEGIBLE] By: /s/ MICHAEL ROBERTSON
------------------------------- -------------------------------
Michael Robertson
Its: Vice President Its: CEO and Secretary
------------------------------ ------------------------------
15
<PAGE> 16
[IMPERIAL BANK LOGO]
PROMISSORY NOTE
<TABLE>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATA MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$3,000,000.00 02-11-1999 02-10-2000 392
- -------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- -------------------------------------------------------------------------------------------------------------
BORROWER: MP3.COM, INC., A DELAWARE CORPORATION LENDER: Imperial Bank
3550 GENERAL ATOMICS COURT, BUILDING 14 Emerging Growth Industries Group -
SAN DIEGO, CA 92121 Southern California Regional Office
701 B Street, Suite 600
San Diego, CA 92101-8120
=============================================================================================================
PRINCIPAL AMOUNT: $3,000,000.00 INITIAL RATE: 8.750% DATE OF NOTE: February 11, 1999
</TABLE>
PROMISE TO PAY. MP3.COM, INC., A DELAWARE CORPORATION ("Borrower") promises to
pay to Imperial Bank ("Lender"), or order, in lawful money of the United States
of America, the principal amount of Three Million & 00/100 Dollars
($3,000,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on February 10, 2000. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
March 11, 1999, and all subsequent interest payments are due on the same day of
each month after that. The annual interest rate for this Note is computed on a
365/360 basis; that is, by applying the ratio of the annual interest rate over
a year of 360 days, multiplied by the outstanding principal balance, multiplied
by the actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to any unpaid collection costs
and any late charges, then to any unpaid interest, and any remaining amount to
principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the Imperial Bank Prime
Rate (the "Index"). The Prime Rate is the rate announced by Lender as its Prime
Rate of Interest from time to time. Lender will tell Borrower the current index
rate upon Borrower's request. Borrower understands that Lender may make loans
based on other rates as well. The interest rate change will not occur more
often than each day. The index currently is 7.750%. The interest rate to be
applied to the unpaid principal balance of this Note will be at a rate of 1.000
percentage point over the index, resulting in an initial rate of 8.750%.
NOTICE: Under no circumstances will the interest rate on this Note be more than
the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $250.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment(1) when due. (b) Borrower breaks any(2)
promise Borrower has made to Lender, or Borrower fails to comply with or to
perform when due any other term, obligation, covenant, or condition contained in
this Note or any agreement related to this Note, or in any other agreement or
loan Borrower has with Lender. (c) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or misleading
in any material respect either now or at the time made or furnished. (d)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or
any of the other events described in this default section occurs with respect to
any guarantor of this Note. (g) A material adverse change occurs in Borrower's
financial condition. See Credit Agreement dated February 11, 1999.
LENDER'S RIGHTS. Upon(3) Lender may declare the entire unpaid principal balance
on this Note and all accrued unpaid interest immediately due, without notice,
and then Borrower will pay that amount. Upon Borrower's failure to pay all
amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate on
this Note to 6.000 percentage points over the index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
in the State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Los Angeles County, the
State of California. Lender and Borrower hereby waive the right to any jury
trial in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other. (Initial Here MR) This Note shall be governed
by and construed in accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. All
oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: MICHAEL ROBERTSON, CEO/SECRETARY(4). Borrower
agrees to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation to
advance funds under this Note if: (a) Borrower or any guarantor is in default
under the terms of this Note or any agreement that Borrower or any guarantor has
with Lender, including any agreement made in connection with the signing of this
Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c)
any guarantor seeks, claims or otherwise attempts to limit, modify or revoke
such guarantor's guarantee of this Note or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender.
REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and all
matters in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this document ("Agreement"), which controversy, dispute
or claim is not settled in writing within thirty (30) days after the "Claim
Date" (defined as the date on which a party subject to the Agreement gives
written notice to all other parties that a controversy, dispute or claim
exists), will be settled by a reference proceeding in California in accordance
<PAGE> 17
(CONTINUED)
================================================================================
with the provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Agreement, including whether such controversy, dispute or claim
is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County where
the Real Property, if any, is located or Los Angeles County if none (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for
hearing within sixty (60) days after the Claim Date and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall be entered pursuant to
CCP 644 in any court in the State of California having jurisdiction. Any party
may apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy, dispute or
claim, by filing a petition for a hearing and/or trial. All discovery permitted
by this Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provision remedies, as
appropriate.
2. Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding. All
proceedings and hearings conducted before the referee, except for trial, shall
be conducted without a court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee. The
party making such a request shall have the obligation to arrange for and pay for
the court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
3. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of law, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be reference proceeding under this provision.
4. In the event that the enabling legislation which provides for appointment of
a referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by the reference procedure herein
described will be resolved and determined by arbitration. The arbitration will
be conducted by a retired judge of the Court, in accordance with the California
Arbitration Act, 1280 through 1294.2 of the CCP as amended from time to time.
The limitations with respect to discovery as set forth hereinabove shall apply
to any such arbitration proceeding.
CREDIT AGREEMENT. This Note is subject to the provisions of the Credit Agreement
dated February 2, 1999, and all amendments thereto and replacements therefor.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability(5). All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MP3.COM, INC., A DELAWARE CORPORATION
By: /s/ MICHAEL ROBERTSON
----------------------------------
MICHAEL ROBERTSON, CEO/SECRETARY
================================================================================
(1) within 5 days of the date
(2) written
(3) the occurrence and during the continuance of an Event of Default (as
defined in the Credit Agreement between Lender and Borrower dated
February 11, 1999)
(4) or such other individual as to whom Michael Robertson shall have advised
Lender in writing.
(5) until the final satisfaction of all obligations hereunder
<PAGE> 18
[LOGO]
IMPERIAL BANK
INNOVATIVE BUSINESS BANKING
Member FDIC
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$3,000,000.00 02-11-199 02-10-2000 392
- --------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to
any particular loan or item
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: MP3.COM, INC., A DELAWARE CORPORATION LENDER: Imperial Bank
3550 GENERAL ATOMICS COURT, BUILDING 14 Emerging Growth Industries Group -
San Diego, CA 92121 Southern California Regional Office
701 B Street, Suite 600
San Diego, CA 92101-8120
==============================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT is entered into between MP3.COM, INC., A
DELAWARE CORPORATION (referred to below as "Grantor"); and Imperial Bank
(referred to below as "Lender"). For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as
this Commercial Security Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this Commercial
Security Agreement from time to time.
COLLATERAL. The world "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All personal property of Obligor (herein referred to as "Obligor" or
"Debtor") whether presently existing or hereafter created, written,
produced or acquired, including, but not limited to: (i) all accounts
receivable, accounts, chattel paper, contract rights (including, without
limitation, royalty agreements, license agreements and distribution
agreements), documents, instruments, money, deposit accounts and general
intangibles including, without limitation, returns, repossessions, books
and records relating thereto, and equipment containing said books and
records, all investment property including securities and securities
entitlements (ii) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for
registration, now existing or hereafter arising, United States of America
and foreign, obtained or to be obtained on or in connection with the
Software Products, or any parts thereof or any underlying or component
elements of the Software Products together with the right to copyright and
all rights to renew or extend such copyrights and the right (but not the
obligation) of Bank (herein referred to as "Bank" or "Secured Party") to
sue in its own name and/or in the name of the Debtor for past, present and
future infringements of copyright, (iii) all goods including, without
limitation, equipment and inventory (including, without limitation, all
export inventory), (iv) all guarantees and other security therefor, (v) all
trademarks, service marks, trade names and service names and the goodwill
associated therewith, (vi) (a) all patents and patent applications filed in
the United States Patent and Trademark Office or any similar office of any
foreign jurisdiction, and interests under patent license agreements,
including, without limitation, the inventions and improvements described
and claimed therein, (b) licenses pertaining to any patent whether Debtor
is licensor or licensee, (c) all income, royalties, damages, payments,
accounts and accounts receivable now or hereafter due and/or payable under
and with respect thereto, including, without limitation, damages and
payments for past, present or future infringements thereof, (d) the right
(but not the obligation) to sue for past, present and future infringements
thereof, (e) all rights corresponding thereto throughout the world in all
jurisdictions in which such patents have been issued or applied for, and
(f) the reissues, divisions, continuations, renewals, extensions and
continuations-in-part with any of the foregoing (all of the foregoing
patents and applications and interests under patent license agreements,
together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as
the "Patents"), and (vii) all products and proceeds including, without
limitation, insurance proceeds, of any of the foregoing.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions for
any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale, destruction,
loss, or other disposition of any of the property described in this
Collateral section.
(e) All records and data relating to any of the property described in this
Collateral section whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor's right,
title, and interest in and to all computer software required to utilize,
create, maintain, and process any such records or data on electronic media.
(6)
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section title
"Events of Default."
GRANTOR. The word "Grantor" means MP3.COM, INC., A DELAWARE CORPORATION, its
successors and assigns.
GUARANTOR. The world "Guarantor" means and include without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
the indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the
Note, including all principal and interest, together with all other indebtedness
and costs and expenses for which Grantor is responsible under this Agreement or
under any of the Related Documents. In addition, the word "Indebtedness"
includes all other obligations, debts and liabilities, plus interest thereon, of
Grantor, or any one or more of them, to Lender, as well as all claims by Lender
against Grantor, or any one or more of them, whether existing now or later;
whether they are voluntary or involuntary, due or not due, direct or indirect,
absolute or contingent, liquidated or unliquidated; whether Grantor may be
liable individually or jointly with others; whether Grantor may be obligated as
grantor, surety, accommodation party or otherwise; whether recovery upon such
indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable. (Initial Here_______)
LENDER. The word "Lender" means Imperial Bank, its successors and assigns.
NOTE. The world "Note" means the note or credit agreement dated February 11,
1999, in the principal amount of $3,000,000.00 from MP3.COM, INC., A DELAWARE
CORPORATION to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of and substitutions for the
note or credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual security interest
in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by law. Grantor
authorizes Lender, to the extent permitted by applicable law, to charge or
setoff all Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
<PAGE> 19
COMMERCIAL SECURITY AGREEMENT PAGE 2
(CONTINUED)
================================================================================
ORGANIZATION. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware.
AUTHORIZATION. The execution, delivery, and performance of this Agreement by
Grantor have been duly authorized by all necessary action by Grantor and do not
conflict with, result in a violation of, or constitute a default under (a) any
provision of its article of incorporation or organization, or bylaws, or any
agreement or other instrument binding upon Grantor or (b) any law, governmental
regulation, court decree, or order applicable to Grantor.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the documents
evidencing or constituting the Collateral, and Grantor will note Lender's
interest upon any and all chattel paper if not delivered to Lender for
possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement. Lender
may at any time, and without further authorization from Grantor, file a carbon,
photographic or other reproduction of any financing statement or of this
Agreement for use as a financing statement. Grantor will reimburse Lender for
all expenses for the perfection and the continuation of the perfection of
Lender's security interest in the Collateral. Grantor promptly will notify
Lender before any change in Grantor's name including any change to the assumed
business names of Grantor. This is a continuing Security Agreement and will
continue in effect even though all or any part of the indebtedness is paid in
full and even though for a period of time Grantor may not be indebted to Lender.
NO VIOLATION. The execution and delivery of this Agreement will not violate any
law or agreement governing Grantor or to which Grantor is a party, and its
certificate or articles of incorporation and bylaws do not prohibit any term or
condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, the Collateral is enforceable in
accordance with its terms, is genuine, and complies with applicable laws
concerning form, content and manner of preparation and execution, and all
persons appearing to be obligated on the Collateral have authority and capacity
to contract and are in fact obligated as they appear to be on the Collateral.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to
Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d) all
other properties where Collateral is or may be located. Except in the ordinary
course of its business, Grantor shall not (1) remove the Collateral from its
existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the
Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such other
locations as are acceptable to Lender. Except in the ordinary course of its
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender. To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of
California, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not sell,
offer to sell, or otherwise transfer or dispose of the Collateral. While
Grantor is not in default under this Agreement, Grantor may sell inventory, but
only in the ordinary course of its business and only to buyers who qualify as a
buyer in the ordinary course of business. A sale in the ordinary course of
Grantor's business does not include a transfer in partial or total satisfaction
of a debt or any bulk sale. Grantor shall not (i) pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security interest,
encumbrance, or charge, other than the security interest provided for in this
Agreement, without the prior written consent of Lender. This includes security
interests event if junior in right to the security interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition of the
Collateral (for whatever reason) shall be held in trust for Lender and shall
not be commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that (1) it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than those
which reflect the security interest created by this Agreement or to which
Lender has specifically consented. Grantor shall defend Lender's rights in the
Collateral against the claims and demands of all other persons.
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of
inventory, Grantor shall deliver to Lender, as often as Lender shall require,
such lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries or
related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible
Collateral in good condition and repair. Grantor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral.
Lender and its designated representatives and agents shall have the right at
all reasonable times to examine, inspect, and audit the Collateral wherever
located. Grantor shall immediately notify Lender of all cases involving the
return rejection, repossession, loss or damage of or to any Collateral; of any
request for credit or adjustment or of any other dispute arising with respect
to the Collateral; and generally of all happenings and events affecting the
Collateral or the value or the amount of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments
and liens upon the Collateral, its use or operation, upon this Agreement, upon
any promissory note or notes evidencing the Indebtedness, or upon any of the
other Related Documents. Grantor may withhold any such payment or may elect to
contest any lien if Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender's interest in
the Collateral is not jeopardized in Lender's sole opinion. If the Collateral
is subjected to a lien which is not discharged within fifteen (15) days,
Grantor shall deposit with Lender cash, a sufficient corporate surety bond or
other security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs, attorneys' fees or other
charges that could accrue as a result of foreclosure or sale of the Collateral.
In any contest Grantor shall defend itself and Lender and shall satisfy any
final adverse judgment before enforcement against the Collateral. Grantor shall
name Lender as an additional obligee under any surety bond furnished in the
contest proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with
all laws, ordinances, rules and regulations of all governmental authorities,
now or hereafter in effect, applicable to the ownership, production,
disposition, or use of the Collateral. Grantor may contest in good faith any
such law, ordinance or regulation and withhold compliance during any
proceeding, including appropriate appeals, so long as Lender's interest in the
Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never
has been, and never will be so long as this Agreement remains a lien on the
Collateral, used for the generation, manufacture, storage, transportation,
treatment, disposal, release or threatened release of any hazardous waste or
substance, as those terms are defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization
Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
Division 20 of the California Health and Safety Code, Section 25100, et seq.,
or other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation petroleum and petroleum
by-products or any fraction thereof and asbestos. The representations and
warranties contained herein are based on Grantor's due diligence in
investigating the Collateral for hazardous wastes and substances. Grantor
hereby (a) releases and waives any future claims against Lender for indemnity
or contribution in the event Grantor becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims and losses resulting from a breach of this provision
of this Agreement. This obligation to indemnify shall survive the payment of
the indebtedness and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks
insurance, including without limitation fire, theft and liability coverage
together with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable to
Lender and issued by a company or companies reasonably acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least thirty (30) days' prior written notice to Lender and not including any
disclaimer of the insurer's liability for failure to give such a notice. Each
insurance policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission or default
of Grantor or any other person. In connection with all policies covering assets
in which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. In
no event shall the insurance be in an amount less than the amount agreed upon
in the Agreement to Provide Insurance. If Grantor at any time fails to obtain
or maintain any insurance as required under this Agreement, Lender may (but
shall not be obligated to) obtain such insurance as Lender deems appropriate,
including if it so chooses "single interest insurance," which will cover only
Lender's interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any
loss or damage to the Collateral. Lender may make proof of loss if Grantor
fails to do so within fifteen (15) days of the casualty. All proceeds of any
insurance on the Collateral, including accrued proceeds thereon, shall be held
by Lender as part of the Collateral. If Lender consents to repair or
replacement of the damaged or destroyed Collateral,
<PAGE> 20
COMMERCIAL SECURITY AGREEMENT PAGE 3
(CONTINUED)
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at least fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grant or shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (a)
the name of the Insurer; (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have
an independent appraiser satisfactory to Lender determine, as applicable,
the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until(2) Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender for
such purposes will then bear interest at the rate charged under the Note from
the date incurred or paid by Lender to the date of repayment by Grantor. All
such expenses shall become a part of the indebtedness and, at Lender's option,
will (a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will
be due and payable at the Note's maturity. This Agreement also will secure
payment of these amounts. Such right shall be in addition to all other rights
and remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform(3) any
other term, obligation, covenant or condition contained in this Agreement
or in any of the Related Documents or in any other agreement between Lender
and Grantor.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Grantor's
deposit accounts with Lender. However, this Event of Default shall not
apply if there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to
Lender, and, in doing so, cure the Event of Default.
ADVERSE CHANGE. As set forth in the Credit Agreement dated February 11,
1999.
(4)
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition, and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made. The requirements of reasonable notice shall be met if such notice is
given at least ten (10) days, or such lesser time as required by state
law, before the time of the sale or disposition. All expenses relating to
the disposition of the Collateral, including without limitation the
expenses or retaking, holding, insuring, preparing for sale and selling
the Collateral, shall become a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the Note rate
from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether
or not Indebtedness or Collateral is then due. For these purposes, Lender
may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or
<PAGE> 21
(CONTINUED)
================================================================================
Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts
received from the exercise of the rights provided in this Agreement.
Grantor shall be liable for a deficiency even if the transaction described
in this subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and
may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Grantor
agrees upon Lender's request to submit to the jurisdiction of the courts
of Los Angeles County, the State of California. Lender and Grantor hereby
waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Grantor against the other.
(INITIAL HERE [Initialed]) This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there
is a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following(5): (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Grantor, shall
constitute a waiver of any of Lender's rights or of any of Grantor's
obligations as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender
in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may
be granted or withheld in the sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes
all claims against such other person which Borrower has or would otherwise
have by virtue of payment of the Indebtedness or any part thereof,
specifically including but not limited to all rights of indemnity,
contribution or exoneration.
INTELLECTUAL PROPERTY. To the extent that Obligor acquires any trademarks,
service marks, trade names and service names and/or the goodwill associated
therewith, copyrights, patents and/or patent applications (collectively
"Intellectual Property"), Obligor shall give prompt notice thereof to Bank and
shall take any and all actions reasonably requested from time to time by Bank
to perfect Obligor's interest in such Intellectual Property and to perfect
Bank's first priority security interest therein. Without limiting the
generality of the foregoing, the Obligor further agrees as follows: Upon
Obligor creating, writing, producing or acquiring any material software,
computer source codes or other computer programs (collectively, the
"Software"), Obligor shall promptly register such Software with the U.S.
Copyright Office before selling or licensing the Software, and to the extent
Obligor's rights therein are acquired from any third party, Obligor shall
promptly upon such acquisition file with the U.S. Copyright Office any and all
documents necessary to perfect Obligor's rights therein. Upon Obligor creating,
writing, producing or otherwise acquiring any material Software, Obligor shall
give prompt notice thereof to Bank. Obligor shall execute and deliver to Bank
any and all copyright mortgages, UCC financing statements and other documents
and instruments which Bank may request in connection with the Bank perfecting
its first priority security interest in such Software.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
FEBRUARY 11, 1999.
GRANTOR:
MP3.COM, INC., A DELAWARE CORPORATION
By: /s/ MICHAEL ROBERTSON
----------------------------------
MICHAEL ROBERTSON, CEO/SECRETARY
- ---------------
(1) , except as permitted by the Related Documents,
(2) an Event of Default has occurred and is continuing,
(3) when due
(4) See Credit Agreement dated February 11, 1999.
(5) at any time and from time to time during which an Event of Default has
occurred and is continuing
(6) Notwithstanding anything to the contrary herein, the Collateral shall not
include any accounts, general intangibles, instruments or chattle paper of
Borrower to the extent that they are not assignable as a matter of law or
pursuant to their terms.
<PAGE> 1
EXHIBIT 10.11
MP3.COM, INC.
AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
APRIL 29, 1999
<PAGE> 2
TABLE OF CONTENTS
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SECTION 1. GENERAL........................................................................... 1
1.1 Definitions....................................................................... 1
SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER............................................ 3
2.1 Restrictions on Transfer.......................................................... 3
2.2 Demand Registration............................................................... 4
2.3 Piggyback Registrations........................................................... 5
2.4 Form S-3 Registration............................................................. 6
2.5 Expenses of Registration.......................................................... 7
2.6 Obligations of the Company........................................................ 8
2.7 Termination of Registration Rights................................................ 9
2.8 Delay of Registration; Furnishing Information..................................... 9
2.9 Indemnification................................................................... 9
2.10 Assignment of Registration Rights................................................. 11
2.11 Amendment of Registration Rights.................................................. 12
2.12 [Reserved]........................................................................ 12
2.13 "Market Stand-Off" Agreement; Agreement to Furnish Information.................... 12
2.14 Rule 144 Reporting................................................................ 13
SECTION 3. COVENANTS OF THE COMPANY.......................................................... 13
3.1 Basic Financial Information and Reporting......................................... 13
3.2 Inspection Rights................................................................. 14
3.3 Limits on Access; Confidentiality of Records...................................... 14
3.4 Reservation of Common Stock....................................................... 15
3.5 Stock Vesting..................................................................... 15
3.6 Key Man Insurance................................................................. 15
3.7 Proprietary Information and Inventions Agreement.................................. 15
3.8 Assignment of Right of First Refusal.............................................. 15
3.9 Election and Removal of Directors................................................. 15
3.10 Qualified Small Business.......................................................... 16
3.11 Termination of Covenants.......................................................... 16
SECTION 4. RIGHTS OF FIRST REFUSAL........................................................... 16
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i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
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4.1 Subsequent Offerings.............................................................. 16
4.2 Exercise of Rights................................................................ 17
4.3 Issuance of Equity Securities to Other Persons.................................... 17
4.4 Sale Without Notice............................................................... 17
4.5 Termination and Waiver of Rights of First Refusal................................. 17
4.6 Transfer of Rights of First Refusal............................................... 18
4.7 Excluded Securities............................................................... 18
SECTION 5. MISCELLANEOUS..................................................................... 18
5.1 Governing Law..................................................................... 18
5.2 Survival.......................................................................... 19
5.3 Successors and Assigns............................................................ 19
5.4 Entire Agreement.................................................................. 19
5.5 Severability...................................................................... 19
5.6 Amendment and Waiver.............................................................. 19
5.7 Delays or Omissions............................................................... 19
5.8 Notices........................................................................... 20
5.9 Attorneys' Fees................................................................... 20
5.10 Titles and Subtitles.............................................................. 20
5.11 Additional Investors.............................................................. 20
5.12 Counterparts...................................................................... 20
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ii.
<PAGE> 4
MP3.COM, INC.
AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "AGREEMENT")
is entered into as of the 29th day of April, 1999, by and among MP3.COM, INC., a
Delaware corporation (the "COMPANY"), certain holders of the Company's Series A
Preferred Stock ("SERIES A STOCK") set forth on Exhibit A hereto (the "SERIES A
INVESTORS") and the purchasers of the Company's Series B Preferred Stock
("SERIES B STOCK") purchased pursuant to that certain Series B Preferred Stock
Purchase Agreement, dated April 19, 1999 (the "PURCHASE AGREEMENT"), as set
forth on Exhibit B hereto (the "SERIES B INVESTORS"). The Series A Investors and
the Series B Investors shall be referred to hereinafter as the "INVESTORS" and
each individually as an "INVESTOR."
RECITALS
WHEREAS, in connection with the Company's prior sale and issuance of
Series A Preferred Stock, the Company and the Series A Investors previously
entered into an Investor Rights Agreement, dated as of January 21, 1999 (the
"PRIOR AGREEMENT");
WHEREAS, the Company has issued a Warrant (the "Warrant"), dated as of
April 27, 1999, to purchase a total of 439,103 shares of Common Stock of the
Company;
WHEREAS, the Company proposes to sell and issue up to 439,103 shares of
its Series B Stock pursuant to the Purchase Agreement; and
WHEREAS, as a condition of entering into the Purchase Agreement, the
Series B Investors have requested that the Company extend to them registration
rights, information rights and other rights as set forth below.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Purchase Agreement, the parties hereby amend and restate
the Prior Agreement in its entirety and mutually agree as follows:
SECTION 1. GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FORM S-3" means such form under the Securities Act as in
effect on the date hereof or any successor registration form under the
Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
1.
<PAGE> 5
"HOLDER" means any person owning of record Registrable
Securities that have not been sold to the public or any assignee of record of
such Registrable Securities in accordance with Section 2.10 hereof.
"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means (a) Common Stock of the Company
issued or issuable upon conversion of the Shares; (b) Common Stock issued upon
exercise of the Warrant; and (c) any Common Stock of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144 or sold in a private transaction in which the transferor's
rights under Section 2 of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number
of shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and either (a) are then issued and
outstanding or (b) are issuable pursuant to then exercisable or convertible
securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by
the Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, reasonable fees and disbursements
not to exceed fifteen thousand dollars ($15,000) of a single special counsel for
the Holders, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"RESTATED CERTIFICATE" means the Company's Second Restated
Certificate of Incorporation.
"SEC" or "COMMISSION" means the Securities and Exchange
Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.
"SHARES" shall mean the Company's Series A Stock and Series B
Stock held by (i) the Investors listed on Exhibit A and Exhibit B hereto,
respectively, and their permitted assigns or (ii) Investors made a party to this
agreement pursuant to Section 5.11 below and their permitted assigns.
2.
<PAGE> 6
SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER
2.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all or
any portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(ii) (A) The transferee has agreed in writing to be
bound by the terms of this Agreement, (B) such Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
and (C) if reasonably requested by the Company, such Holder shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such shares under the
Securities Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144.
(iii) Notwithstanding the provisions of paragraphs
(i) and (ii) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by a Holder which is (A) a partnership to its
partners or former partners in accordance with partnership interests, (B) a
limited liability company to its members or former members in accordance with
their interest in the limited liability company, or (C) to the Holder's family
member or trust for the benefit of an individual Holder; provided that in each
case the transferee will be subject to the terms of this Agreement to the same
extent as if he were an original Holder hereunder.
(b) Each certificate representing Shares or Registrable
Securities shall (unless otherwise permitted by the provisions of the Agreement)
be stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR
UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder shall
have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
3.
<PAGE> 7
(d) Any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with respect
to such securities shall be removed upon receipt by the Company of an order of
the appropriate blue sky authority authorizing such removal.
2.2 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 2.2, if the
Company shall receive a written request from the Holders of a majority of the
Registrable Securities then outstanding (the "INITIATING HOLDERS") that the
Company file a registration statement under the Securities Act covering the
registration of at least a majority of the Registrable Securities then
outstanding (or a lesser percent if the anticipated aggregate offering price,
net of underwriting discounts and commissions, would exceed $5,000,000 (a
"QUALIFIED PUBLIC OFFERING")) then the Company shall, within thirty (30) days of
the receipt thereof, give written notice of such request to all Holders, and
subject to the limitations of this Section 2.2, use its best efforts to effect,
as soon as practicable, the registration under the Securities Act of all
Registrable Securities that the Holders request to be registered.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2.2 or any request pursuant to Section 2.4 and the Company shall
include such information in the written notice referred to in Section 2.2(a) or
Section 2.4(a), as applicable. In such event, the right of any Holder to include
its Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by a majority in interest of the
Initiating Holders (which underwriter or underwriters shall be reasonably
acceptable to the Company). Notwithstanding any other provision of this Section
2.2 or Section 2.4, if the underwriter advises the Company that marketing
factors require a limitation of the number of securities to be underwritten
(including Registrable Securities) then the Company shall so advise all Holders
of Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders). Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from the registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 2.2:
(i) prior to the earlier of (A) December 31, 2002 or
(B) the effective date of the registration statement pertaining to the Initial
Offering;
(ii) after the Company has effected two (2)
registrations pursuant to this Section 2.2, and such registrations have been
declared or ordered effective;
4.
<PAGE> 8
(iii) during the period starting with the date of
filing of, and ending on the date one hundred eighty (180) days following the
effective date of a registration statement pertaining to a public offering;
provided that the Company makes reasonable good faith efforts to cause such
registration statement to become effective;
(iv) if within thirty (30) days of receipt of a
written request from Initiating Holders pursuant to Section 2.2(a), the Company
gives notice to the Holders of the Company's intention to make its Initial
Offering within ninety (90) days;
(v) if the Company shall furnish to Holders
requesting a registration statement pursuant to this Section 2.2, a certificate
signed by the Chairman of the Board 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 stockholders for such registration statement to be effected at
such time, in which event the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
the Initiating Holders; provided that such right to delay a request shall be
exercised by the Company not more than once in any twelve (12) month period; or
(vi) if the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 2.4 below.
2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within twenty (20) days after the above-described notice from the
Company, so notify the Company in writing. Such notice shall state the intended
method of disposition of the Registrable Securities by such Holder. If a Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by
the Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.
(a) UNDERWRITING. If the registration statement under which
the Company gives notice under this Section 2.3 is for an underwritten offering,
the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder to be included in a registration pursuant to
this Section 2.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the
5.
<PAGE> 9
Company. Notwithstanding any other provision of the Agreement, if the
underwriter determines in good faith that marketing factors require a limitation
of the number of shares to be underwritten, the number of shares that may be
included in the underwriting shall be allocated, first, to the Company; second,
to the Holders on a pro rata basis based on the total number of Registrable
Securities held by the Holders; and third, to any stockholder of the Company
(other than a Holder) on a pro rata basis. No such reduction shall (i) reduce
the securities being offered by the Company for its own account to be included
in the registration and underwriting or (ii) reduce the amount of securities of
the selling Holders included in the registration below twenty-five percent (25%)
of the total amount of securities included in such registration, unless such
offering is (a) the Initial Offering or (b) a registration pursuant to Section
2.2 herein, in either of which events any or all of the Registrable Securities
of the Holders may be excluded in accordance with the immediately preceding
sentence. In no event will shares of any other selling stockholder included in
such registration reduce the number of shares which may be included by Holders
without the written consent of Holders of not less than sixty-six and two-thirds
percent (66 2/3%) of the Registrable Securities proposed to be sold in the
offering. If any Holder disapproves of the terms of any such underwriting, such
Holder may elect to withdraw therefrom by written notice to the Company and the
underwriter, delivered at least ten (10) business days prior to the effective
date of the registration statement. Any Registrable Securities excluded or
withdrawn from such underwriting shall be excluded and withdrawn from the
registration. For any Holder which is a partnership or corporation, the
partners, retired partners and stockholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing person shall be deemed to be a single "HOLDER",
and any pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.
(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.5 hereof.
2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 or any similar short-form
registration statement and any related qualification or compliance with respect
to all or a part of the Registrable Securities owned by such Holder or Holders,
the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within twenty (20) days after receipt of such written notice from the Company;
provided, however, that
6.
<PAGE> 10
the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 2.4:
(i) if Form S-3 (or any successor or similar form) is
not available for such offering by the Holders, or
(ii) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than five hundred thousand dollars
($500,000), or
(iii) after the Company has effected two (2)
registrations pursuant to this Section 2.4 and such registrations have been
declared effective; or
(iv) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would not be in the best interests of the Company and its
stockholders for such Form S-3 registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than ninety (90) days after
receipt of the request of the Holder or Holders under this Section 2.4;
provided, that such right to delay a request shall be exercised by the Company
not more than once in any twelve (12) month period, or
(v) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected one (1) registration
on Form S-3 for the Holders pursuant to this Section 2.4, or
(vi) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Subject to the foregoing, the Company shall file a Form
S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. Registrations effected pursuant to this
Section 2.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 2.2 or 2.3, respectively.
2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein,
all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling
Expenses incurred in connection with any registrations hereunder, shall be borne
by the holders of the securities so registered pro rata on the basis of the
number of shares so registered. The Company shall not, however, be required to
pay for expenses of any registration proceeding begun pursuant to Section 2.2 or
2.4, the request of which has been subsequently withdrawn by the Initiating
Holders unless (a) the withdrawal is based upon material adverse information
concerning the Company of which the Initiating Holders were not aware at the
time of such request or (b) the Holders of a majority of Registrable Securities
agree to forfeit their right to one requested registration pursuant to Section
2.2 or Section 2.4, as
7.
<PAGE> 11
applicable, in which event such right shall be forfeited by all Holders). If the
Holders are required to pay the Registration Expenses, such expenses shall be
borne by the holders of securities (including Registrable Securities) requesting
such registration in proportion to the number of shares for which registration
was requested. If the Company is required to pay the Registration Expenses of a
withdrawn offering pursuant to clause (a) above, then the Holders shall not
forfeit their rights pursuant to Section 2.2 or Section 2.4 to a demand
registration.
2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use all reasonable efforts to
cause such registration statement to become effective, and, upon the request of
the Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for up to ninety (90) days or, if
earlier, until the Holder or Holders have completed the distribution related
thereto. The Company shall not be required to file, cause to become effective or
maintain the effectiveness of any registration statement that contemplates a
distribution of securities on a delayed or continuous basis pursuant to Rule 415
under the Securities Act.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its reasonable best efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
8.
<PAGE> 12
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such registration.
(i) Use its best efforts to furnish, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, (i) an opinion, dated as of such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and (ii)
a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters.
2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted
under this Section 2 shall terminate and be of no further force and effect seven
(7) years after the date of the Company's Initial Offering. In addition, a
Holder's registration rights shall expire if all Registrable Securities held by
and issuable to such Holder (and its affiliates, partners, former partners,
members and former members) may be sold under Rule 144 during any ninety (90)
day period.
2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 2.
(b) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 2.2 or Section 2.4 if, due to the
operation of subsection 2.2(b), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in Section 2.2 or Section 2.4,
whichever is applicable.
2.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as
9.
<PAGE> 13
defined in the Securities Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Securities Act or
the Exchange Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"VIOLATION") by the Company: (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) 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 (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will pay as incurred to
each such Holder, partner, officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 2.9(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will pay as incurred any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 2.9(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall any
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indemnity under this Section 2.9 exceed the net proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.9.
(d) If the indemnification provided for in this Section 2.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability 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 Violation(s) that 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 a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the 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; provided, that in no event shall any contribution by a
Holder hereunder exceed the net proceeds from the offering received by such
Holder.
(e) The obligations of the Company and Holders under this
Section 2.9 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Section 2 may be assigned by
a Holder to a transferee or
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assignee of Registrable Securities which (a) is a general partner, limited
partner, retired partner, member or retired member of a Holder, (b) is a
Holder's family member or trust for the benefit of an individual Holder, (c)
acquires at least five hundred thousand (500,000) shares of Registrable
Securities (as adjusted for stock splits and combinations), or (d) with respect
to Atlas/Third Rail Management, Inc. ("Atlas"), is an employee, officer or
affiliate (including Thomas Spiegel) thereof or an artist represented thereby;
provided, that Atlas shall not have the right hereby to transfer its rights
pursuant to this Section 2 to any person or entity engaged, directly or
indirectly, in the business of digital distribution of music over the Internet
or in any other electronic medium, where such business generates greater than $1
million per year in revenues; and provided further, (i) the transferor shall,
within twenty (20) days after such transfer, furnish to the Company written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned and (ii) such
transferee shall agree to be subject to all restrictions set forth in this
Agreement.
2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this Section 2.11 shall be binding upon each Holder and the
Company. By acceptance of any benefits under this Section 2, Holders of
Registrable Securities hereby agree to be bound by the provisions hereunder.
2.12 [RESERVED]
2.13 "MARKET STAND-OFF" AGREEMENT; AGREEMENT TO FURNISH INFORMATION.
Each Holder hereby agrees that such Holder shall not sell, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any Common Stock
(or other securities) of the Company held by such Holder (other than those
included in the registration) for a period specified by the representative of
the underwriters of Common Stock (or other securities) of the Company not to
exceed one hundred eighty (180) days following the effective date of a
registration statement of the Company filed under the Securities Act; provided
that:
(i) such agreement shall apply only to the Company's
Initial Offering; and
(ii) all executive officers and directors of the
Company enter into similar agreements.
Each Holder agrees to execute and deliver such other agreements as may
be reasonably requested by the Company or the underwriter which are consistent
with the foregoing or which are necessary to give further effect thereto. In
addition, if requested by the Company or the representative of the underwriters
of Common Stock (or other securities) of the Company, each Holder shall provide,
within ten (10) days of such request, such information as may be required by the
Company or such representative in connection with the completion of any public
offering of the Company's securities pursuant to a registration statement filed
under the Securities Act. The obligations described in this Section 2.13 shall
not apply to a registration relating solely to
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employee benefit plans on Form S-1 or Form S-8 or similar forms that may be
promulgated in the future, or a registration relating solely to a Commission
Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the
future. The Company may impose stop-transfer instructions with respect to the
shares of Common Stock (or other securities) subject to the foregoing
restriction until the end of said one hundred eighty (180) day period.
2.14 RULE 144 REPORTING. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and
other documents required of the Company under the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities,
furnish to such Holder forthwith upon request: a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144 of
the Securities Act, and of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of the Company; and such other reports and documents as a
Holder may reasonably request in availing itself of any rule or regulation of
the SEC allowing it to sell any such securities without registration.
SECTION 3. COVENANTS OF THE COMPANY
3.1 BASIC FINANCIAL INFORMATION AND REPORTING.
(a) The Company will maintain true books and records of
account in which full and correct entries will be made of all its business
transactions pursuant to a system of accounting established and administered in
accordance with generally accepted accounting principles consistently applied,
and will set aside on its books all such proper accruals and reserves as shall
be required under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year
of the Company, and in any event within one hundred twenty (120) days
thereafter, the Company will furnish each Investor a balance sheet of the
Company, as at the end of such fiscal year, and a statement of income and a
statement of cash flows of the Company, for such year, all prepared in
accordance with generally accepted accounting principles consistently applied
and setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail. Such financial statements shall be
accompanied by a report and opinion thereon by independent public accountants of
national standing selected by the Company's Board of Directors.
(c) The Company will furnish each Investor, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, a balance sheet of the
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Company as of the end of each such quarterly period, and a statement of income
and a statement of cash flows of the Company for such period and for the current
fiscal year to date, prepared in accordance with generally accepted accounting
principles, with the exception that no notes need be attached to such statements
and year-end audit adjustments may not have been made.
(d) So long as an Investor (with its affiliates) shall own not
less than five hundred thousand (500,000) shares of Registrable Securities (as
adjusted for stock splits and combinations) (a "MAJOR INVESTOR"), the Company
will furnish each such Major (i) at least thirty (30) days prior to the
beginning of each fiscal year an annual budget and operating plans for such
fiscal year (and as soon as available, any subsequent revisions thereto); and
(ii) as soon as practicable after the end of each month, and in any event within
twenty (20) days thereafter, a balance sheet of the Company as of the end of
each such month, and a statement of income and a statement of cash flows of the
Company for such month and for the current fiscal year to date, including a
comparison to plan figures for such period, prepared in accordance with
generally accepted accounting principles consistently applied, with the
exception that no notes need be attached to such statements and year-end audit
adjustments may not have been made.
(e) So long as any Series B Investor (with its affiliates)
owns any shares of Registrable Securities, the Company will furnish to three (3)
Investors appointed by Atlas (as designated in writing to the Company) (i) at
least thirty (30) days prior to the beginning of each fiscal year an annual
budget and operating plans for such fiscal year (and as soon as available, any
subsequent revisions thereto); and (ii) as soon as practicable after the end of
each month, and in any event within twenty (20) days thereafter, a balance sheet
of the Company as of the end of each such month, and a statement of income and a
statement of cash flows of the Company for such month and for the current fiscal
year to date, including a comparison to plan figures for such period, prepared
in accordance with generally accepted accounting principles consistently
applied, with the exception that no notes need be attached to such statements
and year end audit adjustments may not have been made; provided, however, that
after the termination of that certain Consulting Agreement (the "Consulting
Agreement") between the Company and Atlas, dated as of April 19, 1999, Investors
who are holders of Registrable Securities issued or issuable upon conversion of
Series B Stock, or upon exercise of the Warrant, shall only be furnished with
balance sheets and statements of income pursuant to this subsection (e).
3.2 INSPECTION RIGHTS. Each Investor shall have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries, and to
discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, and to review such information as is reasonably
requested all at such reasonable times and as often as may be reasonably
requested; provided, however, that the Company shall not be obligated under this
Section 3.2 (i) with respect to a competitor of the Company, (ii) with respect
to information which the Board of Directors determines in good faith is
confidential and should not, therefore, be disclosed, and (iii) with respect to
Series B Investors upon termination of the Consulting Agreement.
3.3 LIMITS ON ACCESS; CONFIDENTIALITY OF RECORDS. With respect to each
Investor holding less than 750,000 shares of Registrable Securities in the
aggregate (as adjusted for stock splits and combinations), each such Investor
agrees that its rights under Sections 3.1 and 3.2 above shall be subject to such
limitations and restrictions as the Board of Directors of the
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Company in good faith determines to be necessary or appropriate for the
protection of the Company's business or proprietary interests from competitive
harm. Each Investor agrees to use, and to use its best efforts to insure that
its authorized representatives use, the same degree of care as such Investor
uses to protect its own confidential information to keep confidential any
information furnished to it which the Company identifies as being confidential
or proprietary (so long as such information is not in the public domain), except
that such Investor may disclose such proprietary or confidential information to
any partner, subsidiary or parent of such Investor for the purpose of evaluating
its investment in the Company as long as such partner, subsidiary or parent is
advised of the confidentiality provisions of this Section 3.3.
3.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of the
Preferred Stock and exercise of the Warrant, all Common Stock issuable from time
to time upon such conversion.
3.5 STOCK VESTING. Unless otherwise approved by the Board of Directors
(including those directors elected or appointed by the holders of Series A
Stock), all stock options and other stock equivalents issued after the date of
this Agreement to employees, directors, consultants and other service providers
shall be subject to vesting as follows: (a) twenty-five percent (25%) of such
stock shall vest at the end of the first year following the earlier of the date
of issuance or the date of commencement of such person's services to the
Company, and (b) seventy-five percent (75%) of such stock shall vest monthly
over the remaining three (3) years thereafter. With respect to any shares of
stock purchased by any such person, the Company's repurchase option shall
provide that upon such person's termination of employment or service with the
Company, with or without cause, the Company or its assignee (to the extent
permissible under applicable securities laws and other laws) shall have the
option to purchase at cost any unvested shares of stock held by such person.
3.6 KEY MAN INSURANCE. The Company will use its best efforts to
maintain in full force and effect term life insurance in the amount of one
million ($1,000,000) dollars on the life of Michael Robertson, naming the
Company as beneficiary.
3.7 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall
require all employees and consultants to execute and deliver the Company's
standard Proprietary Information and Inventions Agreement.
3.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. In the event the Company
elects not to exercise any right of first refusal or right of first offer the
Company may have on a proposed transfer of any of the Company's outstanding
capital stock pursuant to the Company's charter documents, by contract or
otherwise, the Company shall, to the extent it may do so, assign such right of
first refusal or right of first offer to each Investor. In the event of such
assignment, each Investor shall have a right to purchase its pro rata portion
(as defined in Section 4.1) of the capital stock proposed to be transferred.
3.9 ELECTION AND REMOVAL OF DIRECTORS. In the event that the holders of
at least a majority of the then outstanding shares of Common Stock, or the
holders of at least a majority of the then outstanding shares of Series A Stock,
notify the Company that an individual has been designated to serve as a director
which the holders of Common Stock or Series A Stock,
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respectively, are entitled to elect under Section E.2(c) of Article IV of the
Restated Certificate, the Company shall take such actions as may be necessary to
ensure that such individual is duly appointed or elected as a director of the
Company. In the event that the holders of at least a majority of the then
outstanding shares of Common Stock, or the holders of at least a majority of the
then outstanding shares of Series A Stock, notify the Company that they desire
to remove a director which the holders of Common Stock or Series A Stock,
respectively, are entitled to remove under Section E.2(c) of Article IV of the
Restated Certificate, the Company shall take such actions as may be necessary to
ensure that such individual is removed as a director of the Company.
3.10 QUALIFIED SMALL BUSINESS. The Company will use reasonable efforts
to comply with the reporting and recordkeeping requirements of Section 1202 of
the Internal Revenue Code, and any regulations promulgated thereunder and any
similar state laws and regulations and agrees not to repurchase any stock of the
Company from any stockholder other than Sequoia Capital or its affiliates if
such repurchase would cause the Shares not to so qualify as "Qualified Small
Business Stock," unless such a repurchase is approved by the Company's Board of
Directors (including the approval of at least one member of the Board of
Directors designated by the Series A Preferred Stock holders, if such a Director
exists).
3.11 TERMINATION OF COVENANTS. All covenants of the Company contained
in Section 3 of this Agreement shall expire and terminate as to each Investor
upon the earlier of (i) the effective date of the registration statement
pertaining to the Initial Offering or (ii) upon (a) the sale, lease or other
disposition of all or substantially all of the assets of the Company or (b) an
acquisition of the Company by another corporation or entity by consolidation,
merger or other reorganization in which the holders of the Company's outstanding
voting stock immediately prior to such transaction own, immediately after such
transaction, securities representing less than fifty percent (50%) of the voting
power of the corporation or other entity surviving such transaction (each a
"CHANGE IN CONTROL").
SECTION 4. RIGHTS OF FIRST REFUSAL
4.1 SUBSEQUENT OFFERINGS. Each Major Investor, each Series B Investor
and each holder of Common Stock issued upon exercise of the Warrant (each, a
"Right of First Refusal Investor") shall have a right of first refusal to
purchase its pro rata share of all Equity Securities, as defined below, that the
Company may, from time to time, propose to sell and issue after the date of this
Agreement, other than the Equity Securities excluded by Section 4.7 hereof. Each
Investor's pro rata share is equal to the ratio of (a) the number of shares of
the Company's Common Stock (including all shares of Common Stock issued or
issuable upon conversion of the Shares or upon exercise of the Warrant) which
such Investor is deemed to be a holder immediately prior to the issuance of such
Equity Securities to (b) the total number of shares of the Company's outstanding
Common Stock (including all shares of Common Stock issued or issuable upon
conversion of the Shares or upon the exercise of any outstanding warrants or
options) immediately prior to the issuance of the Equity Securities. The term
"EQUITY SECURITIES" shall mean (i) any Common Stock, Preferred Stock or other
security of the Company, (ii) any security convertible, with or without
consideration, into any Common Stock, Preferred Stock or other security
(including any option to purchase such a convertible security), (iii) any
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security carrying any warrant or right to subscribe to or purchase any Common
Stock, Preferred Stock or other security or (iv) any such warrant or right.
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give each Right of First Refusal Investor written notice of
its intention, describing the Equity Securities, the price and the terms and
conditions upon which the Company proposes to issue the same. Each Right of
First Refusal Investor shall have twenty (20) days from the giving of such
notice to agree to purchase its pro rata share of the Equity Securities for the
price and upon the terms and conditions specified in the notice by giving
written notice to the Company and stating therein the quantity of Equity
Securities to be purchased. Notwithstanding the foregoing, the Company shall not
be required to offer or sell such Equity Securities to any Right of First
Refusal Investor who would cause the Company to be in violation of applicable
federal securities laws by virtue of such offer or sale.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the Right of
First Refusal Investors fail to exercise in full the rights of first refusal,
the Company shall have ninety (90) days thereafter to sell the Equity Securities
in respect of which the Right of First Refusal Investors' rights were not
exercised, at a price and upon general terms and conditions materially no more
favorable to the purchasers thereof than specified in the Company's notice to
the Right of First Refusal Investors pursuant to Section 4.2 hereof. If the
Company has not sold such Equity Securities within ninety (90) days of the
notice provided pursuant to Section 4.2, the Company shall not thereafter issue
or sell any Equity Securities, without first offering such securities to the
Right of First Refusal Investors in the manner provided above.
4.4 SALE WITHOUT NOTICE. In lieu of giving notice to the Right of First
Refusal Investors prior to the issuance of Equity Securities as provided in
Section 4.2, the Company may elect to give notice to the Right of First Refusal
Investors within thirty (30) days after the issuance of Equity Securities. Such
notice shall describe the type, price and terms of the Equity Securities. Each
Right of First Refusal Investor shall have twenty (20) days from the date of
receipt of such notice to elect to purchase its pro rata share of Equity
Securities (as defined in Section 4.1, and calculated before giving effect to
the sale of the Equity Securities to the purchasers thereof). The closing of
such sale shall occur within sixty (60) days of the date of notice to the Right
of First Refusal Investors.
4.5 TERMINATION AND WAIVER OF RIGHTS OF FIRST REFUSAL. The rights of
first refusal established by this Section 4 shall not apply to, and shall
terminate upon the earlier of (i) with respect to the Major Investors, the
effective date of the registration statement pertaining to an Initial Offering
that results in the Preferred Stock being converted into Common Stock or, with
respect to the Series B Investors and the holders of Common Stock upon exercise
of the Warrant, the effective date of the registration statement pertaining to
an Initial Offering that results in the Preferred Stock being converted into
Common Stock and the offer and sale of Common Stock at a price per share of at
least $8.54 (as adjusted for stock splits, dividends, recapitalizations and the
like) or (ii) a Change in Control. The rights of first refusal established by
this Section 4 may be amended, or any provision waived with the written consent
of Right of First Refusal Investors holding a majority of the Registrable
Securities held by all Right of First Refusal Investors, or as permitted by
Section 5.6.
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4.6 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal of
each Right of First Refusal Investor under this Section 4 may be transferred to
the same parties, subject to the same restrictions as any transfer of
registration rights pursuant to Section 2.10.
4.7 EXCLUDED SECURITIES. The rights of first refusal established by
this Section 4 shall have no application to any of the following Equity
Securities:
(a) up to an aggregate amount of 6,500,000 shares of Common
Stock (and/or options, warrants or other Common Stock purchase rights issued
pursuant to such options, warrants or other rights) as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like issued or to be
issued after the Original Issue Date (as defined in the Company's Certificate of
Incorporation) to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors
of the Company;
(b) stock issued pursuant to any rights, agreements, options
and warrants outstanding as of the date of this Agreement; and stock issued
pursuant to any such rights, agreements, options and warrants granted after the
date of this Agreement, provided that the rights of first refusal established by
this Section 4 applied with respect to the initial sale or grant by the Company
of such rights or agreements;
(c) any Equity Securities issued for consideration other than
cash pursuant to a merger, consolidation, acquisition or similar business
combination approved by the Board of Directors;
(d) shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
(e) the Warrant, the Shares or the shares of Common Stock
issued upon conversion of the Shares or exercise of the Warrant;
(f) any Equity Securities issued pursuant to any equipment
leasing or loan arrangement, or any debt financing from a bank or similar
financial or lending institution;
(g) any Equity Securities that are issued by the Company
pursuant to a registration statement filed under the Securities Act; and
(h) shares of the Company's Common Stock or Preferred Stock
issued in connection with strategic transactions involving the Company and other
entities, including (i) joint ventures, manufacturing, marketing or distribution
arrangements or (ii) technology transfer or development arrangements; provided
that such strategic transactions and the issuance of shares therein, has been
approved by the Company's Board of Directors.
SECTION 5. MISCELLANEOUS
5.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
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5.2 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
5.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto, the Purchase Agreement and the other documents delivered pursuant
thereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and no party shall be liable or bound
to any other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein. The Company and
a majority of the Series A Investors, hereby agree, as evidenced by their
signatures hereto, that all rights granted and covenants made under the Prior
Agreement are hereby waived, released and terminated in their entirety and shall
have no further force or effect whatsoever. The rights and covenants provided
herein set forth the sole and entire agreement between the parties hereto with
respect to the subject matter hereof.
5.5 SEVERABILITY. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
5.6 AMENDMENT AND WAIVER.
(a) Except as otherwise expressly provided, this Agreement may
be amended or modified only upon the written consent of the Company and the
holders of at least a majority of then outstanding Registrable Securities.
(b) Except as otherwise expressly provided, the obligations of
the Company and the rights of the Holders under this Agreement may be waived
only with the written consent of the holders of at least a majority of then
outstanding Registrable Securities.
5.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be
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construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent, or
approval of any kind or character on any Holder's part of any breach, default or
noncompliance under the Agreement or any waiver on such Holder's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, by law, or otherwise afforded to Holders,
shall be cumulative and not alternative.
5.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (c) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one (1) day after deposit with
a nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address as set forth on the signature pages hereof or
Exhibit A hereto or at such other address as such party may designate by ten
(10) days advance written notice to the other parties hereto.
5.9 ATTORNEYS' FEES. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
5.10 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.11 ADDITIONAL INVESTORS. Notwithstanding anything to the contrary
contained herein, if the Company shall issue additional shares of its Preferred
Stock pursuant to the Purchase Agreement, any purchaser of such shares of
Preferred Stock may become a party to this Agreement by executing and delivering
an additional counterpart signature page to this Agreement and shall be deemed
an "INVESTOR" hereunder.
5.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
20.
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this AMENDED AND
RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first
paragraph hereof.
COMPANY:
MP3.COM, INC.
By: /s/ ROBIN RICHARDS
-------------------------------------
Name: Robin Richards
Title: President and Chief Operating Officer
Address: 10350 Science Center Drive
Building No. 14
San Diego, CA 92121
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 25
INVESTORS:
SEQUOIA CAPITAL VIII
SEQUOIA INTERNATIONAL TECHNOLOGY
PARTNERS VIII
SEQUOIA INTERNATIONAL TECHNOLOGY
PARTNERS VIII (Q)
By: SC VIII Management, LLC
A California Limited Liability Company
its General Partner
By: /s/ Mark A. Stevens
-------------------------------------
Name: Mark A. Stevens
-------------------------------------
Title: Managing Member
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
CMS PARTNERS LLC
SEQUOIA 1997
By: /s/ Mark A. Stevens
-------------------------------------
Name: Mark A. Stevens
-------------------------------------
Title: Partner
-------------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 26
EXHIBIT A
SCHEDULE OF SERIES A INVESTORS
Sequoia Capital VIII
Sequoia International Technology Partners VIII
Sequoia International Technology Partners VIII (Q)
CMS Partners LLC
Sequoia 1997
idealab! Capital Partners I-A, L.P.
idealab! Capital Partners I-B, L.P.
GC&H Investments
Stanford University
PSERD Trust dated 3/11/86
Burcham Community Property Trust dated 5/23/90
Timark L.P.
Scott Taylor Smith
Getting There, LLC
Berg Family Trust dated 1/17/89
Scott M. Harvey
<PAGE> 27
EXHIBIT B
SCHEDULE OF SERIES B INVESTORS
Dennis Gore
The Columbia Charitable Foundation
Alanis Morissette
Charles V. Roven
The Steel Roven Exemption Trust
Spiegel 1982 Grandchildren's Trust
FBO Evan Spiegel, Helene Spiegel Trustee
Spiegel 1982 Grandchildren's Trust
FBO Anthony Spiegel, Helene Spiegel Trustee
Bank Street Partners
Kenny Welch
Henry Welch
Ray Wright
Brian McLaughlin
Mihaela Evans
Lester Knispel
Scott Welch
<PAGE> 1
EXHIBIT 10.12
ZCO, INC.
FOUNDER STOCK PURCHASE AGREEMENT
THIS FOUNDER STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
the eighteenth day of March, 1998 by and between ZCO, INC., a Delaware
corporation (the "Company"), and MICHAEL ROBERTSON ("Purchaser").
WHEREAS, the Company desires to issue, and Purchaser desires to
acquire, stock of the Company as herein described, on the terms and conditions
hereinafter set forth;
WHEREAS, the issuance of common stock hereby is in connection with a
compensatory benefit plan for the employees, directors, officers, advisers or
consultants of the Company and is intended to comply with the provisions of Rule
701 promulgated by the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act").
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. ISSUANCE OF STOCK. The Company, as consideration for the assignment
by Purchaser of certain intellectual property rights to the Company pursuant to
the Technology Transfer Agreement attached hereto as Exhibit A, hereby agrees to
issue to Purchaser an aggregate of eight hundred ninety-five (895) shares of the
Company's Common Stock (the "Stock").
2. EXECUTION OF TECHNOLOGY TRANSFER AGREEMENT. Purchaser agrees to
execute the Technology Transfer Agreement attached hereto as Exhibit A. Upon
execution of this Agreement and the Technology Transfer Agreement attached
hereto as Exhibit A, the Company shall immediately issue and deliver to
Purchaser a share certificate in accordance with the terms of this Agreement.
3. LIMITATIONS ON TRANSFER. Purchaser shall not assign, hypothecate,
donate, encumber or otherwise dispose of any interest in the Stock except in
compliance with the provisions herein and applicable securities laws.
Furthermore, the Stock shall be subject to any right of first refusal in favor
of the Company or its assignees that may be contained in the Company's Bylaws.
The Company shall not be required (a) to transfer on its books any shares of
Stock of the Company which shall have been transferred in violation of any of
the provisions set forth in this Agreement or (b) to treat as owner of such
shares or to accord the right to vote as such owner or to pay dividends to any
transferee to whom such shares shall have been so transferred.
4. RESTRICTIVE LEGENDS. All certificates representing the Stock shall have
endorsed thereon legends in substantially the following forms (in addition to
any other legend which may be required by other agreements between the parties
hereto):
1.
<PAGE> 2
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. THEY 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 AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend required by appropriate blue sky officials.
5. INVESTMENT REPRESENTATIONS. In connection with the purchase of the
Stock, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock. Purchaser is
purchasing the Stock for investment for Purchaser's own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Act.
(b) Purchaser understands that the Stock has not been
registered under the Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
investment intent as expressed herein.
(c) Purchaser further acknowledges and understands that the
Stock must be held indefinitely unless the Stock is subsequently registered
under the Act or an exemption from such registration is available. Purchaser
further acknowledges and understands that the Company is under no obligation to
register the Stock. Purchaser understands that the certificate evidencing the
Stock will be imprinted with a legend which prohibits the transfer of the Stock
unless the Stock is registered or such registration is not required in the
opinion of counsel for the Company.
(d) Purchaser is familiar with the provisions of Rules 144 and
701, under the Act, as in effect from time to time, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof (or from an affiliate of such issuer), in a
non-public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of issuance of
the securities, such issuance will be exempt from registration under the Act. In
the event the Company becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the securities exempt under
Rule 701 may be sold by Purchaser ninety (90) days thereafter, subject to the
satisfaction of certain of the conditions specified by Rule 144 and the market
stand-off provision described in Section 6 below.
In the event that the sale of the Stock does not qualify under Rule 701
at the time of purchase, then the Stock may be resold by Purchaser in certain
limited circumstances subject to the provisions of Rule 144, which requires,
among other things: (i) the availability of certain public information about the
Company and (ii) the resale occurring following the required holding period
under Rule 144 after the Purchaser has purchased, and made full payment of
(within the meaning of Rule 144), the securities to be sold.
2.
<PAGE> 3
(e) Purchaser further understands that at the time Purchaser
wishes to sell the Stock there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 or 701, and
that, in such event, Purchaser would be precluded from selling the Stock under
Rule 144 or 701 even if the minimum holding period requirement had been
satisfied.
(f) Purchaser further warrants and represents that Purchaser
has either (i) preexisting personal or business relationships, with the Company
or any of its officers, directors or controlling persons, or (ii) the capacity
to protect his own interests in connection with the purchase of the Stock by
virtue of the business or financial expertise of himself or of professional
advisors to Purchaser who are unaffiliated with and who are not compensated by
the Company or any of its affiliates, directly or indirectly.
6. MARKET STAND-OFF AGREEMENT. Purchaser shall not sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any Common Stock of the Company held by Purchaser, including the Stock (the
"Restricted Securities"), for a period of time specified by the underwriter(s)
(not to exceed one hundred eighty (180) days) following the effective date of a
registration statement of the Company filed under the Act. Purchaser agrees to
execute and deliver such other agreements as may be reasonably requested by the
Company and/or the underwriter(s) which are consistent with the foregoing or
which are necessary to give further effect thereto. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to Purchaser's Restricted Securities until the end of such period.
7. NO EMPLOYMENT RIGHTS. This Agreement is not an employment contract
and nothing in this Agreement shall affect in any manner whatsoever the right or
power of the Company (or a parent or subsidiary of the Company) to terminate
Purchaser's employment for any reason at any time, with or without cause and
with or without notice.
8. MISCELLANEOUS.
(a) NOTICES. Any notice required or permitted hereunder shall
be given in writing and shall be deemed effectively given upon personal delivery
or sent by telegram or fax or upon deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to the
other party hereto at his address hereinafter shown below its signature or at
such other address as such party may designate by ten (10) days' advance written
notice to the other party hereto.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of the successors and assigns of the Company and, subject to the
restrictions on transfer herein set forth, be binding upon Purchaser,
Purchaser's successors, and assigns.
(c) ATTORNEYS' FEES; SPECIFIC PERFORMANCE. Purchaser shall
reimburse the Company for all costs incurred by the Company in enforcing the
performance of, or protecting its
3.
<PAGE> 4
rights under, any part of this Agreement, including reasonable costs of
investigation and attorneys' fees.
(d) GOVERNING LAW; VENUE. This Agreement shall be governed by
and construed in accordance with the laws of the State of California. The
parties agree that any action brought by either party to interpret or enforce
any provision of this Agreement shall be brought in, and each party agrees to,
and does hereby, submit to the jurisdiction and venue of, the appropriate state
or federal court for the district encompassing the Company's principal place of
business.
(e) FURTHER EXECUTION. The parties agree to take all such
further action(s) as may reasonably be necessary to carry out and consummate
this Agreement as soon as practicable, and to take whatever steps may be
necessary to obtain any governmental approval in connection with or otherwise
qualify the issuance of the securities that are the subject of this Agreement.
(f) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the entire agreement between the parties with respect to the subject matter
hereof and supersedes and merges all prior agreements or understandings, whether
written or oral. This Agreement may not be amended, modified or revoked, in
whole or in part, except by an agreement in writing signed by each of the
parties hereto.
(g) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with its
terms.
(h) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
4.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ZCO, INC.
By: /s/ MICHAEL ROBERTSON
-----------------------------------
MICHAEL ROBERTSON
PRESIDENT
Address: P.O. Box 910091
San Diego, CA 92191-0091
PURCHASER:
/s/ MICHAEL ROBERTSON
---------------------------------------
MICHAEL ROBERTSON
Address: 5437 Panoramic Lane
-------------------------------
San Diego, CA 92121
-------------------------------
5.
<PAGE> 6
EXHIBIT A
TECHNOLOGY TRANSFER AGREEMENT
1.
<PAGE> 7
TECHNOLOGY TRANSFER AGREEMENT
In consideration of the issuance to Michael Robertson ("Transferor"), of
eight hundred ninety-five (895) shares of the Common Stock of ZCO, INC., a
Delaware corporation (the "Company"), pursuant to the Founder Purchase Agreement
to which this Agreement is attached as Exhibit A, Transferor hereby assigns,
sells, transfers and conveys to the Company, all right, title and interest in
and to the intangible assets and technology described in Appendix I hereto (the
"Property").
Upon each request by the Company, Transferor agrees to promptly execute
documents, testify and take other acts at the Company's expense and as
reasonably requested by the Company in order to apply for and obtain, in the
Company's name and for its benefit, utility and design patents, copyrights, mask
works, trademarks, trade secrets, and all other technology and intellectual
property rights throughout the world related to any of the Property, and to
transfer, effect, confirm, perfect, record, preserve, protect and enforce all
right, title and interest transferred hereunder.
Transferor further agrees to deliver to the Company upon execution of
this Agreement any and all tangible manifestations of the Property, including,
without limitation, all notes, records, files and tangible items of any sort in
Transferor's possession or under Transferor's control relating to the Property.
Transferor represents and warrants to the Company that to the best of
Transferor's knowledge (a) Transferor is the sole owner of the Property and has
full and exclusive right to assign the rights assigned herein, (b) all of the
Property is free and clear of all claims, liens, encumbrances and the like of
any nature whatsoever, (c) none of the Property infringes, conflicts with or
violates any patent or other intellectual property right of any kind (including,
without limitation, any trade secret) or similar rights of any third party, and
(d) the execution, delivery and performance of this Agreement does not conflict
with, constitute a breach of, or in any way violate any arrangement,
understanding or agreement to which Transferor is a party or by which Transferor
is bound. Company acknowledges and agrees that none of the foregoing shall be
interpreted as a representation of non-infringement of unknown third party
rights.
Transferor further represents and warrants to the Company that no claim,
whether or not embodied in an action past or present, of any infringement, of
any conflict with, or of any violation of any patent, copyright, trade secret or
other intellectual property right or similar right, has been made or is pending
against Transferor or any entity from which Transferor has obtained such rights
relative to the Property.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California.
This Agreement and all schedules and other documents attached hereto
constitute the entire, complete, final and exclusive understanding and agreement
of the parties hereto with respect to the subject matter hereof, and supersedes
any other prior or contemporaneous oral
1.
<PAGE> 8
understanding or agreement or any other prior written agreement. No modification
of or amendment to this Agreement, nor any waiver of any rights under this
Agreement, will be effective unless in writing and signed by the parties hereto.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as set
forth below.
Dated: March 18, 1998
TRANSFEROR:
/s/ MICHAEL ROBERTSON
-----------------------------------------
MICHAEL ROBERTSON
Address: 5437 Panoramic Lane
--------------------------------
San Diego, CA 92121
--------------------------------
--------------------------------
ACCEPTED:
ZCO, INC.
a Delaware corporation
By: /s/ MICHAEL ROBERTSON
--------------------------------
Michael Robertson
President
Address: P.O. Box 910091
San Diego, CA 92191-0091
2.
<PAGE> 9
APPENDIX I
DESCRIPTION OF TECHNOLOGY
All of the intellectual property and other rights related to the technology
referred to as the Filez.com, Calenderz.com, MP3.com, WebSitez.com, Themez.com
and SharePaper.com web sites (the "Web Sites"), including but not limited to,
all patent, copyright, trade secret and trademark rights, and all right to apply
for any registrations thereof, all know-how, system design documents, detailed
design documents, user specification documents, data processing algorithms,
database schemas, stored procedures, active server page scripts in source code
and in object code formats and html files (to the extent that any of the
foregoing relate, directly or indirectly, to or are useful in connection with,
the Web Sites).
<PAGE> 1
EXHIBIT 10.13
MP3.COM, INC.
STOCK RESTRICTION AGREEMENT
THIS STOCK RESTRICTION AGREEMENT is made as of January 21, 1999 in San
Diego, California, between MP3.COM, INC., a Delaware corporation (the
"Company"), and MICHAEL ROBERTSON (the "Stockholder").
WHEREAS, the Stockholder is the beneficial owner of the number of shares
of the Company's Common Stock listed on EXHIBIT A attached hereto (the
"Restricted Stock"); and
WHEREAS, the Stockholder and the Company acknowledge that they are
entering into this Agreement as a condition to the closing of the sale of the
Series A Preferred Stock of the Company to those entities listed on Exhibit A to
the Series A Preferred Stock Purchase Agreement of even date herewith by and
among the Company and such entities (the "Preferred Stock Purchase Agreement").
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Preferred Stock Purchase Agreement, the parties hereby
agree as follows:
1. REPURCHASE OPTION.
(a) In the event Stockholder's employment with the Company is
terminated (i) voluntarily by the Stockholder or (ii) by the Company "for cause"
before all of the shares of Restricted Stock are released from the Company's
repurchase option (see Section 2), the Company shall, upon the date of such
termination (as reasonably fixed and determined by the Company) have an
irrevocable, exclusive option (which option may be assigned by the Company
pursuant to Section 7(b)) (the "Repurchase Option") for a period of 90 days (or
such longer period of time either mutually agreed to by Stockholder and the
Company or determined by the Company in good faith to be necessary to avoid the
loss of "qualified small business stock" treatment under Section 1202 of the
Internal Revenue Code for any stockholder other than Stockholder) from such date
to repurchase some or all of the Unreleased Shares (as defined in Section 2) at
such time at the original price per share paid by Stockholder for the Restricted
Stock (the "Repurchase Price"). In the event Stockholder's employment with the
Company is terminated by the Company other than "for cause," all shares of
Restricted Stock shall be released from the Repurchase Option and the Repurchase
Option shall terminate and be of no further force or effect. Said Repurchase
Option shall be exercised by the Company by written notice to Stockholder or
Stockholder's executor (with a copy to the Escrow Holder, as defined in Section
3) and, at the Company's option, (i) by delivery to Stockholder or Stockholder's
executor with such notice of a check in the amount of the aggregate Repurchase
Price for the Restricted Stock being repurchased, or (ii) by cancellation by the
Company of an amount of any of Stockholder's indebtedness to the Company equal
to the aggregate Repurchase Price for the Restricted Stock being repurchased, or
(iii) by a combination of (i) and (ii) so that the combined payment and
cancellation of indebtedness equals such aggregate Repurchase Price. Upon
1.
<PAGE> 2
delivery of such notice and the payment of the aggregate Repurchase Price in any
of the ways described above, the Company shall become the legal and beneficial
owner of the Restricted Stock being repurchased and all rights and interests
therein or relating thereto, and the Company shall have the right to retain and
transfer to its own name the number of shares of Restricted Stock being
repurchased by the Company.
(b) For the purposes of this Agreement "for cause" shall be
limited to the occurrence of any of the following events: (i) an act of
dishonesty by Stockholder intended to result in gain or personal enrichment of
Stockholder which causes material harm to the reputation of the Company or its
affiliates; (ii) Stockholder personally engaging in illegal conduct which causes
material harm to the reputation of the Company or its affiliates; (iii)
Stockholder being convicted or found liable for a felony, misdemeanor or gross
misdemeanor relating to an act of dishonesty or fraud against, or a
misappropriation of property belonging to, the Company or its affiliates; (iv)
Stockholder's engagement in substance abuse which substantially impairs his
ability to perform the duties and obligations of Stockholder's employment or
causes material harm to the reputation of the Company; (v) Stockholder
personally engaging in any act of moral turpitude that causes material harm to
the reputation of the Company; (vi) Stockholder's commencement of employment
with another employer while he is an employee of the Company without the prior
consent of the Board of Directors; or (vii) Stockholder's incurable material
breach of any element of the Company's Proprietary Information and Inventions
Agreement, including without limitation, Stockholder's theft or other
misappropriation of the Company's proprietary information.
2. RELEASE OF SHARES OF RESTRICTED STOCK FROM REPURCHASE OPTION.
(a) The number of shares of Restricted Stock to be released from
the Company's Repurchase Option, and the timing thereof, is set forth in a
schedule attached hereto as Exhibit B, provided that, as to each incremental
period resulting in the release of shares of Restricted Stock from such
Repurchase Option, Stockholder's employment with the Company has not been
terminated prior to the date of any such release.
(b) Any of the shares of Restricted Stock which have not yet
been released from the Company's Repurchase Option are referred to herein as
"Unreleased Shares."
(c) Shares of Restricted Stock which (i) have been released from
the Company's Repurchase Option, (ii) have been paid for in full and (iii) no
longer secure shares of Restricted Stock not yet paid for in full, shall be
delivered to Stockholder at Stockholder's request.
3. ESCROW OF SHARES. Certificates representing shares of Restricted
Stock shall be held by an escrow holder designated by the Company (the "Escrow
Holder"), along with a stock assignment executed by Stockholder in blank in the
form attached hereto as Exhibit C, pursuant to the terms of the Joint Escrow
Instructions attached hereto as Exhibit D.
4. ADJUSTMENT FOR STOCK SPLIT. All references to numbers of shares and
the Repurchase Price of shares of Restricted Stock in this Agreement shall be
appropriately adjusted
2.
<PAGE> 3
to reflect any stock split, stock dividend or other change in the Restricted
Stock which may be made by the Company after the date of this Agreement.
5. CHANGE-IN-CONTROL. If, from time to time during the term of the
Repurchase Option, there is any consolidation, merger or sale of all or
substantially all of the assets of the Company, then, in such event, any and all
new securities or other property to which Stockholder is entitled by reason of
his ownership of Restricted Stock shall be immediately subject to the Repurchase
Option and be included in the definition of "Restricted Stock" for all purposes
of the Repurchase Option with the same force and effect as the shares of
Restricted Stock subject to the Repurchase Option as of the date hereof. While
the aggregate Repurchase Price shall remain the same after each such event, the
Repurchase Price per share of Restricted Stock shall be appropriately adjusted.
Upon the consolidation, merger or sale of all or substantially all of the assets
of the Company, the Repurchase Option may be assigned to any successor to the
Company, and the Repurchase Option shall then be exercisable if Stockholder does
not become or shall cease for any reason to be employed by such successor (or
its parent or subsidiaries). In such case, the references herein to the
"Company" shall be deemed to refer to such successor.
6. TAX CONSEQUENCES. Stockholder has reviewed with Stockholder's own tax
advisors the federal, state, local and foreign tax consequences of the
transactions contemplated by this Agreement. Stockholder is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents. Stockholder understands that Stockholder (and not the Company)
shall be responsible for Stockholder's own tax liability that may arise as a
result of the transactions contemplated by this Agreement.
7. GENERAL PROVISIONS.
(a) Except for the escrow described in Section 3, no shares of
Restricted Stock or any beneficial interest therein shall be transferred,
encumbered or otherwise disposed of in any manner until the release of such
shares of Restricted Stock from the Company's Repurchase Option in accordance
with the provisions of this Agreement.
(b) The rights and benefits of the Company under this Agreement
shall be transferable to any one or more persons or entities, and all covenants
and agreements hereunder shall inure to the benefit of, and be enforceable by
the Company's successors and assigns. The rights and obligations of Stockholder
under this Agreement may only be assigned with the prior written consent of the
Company.
(c) The Company shall not be required (i) to transfer on its
books any shares of Restricted Stock which shall have been sold or transferred
in violation of any of the provisions set forth in this Agreement or (ii) to
treat as owner of such shares or to accord the right to vote as such owner or to
pay dividends to any transferee to whom such shares shall have been so
transferred.
(d) Subject to the provisions of paragraphs (a) and (c) above,
Stockholder (but not any unapproved transferee) shall, during the term of this
Agreement, exercise all rights and privileges of a stockholder of the Company
with respect to the Restricted Stock.
3.
<PAGE> 4
(e) Any notice, demand or request required or permitted to be
given by either the Company or Stockholder pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. Mail, First Class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end of
this Agreement or such other address as a party may request by notifying the
other in writing.
(f) Either party's failure to enforce any provision or
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights granted
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
(g) Stockholder agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
(h) All certificates representing any shares of Restricted Stock
subject to the provisions of this Agreement shall have endorsed thereon legends
in substantially the following form:
(i) The shares represented by this certificate are
subject to a repurchase option set forth in an agreement between the corporation
and the registered holder, or the registered holder's predecessor in interest, a
copy of which is on file at the principal office of this corporation. Any
transfer or attempted transfer of any shares subject to such repurchase option
is void without the prior express written consent of the issuer of these shares.
(ii) Any other legend required to be placed thereon by
the Company's Bylaws or applicable state, federal or foreign securities laws.
(i) STOCKHOLDER ACKNOWLEDGES AND AGREES THAT THE VESTING OF
SHARES PURSUANT TO SECTION 2 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN
EMPLOYEE AT THE WILL OF THE COMPANY. STOCKHOLDER FURTHER ACKNOWLEDGES AND AGREES
THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING
SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF
CONTINUED ENGAGEMENT AS AN EMPLOYEE FOR THE VESTING PERIOD, FOR ANY PERIOD, OR
AT ALL, AND SHALL NOT INTERFERE WITH STOCKHOLDER'S RIGHT OR THE COMPANY'S RIGHT
TO TERMINATE STOCKHOLDER'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.
(j) Stockholder has reviewed this Agreement in its entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Agreement and fully understands all provisions of this Agreement.
(k) This Agreement and that certain Founders Stock Purchase
Agreement dated March 20, 1998 between the Company and the Stockholder (the
"Founders Stock Purchase Agreement"), including the Exhibits attached hereto and
thereto, constitute the full and entire
4.
<PAGE> 5
understanding and agreement between the Company and Stockholder with regard to
the subject matter hereof and supersede all prior agreements and/or
understandings regarding the same. In the event of any conflict between the
provisions of this Agreement and the Founders Stock Purchase Agreement, the
provisions of this Agreement shall control. This Agreement may not be amended
except with the consent of holders of a majority of shares issued pursuant to
the Preferred Stock Purchase Agreement. Such holders are intended third party
beneficiaries hereof.
(l) This Agreement shall be governed by and construed in
accordance with the laws of the State of California and interpreted and
determined in accordance with the laws of the State of California, as such laws
are applied by California courts to contracts made and to be performed entirely
in California by residents of that State. The parties agree that any action
brought by either party to interpret or enforce any provision of this Agreement
shall be brought in, and each party agrees to, and does hereby, submit to the
jurisdiction and venue of, the appropriate state or federal court for the
district encompassing the Company's principal place of business.
5.
<PAGE> 6
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first set forth above.
MP3.COM, INC. STOCKHOLDER:
By:
------------------------------- ------------------------------------
Name: Robin Richards MICHAEL ROBERTSON
Title: President and Chief
Operating Officer
Address: P.O. Box 910091 Address: 5437 Panoramic Lane
San Diego, CA 92191-0091 San Diego, CA 92121
6.
<PAGE> 7
CONSENT OF SPOUSE
I, _________________________________________, spouse of Michael
Robertson, have read and approve the foregoing Agreement. I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares subject thereto under the
community property laws of the State of California or similar laws relating to
marital property in effect in the state of our residence as of the date of the
signing of the foregoing Agreement.
Dated: _____________, 1999
------------------------------------
<PAGE> 8
EXHIBIT A
RESTRICTED STOCK
<TABLE>
<CAPTION>
NAME NO. OF SHARES OF COMMON STOCK
- ---- -----------------------------
<S> <C>
Michael Robertson 17,452,500
</TABLE>
<PAGE> 9
EXHIBIT B
REPURCHASE OPTION -- RELEASE SCHEDULE
The number of shares of Restricted Stock subject to the Company's Repurchase
Option shall be released in accordance with the following schedule: six million
one hundred eight thousand three hundred seventy-five (6,108,375) shares of
Restricted Stock shall be released as of the date hereof; the remainder of the
shares of Restricted Stock shall be released on a monthly basis on the 21st day
of each month hereafter, commencing on February 21, 1999, at the rate of two
hundred thirty-six thousand three hundred thirty-six (236,336) shares per month,
except for the last release date, on which two hundred thirty-six thousand three
hundred thirty-three (236,333) shares of Restricted Stock shall be released,
such that all of the shares of Restricted Stock shall be released from the
Company's Repurchase Option as of January 21, 2003.
<PAGE> 10
EXHIBIT C
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Michael Robertson hereby sells, assigns and
transfers unto MP3.COM, INC., a Delaware Corporation (the "Company"), pursuant
to the Repurchase Option under that certain Stock Restriction Agreement dated
January __, 1999 by and between the undersigned and the Company (the
"Agreement"), ____________________ (______) shares of the Company's Common Stock
standing in the undersigned's name on the books of the Company represented by
Certificate No. __________ and does hereby irrevocably constitute and appoint
the Secretary of the Company attorney to transfer said stock on the books of the
Company with full power of substitution in the premises. This Assignment may be
used only in accordance with and subject to the terms and conditions of the
Agreement, in connection with the repurchase of shares of Common Stock pursuant
to the Agreement, and only to the extent that such shares remain subject to the
Company's Repurchase Option under the Agreement.
Dated:
--------------------
------------------------------------
MICHAEL ROBERTSON
<PAGE> 11
EXHIBIT D
JOINT ESCROW INSTRUCTIONS
Assistant Secretary
MP3.com, Inc.
P.O. Box 910091
San Diego, CA 92191-0091
Dear Sir:
As Escrow Agent for both MP3.com, Inc., a Delaware corporation (the
"Company"), and the undersigned holder of stock of the Company ("Stockholder"),
you are hereby authorized and directed to hold the documents delivered to you
pursuant to the terms of that certain Stock Restriction Agreement ("Agreement"),
dated January 21, 1999, to which a copy of these Joint Escrow Instructions is
attached as Exhibit D, in accordance with the following instructions:
1. In the event the Company or an assignee shall elect to exercise the
Repurchase Option set forth in the Agreement, the Company or its assignee will
give to Stockholder and you a written notice specifying the number of shares of
stock to be repurchased, the Repurchase Price, and the time for a closing
hereunder at the principal office of the Company. Stockholder and the Company
hereby irrevocably authorize and direct you to close the transaction
contemplated by such notice in accordance with the terms of said notice.
2. At the closing of the exercise of the Repurchase Option you are
directed (a) to date any stock assignments necessary for the transfer in
question, (b) to fill in the number of shares being transferred, and (c) to
deliver same, together with the certificate evidencing the shares of stock to be
transferred, to the Company against the simultaneous delivery to you of the
Repurchase Price (which may include suitable acknowledgment of cancellation of
indebtedness) of the number of shares of stock being purchased pursuant to the
exercise of the Repurchase Option.
3. Stockholder irrevocably authorizes the Company to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as specified in the Agreement.
Stockholder does hereby irrevocably constitute and appoint you as his
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities and other property all documents of assignment and/or
transfer and all stock certificates necessary or appropriate to make all
securities negotiable and complete any transaction herein contemplated.
4. This escrow shall terminate upon expiration or exercise in full of
the Repurchase Option, whichever occurs first.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to
Stockholder, you shall deliver all of same to
<PAGE> 12
Stockholder and shall be discharged of all further obligations hereunder;
provided, however, that if at the time of termination of this escrow you are
advised by the Company that the property subject to this escrow is the subject
of a pledge or other security agreement, you shall deliver all such property to
the pledgeholder or other person designated by the Company.
6. Except as otherwise provided in these Joint Escrow Instructions, your
duties hereunder may be altered, amended, modified or revoked only by a writing
signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties or
their assignees. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact for Stockholder
while acting in good faith and any act done or omitted by you pursuant to the
advice of your own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel (including
without limitation the firm of Cooley Godward LLP) and other experts as you may
deem necessary properly to advise you in connection with your obligations
hereunder, may rely upon the advice of such counsel, and may pay such counsel
reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be Assistant Secretary of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company may appoint any officer or assistant officer of the Company as successor
Escrow Agent and Stockholder hereby confirms the appointment of such successor
or successors as his attorney-in-fact and agent to the full extent of your
appointment.
<PAGE> 13
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities, you may (but are not obligated to) retain in your possession without
liability to anyone all or any part of said securities until such dispute shall
have been settled either by mutual written agreement of the parties concerned or
by a final order, decree or judgment of a court of competent jurisdiction after
the time for appeal has expired and no appeal has been perfected, but you shall
be under no duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
any United States Post Box, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties hereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' written notice to each of the other parties hereto:
COMPANY: MP3.COM, INC.
P.O. Box 910091
San Diego, CA 92191-0091
STOCKHOLDER: MICHAEL ROBERTSON
5437 Panoramic Lane
San Diego, CA 92121
ASSISTANT SECRETARY: Assistant Secretary
MP3.COM, INC.
P.O. Box 910091
San Diego, CA 92191-0091
16. By signing these Joint Escrow Instructions you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
<PAGE> 14
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns. It is
understood and agreed that references to "you" or "your" herein refer to the
original Escrow Agent and to any and all successor Escrow Agents. It is
understood and agreed that the Company may at any time or from time to time
assign its rights under the Agreement and these Joint Escrow Instructions in
whole or in part.
Very truly yours,
MP3.COM, INC.
By
---------------------------------
Robin Richards
STOCKHOLDER:
------------------------------------
Michael Robertson
ESCROW AGENT:
- ---------------------------------
Assistant Secretary,
MP3.COM, INC.
<PAGE> 1
EXHIBIT 10.14
MP3.COM MUSIC SUBMISSION AGREEMENT
<PAGE> 2
This agreement describes the legal relationship between you (an individual
artist, or, in the case where you are involved with a band, an individual
acting as the legal representative of your band) and Zco, Inc. (a corporation
doing business as MP3.com, and referred to in this agreement as "we" or "us"].
Please read it very carefully. BY CLICKING ON THE "I AGREE" BUTTON BELOW, YOU
INDICATE THAT YOU AGREE TO BE BOUND BY ALL OF THE TERMS AND CONDITIONS OF THIS
AGREEMENT. FURTHER, BY SUBMITTING ANY MUSIC OR OTHER CONTENT TO US, YOU
INDICATE THAT YOU AGREE TO BE BOUND BY THIS AGREEMENT.
This agreement addresses two different types of situations. The first situation
is our "Standard Program," where you supply songs and/or other content to us
and allow us to include your material in our database which we make freely
available over the Web, and allow us to make certain other uses of your
material. The second situation is our Digital Automatic Music ["DAM"] System,
under which you supply us with at least one song which we can make freely
available, and a number of other songs which we can distribute on your behalf
on compact disk. The legal terms which apply to the Standard Program are
described below in Part I. The legal terms which apply to the DAM System are
described in Part II. One or the other of these parts may not apply to you.
Legal terms applicable to both situations, INCLUDING YOUR RIGHT TO TERMINATE
THIS AGREEMENT AND ALL LICENSES GRANTED TO US AT ANY TIME, are described in
Part III.
PART I: STANDARD PROGRAM
If you provide us with sound recordings, musical works and/or other material
(such as pictures, videos, song lyrics, etc.) for use as part of our Standard
Program (collectively "Standard Program Material"], the following terms apply:
1. STANDARD PROGRAM LICENSE GRANT. You hereby grant to us, and by the act of
delivering Standard Program Material to us grant to us, a nonexclusive,
worldwide, royalty-free license to: (a) reproduce, distribute, publicly perform,
publicly display and digitally perform the Standard Program Material in whole or
in part (including the right to create compilations which include your songs);
(b) create and use samples of the Standard Program Material solely for the
purpose of demonstrating or promoting our or your products or services; (c) use
any trademarks, service marks or trade names incorporated in the Standard
Program Material in connection with your material; and (d) use the name and
likeness of any individuals represented in the Standard Program Material only in
connection with your material.
PART II: DAM SYSTEM
If you provide us with sound recordings, musical works and/or material (such as
pictures, videos, song lyrics, etc.) for use as part of our DAM System, the
following terms apply:
1. LICENSE GRANT FOR SAMPLE SONG(S) AND COLLATERAL MATERIAL. As part of your
participation in the DAM System you will deliver one or more songs to us which
we can make widely available as samples of your work ["Sample Songs."] You may
also deliver other materials related to you or any of your songs ["Collateral
Material"]. You hereby grant to us, and by the act of delivering Sample Songs
and Collateral Material
<PAGE> 3
to us grant to us, a nonexclusive, worldwide, royalty-free license to: (a)
reproduce, distribute, publicly perform, publicly display and digitally perform
the Sample Songs and the Collateral Material in whole or in part (including the
right to create compilations which include the Sample Songs and related
Collateral Material); (b) create and use samples of the Sample Songs and
Collateral Material solely for the purpose of demonstrating or promoting our or
your products or services; (c) convert your songs from MP3 format to redbook
format in order to distribute them on a DAM CD; (d) use any trademarks, service
marks or trade names incorporated in the Sample Songs and/or the Collateral
Material only in connection with your material; and (e) use the name and
likeness of any individuals represented in the Sample Songs and/or the
Collateral Material only in connection with your material.
2. LICENSE GRANT FOR DAM SONGS. As part of your participation in the DAM
System you will deliver several songs to us which we can only make available on
CDs as part of the DAM System ["DAM Songs"]. You hereby grant to us, and by the
act of delivering DAM Songs to us grant to us, a nonexclusive, worldwide
license to: (a) reproduce and distribute each DAM Song only in connection with
distributing CDs containing your songs as part of our DAM System; (b) convert
your songs from MP3 format to redbook format in order to distribute them on a
DAM CD; and (c) use any trademarks, service marks or trade names incorporated
in the DAM Songs only in connection with your material.
3. PAYMENTS. You will set the price of the CDs which contain your DAM Songs.
We will pay you 50% of the Net Revenue we receive from sales of such CDs. "Net
Revenue" means the gross revenues we actually receive from such sales, less
only sales, use, value added, or similar taxes, customs duties, import or export
taxes of levies, shipping or freight, and all returns. We will determine the
amount owed to you on a quarterly basis. Within 60 days of the close of each
quarter in which we have sold any CDs containing your DAM Songs, we will send
you a detailed accounting statement and a check payable in U.S. Dollars in the
appropriate amount, except if the amount we owe you is less than $50.00 then we
will hold the money until either (i) the total cumulative amount we owe you at
the end of any particular quarter is greater than $50.00, or (ii) this
agreement terminates. We agree to keep accurate books and records covering all
transactions related to this agreement. During the one year period following
your receipt of an accounting statement you may, at your expense and upon
reasonable notice, inspect our records related to that statement at our offices
or at a location specified by us, provided that your inspection must not
unreasonably interfere with our business. If your inspection reveals that we
have underpaid you we will promptly correct the deficiency, plus 10% interest.
PART III: GENERAL TERMS
The following terms apply to both the Standard Program and to the DAM System:
1. OWNERSHIP. You retain ownership of the copyrights and all other rights in
your songs, subject to the non-exclusive rights granted to us under this
agreement. You are free to grant similar rights to others during and after the
term of this agreement.
2. TERMINATION. You may terminate this agreement at any time by so notifying
<PAGE> 4
us; the agreement will terminate upon our actual receipt of such notice. We may
terminate this agreement at any time by so notifying you; the agreement will
terminate upon your actual receipt of such notice or three days after we have
sent a notice of termination to the e-mail address which you supply us below.
Upon termination, all of our license rights terminate, except that we retain
those rights necessary for us to sell any CDs or other tangible goods which we
have produced prior to the date of termination which incorporate any of your
Material (as defined in section 3 below). Our obligation to pay you amounts due
to you under this agreement survives termination. Also, sections 3 and 6 below
survive termination.
3. REPRESENTATIONS AND WARRANTIES. The term "Material" means all material that
you submit to us, including Standard Program Material, Sample Songs, DAM Songs
and Collateral Material, as applicable. You represent and warrant that (a) the
Material is your or your band's own original work, and contains no sampled
material, (b) you have full right and power to enter into and perform this
agreement, and have secured all third party consents necessary to enter into
this agreement, (c) the Material does not and will not infringe on any third
party's copyright, patent, trademark, trade secret or other proprietary rights,
rights of publicity or privacy, or moral rights (d) the Material does not and
will not violate any law, statute, ordinance or regulation; (e) the Material is
not and will not be defamatory, trade libelous, pornographic or obscene, (f) the
Material does not and will not contain any viruses or other programming routines
that detrimentally interfere with computer systems or data, (g) all factual
assertions that you have made and will make to us are true and complete. You
agree to indemnify and hold us and our customers harmless from any and all
damages and costs, including reasonable attorney's fees, arising out of or
related to your breach of the representations and warranties described in this
section. You agree to execute and deliver documents to us, upon our reasonable
request, that evidence or effectuate our rights under this agreement.
4. DETERMINING TYPE OF CONTENT. We will implement and maintain business
practices which enable us to accurately categorize content that you deliver to
us. If we make an error in good faith, however (for example, if we erroneously
categorize a song that you send to us as a "Sample Song" when in fact you
intended it to be a "DAM Song") and consequently exceed our license rights, your
sole and exclusive remedy will be for us to take all reasonable steps to
promptly correct the error as soon as we become aware of the error.
5. DISCLAIMER. We provide our products and services related to this agreement
"AS IS" without warranty of any kind.
6. WAIVER OF CERTAIN DAMAGES. EXCEPT FOR A BREACH OF SECTION 3 OF PART III,
NEITHER YOU OR US WILL BE LIABLE FOR ANY CONSEQUENTIAL, INDIRECT, EXEMPLARY,
SPECIAL OR INCIDENTAL DAMAGES ARISING FROM OR RELATING TO THIS AGREEMENT.
7. MISCELLANEOUS. This agreement will be governed by California law, excluding
conflict of law principles. Any action or proceeding arising out of or related
to this agreement must be brought in a state or Federal court located in San
Diego County, California, and we both irrevocably submit to the exclusive
jurisdiction of such courts. All notices, requests and other communications
under this agreement must be
<PAGE> 5
in writing (e-mail messages shall be deemed writings). This agreement sets forth
the entire understanding and agreement of the parties as to this agreement's
subject matter and supersedes all prior proposals, discussions or agreements
with respect to such subject matter. It may be changed only by a writing signed
by both parties (e-mail headers and/or plaintext signatures on e-mail messages
shall be deemed signatures).
The address and phone info below will not be given out to anyone. It's only for
our internal records.
I AM OVER 18 YEARS OF AGE: [ ] NO [ ] YES
I AM ACTING ON BEHALF OF THE FOLLOWING BAND (IF APPLICABLE):
______________________________________
MY NAME: _____________________________
ADDRESS: _____________________________
PHONE: _____________________________
E-MAIL: _____________________________
I HAVE READ AND AGREE TO BE BOUND BY THE MP3.COM MUSIC
SUBMISSION AGREEMENT:
[ ] I AGREE [ ] I DON'T AGREE
- -------------------------------
Continue to step 2
- -------------------------------
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<PAGE> 1
EXHIBIT 10.15
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is made and entered into as of this
19th day of April, 1999, by and between MP3.COM, INC. ("Company") and
ATLAS/THIRD RAIL MANAGEMENT, INC. ("Consultant").
1. Services.
Consultant shall render services as a promotional consultant to Company
consisting of Consultant's using reasonable efforts to facilitate multiple
promotions each involving one or more artists to be mutually approved by
Consultant and Company. Each promotion may consist of one free download or
on-demand streaming for a limited period of time of a sound recording of a song
by the artist(s) from the Company's website and a related promotional event to
be mutually approved by Consultant, Company and the artist(s) (the
"Promotion"). Consultant and Company mutually approved Alanis Morissette to
participate in a Promotion and currently expect that she will be involved in
the first Promotion contemplated under this Agreement. Consultant and Company
currently anticipate that the Promotion involving Alanis Morissette will
coincide with her Summer of 1999 tour and will include tour sponsorship,
tickets, merchandise giveaways, a retail partner and on-line tour events (e.g.,
live tracks, interview and reviews). Consultant will use reasonable efforts
1
<PAGE> 2
to assist in providing for the multiple promotions and other promotional
activities, but does not guarantee, represent or warrant that any or all of
them will be provided.
2. Term.
This Agreement shall be for a period of three (3) years from the date of
this Agreement, unless earlier terminated as provided in paragraph 6 below.
3. Common Stock Warrant.
Concurrently with the release of the press announcement of this Agreement
pursuant to paragraph 4 below, Company shall issue to Consultant a Warrant to
Purchase 439,103 shares of Common Stock of MP3.COM, Inc. ("Warrant")
substantially in the form attached hereto.
4. Press Announcements.
Consultant and Company will jointly approve press announcement(s) of this
Agreement and any Promotion(s) under this Agreement, and the artist(s) involved
in a Promotion will also have the right to approve press announcement(s)
insofar as they relate to them.
<PAGE> 3
5. Expenses.
Company shall reimburse Consultant for all expenses reasonably
incurred by Consultant in the performance of the services under this Agreement,
including, without limitation, travel and related expenses; provided, however,
that prior to incurring expenses reasonably foreseen to exceed $500.00,
Consultant shall seek pre-approval by Company of any such expenses.
6. Termination.
Consultant, in its sole discretion,may terminate this Agreement if
Company exercises its "Right of Repurchase" pursuant to paragraph 8 of the
Warrant. In addition, Consultant, in its sole discretion, may terminate this
Agreement if within one year of the date of this Agreement Company has not
either (i) completed its initial public offering; or (ii) been acquired by a
company with a pre-acquisition market capitalization of at least $500 million
in a transaction that values the market capitalization of the Company at a
minimum of $300 million. Notwithstanding any termination of this Agreement by
Consultant as provided herein, Consultant shall be entitled to the Warrant as
provided in this Agreement and subject to the terms and conditions of the
Warrant.
3
<PAGE> 4
7. Non-Exclusivity and Registrations.
Consultant and Company acknowledge and agree that the services
provided by Consultant are non-exclusive and that Consultant may also act as a
consultant, whether promotional or otherwise, for other companies and
individuals; provided, however, that, except as provided below, Consultant shall
not, during the Term of this Agreement, consult with or provide consulting
services to another company engaged in the business of digital distribution
of music over the internet or other electronic medium. Consultant and Company
acknowledge and agree that nothing in this Agreement shall prevent Consultant
from engaging in any of the following even if it involves consulting or other
services rendered by Consultant relating to the digital distribution of music
over an electronic medium: (i) representing, managing or consulting with
individual artists or performers who are managed by Consultant or representing,
managing or consulting with companies owned and/or controlled by such artists
or performers notwithstanding that such artists, performers or companies are
engaged in the business of digital distribution of music over an electronic
medium; (ii) representing, managing or consulting with individual artists or
performers or representing, managing or consulting with individuals or
companies who do business with a company engaged in the business of digital
distribution of music over an electronic medium; and/or (iii) owning, managing,
operating,
4
<PAGE> 5
controlling, participating in or being affiliated with a company primarily
engaged in the business of producing, broadcasting, promoting, marketing,
selling, distributing, exhibiting or otherwise exploiting phonorecords, motion
pictures, soundtracks or television programming or services, including free,
basic cable, pay television, pay-per-view, satellite and other methods of
distribution of television programming or services now known or hereafter
developed, even if such business includes digital distribution of music over an
electronic medium (including, without limitation, the co-venture between
consultant's affiliate and Hollywood Records). In addition, Consultant and
Company acknowledge and agree that nothing in this Agreement shall prevent
Consultant from representing, managing or consulting with individuals or
companies primarily engaged in a business other than digital distribution of
music over an electronic medium, even if their business may include such
distribution of music, so long as the services rendered relate to business
activities other than digital distribution of music over an electronic medium.
8. Personnel.
Company agrees to employ or hire as additional consultants Mitch
Schneider and Lisa Hendricks pursuant to terms to be negotiated in good faith
for the purpose of helping to formulate and carry out the artist promotions
referred to in paragraph 1 above and the press releases referred to in paragraph
5
<PAGE> 6
4 above.
9. Miscellaneous.
Company and Consultant acknowledge and agree that they intend to
enter into a more detailed agreement consistent with the terms hereof, the
language of which shall be negotiated diligently and in good faith by the
parties hereto. This Agreement shall be binding and effective until such time
as a more formal agreement is executed by the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives and to be effective as of the
date first written above.
MP3.COM, INC. ATLAS/THIRD RAIL MANAGEMENT, INC.
By: /s/ ROBIN D. RICHARDS By: /s/ CHARLES V. ROVEN
----------------------------- ----------------------------
Name: Robin D. Richards Name: Charles V. Roven
--------------------------- --------------------------
Title: President Title: President
-------------------------- -------------------------
6
<PAGE> 1
EXHIBIT 10.16
NO. CW-8
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE 79,038 SHARES
OF COMMON STOCK OF
MP3.COM, INC.
(VOID AFTER APRIL 26, 2002)
This certifies that Atlas/Third Rail Management, Inc. or its assigns
(the "Holder"), for value received, is entitled to purchase from MP3.COM, INC.,
a Delaware corporation (the "Company"), having a place of business at 10350
Science Center Drive, Building No. 14, San Diego, California 92121, a maximum of
79,038 fully paid and nonassessable shares of the Company's Common Stock
("Common Stock") for cash at a price of Fifty Cents ($0.50) per share (the
"Stock Purchase Price") at any time or from time to time up to and including the
earlier of (the first to occur of such events being the "Expiration Date") (i)
5:00 p.m. (Pacific time) on April 26, 2002, (ii) the closing of the initial
public offering of the Common Stock of the Company (the "Initial Public
Offering") pursuant to a registration statement under the Securities Act of
1933, as amended (the "1933 Act"), (iii) the effective time of a consolidation
or merger of the Company with or into any other corporation or other entity or
person in which the stockholders of the Company immediately prior to such
consolidation or merger own less than 50% of the voting power of the surviving
corporation (or its parent, if any) immediately after such consolidation or
merger, excluding any consolidation or merger effected exclusively to change the
domicile of the Company, (iv) the closing of a sale of all or substantially all
of the Company's assets, or (v) the date of termination of this Warrant under
Section 8 hereof; provided that, if the last day on which this Warrant may be
exercised is a Sunday or a legal holiday or a day on which banking institutions
doing business in the City of San Diego are authorized by law to close, this
Warrant may be exercised prior to 5:00 p.m. (Pacific time) on the next
succeeding full business day with the same force and effect as if exercised on
such last day specified herein. This Warrant may be exercised by surrender to
the Company at its principal office (or at such other location as the Company
may advise the Holder in writing) prior to the Expiration Date of this Warrant
properly endorsed with the Form of Subscription attached hereto duly filled in
and signed and, if applicable, upon payment in cash or by check of the aggregate
Stock Purchase Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof. The Company shall
deliver notice of the transactions described in (ii), (iii) and (iv) above to
the Holder at least 10 days prior to the closing thereof. The Stock Purchase
Price and the number of shares purchasable hereunder are subject to adjustment
as provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
<PAGE> 2
1.1 GENERAL. This Warrant is exercisable at the option of the holder of
record hereof, at any time or from time to time, up to the Expiration Date for
all or any part of the shares of Common Stock (but not for a fraction of a
share) which may be purchased hereunder. The Company agrees that the shares of
Common Stock purchased under this Warrant shall be and are deemed to be issued
to the Holder hereof as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been surrendered, properly
endorsed, the completed, executed Form of Subscription delivered and payment
made for such shares. Certificates for the shares of Common Stock so purchased,
together with any other securities or property to which the Holder hereof is
entitled upon such exercise, shall be delivered to the Holder hereof by the
Company at the Company's expense within a reasonable time after the rights
represented by this Warrant have been so exercised. In case of a purchase of
less than all the shares which may be purchased under this Warrant, the Company
shall cancel this Warrant and execute and deliver a new Warrant or Warrants of
like tenor for the balance of the shares purchasable under the Warrant
surrendered upon such purchase to the Holder hereof within a reasonable time.
Each stock certificate so delivered shall be in such denominations of Common
Stock as may be requested by the Holder hereof and shall be registered in the
name of such Holder.
1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Company's Common Stock is
greater than the Stock Purchase Price (at the date of calculation as set forth
below), in lieu of exercising this Warrant for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with the properly endorsed Form of Subscription
and notice of such election in which event the Company shall issue to the Holder
a number of shares of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being canceled
(at the date of such calculation)
A = the fair market value of one share of the
Company's Common Stock (at the date of such
calculation)
B = Stock Purchase Price (as adjusted to the
date of such calculation)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be determined by the Company's Board of Directors in good faith;
provided, however, that in the event the Holder exercises this Warrant effective
upon the closing of the Initial Public Offering,
2.
<PAGE> 3
the fair market value per share shall be the per share offering price to the
public in the Initial Public Offering.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that all shares of Common Stock which may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable and free from all preemptive rights
of any stockholder and free of all taxes, liens and charges with respect to the
issue thereof. The Company further covenants and agrees that, during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved, for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of authorized but unissued Common Stock, or other
securities and property, when and as required to provide for the exercise of the
rights represented by this Warrant. The Company will take all such action as may
be necessary to assure that such shares of Common Stock may be issued as
provided herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Common Stock may
be listed; provided, however, that the Company shall not be required to effect a
registration under Federal or State securities laws with respect to such
exercise. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (as set forth in Section 3 hereof) if the
total number of shares of Common Stock issuable after such action upon exercise
of all outstanding warrants, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise of all
options and upon the conversion of all convertible securities then outstanding,
would exceed the total number of shares of Common Stock then authorized by the
Company's Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock Purchase
Price and the number of shares purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the occurrence of certain
events described in this Section 3. Upon each adjustment of the Stock Purchase
Price, the Holder of this Warrant shall thereafter be entitled to purchase, at
the Stock Purchase Price resulting from such adjustment, the number of shares
obtained by multiplying the Stock Purchase Price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto immediately
prior to such adjustment, and dividing the product thereof by the Stock Purchase
Price resulting from such adjustment.
3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at
any time subdivide its outstanding shares of Common Stock into a greater number
of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY, RECLASSIFICATION.
If at any time or from time to time the Holders of Common Stock (or any shares
of stock or other securities at the time receivable upon the exercise of this
Warrant) shall have received or become entitled to receive, without payment
therefor,
3.
<PAGE> 4
(a) Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,
or
(b) Common Stock or additional stock or other securities by way
of spinoff, split-up, reclassification, combination of shares or similar
corporate rearrangement, (other than shares of Common Stock issued as a stock
split or adjustments in respect of which shall be covered by the terms of
Section 3.1 above), then and in each such case, the Holder hereof shall, upon
the exercise of this Warrant, be entitled to receive, in addition to the number
of shares of Common Stock receivable thereupon, and without payment of any
additional consideration therefor, the amount of stock and other securities
which such Holder would hold on the date of such exercise had he been the holder
of record of such Common Stock as of the date on which holders of Common Stock
received or became entitled to receive such shares or all other additional stock
and other securities.
3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If
any recapitalization, reclassification or reorganization of the capital stock of
the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (a
"Transaction"), then, as a condition of such Transaction, lawful and adequate
provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the value of the stock, securities or other assets or
property (determined in good faith by the Board of Directors of the Company)
issuable or payable with respect to one share of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to consummation of such Transaction. In the event of any
Transaction, appropriate provision shall be made by the Company 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 Stock Purchase Price and of the number of shares purchasable and receivable
upon the exercise of this Warrant) shall thereafter be applicable, in relation
to any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof.
3.4 NOTICES OF CHANGE.
(a) As soon as practicable following any adjustment in the
number or class of shares subject to this Warrant and of the Stock Purchase
Price, the Company shall give written
4.
<PAGE> 5
notice thereof to the Holder, setting forth in reasonable detail and certifying
the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at least
10 days prior to the date on which the Company closes its books or takes a
record for determining rights to receive any dividends or distributions.
(c) The Company shall also give written notice to the Holder at
least 10 days prior to the date on which a Transaction shall take place.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock upon the
exercise of the Warrant shall be made without charge to the Holder of the
Warrant for any issue tax (other than any applicable income taxes) in respect
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the then Holder of the
Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer books
against the transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in
this Warrant shall be construed as conferring upon the Holder hereof the right
to vote or to consent or to receive notice as a stockholder of the Company or
any other matters or any rights whatsoever as a stockholder of the Company. No
dividends or interest shall be payable or accrued in respect of this Warrant or
the interest represented hereby or the shares purchasable hereunder until, and
only to the extent that and from and after the date that this Warrant shall have
been exercised. No provisions hereof, in the absence of affirmative action by
the holder to purchase shares of Common Stock, and no mere enumeration herein of
the rights or privileges of the holder hereof, shall give rise to any liability
of such Holder for the Stock Purchase Price or as a stockholder of the Company,
whether such liability is asserted by the Company or by its creditors.
7. REPRESENTATIONS AND WARRANTIES OF THE HOLDER
7.1 PURCHASE FOR OWN ACCOUNT. Holder represents that it is acquiring
this Warrant and the Common Stock issuable upon exercise of this Warrant
(collectively, the "Securities") solely for its own account and beneficial
interest for investment and not for sale or with a view to distribution of the
Securities or any part thereof, has no present intention of selling (in
connection with a distribution or otherwise), granting any participation in, or
otherwise distributing the same, and does not presently have reason to
anticipate a change in such intention.
7.2 INFORMATION AND SOPHISTICATION. Holder acknowledges that it has
received all the information it has requested from the Company and considers
necessary or appropriate for deciding whether to acquire this Warrant. Holder
represents that it has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the offering of this
Warrant and to obtain any additional information necessary to verify the
accuracy
5.
<PAGE> 6
of the information given the Holder. Holder further represents that it has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risk of this investment.
7.3 ABILITY TO BEAR ECONOMIC RISK. Holder acknowledges that investment
in this Warrant involves a high degree of risk, and represents that it is able,
without materially impairing its financial condition, to hold the Securities for
an indefinite period of time and to suffer a complete loss of its investment.
7.4 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the
representations set forth above, Holder further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(a) There is then in effect a Registration Statement under the
1933 Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration under the 1933 Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by Holder to a stockholder or partner (or retired partner) of
such Holder, or transfers by gift, will or intestate succession to any spouse or
lineal descendants or ancestors, if all transferees agree in writing to be
subject to the terms hereof to the same extent as if they were a Holder
hereunder.
7.5 EXPERIENCE. Holder is an "accredited investor" as such term is
defined in Rule 501 under the 1933 Act.
7.6 LEGENDS. It is understood that the certificates evidencing the
Common Stock issuable upon exercise hereof (and the Common Stock issuable upon
conversion thereof) may bear one or all of the following legends:
(a)THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED.
(b) Any legend imposed by the Company's Bylaws or applicable
state securities laws.
6.
<PAGE> 7
8. RIGHT OF REPURCHASE. The Company no longer maintains a Right of Repurchase
pursuant to Section 8 of this Warrant or any predecessor Warrant.
9. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal and
state securities laws, this Warrant and all rights hereunder are transferable,
in whole or in part, without charge to the holder hereof (except for transfer
taxes), upon surrender of this Warrant properly endorsed along with a completed
warrant assignment in the form attached hereto as Exhibit B; provided, however,
that this Warrant and any rights hereunder may not be transferred at any time to
any person or entity engaged, directly or indirectly, in the business of digital
distribution of music over the Internet or in any other electronic medium, where
such business generates greater than $1 million per year in revenues. 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 that
the holder hereof, when this Warrant shall have been so endorsed, may be treated
by the Company, at the Company's option, and all other persons dealing with this
Warrant as the absolute owner hereof for any purpose and as the person entitled
to exercise the rights represented by this Warrant, or to the transfer hereof on
the books of the Company any notice to the contrary notwithstanding; but until
such transfer on such books, the Company may treat the registered owner hereof
as the owner for all purposes.
10. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant referred to in
Sections 7, 8 and 17 shall survive the exercise of this Warrant.
11. 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.
12. NOTICES. Except as otherwise provided in this Warrant, any requirement for a
notice, demand or request under this Warrant will be satisfied by a writing (a)
hand delivered with receipt; (b) mailed by United States registered or certified
mail or Express Mail, return receipt requested, postage prepaid; or (c) sent by
Federal Express or any other nationally recognized overnight courier service,
and addressed as follows: if to the Holder, at its address as shown on the books
of the Company; and if to the Company, at the address indicated therefor in the
first paragraph of this Warrant, Attn: Chief Financial Officer, with a copy to
Frederick T. Muto, Esq., Cooley Godward LLP, 4365 Executive Drive, Suite 1100,
San Diego, California 92121-2128. All notices that are sent in accordance with
this Section 12 will be deemed received by the Holder or the Company on the
earliest of the following applicable time periods: (i) the date the return
receipt is executed; or (ii) the date delivered as documented by the overnight
courier service or the hand delivery receipt. Either the Holder or the Company
may designate a change of address by written notice to the other party.
13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
(and the Common Stock issuable upon conversion thereof)
7.
<PAGE> 8
shall survive the exercise and termination of this Warrant. All of the covenants
and agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.
14. 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.
15. LOST WARRANTS. The Company represents and warrants to the Holder hereof that
upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant, the Company, at its expense, will make and deliver
a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Warrant.
16. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of
this Warrant. The Company 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 effective Stock Purchase Price.
17. MARKET STANDOFF. If requested by the Company or the representative of the
underwriters of Common Stock (or other securities) of the Company, Holder shall
not sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Holder (other than those included in the
registration, if any) for a period specified by the representative of the
underwriters not to exceed one hundred eighty (180) days following the effective
date of a registration statement of the Company filed under the 1933 Act
pertaining to the Company's Initial Public Offering. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
18. CONFIDENTIALITY. In handling any confidential information of the Company,
Holder shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same type to maintain the confidentiality
of any nonpublic information thereby received or received pursuant to this
Warrant except that disclosure of such information may be made (a) to the
subsidiaries or affiliates of Holder in connection with their present or
prospective business relations with the Company, (b) to prospective permitted
transferees or purchasers of any interest in this Warrant, provided that they
have entered into a comparable confidentiality agreement in favor of the
Company, or (c) as may be required in connection with the examination, audit or
similar investigation of Holder. Confidential information shall not include
information that either (i) is in the public domain through no fault of Holder
or in the knowledge or possession of Holder when disclosed to Holder, or (ii) is
disclosed to Holder by a third party, provided that Holder does not have actual
knowledge that such third party is prohibited from disclosing such information.
8.
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this 30th day of April,
1999.
COMPANY:
MP3.COM, INC.,
a Delaware corporation
By: /s/ ROBIN RICHARDS
---------------------------------
Name: Robin Richards
-------------------------------
Its: President
--------------------------------
HOLDER:
ATLAS/THIRD RAIL MANAGEMENT, INC.
a California corporation
By: /s/ CHARLES ROVEN
---------------------------------
Name: Charles Roven
-------------------------------
Its: President
--------------------------------
9.
<PAGE> 10
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________
MP3.COM, INC.
10350 Science Center Drive
Building No. 14
San Diego, CA 92121
Attn: President
Ladies and Gentlemen:
[ ] The undersigned hereby elects to exercise the warrant issued to it by
MP3.COM, INC. (the "Company") and dated ______________, 1999 (the
"Warrant") and to purchase thereunder _______________ shares of the
Common Stock of the Company at a purchase price of Fifty Cents ($0.50)
per share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "Purchase
Price").
[ ] The undersigned hereby elects to convert _______________________ percent
(____%) of the value of the Warrant pursuant to the provisions of
Section 1.2 of the Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
The undersigned also confirms the representations set forth in Sections 7, 8 and
17 of the Warrant.
Very truly yours,
------------------------------------
By:
---------------------------------
Name:
-------------------------------
<PAGE> 11
EXHIBIT B
WARRANT ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all of
the rights of the undersigned in that number of shares specified below of that
certain Warrant or Warrants identified below to purchase that number of shares
of Common Stock of MP3.COM, INC., a Delaware corporation, specified below and
does hereby irrevocably constitute and appoint ______________________ as its
Attorney to transfer said shares on the books of said corporation with full
power of substitution in the premises.
Dated: ___________, _____
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
WARRANT UNDERLYING WARRANT NUMBER OF WARRANT
SERIAL NO. (THE "WARRANT SHARES") SHARES TRANSFERRED NAME OF TRANSFEREE
---------- ---------------------- ------------------ ------------------
<S> <C> <C> <C>
</TABLE>
------------------------------------
(Print Name of Warrant Holder)
------------------------------------
(Authorized Signature)
------------------------------------
(Title, if applicable)
<PAGE> 1
EXHIBIT 10.20
MP3.COM, INC.
P.O. Box 910091
San Diego, CA 92191
April 30, 1999
Delon Dotson
c/o MP3.com, Inc.
P.O. Box 910091
San Diego, CA 92191
RE: EMPLOYMENT TERMS
Dear Delon:
MP3.com, Inc., a Delaware corporation, (the "Company") is pleased to offer you a
full-time position as an employee of the Company, on the following terms.
You will be responsible for such duties as are determined by the Chief Executive
Officer of the Company. You will report to Michael Robertson, the Chief
Executive Officer of the Company. You will work at our facility located in San
Diego. Of course, the Company may change your position, duties, and work
location from time to time as it deems necessary.
Your compensation will be $11,666.67 per month, less payroll deductions and all
required withholdings. You will be paid bi-weekly and you will be eligible for
standard benefits, such as medical insurance, sick leave, vacations and
holidays, according to standard Company policy as may be adopted by the Company
from time to time. Details about these benefits will be provided in an Employee
Handbook and in Summary Plan Descriptions, which will be prepared by the Company
and made available for your review in due course. The Company may modify your
compensation and benefits from time to time as it deems necessary.
Upon commencement of employment with the Company pursuant to this letter (the
"Commencement Date"), and subject to the approval of the Company's Board of
Directors, you will be granted an Incentive Stock Option to purchase 50,000
shares of the Common Stock of the Company under the Company's 1998 Equity
Incentive Plan (the "Plan"). The exercise price per share of the Incentive Stock
Option will be at the then current fair market value of the Company's Common
Stock, as determined by the Company's Board of Directors in good faith.
The shares of Common Stock subject to your Incentive Stock Option will be
subject to vesting over four years so long as you continue to be employed by the
Company.
<PAGE> 2
Delon Dotson
April 30, 1999
Page 2
according to the following schedule: 25% of such shares will vest as of the one
year anniversary of the Commencement Date; an additional one forty-eighth
(1/48th) of such shares will vest as of the end of each monthly period
thereafter.
The specific terms and conditions of your Incentive Stock Option will be set
forth in an Incentive Stock Option Agreement between you and the Company. Such
agreement shall be in substantially the form approved by the Board of Directors
of the Company for use with the Plan, and will be executed after you commence
your employment with the Company pursuant to this letter.
As a Company employee, you will be expected to abide by Company rules and
regulations, and acknowledge in writing that you have read the Company's
Employee Handbook (once it has been made available to you). As a condition of
employment, you will be required to sign and comply with a Proprietary
Information and Inventions Agreement, a copy of which is attached hereto as
Exhibit A, which, among other things, prohibits unauthorized use or disclosure
of Company proprietary information.
Normal working hours are from 8:30 a.m. to 5:30 p.m., Monday through Friday. As
an exempt salaried employee, you will be expected to work additional hours as
required by the nature of your work assignments.
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company in writing no later than two
weeks prior to the date of such termination. Likewise, the Company may terminate
your employment at any time and for any reason whatsoever, with or without cause
or advance notice. This at-will employment relationship cannot be changed except
in a writing signed by a Company officer.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and comprise the final, complete
and exclusive agreement between you and the Company. As required by law, this
offer is subject to satisfactory proof of your right to work in the United
States.
Please sign and date this letter, and return it to me as soon as possible if you
wish to accept employment at the Company under the terms described above. If you
accept our offer, we would like you to commence your employment with us as soon
as practicable.
<PAGE> 3
Delon Dotson
April 30, 1999
Page 3
We look forward to your favorable reply and to a productive and enjoyable work
relationship.
Sincerely,
MP3.COM, INC.
By: /s/ MICHAEL ROBERTSON
------------------------------
Michael Robertson
Chief Executive Officer
ACCEPTED BY:
/s/ DELON DOTSON
- ----------------------------------
Delon Dotson
5-3-99
- ----------------------------------
<PAGE> 4
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-17-1998
<PERIOD-END> DEC-31-1998
<CASH> 39,509
<SECURITIES> 0
<RECEIVABLES> 357,544
<ALLOWANCES> 56,615
<INVENTORY> 0
<CURRENT-ASSETS> 397,053
<PP&E> 62,550
<DEPRECIATION> 9,999
<TOTAL-ASSETS> 463,355
<CURRENT-LIABILITIES> 264,584
<BONDS> 0
0
0
<COMMON> 29,250
<OTHER-SE> 165,456
<TOTAL-LIABILITY-AND-EQUITY> 463,355
<SALES> 1,162,438
<TOTAL-REVENUES> 1,162,438
<CGS> 214,958
<TOTAL-COSTS> 214,958
<OTHER-EXPENSES> 1,110,633
<LOSS-PROVISION> 56,615
<INTEREST-EXPENSE> 3,810
<INCOME-PRETAX> (223,578)
<INCOME-TAX> 133,960
<INCOME-CONTINUING> (357,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (357,538)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
