<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1999
REGISTRATION NO. 333-78545
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MP3.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3652 33-0840026
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock ($.001 par value)........................... $245,700,000 $68,305
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 JULY 12, 1999
12,300,000 Shares
[MP3 LOGO]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $16.00 and
$18.00 per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "MPPP."
Of the 12,300,000 shares for sale in this offering, we have offered
approximately 3,300,000 shares to Arkaro S.A., a subsidiary of Groupe Arnault,
which has expressed an interest in acquiring shares of our common stock. If this
offer is accepted, we would sell these shares directly to Arkaro S.A. at the
initial public offering price as part of an agreement we have signed with them.
As a result, we will offer 9,000,000 shares for sale to the public through the
underwriters. See "Underwriting."
In addition, at our request, the underwriters have reserved up to 1,850,000
shares of common stock for sale at the initial public offering price to artists
and customers of MP3.com, consultants and others with whom we do business,
existing stockholders and friends of MP3.com. These shares are part of the
9,000,000 shares that will be issued through the underwriters. See
"Underwriting."
The underwriters have an option to purchase a maximum of 1,350,000
additional shares to cover over-allotments of shares. See "Underwriting."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MP3.COM
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
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., INC.
The date of this prospectus is , 1999.
<PAGE> 3
DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
The following text appears in the center of the page against a blue background:
There is 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 a portion of one artist page from the MP3.com website.
Twenty-one images depicting album cover art of artists with music on the MP3.com
website.
The following text appears as subheads and smaller copy blocks:
- Over 6,000,000 visitors per month.
- 44,000,000 songs delivered online.
- A database of over 3,900,000 music lovers.
- Music from over 18,000 artists, with 100's more added weekly.
BACK PANEL
The MP3.com logo appears against a black background. Affixed over the logo
(on our preliminary prospectus) is a sleeve containing a music CD suitable for
play on either a computer or audio CD player. The CD sleeve is blue with the
MP3.com logo and the phrase "Music to Invest By." The following text appears on
the page:
- Top acts of tomorrow as well as current major artists.
- MP3.com. Where the world comes for music.
<PAGE> 4
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
USE OF PROCEEDS....................... 17
DIVIDEND POLICY....................... 17
CAPITALIZATION........................ 18
DILUTION.............................. 19
SELECTED HISTORICAL FINANCIAL DATA.... 20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS............... 21
BUSINESS.............................. 29
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT............................ 44
RELATED-PARTY TRANSACTIONS............ 51
PRINCIPAL STOCKHOLDERS................ 52
DESCRIPTION OF CAPITAL STOCK.......... 54
SHARES ELIGIBLE FOR FUTURE SALE....... 56
UNDERWRITING.......................... 58
NOTICE TO CANADIAN RESIDENTS.......... 60
LEGAL MATTERS......................... 61
EXPERTS............................... 61
ADDITIONAL INFORMATION................ 61
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU WHEN YOU ARE CONSIDERING THE INFORMATION IN THIS
PROSPECTUS. 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.
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.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary 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 file formats that make music files smaller
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 100,000 songs from over 18,000 artists, which
we believe represents 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, electronic commerce and offline
advertising. From inception to March 31, 1999, 89% of our revenues have been
from the sale of advertising space on our website. We also receive revenue from
the sale of CDs online and from advertisers for their sponsorship of CD
samplers, which are distributed free of charge to consumers and contain
collections of music from artists that have posted music on our website.
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 expect to continue introducing new products and services designed
to meet their entertainment, electronic 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 this year, our growth has been dramatic.
The number of our employees increased from eight on December 31, 1998, to 141 on
June 30, 1999. In June 1999, we added over 125 artists and 660 new songs on
average each day. During June 1999, visitors to our website viewed over 57
million webpages, listened to or downloaded over 10 million songs and conducted
over 5.5 million music searches.
We recently formed several strategic relationships that we believe will
help increase our music content, brand awareness and electronic commerce
opportunities. In July 1999, Groupe Arnault agreed to purchase an aggregate of
$150 million in advertising, promotion and marketing services from us over the
next three years. Groupe Arnault is a French corporation with interests in
diverse companies such as LVMH Moet Hennessy Louis Vuitton and others. Groupe
Arnault will also have an exclusive right for 90 days after this offering to
negotiate the terms of a joint venture with us covering the territories of
Europe and Asia. In a separate agreement, we have offered Arkaro S.A., a
subsidiary of Groupe Arnault, the opportunity to purchase shares of our common
stock directly from us in this offering totaling five percent of our outstanding
capital stock after the offering. In June 1999, Cox Interactive Media, Inc.
invested $45 million in us and formed a joint venture with us that will focus on
providing downloadable music for affiliated radio stations across the U.S. We
also have a consulting arrangement with Atlas/Third Rail Management, Inc., to
conduct promotional activities like our sponsorship of the Alanis Morissette and
Tori Amos "5 1/2 Weeks" Summer 1999 tour. Additionally, we recently entered into
a three year license and promotion agreement with Boutit, Inc., also known as
"No Limit Records," which represents platinum-selling artists including Master P
and Snoop Dogg.
3
<PAGE> 6
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered......................... 12,300,000 shares
Common stock to be outstanding after the
offering................................... 65,724,913 shares
Shares offered to Arkaro S.A. ............... We have offered approximately 3,300,000 of
the shares for sale in this offering to
Arkaro S.A., a subsidiary of Groupe Arnault.
If this offer is accepted, we would sell
these shares directly to Arkaro S.A. As a
result, we will offer approximately 9,000,000
shares for sale to the public through the
underwriters.
Directed shares.............................. At our request, the underwriters have
reserved up to 1,850,000 shares of common
stock offered for sale at the initial public
offering price to artists and customers of
MP3.com, consultants and others with whom we
do business, existing stockholders and
friends of MP3.com. See "Underwriting."
Use of proceeds.............................. For marketing and promotional activities,
capital expenditures, concert sponsorships
and tours, facilities expansion and related
improvements, and general corporate purposes,
including working capital and potential
partnerships and acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... MPPP
</TABLE>
SHARES OUTSTANDING AFTER THE OFFERING
The number of shares of common stock to be outstanding after the offering
is based upon the actual number of shares outstanding as of June 21, 1999 and
assumes a three-for-two split in our common stock that will take effect prior to
the date of this offering. It also includes an estimated 147,058 shares to be
issued to Boutit, Inc. in a private placement concurrent with the closing of
this offering and an estimated 3,300,000 shares to be issued to Arkaro S.A.
assuming it accepts our offer to purchase these shares directly from us in this
offering. However, it does not include 8,837,063 shares of common stock reserved
under our stock benefit plans, of which 4,169,213 shares were covered by
outstanding options at a weighted average exercise price of $0.74 per share as
of June 21, 1999. See "Capitalization," "Description of Capital Stock" and
"Management -- 1998 Equity Incentive Plan."
After the offering, our founder and affiliated and major stockholders will
continue to hold a substantial percentage of our stock. Stockholders who will
hold more than 5% of our stock after the offering include the following:
<TABLE>
<CAPTION>
OWNERSHIP
STOCKHOLDER POST-OFFERING
----------- -------------
<S> <C>
Michael L. Robertson........................................ 39.0%
Entities affiliated with Sequoia Capital.................... 14.2%
Cox Interactive Media, Inc. ................................ 9.5%
Arkaro S.A. ................................................ 5.0%
Total stock held by executive officers, directors and major
stockholders.............................................. 75.0%
</TABLE>
For a complete discussion of how these numbers are calculated, and our
stock ownership after the offering generally, see "Principal Stockholders."
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.
4
<PAGE> 7
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.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 1,162,438 $ 665,785
Gross profit................................................ 947,480 460,482
Loss from operations........................................ (219,768) (1,478,919)
Net loss.................................................... (357,538) (1,405,628)
Net loss per share, basic and diluted(1).................... $ (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) $ (0.03)
Shares used in pro forma net loss per share
calculations(1)........................................... 45,490,301 46,844,583
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
---------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 9,327,149 $104,966,185 $302,381,185
Working capital............................................ 9,146,989 96,421,958 293,836,358
Total assets............................................... 11,245,608 111,686,644 309,101,644
Total stockholders' equity................................. 10,359,317 65,800,353 263,215,353
</TABLE>
- ---------------
(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 to:
- the conversion of 7,150,000 shares of convertible Series A preferred
stock outstanding as of March 31, 1999 into 10,724,996 shares of
common stock;
- the conversion of 1,100,000 shares of convertible Series A preferred
stock issued during April 1999 for $2,200,000 into 1,650,000 shares of
common stock;
- the conversion of 439,103 shares of convertible Series B preferred
stock issued during April 1999 for $2,498,496 into 658,653 shares of
common stock;
- the conversion of 4,182,578 shares of Series C preferred stock issued
during June 1999 for $45,004,539 into 6,273,867 shares of common
stock;
- a three-for-two split in our common stock;
- the issuance and exercise of warrants to purchase 658,653 shares of
common stock for $219,551 with a deemed fair value of $2,191,000;
- the exercise of stock options to purchase 1,494,187 shares of common
stock for $716,450 from April 1, 1999 to June 21, 1999;
- the issuance of 22,500 shares of common stock in May 1999 for services
rendered with a deemed fair value of $111,000;
- 147,058 shares of common stock (assuming an initial public offering
price of $17.00 per share) that we will issue in a private placement
as part of our agreement with Boutit, Inc. entered into on May 12,
1999 for a deemed fair value of $2,500,000;
- our donation of 100,000 shares of common stock to the MP3.com
Foundation with a deemed fair value of approximately $767,000; and
- our anticipated receipt during July 1999 of a $45,000,000 advance
payment from Groupe Arnault for advertising, promotion and marketing
services to be provided in the fourth quarter of 1999 and the year
2000.
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 $17.00 per share),
after deducting estimated underwriting discounts and commissions and
estimated offering expenses. See "Capitalization" and "Use of Proceeds."
5
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. 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 in this prospectus, including our financial
statements and the related notes.
RISKS RELATED TO OUR BUSINESS MODEL
OUR BUSINESS MODEL IS NOT TYPICAL OF TRADITIONAL, MORE ESTABLISHED BUSINESS
ENTERPRISES AND MAY NOT GENERATE SUFFICIENT REVENUES FOR OUR BUSINESS TO
SURVIVE.
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
- marketing our 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 WHICH MAY NOT DEVELOP OR WHERE WE MAY FAIL TO
GAIN MARKET ACCEPTANCE FOR OUR PRODUCTS AND SERVICES.
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 exposes us 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
or that the traditional music industry will not successfully serve these artists
in the future. 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. Due to our limited operating
history, it will be
6
<PAGE> 9
difficult to accurately predict our future revenues or results of operations.
This may result in one or more future quarters where our financial results may
fall below the expectation of analysts and investors. As a result, the trading
price of our common stock might decline. Operating results may vary depending on
a number of factors, many of which are outside our control. Before investing,
you should evaluate the risks, uncertainties, expenses and difficulties
frequently encountered by companies in early stages of development, particularly
companies in the new and rapidly evolving Internet markets.
RAPID GROWTH IN OUR OPERATIONS AND INFRASTRUCTURE IS PLACING A SIGNIFICANT
STRAIN ON OUR RESOURCES, AND FAILURE TO MANAGE THIS GROWTH EFFECTIVELY COULD
DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING THE REVENUES WE EXPECT.
We currently are experiencing a period of rapid expansion in our website
traffic, personnel, facilities and infrastructure. For example, the number of
daily visitors to our website increased approximately 88% from December 1998 to
June 1999. Our number of employees increased from eight on December 31, 1998 to
141 on June 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. Our failure to manage growth
could disrupt our operations and ultimately prevent us from generating the
revenues we expect.
OUR CONTINUED RELIANCE ON REVENUE FROM ONLINE ADVERTISING MAY NOT PROVIDE
SUFFICIENT FINANCIAL RETURNS FOR OUR BUSINESS TO GROW OR SURVIVE.
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 reduce our revenue from
online advertising and ultimately prevent us from generating the revenues we
expect.
A SUBSTANTIAL PORTION OF OUR REVENUES AND REVENUE GROWTH FOR AT LEAST THE NEXT
THREE YEARS WILL COME FROM GROUPE ARNAULT. IF THIS RELATIONSHIP IS NOT RENEWED,
OR IF OTHER SIGNIFICANT SOURCES OF REVENUE ARE NOT DEVELOPED, WE MAY NOT HAVE
SUFFICIENT REVENUES TO SUSTAIN OUR GROWTH AND OUR STOCK PRICE MAY FALL.
We have recently entered into a three-year advertising, promotion and
marketing agreement with Groupe Arnault. We anticipate that for at least the
next three years a substantial portion of our revenues will come from sales of
our advertising, promotion and marketing services under this agreement. Although
payment for these services has been secured for the term of the agreement by a
$45 million pre-payment and a letter of
7
<PAGE> 10
credit for the remaining $105 million of services to be provided under the
agreement, Groupe Arnault is under no obligation to renew its relationship with
us after the current agreement terminates at the end of June 2002. See
"Business -- Relationship with Groupe Arnault."
Furthermore, we anticipate that our revenue growth for the next three years
will largely be due to the scheduled growth in revenues under our agreement with
Groupe Arnault. Historically, most of our revenue sources have not provided for
a similarly-scheduled growth in revenues. If we do not develop significant
additional revenue sources in the future our business will be substantially
dependent on the Groupe Arnault agreement. Moreover, if Groupe Arnault does not
renew its relationship after termination of the current agreement at the end of
June 2002, or renews the relationship but at a lower level of commitment, our
revenues or growth rate may decline in periods subsequent to the end of the
current agreement.
We cannot guarantee that we will be able to develop enough additional
revenue to offset the loss of revenues that would result if Groupe Arnault does
not renew its relationship or that the other revenue sources we may develop will
be sufficient to maintain our rate of revenue growth. If either event causes our
revenues or our revenue growth rate to be substantially reduced, we may not have
sufficient revenues to support our business and the market price of our stock
may fall.
IN ORDER TO PROVIDE MUSIC AND OTHER CONTENT ON OUR WEBSITE, WE RELY HEAVILY ON
THE CONTRIBUTIONS OF ARTISTS WHO, OVER TIME, MAY BE DIFFICULT TO ATTRACT AND
RETAIN.
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 music and other content would
limit the overall quality and quantity of the offerings on our website and harm
our business. Because our contracts with artists are, with few exceptions,
non-exclusive and can be terminated by the artist at any time, our retention of
artists requires that we offer sufficient benefits, including artist services
and artist-oriented content, to encourage them to 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 music
and other content. This could also prevent us from attracting new artists. We
may also lose artists who gain recognition on our website and then are recruited
by or attracted to the traditional music industry. The loss of artists and the
inability to attract new artists would impair our ability to generate
advertising revenue targeted to our artist community and generate CD revenues.
OUR BRAND NAME AND REVENUES COULD BE DAMAGED IF THE MUSIC PROVIDED BY
LESSER-KNOWN ARTISTS FAILS TO MEET CONSUMER EXPECTATIONS.
Although most of the artists that post music on our website are not bound
by record contracts, some artists, including most internationally-recognized
artists, typically sign multi-year exclusive recording contracts that may
prevent them from posting music on our website. To post music on our website,
these artists must typically get permission from their record company. As a
result, our access to internationally-recognized artists and our ability to
distribute this music or place their music on our website and on our CDs is
limited. For this reason, and because of the emphasis of our business model on
underserved artists, we expect our music to continue to concentrate principally
on lesser-known and local artists. If the music provided by these lesser-known
and local artists fails to meet consumer expectations, our brand name could be
damaged and our business may not generate sufficient revenues to survive.
DEVELOPMENT OF NEW STANDARDS FOR THE ELECTRONIC DELIVERY OF MUSIC MAY DIMINISH
OUR BRAND IDENTITY AND DISRUPT THE WAY WE DO 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 that makes music files smaller. 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
8
<PAGE> 11
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 including 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 features that track the number of copies made. The mp3 technology we
currently use does not offer these features. These features are especially
popular among 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 these 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 that 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
inaccessible 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 NEGATIVELY AFFECT THE PERCEPTION OF OUR
BUSINESS, LEAD TO MARKET CONFUSION, ALIENATE ADVERTISERS AND CONSUMERS AND
REDUCE OUR REVENUES.
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 can support more than one audio compression format and method of delivery,
and is intended to discourage music piracy and ensure that only legitimate music
is posted on our website, 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, alienate advertisers and consumers, reduce
revenues and harm our overall financial results.
WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE INTERNET AND THE
AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS, OUR BUSINESS MAY NOT SUCCEED.
Given the online nature of our business, without the continued development
and maintenance of the Internet infrastructure, we could fail to meet our
overall strategic objectives and ultimately fail to generate the website traffic
and revenues we expect. This continued development of the Internet includes
maintenance of a reliable network with the necessary speed, data capacity and
security, as well as timely development of complementary products including 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 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.
9
<PAGE> 12
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 "-- Year 2000 problems could lead to malfunctions of our computer
and communications systems, and prevent us from running our business." 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 BUSINESS PARTNERSHIPS AND
MAKING ACQUISITIONS THAT WE MAY NEED TO EXPAND OUR CONTENT AND DISTRIBUTION
CHANNELS, WHICH COULD IMPAIR OUR OVERALL STRATEGIC GOALS.
Our business strategy includes entering into business partnerships and may
include acquiring complementary businesses, technologies, content or products.
For example, in June 1999 we entered into a joint venture with Cox Interactive
Media to create and operate music-related websites. We cannot assure you that
this joint venture or any other business partnership will be successful. In
addition, in July 1999 we entered into an agreement with Groupe Arnault under
which Groupe Arnault will have an exclusive right for 90 days after this
offering to negotiate the terms of a joint venture with us covering the
territories of Europe and Asia. We cannot guarantee that we and Groupe Arnault
will establish this joint venture or that, if established, this joint venture
will be successful and provide us with desired international presence or
branding. We may be unable to complete suitable business partnerships and
acquisitions on commercially reasonable terms, if at all. We expect to face
competition for business partnership and acquisition candidates and
sponsorships. This competition could impair our ability to successfully pursue
these aspects of our business strategy.
Business partnerships 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
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, AND OUR STOCK PRICE MAY FALL IF OUR
PERFORMANCE DOES NOT MEET ANALYSTS' OR INVESTORS' EXPECTATIONS.
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, our revenue and earnings
may vary substantially as a result of holiday-based buying and the business
cycles of the music industry and of internet commerce in general. However, the
actual effect of these factors on the price of our stock will be difficult to
assess due to our limited operating history. 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.
10
<PAGE> 13
WE EXPECT NET LOSSES IN THE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY, WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.
In 1998, we had a net loss of approximately $360,000. During the first
three months of 1999, we had a net loss of approximately $1.4 million. 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.
UNLESS WE OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO MEET OUR STRATEGIC
BUSINESS OBJECTIVES.
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 our stockholders.
RISKS RELATED TO SALES, MARKETING AND COMPETITION
UNLESS WE DEVELOP A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT CONTINUE TO GROW
AND OUR FINANCIAL RESULTS MAY SUFFER.
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.
IF WE DO NOT TRANSCEND A MERE ASSOCIATION BETWEEN OUR COMPANY AND THE MP3 FORMAT
IN THE MINDS OF CONSUMERS, OUR BRAND IDENTITY AND FINANCIAL RESULTS COULD
SUFFER.
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 brand recognition apart
from
11
<PAGE> 14
the mp3 format could significantly affect the future viability of our brand name
and our ability to generate revenues.
IF WE FAIL TO COLLECT ACCURATE AND USEFUL DATA ABOUT OUR CONSUMERS, POTENTIAL
ADVERTISERS MAY NOT ADVERTISE ON OUR WEBSITE, WHICH MAY RESULT IN REDUCED
ADVERTISING REVENUES.
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 would be less effective since advertisers generally require
detailed demographic data on their target audiences. 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. Failure to collect
accurate and useful data could result in a substantial reduction in advertising
revenues, which represented 84% of our total revenues in the first quarter of
1999. 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 and our associated advertising revenue.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE WHICH COULD REDUCE
OUR REVENUES, POTENTIAL PROFITS AND OVERALL MARKET SHARE.
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, many of which 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 damage the long-term or short-term prospects
of our business.
RISKS RELATED TO OPERATIONS
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO PROPERLY 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, other than our Chief Executive Officer, 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 operations could be significantly disrupted.
WE MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES, AND AS A RESULT WE MAY NOT BE ABLE TO GROW AS WE EXPECT, OR MAINTAIN
THE QUALITY OF OUR SERVICES.
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. If we cannot integrate these employees into
12
<PAGE> 15
our business, we will not be able to effectively manage our growth. Also, our
inability to hire, integrate and retain qualified personnel in sufficient
numbers may reduce the quality of our programs, products and services.
WE MUST CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE, OR WE WILL BE UNABLE
TO EFFECTIVELY MEET DEMAND ON OUR WEBSITE.
In May 1999, an average of approximately 20 gigabytes of musical content
was added to our website each week and traffic to the site increased by
approximately 14% from the previous month. We must continue to add hardware and
enhance software to accommodate the increased content and use of our 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.
OUR NEW FINANCIAL ACCOUNTING SYSTEM AND OTHER INTERNAL SYSTEMS MAY NOT WORK
EFFECTIVELY AND AS A RESULT WE MAY NOT HAVE THE INFORMATION WE NEED TO RECORD
TRANSACTIONS AND MEET OUR ACCOUNTING AND REPORTING OBLIGATIONS, WHICH IN TURN
COULD AFFECT OUR ABILITY TO RUN OUR BUSINESS EFFICIENTLY OR PROFITABLY.
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 MAY STOP WORKING OR WORK IMPROPERLY
DUE 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 like 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 would impair our ability to
access archives and operate our website.
WE MAY LOSE VISITORS TO OUR WEBSITE AND LOSE REVENUES IF OUR ONLINE SECURITY
MEASURES FAIL.
If the security measures that we use to protect personal information are
ineffective, we may lose visitors to our website which could reduce our
revenues. 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.
YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, AND PREVENT US FROM RUNNING OUR BUSINESS.
13
<PAGE> 16
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.
The laws and regulations that govern our business change rapidly. 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 laws and regulations. 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. See "Business -- Government
Regulation."
WE MAY BE LIABLE TO THIRD PARTIES FOR MUSIC, SOFTWARE AND OTHER CONTENT THAT IS
AVAILABLE ON OUR WEBSITE AND ON THE CDS WE DISTRIBUTE.
We may be liable to third parties for the content on our website and on the
CDs we distribute:
- if the music, text, graphics, software or other content on our website or
CDs 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 CDs; or
- if anything on our website or CDs is deemed obscene, indecent or
defamatory.
We may also be liable for anything 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 and on our CDs. However, 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."
WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TRADEMARKS, COPYRIGHTS,
SOFTWARE AND OTHER INTELLECTUAL PROPERTY ASSETS. IF OTHERS DO USE THESE ASSETS,
THEIR VALUE TO US, AND OUR ABILITY TO USE THEM TO GENERATE REVENUE, MAY
DECREASE.
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 or
requiring us to pay monetary damages. Even if
14
<PAGE> 17
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 STOCK PRICE MAY BE PARTICULARLY VOLATILE 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 these 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.
Most of the net proceeds of this offering are not allocated for specific
uses. Our management has broad discretion to spend the proceeds from this
offering in ways with which stockholders may not agree. The failure of our
management to apply these funds effectively could result in unfavorable returns.
This could have significant adverse effects on our financial condition and could
cause the price of our common stock to decline.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL 75.0% 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 75.0% of our outstanding common stock. These stockholders would
be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control of
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 us to issue "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
15
<PAGE> 18
"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.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES, AND IF A LIQUIDATION WERE TO OCCUR YOU MAY RECEIVE
SIGNIFICANTLY LESS THAN YOUR FULL PURCHASE PRICE FOR THE SHARES.
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. This dilution will reduce the net tangible book value of
their shares, since these investments will be at a substantially higher per
share price than they were for our existing stockholders. The dilution will be
$13.00 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. As a result of this dilution, common stockholders purchasing stock in
this offering may receive significantly less than the full purchase price that
they paid for the shares purchased in this offering in the event of a
liquidation.
FIFTY-TWO MILLION, OR 84%, OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS COULD
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.
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 $17.00, we
will have outstanding 65,724,913 shares of common stock. The 9,000,000 shares
offered for sale through the underwriters will be freely tradable. Of the
remaining 56,724,913 shares of common stock outstanding after this offering,
31,705,125 shares will be eligible for sale in the public market beginning 181
days after the date of this prospectus. The remaining 25,019,788 shares will
become available at various times thereafter upon the expiration of one-year
holding periods or, in the case of the 3,300,000 shares we have offered to
Arkaro S.A., upon the expiration of a lock-up agreement. See "Shares Eligible
for Future Sale." We also intend to register up to 8,837,063 additional shares
of our common stock after this offering for issuance under 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 including "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," the
negative of these 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. 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.
16
<PAGE> 19
USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately
$197.4 million (based upon an assumed initial public offering price of $17.00
per share) after deducting the estimated underwriting discount and commissions
and estimated offering expenses ($218.8 million if the over-allotment option is
exercised in full).
We expect to use approximately $10 million of our net proceeds for
marketing and promotional activities, $8 million for capital expenditures, $4
million for concert sponsorships and tours, and $2 million for planned
facilities expansion and related improvements. We intend to use the remaining
net proceeds for general corporate purposes, including working capital and
capital expenditures, and expansion of sales and marketing activities. The
amounts we actually expend for general corporate 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." 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 for strategic
partnerships, including joint ventures, or to acquire or invest in complementary
businesses, technologies, product lines, content or products. We have no current
agreements or commitments and we are not currently engaged in any negotiations
with respect to any acquisitions. Pending these uses, the net proceeds of this
offering will be invested in short term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
Covenants in our financing arrangements will prohibit or limit our ability
to declare or pay cash dividends. 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 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.
17
<PAGE> 20
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 to:
-- the conversion of 7,150,000 shares of convertible Series A preferred
stock outstanding as of March 31, 1999 into 10,724,996 shares of common
stock;
-- the conversion of 1,100,000 shares of convertible Series A preferred
stock issued during April 1999 for $2,200,000 into 1,650,000 shares of
common stock;
-- the conversion of 439,103 shares of convertible Series B preferred
stock issued during April 1999 for $2,498,496 into 658,653 shares of
common stock;
-- the conversion of 4,182,578 shares of Series C preferred stock issued
in June 1999 for $45,004,539 into 6,273,867 shares of common stock;
-- a three-for-two split in our common stock;
-- the issuance and exercise of warrants to purchase 658,653 shares of
common stock for $219,551 with a deemed fair value of $2,191,000;
-- the exercise of stock options to purchase 1,494,187 shares of common
stock for $716,450 from April 1, 1999 to June 21, 1999;
-- the issuance of 22,500 shares of common stock in May 1999 for services
rendered with a deemed fair value of $111,000;
-- 147,058 shares of common stock (assuming an initial public offering
price of $17.00 per share) we will issue in a private placement
pursuant to an agreement with Boutit, Inc. entered into on May 12, 1999
for a deemed fair value of $2,500,000; and
-- our donation of 100,000 shares of common stock to the MP3.com
Foundation with a deemed fair value of approximately $767,000; and
- On a pro forma as adjusted basis, giving effect to our sale of the common
stock in this offering at an assumed offering price of $17.00 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 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:
Preferred Stock, par value $0.001 per share; none
authorized, actual; 15,000,000 authorized pro forma and
pro forma as adjusted; none issued and outstanding
actual, pro forma, and pro forma as adjusted............ -- -- --
Convertible Preferred Stock, par value $0.001 per share;
authorized 9,500,000, actual; none authorized pro forma
and pro forma as adjusted...............................
Series A, 8,150,000 authorized and 7,150,000 issued and
outstanding, actual; none authorized and none issued
and outstanding, pro forma and pro forma as adjusted... 7,150 -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized and 31,694,999 shares issued and outstanding,
actual; 53,424,913 shares issued outstanding pro forma
(unaudited); 200,000,000 shares authorized; and
65,724,913 shares issued and outstanding, pro forma as
adjusted(2)............................................. 31,695 53,425 65,725
Additional paid in capital................................ 16,351,763 72,545,219 269,947,919
Note receivable from a stockholder........................ (260,000) (260,000) (260,000)
Deferred compensation..................................... (4,008,125) (4,008,125) (4,008,125)
Accumulated deficit....................................... (1,763,166) (2,530,166) (2,530,166)
----------- ----------- ------------
Total stockholders' equity................................ 10,359,317 65,800,353 263,215,353
----------- ----------- ------------
Total capitalization............................... $10,359,317 $65,800,353 $263,215,353
=========== =========== ============
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements.
(2) Does not include 8,837,063 shares of common stock reserved under our stock
benefit plans, of which 4,169,213 shares were covered by outstanding options
at a weighted average exercise price of $0.74 per share as of June 21, 1999.
See "Description of Capital Stock," "Management -- 1998 Equity Incentive
Plan" and "Management -- Employee Stock Purchase Plan."
18
<PAGE> 21
DILUTION
As of March 31, 1999, our pro forma net tangible book value was
approximately $65.8 million, or $1.23 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, and
gives effect to:
- the conversion of 7,150,000 shares of convertible Series A preferred
stock outstanding as of March 31, 1999 into 10,724,996 shares of common
stock;
- the conversion of 1,100,000 shares of convertible Series A preferred
stock issued during April 1999 for $2,200,000 into 1,650,000 shares of
common stock;
- the conversion of 439,103 shares of convertible Series B preferred stock
issued during April 1999 for $2,498,496 into 658,653 shares of common
stock;
- the conversion of 4,182,578 shares of Series C preferred stock issued in
June 1999 for $45,004,539 into 6,273,867 shares of common stock;
- a three-for-two split in our common stock;
- the issuance and exercise of warrants to purchase 658,653 shares of
common stock for $219,551 with a deemed fair value of $2,191,000;
- the exercise of stock options to purchase 1,494,187 shares of common
stock for $716,450 from April 1, 1999 to June 21, 1999;
- the issuance of 22,500 shares of common stock in May 1999 for services
rendered with a deemed fair value of $111,000
- 147,058 shares of common stock (assuming an initial public offering price
of $17.00 per share) we will issue in a private placement as part of our
agreement with Boutit, Inc. entered into on May 12, 1999 for a deemed
fair value of $2,500,000; and
- our donation of 100,000 shares of common stock to the MP3.com Foundation
with a deemed fair value of approximately $767,000.
After giving effect to our sale of common stock in this offering at an
assumed initial public offering price of $17.00 per share, and our receipt of
the estimated net proceeds from the sale, our pro forma net tangible book value
as of March 31, 1999 would have been approximately $263.2 million, or $4.00 per
share. This represents an immediate increase in net tangible book value of $2.77
per share to existing stockholders and an immediate dilution of $13.00 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $17.00
Pro forma net tangible book value per share before the
offering............................................... $1.23
Increase per share attributable to new investors.......... 2.77
-----
Pro forma net tangible book value per share after this
offering.................................................. 4.00
------
Dilution per share to new investors......................... $13.00
======
</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.................... 53,424,913 81.3% $ 61,652,083 22.8% $ 1.15
New investors............................ 12,300,000 18.7% $209,100,000 77.2% 17.00
---------- ----- ------------ ------
Total.......................... 65,724,913 100.0% $270,752,083 100.0%
========== ===== ============ ======
</TABLE>
The discussion and tables above 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. To the extent that any of
these options 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.
19
<PAGE> 22
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 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1998 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..................... 550,197 652,315
---------- -----------
Total operating expenses.......................... 1,167,248 1,939,401
---------- -----------
Loss from operations........................................ (219,768) (1,478,919)
Interest income (expense), net.............................. (3,810) 73,291
---------- -----------
Loss before income taxes.................................... (223,578) (1,405,628)
Provision for income taxes.................................. 133,960 --
---------- -----------
Net loss.................................................... $ (357,538) $(1,405,628)
========== ===========
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.
20
<PAGE> 23
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 related notes 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 forward-looking information due to
factors discussed under "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
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. On December 31, 1998, we had only eight
employees. This increased to 54 employees on March 31, 1999 and to 141 employees
on June 30, 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
From inception to March 31, 1999, net revenues have consisted primarily of
the sale of online advertisements (89% of net revenues) on our website, and to a
lesser extent, the online sale of CDs and music-related merchandise (11% of net
revenues). 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. From inception to March 31, 1999, banner
and sponsorship advertisements on our website have accounted for 75% of our
online advertising revenue. The duration of our banner advertising commitments
has ranged from one month to one year. Sponsorship advertising contracts involve
more integration with our website, including 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 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 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
21
<PAGE> 24
revenue from the online sale of CDs will constitute an increasing portion of
total net revenues. This revenue is recognized upon shipment.
Revenue from No Limit Agreement. 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 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 artists that have posted music on our website
and cooperate with us on other promotional activities. We will record all
revenues generated under the agreement and will recognize royalty expense (to be
included in cost of sales) representing the royalties payable to No Limit. The
royalty percentage due to No Limit will vary depending on the source of revenue.
No Limit will also become a stockholder of MP3.com at the closing of this
offering. As part of our agreement, we will issue 147,058 shares of our common
stock (assuming an initial public offering price of $17.00 per share) 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 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 a portion of our 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, as a percentage of net revenue, due primarily to
increased depreciation expense ($9,000 or 1% of net revenues) associated with
increased investment in website and fulfillment-related equipment, as well as an
increase, as a percentage of net revenues, in CD and other music related
merchandise sales (which typically have lower associated gross margins) from 9%
to 16%. 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 a portion of our 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 ($180,000 or 27% of
net revenues), substantial increases in sales and marketing payroll and related
expenses ($182,000 or 27% of net revenues) and the costs associated with the
increase in our size. 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.
In April 1999, we entered into an artist promotion consulting agreement
with Atlas/Third Rail Management, Inc., a 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 of
these promotions involves our sponsorship of Alanis Morissette and Tori Amos'
"5 1/2 Weeks" summer 1999 tour. Under the promotion agreement, we granted
Atlas/Third Rail warrants to purchase 658,653 shares of our common stock
exercisable at $0.33 per share. In May 1999, we entered into a limited services
agreement with Tori Amos. This agreement terminates after the "5 1/2 Weeks" tour
in September 1999. Under this agreement, we issued 22,500 shares of common stock
to Ms. Amos in exchange for her services. As a result of the grant and issuance
to Atlas/Third Rail and Ms. Amos, we recorded deferred marketing costs of
$2,302,000. We will
22
<PAGE> 25
account for the warrants based on the fair value provisions of FAS 123. We will
amortize the value of the warrants and common stock to sales and marketing
expense as follows: approximately $365,000 in the second quarter of 1999 (when
the 5 1/2 Weeks tour was announced) and approximately $1,937,000 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 June 1999, we established the MP3.com Foundation. Our board of directors
authorized the initial contribution to this foundation of 100,000 shares of
common stock. The deemed fair value of the contribution was approximately
$767,000. We will charge the contribution to expense during the second quarter
of 1999.
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 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 associated with
maintaining our website. 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, as a percentage of net revenue, was
primarily due to increased payroll and related expenses (from 29% to 34% of net
revenues) associated with hiring more employees and expensed computer supplies
(from 0% to 4% of net revenues). 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 payroll and related expenses (from 0% to 10% of net
revenues), recruiting and relocation expenses (from 0% to 3% of net revenues)
related to hiring our management team, increased legal and accounting expenses
(from 4% to 26% of net revenues), increased depreciation expense (from 0% to 2%
of net revenues) and costs associated with the increase in our size. 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 $4,482,000, respectively, for the grant of
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 of no less than $30.0 million in the second and third quarters of
1999 to reflect additional option grants at exercise prices less than the deemed
fair value of common stock on the grant date through July 9, 1999.The deferred
compensation is being amortized over the vesting period of the options, which is
generally four years.
23
<PAGE> 26
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
Overview
To date, our operations have been financed from internally generated cash,
the sale of 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 to fund our
operations. Borrowings under the line of credit accrue interest at the bank's
prime rate plus 1% (8.75% as of March 31, 1999), expires in February 2000, and
is secured by most of our assets. We are required to comply with debt covenants,
the most restrictive of which is a minimum liquidity ratio of two times current
liabilities plus all bank debt or six months historical cash spending.
Currently, due to our cash balance after the sale of Series C convertible
preferred stock, we do not believe the debt covenants will place limitations on
our growth strategy. As of March 31, 1999, we have complied with all debt
covenants. 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.
Operating Activities
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 $1,406,000;
- 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;
24
<PAGE> 27
- an increase in accounts payable and accrued expenses of approximately
$558,000; and
- an increase in deferred revenue of approximately $68,000.
Investing Activities
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.
Financing Activities
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 new
employees and facility expansion;
- website computer equipment and additional website maintenance personnel;
- product fulfillment equipment, infrastructure and new employees;
- bandwidth and networking equipment and infrastructure;
- additional sales and marketing employees;
- equipment and additional employees 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.
Recent Events
In July 1999, we entered into an agreement with Groupe Arnault, which
committed to purchase an aggregate of $150 million in advertising, promotion and
marketing services from us over the next three years, including $5 million in
1999, $40 million in 2000, $70 million in 2001 and $35 million in the first half
of 2002. Under the agreement, we will receive pre-payments from Groupe Arnault
totaling $45 million in July 1999. The remaining amounts owed under the
agreement will be secured by an irrevocable letter of credit to be executed in
July 1999. In addition, Groupe Arnault will have an exclusive right for 90 days
after this offering to negotiate the terms of a joint venture with us covering
the territories of Europe and Asia.
The agreement obligates Groupe Arnault to purchase guaranteed specific
quarterly amounts of advertising, promotion and marketing services. We will
recognize revenue in the period we deliver the mutually agreed-upon advertising,
promotion and marketing services. In the event Groupe Arnault does not purchase
the quarterly amount specified in the agreement, or purchases an amount less
than the quarterly amount specified in the agreement, the unpurchased amount
will be recognized as revenue in the related quarter, as there will be no
remaining obligations due by us to Groupe Arnault with respect to such amount.
In a separate agreement, we offered Arkaro S.A., a subsidiary of Groupe
Arnault, the opportunity to purchase registered shares of common stock directly
from us in this offering totaling five percent of our outstanding capital stock
after this offering. If Arkaro S.A. accepts this offer, we will sell Arkaro S.A.
an estimated 3,300,000 shares of stock in this offering at the initial public
offering price. Should Arkaro S.A. decide not to accept this offer, the
agreement between us and Groupe Arnault will still remain in effect.
In June 1999, we sold 4,182,578 shares of Series C preferred stock (which
will be converted into 6,273,867 shares of common stock at the close of this
offering) to Cox Interactive Media, for a total purchase
25
<PAGE> 28
price of approximately $45 million. We also entered into a joint venture with
Cox Interactive Media that will focus on providing downloadable music for
affiliated radio stations across the U.S. We will contribute approximately $14
million to the joint venture over the next year.
We are currently negotiating a five year lease for approximately 61,000
square feet of office and production space, and anticipate moving into this new
facility during the second half of 1999. We are also exploring the possible
lease of additional facilities, although we do not anticipate occupying these
facilities until the first half of 2000.
Future Capital Requirements
We believe that our cash and cash equivalent balances, funds available
under our existing line of credit, revenues from the agreement with Groupe
Arnault, proceeds from the Cox Interactive Media investment, net of our
financing commitment to the joint venture, 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.
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 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 sale of
equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced, our stockholders may experience additional
dilution and these 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 these limitations.
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in 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 affect the fair value of interest sensitive financial instruments
at December 31, 1998 or March 31, 1999.
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, telecommunication and
software systems are new, we believe most of these systems are already year 2000
compliant 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.
26
<PAGE> 29
We have started assessing the corporate systems and operations that we
believe could be affected by the year 2000 problem. We have focused our year
2000 review on three areas:
- information technology infrastructure;
- non-information technology systems; and
- third-party compliance.
Information Technology Infrastructure
Because our consumer and business systems are essential to our business,
our year 2000 team has assessed and evaluated our information technology
systems, including our computers, hardware, and software systems. As the team
has identified critical computer, hardware, or software information technology
systems that require replacement, upgrade, or modification, we have made the
required replacement, upgrade, or modification immediately. We use the following
information technology for our internal infrastructure:
- website and Internet ordering systems;
- main enterprise software systems, including those used for music
delivery, production, shipping, and accounting;
- individual workstations, including personal computers; and
- networking related hardware and software systems.
We currently believe that all of our critical information technology
systems are year 2000 compliant. In addition, we are in the process of
implementing a new accounting system which is certified year 2000 compliant by
the vendor. We expect this system to be in place by the end of 1999. We have
conducted and continue to conduct year 2000 compliance testing of our individual
workstations and networking related hardware and software systems. To date, we
have not discovered any material year 2000 problems in these internal systems.
Non-Information Technology Systems
Some non-information technology systems used in our business, including air
conditioning, fire sprinkler and telephone systems, our facility's security
system, the security system for our facility's campus, and other equipment, may
contain software that is vulnerable to year 2000 problems. The year 2000 problem
could cause failures in these systems which could disrupt our operations. We are
currently assessing the year 2000 readiness of many of these systems and
equipment and expect to have identified and corrected year 2000 problems in our
critical non-information technology systems by September 1999.
Third-Party Compliance
Our material third party business relationships include:
- customers who place orders for products using the Internet;
- our Internet service providers; and
- vendors and suppliers who provide the goods that we offer to our
customers.
We are unable to predict, and have not attempted to assess, the year 2000
readiness of our customers or the systems they use to interact with us. Since we
take all of our product orders and offer most of our artist services over the
Internet, our operations would be harmed if a significant number of our
customers were unable to use the Internet and place orders due to year 2000
problems.
We have assessed the year 2000 readiness of our Internet service providers
and the systems they use to interact with us and determined that they have
implemented strategies for becoming year 2000 compliant. Our Internet service
providers expect to be year 2000 compliant prior to December 31, 1999. Since our
business is reliant on the ability of our Internet service providers to direct
customers to our website, our operations would be materially and adversely
affected if those providers were unable to provide their services.
27
<PAGE> 30
Year 2000 disruptions in the systems or equipment used by our suppliers
could result in our customers being unable to obtain products in a timely
manner. We are currently reviewing our vendors' year 2000 compliance plans and
statements, and we expect to complete the assessment of our primary software and
hardware suppliers by the end of July 1999.
If we determine that any of our Internet service providers, third party
vendors or third party suppliers are not year 2000 compliant and cannot resolve
all significant year 2000 issues by August 1999, we intend to select and
implement alternate providers no later than September 1999.
Most Reasonable Worst Case Scenario
It is possible that year 2000 problems could disrupt one or more of the
following systems:
- customers' access to the Internet and their ability to place orders using
our website (we believe this is more likely for international customers
than domestic customers);
- artists' uploading of music content to our website;
- the fulfillment of customer orders; and
- credit card transactions.
In the first case, there is no alternative technology available which would
allow us to continue to run our business. In the last three cases, there is a
less efficient higher cost alternative which would allow us to continue to run
our business. However, any of these alternatives would result in increased
costs, reduced revenues or service delays, which would increase our operating
losses. Extended disruptions may impact both short term and long term customer
and supplier relationships and further impact our future profitability.
Costs
Our year 2000 assessment, remediation and testing activities have been
conducted by internal personnel, and we have not tracked the amount of employee
time expended on these tasks. Accordingly, we are unable to determine the cost
of employee time devoted to year 2000 matters. We estimate that the cost of our
year 2000 readiness efforts, including any necessary modifications, upgrading or
replacement of computer equipment or software, will not exceed $100,000. We have
funded and plan to continue funding these activities principally through cash
flow.
Contingency Plan
In addition to the less efficient higher cost alternatives discussed above,
we are 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.
28
<PAGE> 31
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 file formats that make music files smaller
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 100,000 songs from over 18,000 artists, which
we believe represents 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, electronic commerce and offline
advertising. From inception to March 31, 1999, 89% 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 artists sold through our Digital Automatic
Music system, which we call "DAM CDs," and albums we compile featuring the work
of multiple 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.
We believe that artists and consumers are drawn to MP3.com because they
have been historically underserved by the traditional music industry. We expect
to continue introducing new products and services designed to meet their
entertainment, electronic commerce, communications and information needs.
INDUSTRY BACKGROUND
Recorded Music Industry
Music is one of the most popular forms of entertainment in the world. Music
is also a big business. According to the International Federation of the
Phonographic Industry, 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 study by Soundata, Inc.
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.
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
29
<PAGE> 32
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. There
are also competitive formats that have different and additional features. 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
including 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. Although the traditional
music industry has not embraced the mp3 format (see "-- Intellectual Property"),
Forrester Research, Inc. estimates that there are over 50 million mp3-capable
users today.
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 like 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.
Individual Growth May Not Track Industry Growth
The growth rate of mp3 technology, or of the popularity of listening to and
downloading music from the Internet, does not mean that a particular business
will grow at a similar rate. Similarly, a particular business may not grow as
much as, and to the extent that, use of the Internet becomes more widespread.
However, we believe rapid and widespread growth may be possible for individual
businesses within the industry.
30
<PAGE> 33
THE MP3.COM SOLUTION
We are pioneering a revolutionary approach to the promotion and
distribution of music. This approach provides 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. Under our
revenue sharing arrangement artists typically earn a 50% royalty on sales of
their DAM CDs, compared to the 10% to 15% royalty we believe is typically earned
by artists for sale of CDs under traditional music industry contracts. 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, 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 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, including
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 posted on our website by 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 96 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
31
<PAGE> 34
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 18,000 artists
and 120 independent labels that have posted more than 100,000 songs on MP3.com.
Since we began offering services, we have digitally delivered more than 44
million songs to consumers visiting our site. In June 1999:
- we added over 125 new artists and 660 new songs on average each day;
- visitors to our website viewed over 57 million webpages, listened to or
downloaded over 10 million songs and conducted over 5.5 million music
searches;
- we estimate that more than 315,000 consumers per day on average visited
our website and listened to approximately 330,000 songs; and
- we sold on average over 320 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 expect to continue introducing new products and services designed
to meet their entertainment, electronic commerce, communications and information
needs.
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, Electronic 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 like 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 artists so that we offer the largest group of global artists
online. As part of this effort, we intend to offer new promotional services
including 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 increase the loyalty among artists that
currently post music on our website and allow us to continue to
32
<PAGE> 35
increase the number of new artists using our website. These new artists may
include those artists who are signed to exclusive contracts with record
companies, who need to obtain the consent of those record companies to post
music on our website, and to whom we may be required to pay increased royalties
in order to facilitate the receipt of their consent. 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 electronic
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 agreements with established popular artists and our free CD sampler
program. We intend to achieve greater offline awareness by targeting 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 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 32%
of our online artist community. Although our historical revenues from export
sales have been insignificant, approximately 19% of our DAM CD customers during
June 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.
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.
33
<PAGE> 36
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 webpage 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>
- - My MP3 Database of MP3.com music customized for each fan based on
their listening habits.
- - Browsing by Genre Fans can browse 100,000+ songs by 18,000+ 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.O.E.: Alien Orbiter Explorer" to
"ZZZZRA."
- - 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.
- - Electronic 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>
34
<PAGE> 37
PRODUCTS AND SERVICES
The following lists our current and future products and services:
<TABLE>
<S> <C>
-------------------------------------------------------------------------------------------------------
ADVERTISING ELECTRONIC COMMERCE
- ----------------------------------------------------------------------------------------------------------
ONLINE
Website advertising: banners, portals, DAM CDs
buttons Compilation CDs
Website sponsorships Collectible CDs*
E-mail marketing* T-shirts
Books and other music-related
merchandise*
Concert broadcasts on our website*
- ----------------------------------------------------------------------------------------------------------
OFFLINE
Sponsorship of CD samplers
Concert sponsorships*
- ---------------------------------------------------
</TABLE>
* = in development and expected to be released prior to the end of 1999
Online Advertising
For the three months ended March 31, 1999, 84% of our revenues were derived
from a 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, like 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
elements on a webpage. 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. For a premium rate, banners can
also be displayed in specific areas. 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.
Significant Online Advertising Relationships. In the first quarter of 1999,
Cyberian Outpost, Inc. and Alexa Internet accounted for approximately 14% and
13%, respectively, of our net revenues. We are currently not providing any
advertising services for Cyberian. Our agreement with Alexa is a month-to-month
advertising agreement. Under this agreement we receive a specified amount for
each download of Alexa software by our customers. Revenues under this agreement
are not expected to be a significant portion of our total revenues in subsequent
periods.
35
<PAGE> 38
In February 1999, we entered into a one year sponsorship agreement with
Tickets.com, Inc. Under this agreement, we include a Tickets.com webpage
advertisement on several pages on our website. Tickets.com pays us a monthly fee
under this agreement in exchange for the display of the Tickets.com
advertisement to our website visitors a minimum number of times each month. This
agreement does not provide for any early termination. Tickets.com has the right
to renew this agreement for a second year.
In February 1999, we also entered into a one year sponsorship agreement
with Xing Technology, Inc. Under this agreement, Xing pays us a monthly fee to
list a software product on several pages on our website. In addition, Xing pays
us, based on an agreed upon rate, for the display of Xing banner advertisements
to our website visitors a minimum number of times each month. If we fail to
display Xing's banner advertisements the required minimum number of times in any
month, Xing may, at its option, elect to receive additional impressions in
future periods or pay a reduced amount based upon the number of impressions
actually delivered. This agreement does not provide for any early termination.
In May 1999 we entered into a 26-month advertising insertion order with
Bill Gross' Idealab!. Under this agreement, Idealab! pays us, based on an agreed
upon rate, for the display of Idealab! banner advertisements to our website
visitors. We are required to deliver a target number of impressions during each
month of the term of this agreement. In the event we fail to provide at least
85% of this target number of impressions on an aggregate, ongoing basis,
Idealab! may terminate this agreement.
Revenues generated under the Tickets.com, Xing and Idealab! agreements are
expected to represent approximately 22% of our total revenues for the second
quarter of 1999.
Electronic Commerce
DAM CDs. DAM CDs are fully-packaged albums created by artists who post
music on our website. Prices are determined by the artists and are between $5.99
and $10.00 per CD. Each CD contains 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 including 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 artists from our website. 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 T-shirts on our website.
Offline Advertising
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 18,000
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, an initial version of the CD sampler was distributed
through our website.
Future Products in Development
E-Mail Marketing. We intend to use 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.
36
<PAGE> 39
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 Broadcasts on Our Website. We plan to broadcast live concerts on
our website featuring nationally-recognized and regional artists. We may charge
customers a fee to view these concert broadcasts on a "pay per view" basis.
Concert Sponsorships. We are organizing a series of concerts and festivals
featuring headliner bands and regional bands that have posted music on our
website. 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 May 31, 1999, our sales force consisted of nine
people located in our San Diego, California office. For our electronic 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 advertising banner campaign to
attract new users to our website. Our Internet advertising has been supplemented
with traditional media advertising including 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 held 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.
RELATIONSHIP WITH COX INTERACTIVE MEDIA
In June 1999 we sold 4,182,578 shares of Series C preferred stock (which
will be converted into 6,273,867 shares of common stock at the close of this
offering) to Cox Interactive Media, Inc. for a total purchase price of
approximately $45 million. Cox Interactive Media is a subsidiary of Cox
Enterprises, Inc., a media company whose business includes newspapers,
television, cable television and radio. Cox Interactive Media operates a network
of websites including 25 city sites. We also entered into a joint venture with
Cox Interactive Media. Cox Interactive Media and we are initially required to
contribute to the joint venture
37
<PAGE> 40
$30 million cash ($16,050,000 by Cox Interactive Media and $13,950,000 by us)
over time as required by the management committee of the joint venture.
The joint venture will be named MP3 Radio.com, and will focus on providing
downloadable music for affiliated radio stations across the U.S. In addition, we
will license to the joint venture various intellectual property rights. There
will also be advertising and electronic commerce revenue sharing arrangements
between the joint venture and MP3.com. The joint venture is owned 46.5% by us
and 53.5% by Cox Interactive Media, and we will split profits and losses of the
joint venture with Cox Interactive Media according to those percentages. We
cannot assure you that the business model of the joint venture will be
successful, or that the venture will generate revenues for MP3.com.
As part of our relationship with Cox Interactive Media, David E. Easterly,
a director of Cox Interactive Media, became a member of our board of directors
and will be a Class III director. Under the terms of our agreement with Cox
Interactive Media, we are obligated to nominate a representative from Cox
Interactive Media to serve for two additional three-year terms following
expiration of the initial term of Mr. Easterly, so long as Cox Interactive Media
holds at least 5% of our outstanding common stock and the joint venture
continues.
RELATIONSHIP WITH GROUPE ARNAULT
In July 1999, we entered into an agreement with Groupe Arnault, which has
committed to purchase an aggregate of $150 million in advertising, promotion and
marketing services from us over the next three years, including $5 million in
1999, $40 million in 2000, $70 million in 2001 and $35 million in the first half
of 2002. Groupe Arnault is a French corporation with interests in diverse
companies such as LVMH Moet Hennessy Louis Vuitton and others. It is intended
that our services under this agreement will primarily be used with LVMH brands
or brands of a similar quality of other entities in which Groupe Arnault
affiliates have investments.
Under the agreement, we will receive pre-payments from Groupe Arnault
totaling $45 million in July 1999. The remaining amounts owed under the
agreement will be secured by an irrevocable letter of credit to be executed in
July 1999. In addition, Groupe Arnault will have an exclusive right for 90 days
after this offering to negotiate the terms of a joint venture with us covering
the territories of Europe and Asia. We cannot guarantee that we and Groupe
Arnault will establish this joint venture or that, if established, this joint
venture will be successful and provide us with desired international presence or
branding.
In a separate agreement, we offered Arkaro S.A., a subsidiary of Groupe
Arnault, the opportunity to purchase registered shares of common stock directly
from us in this offering totaling five percent of our outstanding capital stock.
If Arkaro S.A. accepts this offer, we will sell Arkaro S.A. an estimated
3,300,000 shares of stock in this offering at the initial public offering price.
OTHER SIGNIFICANT RELATIONSHIPS
We have signed a three year consulting arrangement with Atlas/Third Rail
Management, Inc., an artist management group. Under the agreement, Atlas/Third
Rail will use its reasonable efforts to facilitate artist promotions. The first
promotion arranged by Atlas/Third Rail involves our sponsorship of Alanis
Morissette and Tori Amos' "5 1/2 Weeks" Summer 1999 tour. Under this agreement,
we granted Atlas/Third Rail a warrant to purchase 658,653 shares of common stock
exerciseable at $0.33 per share. See "Management's Discussion and Analysis of
Financial Condition and Operating Results -- Sales and Marketing." We expect to
take advantage of 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.
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 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
38
<PAGE> 41
concert performances, hold concerts with artists that have posted music on our
website and cooperate with us on other promotional activities. We will record
all revenues generated under the agreement and will recognize royalty expense
(to be included in cost of sales) representing the royalties payable to No
Limit. The royalty percentage due to No Limit will vary depending on the source
of revenue subject to the royalty obligation. No Limit will also become one of
our stockholders at the closing of this offering. Under this agreement, we will
issue 147,058 shares of our common stock (assuming an initial public offering
price of $17.00 per share) in a private placement concurrent with the closing of
this offering. See "Management's Discussion and Analysis of Financial Condition
and Operating Results -- Results of Operations."
We recently entered into an agreement with ASCAP, a music performing rights
organization. Under this agreement, we will obtain a comprehensive music
performance license that will allow unlimited interactive performances on our
website of all copyrighted works whose rights are held by ASCAP's members. We
are currently working with ASCAP to finalize the specific terms and conditions
of this license. As part of this agreement, we will provide prominent exposure
of the benefits of ASCAP membership to all unaffiliated writers, composers,
artists and publishers using the MP3.com site, as well as help facilitate the
processing of membership applications.
An interactive ASCAP "radio channel" is expected to be created on our
website. Programmed by ASCAP in collaboration with people who listen to music on
this channel, it will feature the music works of ASCAP artists and writers.
Also, we will nationally co-host music showcases and educational workshops both
on- and off-line.
RELATIONSHIPS WITH ARTISTS
Our music submission agreement governs music submitted to us by artists for
free distribution from our website, as well as music submitted to us for our DAM
CD program. Under this agreement, artists grant us a non-exclusive license to
distribute their music. Artists also make a number of representations and
warranties to us, including a representation and warranty that the music being
submitted will not infringe any third party rights. For music sold through our
DAM CD program, we typically pay artists 50% of the net revenue we receive.
Because this agreement is non-exclusive, artists are free to grant similar
rights to others during and after the term of the agreement. In addition, both
we and the artist may terminate the agreement at any time.
TECHNOLOGY INFRASTRUCTURE
Data Mining and Warehousing Activities
We maintain relational databases of all artists, music, electronic 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 the number of times that web
pages were viewed, 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 an architecture designed to be
secure, reliable and expandable. 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 Media, Inc.
and The Apache Group. We run our software on platforms from, among others, Intel
Corporation, Sun Microsystems, Inc., Cisco Systems, Inc. and Storage Technology
Corporation.
39
<PAGE> 42
During June 1999, our website delivered over 57 million webpages and 10
million songs and conducted over 5.5 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 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 electronic 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, electronic 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 expandable 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 like EMusic.com Inc. (formerly
GoodNoise Corporation), Launch Media, Inc. and various private companies
such as Musicmaker.com and Tunes.com, some of which also offer artist
services that are competitive with ours.
- 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. Some of these companies have taken significant
steps into the market for online music distribution. For example,
Amazon.com has announced its launch of a digital-download area on its
website, allowing free song downloads. In addition, America Online
40
<PAGE> 43
recently announced its acquisition of two Internet music companies,
Spinner Networks, Inc. and Nullsoft, Inc., and stated its intent to offer
downloadable music in leading formats.
- 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. Most of these
companies have recently entered the online commercial community and are
currently backing the SDMI security format.
Other 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, and Musicmaker.com
recently announced that it signed an exclusive 5-year licensing agreement for
EMI's music catalogue for custom compilation CDs.
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 business partnerships.
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
The laws and regulations that govern our business change rapidly. 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 use the information in
our databases to generate revenues.
- Encryption Laws. 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 these laws are adopted, we may
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, indecency, libel and
defamation. We could be liable if content delivered by us or placed on
our website violates these regulations.
- 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
41
<PAGE> 44
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 the content on our website and the
CDs we distribute:
- if the music, text, graphics, software or other content on our website or
CDs 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 CDs; or
- if anything on our website or CDs is deemed obscene, indecent or
defamatory.
We may also be liable for anything 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 and on our CDs. 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. The traditional music industry has not embraced the mp3 format for the
delivery of music, in large part because users of the mp3 format can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Our in-house musicologists listen to a significant amount of
the music submitted to us for posting on our website. 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 of
license rights with our in-house musicologists.
It is our belief that the artist is responsible for the material he or she
submits. 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. 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 the 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
42
<PAGE> 45
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 or requiring us to pay monetary
damages. 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.
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.
We are currently negotiating a five year lease for approximately 61,000
square feet of office and production space, and anticipate moving into this new
facility during the second half of 1999. We are also exploring the possible
lease of additional facilities, although we do not anticipate occupying these
facilities until the first half of 2000.
EMPLOYEES
On June 30, 1999, we had 141 employees, including 72 in sales and
marketing, 50 in product development, and 19 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.
43
<PAGE> 46
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information about our directors, executive
officers and key employees as of June 21, 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
David E. Easterly....................... 56 Director
Lawrence F. Probst III(1)............... 49 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 electronic
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.
44
<PAGE> 47
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 is a director of Mosaic Group, Inc. 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.
David E. Easterly has served as one of our directors since June 1999. Since
October 1994, Mr. Easterly has served as President and Chief Operating Officer
of Cox Enterprises, Inc., a diversified media company. From May 1986 to October
1994, Mr. Easterly served as President of Cox Newspapers, Inc. a subsidiary of
Cox Enterprises, Inc. Mr. Easterly serves as a member of the board of directors
of Cox Communications, Inc., Cox Radio, Inc. and several private companies. Mr.
Easterly holds a Bachelor of Arts from Austin College.
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 software, serving most recently as a Senior
45
<PAGE> 48
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 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 of incorporation, 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 directors will
be Messrs. Waitt and Easterly. 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.
Under the terms of our agreement with Cox Interactive Media, we are
obligated to nominate a representative from Cox Interactive Media to serve for
two additional three-year terms as a Class III director following expiration of
the initial term of Mr. Easterly, as long as Cox Interactive Media holds at
least 5% of our outstanding common stock.
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 expenses they incur by attending board and committee meetings.
All directors are eligible to participate in our 1998 Equity Incentive Plan.
46
<PAGE> 49
In March 1999, 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.
EXECUTIVE COMPENSATION
Except for Michael L. Robertson, all of our executive officers began to
work for us 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 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........................................ $70,833
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. We can terminate Mr.
Robertson's employment at any time. Mr. Robertson is eligible to participate in
our standard benefit programs available to all of our employees.
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
provides that Mr. Richards is eligible to participate in our standard benefit
programs available to all of our employees. Mr. Richards' employment is at-will.
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. 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, or if Mr. Ouyang terminates his employment for good reason. Under
the agreement we will reimburse Mr. Ouyang for expenses related to relocation
not to exceed $3,000 per month for a period of twelve months. Mr. Ouyang is
entitled to participate in our standard benefit programs available to all of our
employees. Mr. Ouyang's employment is at-will.
On January 29, 1999, we entered into a letter agreement with Steven G.
Sheiner, our Executive Vice President, Sales & Marketing regarding the terms of
his employment. This agreement was amended on May 19, 1999. This agreement
provides for an annual base salary of $200,000, and provides that Mr. Sheiner is
eligible to participate in our standard benefit programs available to all of our
employees. Mr. Sheiner's employment is at-will.
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, provides that we
will reimburse Mr. Alofs' living expenses up to $2,250 per month for a period of
twelve months. Mr. Alofs is also entitled to participate in our standard benefit
programs available to all of our employees. Mr. Alofs' employment is at-will.
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
47
<PAGE> 50
salary of $140,000, and provides that Mr. Dotson is entitled to participate in
our standard benefit programs available to all of our employees. Mr. Dotson's
employment is at-will.
As of June 21, 1999, the Company had issued the following options to its
executive officers:
<TABLE>
<CAPTION>
NUMBER PRICE NUMBER AGGREGATE
OF SHARES PER OF SHARES EXERCISE EXPIRATION SPECIAL
NAME GRANTED SHARE EXERCISED PRICE DATE VESTING PROVISIONS
---- --------- --------- --------- --------- ---------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robin D. Richards 2,437,500 $0.11 2,437,500 $260,000 1/17/09 - 100% upon termination
other than for cause
- 20% on IPO
- 100% on change of control
Paul L. H. Ouyang 480,000 $0.11 480,000 $ 51,200 2/27/09 - 100% upon termination
150,000 $0.33 150,000 $ 50,000 4/01/09 other than for cause, or due to
death or disability
- 20% on IPO
- 100% on change of control
- 50% upon resignation for
good reason
Steven G. Sheiner 375,000 $0.11 60,937 $ 6,500 2/27/09 - 10% on IPO
112,500 $0.33 11,250 $ 3,750 4/01/09 - 100% on change of control
Paul S. Alofs 495,000 $0.67 -- -- 4/26/09 - 20% on earlier of IPO or
April 27, 2000
- remainder monthly over
next four years
Ronald D. Dotson 75,000 $1.00 -- -- 5/12/09 - none
75,000 $2.00 -- -- 6/9/09
</TABLE>
Except as stated above, all of these options vest over four years.
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 of
directors in January 1999, May 1999 and June 1999. A total of 12,750,000 shares
of common stock, as amended, has been authorized for issuance under to the 1998
Plan. When a stock award expires or is terminated before it is exercised, the
shares set aside for that award are returned to the pool of shares available for
future awards. Shares that are issued when an award is exercised and that are
subsequently repurchased by us will not return to the pool and will not become
available for future awards.
The 1998 Plan permits the grant of options to our directors, officers, key
employees and consultants and 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. Under the guidelines 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 to specify
other terms of awards.
48
<PAGE> 51
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 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,
that 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 under the guidelines 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 transfers.
Upon 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 substitute these
outstanding stock awards, then the vesting and exercisability of outstanding
awards will accelerate prior to the charge in control and the awards will
terminate to the extent not exercised prior to the change in control. Even if
the surviving entity does assume or substitute outstanding stock awards, if the
holder of an award is terminated other than for cause, or constructively
terminated, within one month prior to or eighteen months following a change in
control, that holder's award will vest in full.
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 June 21, 1999, we had issued and outstanding under the 1998 Plan
options to purchase 4,169,213 shares of common stock. The per share exercise
prices of these options ranged from $0.11 to $2.00.
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.
Under the Purchase Plan, employees who participate in an offering may have
up to 15% of their earnings for the period of that offering withheld. 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 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
49
<PAGE> 52
may provide for all sums collected by payroll deductions to be applied to
purchase stock immediately prior to the change in control transaction.
The board has the authority to amend or terminate the Purchase Plan;
provided, however, that no amendment or termination of the Purchase Plan 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 proceedings initiated by these 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. We have entered into indemnification
agreements with each of our directors and officers.
In addition, our restated certificate of incorporation 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:
- for any breach of the director's duty of loyalty to us or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the Delaware General Corporation Law or
- for any transaction from which the director derives an improper personal
benefit.
Our restated certificate of incorporation will also provide that if the
Delaware General Corporation Law is amended after the approval by our
stockholders of the restated certificate of incorporation 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. The provision does not
affect a director's responsibilities under any other law, including the federal
securities laws or state or federal environmental laws.
50
<PAGE> 53
RELATED-PARTY 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 this 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. Upon the closing
of this offering, each share of Series A preferred stock will automatically
convert into one and one-half shares of common stock.
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 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 May 31, 1999, we had spent approximately
$99,000 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.
In June 1999, we sold 4,182,578 shares of Series C preferred stock to Cox
Interactive Media, Inc. for a total purchase price of approximately $45 million.
We also entered into a joint venture with Cox Interactive Media to create and
operate music-related websites. David E. Easterly, one of our directors, is the
President and Chief Operating Officer and a director of Cox Enterprises, Inc.,
the parent corporation of Cox Interactive Media, and a director of Cox
Interactive Media. Upon the closing of this offering, each share of Series C
preferred stock will automatically convert into one and one-half shares of
common stock. The Series C preferred stock sold to Cox Interactive Media was
purchased at a price equal to the fair value of the stock, as determined by our
board of directors on the date of issuance.
In July 1999, Groupe Arnault agreed to purchase an aggregate of $150
million in advertising, promotion and marketing services from us over the next
three years. In addition, we have offered Arkaro S.A., a subsidiary of Groupe
Arnault, the opportunity to purchase shares of our common stock directly from us
in this offering totaling five percent of our outstanding capital stock after
the offering.
51
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:
- each person who beneficially owns more than five percent of the common
stock;
- each of our directors;
- our Chief Executive Officer; and
- 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 except
for 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 before the offering is based on 53,277,855 shares of common stock
outstanding as of June 21, 1999, as adjusted to reflect the conversion of all
outstanding shares of preferred stock into common stock upon the closing of this
offering. The percentage of beneficial ownership after the offering additionally
reflects the 12,300,000 shares offered by this prospectus and the sale of
147,058 shares in a private placement as part of our agreement with Boutit, Inc.
entered into on May 12, 1999.
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 1,350,000 additional shares of our common stock, and up to
67,074,913 shares of common stock will be outstanding after the completion of
this offering.
All share numbers in this section reflect a three-for-two split in our
common stock that will take place prior to the close 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 48.1 39.0%
Mark A. Stevens(1)........................................ 9,337,011 17.5 14.2
Sequoia Capital
3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
David E. Easterly(2)...................................... 6,273,867 11.8 9.5
Cox Interactive Media, Inc.
1400 Lake Hearn Dr., N.P.
Atlanta, GA 30319
Robin D. Richards(3)...................................... 2,373,301 4.5 3.6
Theodore W. Waitt......................................... 1,500,000 2.8 2.3
Lawrence F. Probst III.................................... 150,000 * *
All directors and officers as a group (10 persons)(4)..... 46,003,845 86.3% 70.0%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
52
<PAGE> 55
(1) Includes:
- 8,462,134 shares held by Sequoia Capital VIII, which represents 15.9% and
12.9%, 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 1.1% and less than one percent, 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 the shares listed above except to the extent of his
pecuniary interest in those shares.
(2) Includes 6,273,867 shares held by Cox Interactive Media, Inc. Mr. Easterly,
one of our directors, is the President and Chief Operating Officer and a
director of Cox Enterprises, Inc., the parent corporation of Cox Interactive
Media, and a director of Cox Interactive Media, and shares voting power over
these securities with the other members of the board of directors of Cox
Interactive Media, none of whom are affiliated with us. Mr. Easterly has no
pecuniary interest in and disclaims beneficial ownership of these shares.
(3) Includes 1,965,233 shares we have the right to repurchase as of June 21,
1999.
(4) Includes:
- shares listed in footnotes 1, 2 and 3 above;
- 630,000 shares held by Paul L. H. Ouyang, 534,375 of which we have the
right to repurchase as of June 21, 1999; and
- 30,469 shares issuable upon exercise of options held by Steven G. Sheiner
exercisable within 60 days of June 21, 1999. Excludes 27,218 shares
issuable upon exercise of options exercisable upon consummation of this
offering.
53
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering and the filing of our
restated certificate of incorporation, 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 June 21,
1999, after giving effect to the conversion of all outstanding preferred stock
into common stock upon the closing of this offering and an estimated 147,058
shares to be issued to Boutit, Inc. in a private placement concurrent with the
closing of this offering, there were outstanding 53,424,913 shares of common
stock held of record by 79 stockholders and options to purchase 4,169,213 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. After the holders of preferred
stock, holders of common stock are entitled to receive dividends declared by the
board of directors out of funds legally available for dividends. In the event of
our liquidation, dissolution or winding up, holders of common stock are entitled
to share 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 19,307,516 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 of incorporation, 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 common
stockholders 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 our company. We have no present
plans to issue any additional shares of preferred stock.
REGISTRATION RIGHTS
Under the Second Amended and Restated Investor Rights Agreement dated June
4, 1999 between us and several of our investors, the investors, holding an
aggregate of 18,316,169 shares of our common stock issued or issuable upon
conversion of our preferred stock, have 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 these registrable shares are
entitled to notice of the registration and entitled to include registrable
shares in that offering, provided that the underwriters of that offering have
the right to limit the number of shares included in the 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 the registration. We are not
obligated to effect more than two stockholder-initiated registrations. Further,
holders of registrable securities may require us to file no more than
54
<PAGE> 57
one registration statements on Form S-3 per year and no more than two in total.
We are not required to affect any registrations on Form S-3 unless the aggregate
price to the public is $500,000 or more.
We are required to bear substantially all costs incurred in these
registrations, other than underwriting discounts and commissions. The
registration rights described above 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 of incorporation 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 of incorporation 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 after
a resolution is 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 of incorporation 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
of incorporation and bylaws could delay or discourage some 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 could adversely affect
the price of our common stock.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the trading symbol "MPPP."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
55
<PAGE> 58
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. 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 65,724,913 outstanding
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the 9,000,000
shares offered for sale through the underwriters will be freely tradable without
restriction under the Securities Act unless purchased by our affiliates. If
Arkaro S.A. accepts our offer to purchase an estimated 3,300,000 shares in this
offering, 10% of their shares will be eligible for sale in the public market
beginning six months after the date of this prospectus, with an additional 10%
becoming eligible at the beginning of each of the next five months. Arkaro S.A.
may not sell more than 20% of their shares in any month prior to one year after
the date of this prospectus. One year after the date of this prospectus, all of
Arkaro S.A.'s remaining shares will be eligible for sale.
The remaining 53,424,913 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- 31,375,125 shares will have been held long enough to be sold under Rule
144 or Rule 701 beginning 181 days after the date of this prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
Lock-Up Agreements. All of our stockholders and option holders have agreed
not to transfer or dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exercisable or exchangeable for
shares of our common stock, for a period of 180 days after the date the
registration statement of which this prospectus is a part is declared effective.
Transfers or dispositions can be made sooner with the prior written consent of
Credit Suisse First Boston Corporation.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately 657,249 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also limited by manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under a compensatory stock
purchase plan or option plan or other written agreement
56
<PAGE> 59
will be eligible to resell their shares beginning 90 days after the date of this
prospectus. Non-affiliates will be able to sell their shares subject only to the
manner-of-sale provisions of Rule 144. Affiliates will be able to sell their
shares without compliance with the holding period requirements of Rule 144.
Registration Rights. Upon completion of this offering, the holders of
18,316,169 shares of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." Except for shares purchased by
affiliates, registration of their shares under the Securities Act would result
in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration.
Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering the shares of common
stock reserved for issuance upon exercise of outstanding options. The
registration statement is expected to be filed and become effective as soon as
practicable after the closing of this offering. Accordingly, shares registered
under the registration statement will be available for sale in the open market
beginning 180 days after the effective date of the registrant statement of which
this prospectus is a part, except with respect to Rule 144 volume limitations
that apply to our affiliates.
57
<PAGE> 60
UNDERWRITING
Under 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 and
an estimated 3,300,000 shares that may be issued to Arkaro S.A. directly by us
as part of an agreement to offer such shares to them. 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 up to
1,350,000 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>
We will pay Credit Suisse First Boston Corporation a financial advisory fee for
financial services performed as part of the agreements with Groupe Arnault and
Arkaro S.A. We will not pay any discount or commission to the underwriters for
the estimated 3,300,000 shares that may be issued to Arkaro S.A. directly by us
as part of an agreement to offer such shares to them.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Our officers and directors and most of our other stockholders have agreed
not sell any shares of our common stock or other securities without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus. They also may not during this period
engage in some
58
<PAGE> 61
transactions that might lead to the transfer of their shares. They will however
be permitted to exercise stock options without consent.
At our request, the underwriters have reserved up to 1,850,000 shares of
common stock offered by this prospectus for sale at the initial public offering
price to artists and customers of MP3.com, consultants and others with whom we
do business, existing stockholders and friends of MP3.com. This group may
include Sequoia Capital and entities related to it that have expressed an
interest in acquiring up to 200,000 shares. As a result, the number of shares
available for sale to the general public will be reduced to the extent that
persons purchase these 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 by this prospectus.
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 to those
liabilities.
We have applied to list our 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
included 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 the 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 these kinds of transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
59
<PAGE> 62
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.
60
<PAGE> 63
LEGAL MATTERS
We are represented in this offering by Cooley Godward LLP, San Diego,
California. As of the date of this prospectus, an investment fund created by
Cooley Godward LLP owns an aggregate of 48,701 shares of Series A preferred
stock (convertible into 73,051 shares of common stock). O'Melveny & Myers LLP,
Newport Beach, California represents 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 included in the
registration statement. For further information pertaining to us and the common
stock offered under this prospectus, reference is made to the registration
statement and the attached exhibits and schedules. Although required material
information has been presented in this prospectus, statements contained in this
prospectus as to the contents or provisions of any contract or other document
referred to in this prospectus may be summary in nature, and in each instance
reference is made to the copy of this contract or other document filed as an
exhibit to the registration statement, and each statement is qualified in all
respects by this 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 the SEC's 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.
After this offering, we will have to provide the information and reports
required by the Exchange Act and we 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, these 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.
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;
- the conversion of each outstanding share of preferred stock into one and
one-half shares of common stock upon the closing of this offering;
- that we will issue 147,058 shares of common stock (assuming an initial
public offering price of $17.00 per share) concurrent with the closing of
this offering in a private placement as part of an agreement with Boutit,
Inc. entered into on May 12, 1999; and
- the filing 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.
61
<PAGE> 64
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> 65
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 MP3.com'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 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
July 9, 1999
F-2
<PAGE> 66
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 and contingencies (Notes 3 and 6)
Stockholders' equity:
Preferred stock, par value $0.001 per share; none
authorized at December 31, 1998 and March 31, 1999;
none issued and outstanding at December 31, 1998
and March 31, 1999; authorized 15,000,000 and none
issued and outstanding, pro forma (unaudited)...... -- -- $ --
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;
none authorized pro forma (unaudited)..............
Series A, authorized 5,000,000 and 8,150,000 at
December 31, 1998 and March 31, 1999,
respectively; none and 7,150,000 issued and
outstanding at December 31, 1998 and March 31,
1999, respectively; 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 29,249,999 and 31,694,999 at
December 31, 1998 and March 31, 1999, respectively;
authorized 200,000,000 and 42,419,995 issued and
outstanding pro forma (unaudited).................. 29,250 31,695 42,420
Additional paid in capital............................ 701,064 16,351,763 16,348,188
Notes receivable from stockholder..................... -- (260,000) (260,000)
Deferred compensation................................. (178,070) (4,008,125) (4,008,125)
Accumulated deficit................................... (357,538) (1,763,166) (1,763,166)
--------- ----------- -----------
Total stockholders' equity.................... 194,706 10,359,317 $10,359,317
--------- ----------- ===========
$ 463,355 $11,245,608
========= ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 67
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..................... 550,197 652,315
----------- -----------
Total operating expenses.......................... 1,167,248 1,939,401
----------- -----------
Loss from operations........................................ (219,768) (1,478,919)
Interest income (expense), net.............................. (3,810) 73,291
----------- -----------
Loss before income taxes.................................... (223,578) (1,405,628)
Provision for income taxes.................................. 133,960 --
----------- -----------
Net loss.................................................... $ (357,538) $(1,405,628)
=========== ===========
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) $ (0.03)
=========== ===========
Weighted average shares -- basic and diluted.............. 45,490,301 46,844,583
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 68
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.... -- $ -- 26,178,749 $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...................... -- -- 29,249,999 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) -- --
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)........ -- -- -- -- 4,482,370 -- (4,482,370) --
Amortization of deferred
compensation
(unaudited)............... -- -- -- -- -- -- 652,315 --
Net loss (unaudited)........ -- -- -- -- -- -- -- (1,405,628)
--------- ------ ---------- ------- ----------- --------- ------------ -----------
Balance at March 31, 1999
(unaudited)............... 7,150,000 $7,150 31,694,999 $31,695 $16,351,763 $(260,000) $ (4,008,125) $(1,763,166)
========= ====== ========== ======= =========== ========= ============ ===========
<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)............... --
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)............... 652,315
Net loss (unaudited)........ (1,405,628)
-----------
Balance at March 31, 1999
(unaudited)............... $10,359,317
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 69
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) $(1,405,628)
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..................... 550,197 652,315
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> 70
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. is developing a revolutionary approach to the promotion and
distribution of music. MP3.com uses the Internet and file formats that make
music files smaller 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.
MP3.com, Inc., formerly named ZCo, Inc., was incorporated in Delaware and
commenced operations on March 17, 1998 (inception). At inception, MP3.com's
principal founder contributed personal assets and liabilities to MP3.com. In
exchange, the principal founder received 26,178,749 shares of MP3.com's common
stock. The assets and liabilities assumed by MP3.com were recorded at carryover
basis. There were no significant revenues and operations related to the assets
and liabilities transferred to MP3.com.
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
included, 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. Financial statements
for the period from March 17, 1998 (inception) to March 31, 1998 have not been
presented as the operating activity was insignificant and disclosure would not
be meaningful.
CONCENTRATION OF CREDIT RISKS
MP3.com 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. MP3.com maintains a significant portion of its cash and cash
equivalents with one financial institution. MP3.com 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. Two customers
accounted for 13.5% and 13.1%, respectively, for the quarter ended March 31,
1999.
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. MP3.com
generally invests its excess cash in money market funds and certificates of
deposit with a financial
F-7
<PAGE> 71
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
institution with a strong credit rating. These investments are made in
accordance with MP3.com's 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
MP3.com'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
MP3.com evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS
121 requires recognition of impairment of long-lived assets in the event the net
book value of these assets exceeds the future undiscounted cash flows
attributable to these assets. MP3.com 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. MP3.com has identified no such impairment losses. Substantially all
of MP3.com's long-lived assets are located in the United States.
REVENUE RECOGNITION
MP3.com's revenues are derived principally from the sale of banner and
sponsorship advertisements. To date, the duration of MP3.com's banner
advertising commitments has ranged from one month to one year. Sponsorship
advertising contracts involve more integration with MP3.com's website, including
the placement of buttons that provide users with direct links to the
advertiser's website. Sponsorship advertisement contracts are recognized evenly
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 MP3.com has no remaining
significant obligations and collection of the resulting receivable is probable.
MP3.com banner advertisement obligations typically include guarantees of minimum
number of "impressions" or times that an advertisement appears in pages viewed
by users of MP3.com's website. In these circumstances, MP3.com 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, MP3.com 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.
Revenue derived from the sales of CDs and music-related merchandise are
recognized by MP3.com at their gross sales price upon shipment. The portion of
the sales price payable to artists as royalties is expensed to cost of revenues
and accrued at the time revenue is recorded.
F-8
<PAGE> 72
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 MP3.com to manage,
monitor, maintain and operate MP3.com's website. Product development costs are
expensed as incurred.
STOCK-BASED COMPENSATION
MP3.com accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS 123, "Accounting for Stock-Based Compensation". 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 MP3.com'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
MP3.com computes net loss per share following SFAS No. 128, "Earnings Per
Share" and SEC Staff Accounting Bulletin No. 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 these 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.
Under the provisions of 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 common shares have been
issued for nominal consideration.
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) $(1,405,628)
=========== ===========
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>
F-9
<PAGE> 73
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dilutive common stock equivalents include common stock options and
preferred stock as if converted and restricted stock that has not yet fully
vested. 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.
PRO FORM STOCKHOLDERS EQUITY (UNAUDITED)
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 MP3.com's initial public offering
(using the as-if-converted method). If MP3.com'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 19,307,516
shares of common stock based on the shares of convertible preferred stock
outstanding at June 21, 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.
COMPREHENSIVE INCOME
MP3.com 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 MP3.com's
net loss and its total comprehensive loss for the period from March 17, 1998
(inception) to December 31, 1998.
SEGMENT INFORMATION
MP3.com adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 requires public companies to
report financial and descriptive information about their reportable operating
segments. MP3.com identifies its operating segments based on how management
internally evaluates separate financial information (if available), business
activities and management responsibility. MP3.com believes it operates in a
single business segment and adoption of this standard did not have a material
impact on MP3.com's financial statements. Through December 31, 1998, there have
been no foreign operations.
F-10
<PAGE> 74
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A summary of advertising and merchandise revenue from customers is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, THREE
1998 MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Advertising......................................... $1,060,551 $560,036
Merchandise......................................... 101,887 105,749
---------- --------
$1,162,438 $665,785
========== ========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP No. 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. MP3.com 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." 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. MP3.com 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
MP3.com leases its facilities and some of its CD production 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.
F-11
<PAGE> 75
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LEASE COMMITMENTS (CONTINUED)
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.
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
MP3.com 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. MP3.com's board of directors can fix or change the features of
preferred stock. See Note 6 "Recent Events".
STOCK OPTIONS
During 1998, MP3.com adopted the Founders Stock Option Plan and the 1998
Equity Incentive Plan 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 MP3.com and non-qualified stock options may be
granted to consultants, employees, directors, and officers of MP3.com. 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 grants to
founders of MP3.com. 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 some of these shares can be repurchased by MP3.com. Common
shares obtained by an early exercise of unvested options can be repurchased by
MP3.com at the original exercise price and will vest according to the respective
option agreement. Repurchase can only be initiated at MP3.com's option. As of
December 31, 1998, there were 585,000 shares vested and 2,486,250 shares could
be repurchased by MP3.com.
The equity incentive plan reserved 9,750,000 shares of common stock for
granting to employees and non-employees of MP3.com. Grants under the equity
incentive plan vest over four years with 25% of the shares
F-12
<PAGE> 76
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
vesting on the first anniversary of the grant and 1/36 of the remaining shares
vesting in equal installments monthly for the following 36 months. As of
December 31, 1998, there were no stock options granted under the equity
incentive plan.
The following table summarizes MP3.com'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)..................... -- (3,168,750) $ 0.11
---------- ----------
Balance as of March 31, 1999 (unaudited)........... 3,823,500 2,757,750 $ 0.20
========== ==========
</TABLE>
For the period from March 17, 1998 (inception) to December 31, 1998, the
weighted average exercise price and weighted average grant date fair value for
options to purchase 2,193,750 shares of common stock that were granted at
exercise prices less than deemed fair value were approximately $0.001 and $0.33,
respectively. The remaining options to purchase 877,500 shares of common stock
were granted at exercise prices equal to the deemed fair value. For the three
months ended March 31, 1999, the weighted average grant date fair value for
options granted at exercise prices less than deemed fair value was approximately
$0.85. For the three months ended March 31, 1999, no options were granted at
exercise prices equal to or in excess of deemed fair value.
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
MP3.com has recorded deferred compensation corresponding to the grants of
stock options to employees and consultants of $728,267 and $4,482,370, during
the period from March 17, 1998 (inception) to December 31, 1998 and the three
months ended March 31, 1999, respectively.
During the three months ended March 31, 1999, MP3.com granted options to
purchase 322,500 common shares to four consultants at a weighted average
exercise price of $0.33. MP3.com recorded compensation totaling $283,800 for the
fair value of the options which will be amortized to sales and marketing expense
over the life of the consulting arrangements. The fair value of the 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%;
F-13
<PAGE> 77
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
an expected option life of two years; and no annual dividends. For the three
months ended March 31, 1999, MP3.com amortized $19,800 to sales and marketing
expense related to the consulting agreements.
Had compensation expense for MP3.com's stock-based compensation plans been
determined consistent with SFAS 123, MP3.com'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>
Pro forma information is required by SFAS 123, and has been determined as
if MP3.com 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
MP3.com accounts for income taxes following the provisions of 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>
F-14
<PAGE> 78
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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>
A reconciliation of income taxes at the statutory federal income tax rate
to the provision for income taxes is as follows for the period from March 17,
1998 (inception) to December 31, 1998:
<TABLE>
<S> <C>
U.S. federal taxes at the statutory rate.................... $(76,017)
State taxes, net of federal benefit......................... 20,024
Nondeductible amortization of deferred compensation......... 187,067
Other nondeductible expenses................................ 2,886
--------
$133,960
========
</TABLE>
6. RECENT EVENTS
In January 1999, MP3.com issued 7,150,000 shares of Series A convertible
preferred shares at $1.54 per share for net proceeds of approximately $10.9
million. In April 1999, MP3.com issued 1.1 million shares of Series A
convertible preferred shares at $2.00 per share for proceeds of $2.2 million
with no issuance costs for these proceeds. 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 Series A preferred stockholders 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 Series A preferred stockholders are entitled to receive
liquidation preferences at the rate of $1.54 per share, prior and in preference
to any distribution of assets to common stockholders. Additionally, the Series A
preferred stockholders have voting rights for each share of common stock into
which the preferred shares convert.
In February 1999, MP3.com 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 MP3.com may finance 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 MP3.com's assets. Under the
line of credit, MP3.com is required to comply with financial covenants. MP3.com
was in compliance with all financial covenants on March 31, 1999. In April 1999,
MP3.com drew $1,234,000 on the line of credit.
In April 1999, MP3.com entered into an artist promotion consulting
agreement for the term of three years. Independent of the promotion agreement,
in April 1999, MP3.com entered into a Series B preferred stock purchase
agreement whereby MP3.com issued 439,103 shares of MP3.com's Series B
convertible preferred stock at $5.69 per share for total proceeds of
approximately $2.5 million. The Series B convertible preferred stockholders have
substantially the same rights and features as the Series A convertible preferred
stockholders. Additionally, the consultants were issued a warrant for 658,653
shares of common stock exercisable at $0.33 per common share of which 540,096
shares of common stock were exercised. The
F-15
<PAGE> 79
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RECENT EVENTS (CONTINUED)
warrants expire upon the earlier of (i) the closing of an initial public
offering of MP3.com's common stock, (ii) the sale or merger of MP3.com which
results in a change of control as defined, or (iii) or the closing for the sale
of substantially all of MP3.com's assets. MP3.com recorded deferred advertising
of approximately $2,191,000, representing the fair value of the warrants which
will be amortized during the year ended December 31, 1999. The fair value of the
warrants was estimated at the date of grant using the minimum value method with
the following assumptions: risk free interest rate of 5.5%; an expected warrant
life of three years; and no annual dividends.
In May 1999, MP3.com entered into an agreement with Tori Amos with terms
and conditions consistent with the agreement with Atlas/Third Rail except that
the agreement with Ms. Amos terminates after the "5 1/2 Weeks" tour in September
1999. As a result of the agreement with Ms. Amos, MP3.com issued 22,500 shares
of common stock to Ms. Amos in consideration for her services. As a result of
this issuance, MP3.com recorded deferred marketing costs of $111,000. MP3.com
will expense the $111,000 to sales and marketing expense in the third quarter of
1999 (during the 5 1/2 Weeks" tour promotion).
MP3.com was named as an additional defendant in an action entitled
PlayMedia Systems, Inc., et al., v. Nullsoft, Inc., et al., etc. (Case No.
99-02494) filed in the United States District Court for the Central District of
California. The First Amended Complaint alleged that MP3.com is liable for
copyright infringement with respect to "AMP" software used for decoding mp3
files distributed over the Internet. In May 1999, MP3.com and PlayMedia mutually
agreed to dismiss the action at no financial cost to MP3.com.
In May 1999, MP3.com adopted an Employee Stock Purchase Plan. Under the
plan, employees of MP3.com 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 plan 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 plan is
300,000.
In May 1999, MP3.com entered into a three year agreement with Boutit, Inc.
Under the terms of the agreement, MP3.com obtained the exclusive rights to
certain master music recordings and arranged for other promotional events in
exchange for shares of MP3.com's common stock valued at $2.5 million. The number
of shares to be issued upon completion of the initial public offering will be
determined by dividing $2.5 million by the price of a common share offered to
the public in the initial public offering. MP3.com expects to expense the value
of the stock over the term of the arrangement. In the event MP3.com does not
complete a firm underwritten public offering within eight months of the date of
the agreement, Boutit, Inc. can terminate the agreement.
In May 1999, MP3.com's board of directors authorized, subject to
stockholder approval, the restatement of MP3.com's certificate of incorporation
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. In addition, MP3.com's board of directors,
subject to stockholder approval, increased the number of shares reserved under
the 1998 Equity Incentive Plan to 12,750,000.
In June 1999, MP3.com sold 4,182,578 shares of Series C convertible
preferred stock (which will be converted into 6,273,867 shares of common stock
at the closing of this offering) to Cox Interactive Media, Inc. for a total
purchase price of approximately $45 million. In addition, MP3.com and Cox have
formed a joint venture that will focus on providing downloadable music for
affiliated radio stations across the U.S. MP3.com and Cox own 46.5% and 53.5%,
respectively, of the joint venture, and MP3.com is committed to
F-16
<PAGE> 80
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RECENT EVENTS (CONTINUED)
fund approximately $14 million during the first year of the joint venture's
operations. All future capital calls, if necessary, will be based upon each
partner's ownership percentage.
In June 1999, MP3.com established the MP3.com Foundation. MP3.com's board
of directors authorized the initial contribution to the Foundation of 100,000
shares of common stock. The deemed fair value of the contribution was $766,700.
The value will be charged to expense during the second quarter of 1999.
For the period from March 31, 1999 to June 21, 1999, MP3.com granted
additional options to purchase 2,932,650 shares of common stock at a weighted
average exercise price of $1.11 per share. Included in the 2,932,650 options are
450,000 options granted at a weighted average exercise price of $1.00 outside of
MP3.com's equity incentive plan. All 450,000 options were exercised in May 1999.
For the same period, employees and consultants exercised options for 1,044,187
shares of common stock and investors exercised warrants for 658,653 shares of
common stock.
In July 1999, MP3.com entered into an agreement with Groupe Arnault, which
has committed to purchase an aggregate of $150 million in advertising, promotion
and marketing services from MP3.com over a three-year period beginning October
1999, including $5 million in 1999, $40 million in 2000, $70 million in 2001 and
$35 million in the first half of 2002. Under the agreement, MP3.com will receive
pre-payments of $45 million in July 1999 representing advertising, promotional,
and marketing services to be delivered by MP3.com from October 1, 1999 through
December 31, 2000.
In July 1999, MP3.com entered into an agreement with Arkaro S.A., a
subsidiary of Groupe Arnault, in which MP3.com offered Arkaro S.A. the
opportunity to purchase five percent of MP3.com's outstanding shares of capital
stock as of the effective date of MP3.com's underwritten initial public offering
at the price per share offered to the public.
F-17
<PAGE> 81
BACK PANEL ARTWORK:
The MP3.com logo appears against a black background. Affixed over the logo
(on our preliminary prospectus) is a sleeve containing a music CD suitable for
play on either a computer or audio CD player. The CD sleeve is blue with the
MP3.com logo and the phrase "Music to Invest By." The following text appears on
the page:
- Top acts of tomorrow as well as current major artists.
- MP3.com. Where the world comes for music.
<PAGE> 82
MP3 LOGO
<PAGE> 83
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................................ 225,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 41,030
--------
Total............................................. $975,000
========
</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> 84
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 26,178,749 shares
of its common stock to Michael L. Robertson, a founder of the Registrant,
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 30, 1998 the Registrant issued and sold an aggregate of
3,071,250 shares of its common stock to three founding employees of the
Registrant, 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 and February 1999 the Registrant issued and sold
7,150,000 shares of its Series A preferred stock (convertible into
10,724,996 shares of common stock) to sixteen 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.
(d) 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 Theodore W. Waitt, an accredited investor, 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.
(e) On April 23, 1999 the Registrant issued and sold 100,000 shares of
its Series A preferred stock (convertible into 150,000 shares of common
stock) to Lawrence F. Probst III, an 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.
(f) On April 26, 1999, the Registrant issued a warrant to purchase up to
658,653 shares of its common stock to Atlas/Third Rail Management, Inc., a
sophisticated investor, at an exercise price of $0.33 per share.
Atlas/Third Rail is a business consultant of the Registrant and had access
to material information about the Registrant. For the issuance of the
warrant, the Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.
(g) On April 29, 1999, the Registrant issued and sold 439,103 shares of
its Series B preferred stock (convertible into 658,653 shares of common
stock) to fifteen accredited investors for an aggregate purchase price of
$2,498,496. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act and Regulation D promulgated thereunder.
II-2
<PAGE> 85
(h) In April and May 1999, the Registrant issued and sold an aggregate
of 750,000 shares of its common stock for an aggregate purchase price of
$550,000 to two sophisticated business consultants of the Registrant,
pursuant to the exercise of stock options. These consultants had access to
material information about the Registrant. The Registrant relied on the
exemption provided by Section 4(2) of the Securities Act.
(i) 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 to Boutit, Inc., an accredited investor, at the initial public
offering price in a private placement concurrent with the closing of this
offering. The Registrant is relying upon the exemption provided by Section
4(2) under the Securities Act and Regulation D promulgated thereunder.
(j) On May 13, 1999, the Registrant issued and sold 22,500 shares of its
common stock for services originally valued at the time of issuance by the
board of directors at $15,000 to Tori Amos, an accredited investor. The
Registrant relied on the exemption provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
(k) On June 4, 1999 the Registrant issued and sold 4,182,578 shares of
Series C preferred stock (convertible into 6,273,867 shares of common
stock) to Cox Interactive Media, Inc., an accredited investor, for a total
purchase price of $45,004,539. The Registrant relied on the exemption
provided by Section 4(2) under the Securities Act and Regulation D
promulgated thereunder.
(l) On June 10, 1999 the Registrant donated 100,000 shares of common
stock to MP3.com Foundation, a non-profit public benefit corporation.
Exemption from registration of these shares was not necessary because the
transaction did not involve a "sale" of securities as that term is used in
Section 2(3) of the Securities Act. The Registrant relied upon the
exemption provided by Section 4(2) under the Securities Act and Regulation
D promulgated thereunder.
(m) In April and June 1999, the Registrant issued and sold 658,653
shares of its common stock for a purchase price of $219,552 to seven
accredited investors, 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 and Regulation D promulgated thereunder.
(n) As of June 21, 1999, the Registrant had issued and sold, in the
aggregate, 3,912,937 shares of its common stock for per-share exercise
prices ranging from $0.11 to $1.00 to employees and consultants pursuant to
their exercise of stock options granted under the Registrant's 1998 Equity
Incentive Plan. The Registrant relied on the exemption provided by Rule 701
under the Securities Act.
(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 and
pursuant to option grants not under either of such plans. With respect to
all 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> 86
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.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Specimen Stock Certificate.
5.1* Opinion of Cooley Godward LLP.
10.1* 1998 Equity Incentive Plan (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.
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, as amended, dated as of May
19, 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* Second Amended and Restated Investor Rights Agreement by and
among the Company and certain stockholders of the Company
dated June 4, 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.
10.18* Stock Pledge Agreement, as amended, from Robin D. Richards
to the Company dated as of January 25, 1999.
</TABLE>
II-4
<PAGE> 87
<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.
10.20* Letter Agreement regarding employment by and between the
Company and Ronald D. Dotson dated as of May 3, 1999.
10.21+ Series C Preferred Stock Purchase Agreement by and between
the Company and Cox Interactive Media, Inc. dated as of May
19, 1999.
10.22+* Sponsorship Agreement by and between the Company and
Tickets.com, Inc. dated as of February 17, 1999.
10.23+ Sponsorship Agreement by and between the Company and Xing
Technology, Inc. dated as of February 18, 1999.
10.24+ Advertising Insertion Order by and between the Company and
Bill Gross' idealab! dated as of May 19, 1999.
10.25 Advertising, Promotion and Marketing Agreement by and
between the Company and Groupe Arnault dated July 10, 1999.
10.26 IPO Equity Offer Agreement by and between the Company and
Arkaro S.A. dated July 10, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Reference is made to page II-8.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
(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.
II-5
<PAGE> 88
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-6
<PAGE> 89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to 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 July 11, 1999.
By: /s/ ROBIN D. RICHARDS
------------------------------------
Robin D. Richards
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to 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>
* Chief Executive Officer and Director July 11, 1999
- ------------------------------------------ (Principal Executive Officer)
Michael L. Robertson
/s/ ROBIN D. RICHARDS President, Chief Operating Officer July 11, 1999
- ------------------------------------------ and Director
Robin D. Richards
* Chief Financial Officer and Executive Vice July 11, 1999
- ------------------------------------------ President (Principal Financial and
Paul L. H. Ouyang Accounting Officer)
* Director July 11, 1999
- ------------------------------------------
Lawrence F. Probst III
* Director July 11, 1999
- ------------------------------------------
Mark A. Stevens
* Director July 11, 1999
- ------------------------------------------
Theodore W. Waitt
</TABLE>
* By: /s/ ROBIN D. RICHARDS
-----------------------------------------
(Robin D. Richards)
(Attorney-in-fact)
II-7
<PAGE> 90
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 Note 6, as to which the date is , 1999) in
Amendment No. 4 to the Registration Statement (Form S-1 No. 333-78545) and
related Prospectus of MP3.com, Inc.
Our audit 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 MP3.com'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
July 9, 1999
II-8
<PAGE> 91
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-9
<PAGE> 92
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.
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Specimen Stock Certificate.
5.1* Opinion of Cooley Godward LLP.
10.1* 1998 Equity Incentive Plan (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.
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, as amended, dated as of May
19, 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* Second Amended and Restated Investor Rights Agreement by and
among the Company and certain stockholders of the Company
dated June 4, 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.
10.18* Stock Pledge Agreement, as amended, from Robin D. Richards
to the Company dated as of January 25, 1999.
</TABLE>
<PAGE> 93
<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.
10.20* Letter agreement regarding employment by and between the
Company and Ronald D. Dotson dated as of May 3, 1999.
10.21+ Series C Preferred Stock Purchase Agreement by and between
the Company and Cox Interactive Media, Inc. dated as of May
19, 1999.
10.22+* Sponsorship Agreement by and between the Company and
Tickets.com, Inc. dated as of February 17, 1999.
10.23+ Sponsorship Agreement by and between the Company and Xing
Technology, Inc. dated as of February 18, 1999.
10.24+ Advertising Insertion Order by and between the Company and
Bill Gross' idealab! dated as of May 19, 1999.
10.25 Advertising, Promotion and Marketing Agreement by and
between the Company and Groupe Arnault dated July 10, 1999.
10.26 IPO Equity Offer Agreement by and between the Company and
Arkaro S.A. dated July 10, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
Reference is made to page II-8.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
(1) To be filed by amendment.
<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 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, Series
B Preferred and Series C 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"). Four million
one hundred eighty-two thousand five hundred seventy-eight (4,182,578) of the
authorized shares of Preferred Stock are hereby designated "Series C Preferred
Stock" (the "Series C Preferred").
F. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C Preferred (as
adjusted for any stock dividends, combinations, splits,
2.
<PAGE> 3
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, (ii) the Series B Preferred shall be five dollars and
sixty-nine cents ($5.69) per share and (i) the Series C Preferred shall be ten
dollars and seventy-six cents ($10.76) 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, Series
B Preferred or Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, the Series B Preferred and Series
C 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, Series B
Preferred and Series C 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, Series B
Preferred and Series C 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, SERIES B
PREFERRED AND SERIES C 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, Series B Preferred
and/or Series C Preferred (subject to adjustment for any stock split, reverse
stock split or other similar event affecting the Series A Preferred, Series B
Preferred and Series C 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, Series B
Preferred and Series C Preferred, voting together as a single class, shall be
necessary for effecting or validating the following actions:
3.
<PAGE> 4
(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, Series B Preferred or Series C Preferred, or that otherwise
adversely affects the voting powers, preferences or other special rights,
privileges or restrictions of the Series A Preferred, Series B Preferred or
Series C 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, Series B Preferred or
Series C 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, Series B Preferred and Series C Preferred,
each consenting or voting (as the case may be) together as a single class,
increase the maximum number of directors constituting the Board of Directors to
a number in excess of six (6). 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)
4.
<PAGE> 5
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. For so long as at least
3,500,000 shares of Series C Preferred remain outstanding (subject to adjustment
for any stock split, reverse stock split or similar event affecting the Series C
Preferred), the holders of Series C Preferred, voting together as a separate
class, shall be entitled to elect one (1) member of the Company's Board of
Directors (the "Series C Director") 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 Series A Preferred and a majority of the then outstanding
shares of Series C Preferred shall constitute a quorum of the Series A Preferred
and Series C Preferred, respectively, for the election of directors to be
elected solely by the holders of the Series A Preferred and Series C Preferred,
respectively. 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, Series B Preferred and Series C 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 (i) is
subject to Section 2115 of the California General Corporation Law ("CGCL") and
(ii) is not 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.
5.
<PAGE> 6
(d) REMOVAL.
(i) Subject to the rights of the holders of
Common Stock, Series A Preferred, Series B Preferred and Series C 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, Series B Preferred
and Series C Preferred to remove certain directors pursuant to Section 2(c)
above, and (ii) Section VA.3(b) below, 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 time to time come into existence,
the holders of Series A Preferred, Series B Preferred and Series C Preferred
shall be entitled to be paid out of the assets of the Company an amount per
share of Series A Preferred, Series B Preferred and Series C Preferred,
respectively, equal to their respective Original Issue Price plus all declared
and unpaid dividends on the Series A Preferred, Series B Preferred and Series C
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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B
Preferred and Series C Preferred at the time outstanding, ratably in proportion
to the full amounts to which they would otherwise be respectively entitled.
6.
<PAGE> 7
(b) After the payment of the full liquidation preference
of the Series A Preferred, Series B Preferred and Series C 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
(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, Series B
Preferred and Series C Preferred shall have the following rights with respect to
the conversion of the Series A Preferred,
7.
<PAGE> 8
Series B Preferred and Series C Preferred, respectively, 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, Series
B Preferred and Series C 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,
Series B Preferred or Series C Preferred shall be entitled upon conversion shall
be the product obtained by multiplying the "Series A Preferred Conversion Rate,"
the "Series B Preferred Conversion Rate" or the "Series C 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, Series B Preferred or
Series C Preferred being converted.
(b) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED CONVERSION RATE. The conversion rate in effect at any time for
conversion of the Series A Preferred (the "Series A Preferred Conversion Rate"),
the Series B Preferred (the "Series B Preferred Conversion Rate") and the Series
C Preferred (the "Series C Preferred Conversion Rate") respectively, shall be
the quotient obtained by dividing the Original Issue Price of the Series A
Preferred, the Series B Preferred and Series C Preferred, respectively, by the
"Series A Preferred Conversion Price," the "Series B Preferred Conversion Price"
and the "Series C Preferred Conversion Price," respectively, calculated as
provided in Section 4(c).
(c) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED CONVERSION PRICE. The conversion price for the Series A Preferred, the
Series B Preferred and Series C Preferred, respectively, shall initially be the
respective Original Issue Price of the Series A Preferred (the "Series A
Preferred Conversion Price"), the Series B Preferred (the "Series B Preferred
Conversion Price") and the Series C Preferred (the "Series C Preferred
Conversion Price"), but each shall be adjusted as a result of the stock split
effected hereby, and from time to time in accordance with this Section 4. All
references herein to the Series A Preferred Conversion Price, Series B Preferred
Conversion Price and Series C Preferred Conversion Price shall mean the Series A
Preferred Conversion Price, Series B Preferred Conversion Price and Series C
Preferred Conversion Price, respectively, as so adjusted.
(d) MECHANICS OF CONVERSION. Each holder of Series A
Preferred, Series B Preferred or Series C 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, Series B Preferred and
Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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
8.
<PAGE> 9
fractional share of Common Stock otherwise issuable to any holder of Series A
Preferred, Series B Preferred and Series C 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, Series B Preferred and Series C 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,
the conversion may, at the option of any holder tendering Series A Preferred,
Series B Preferred or Series C 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, Series B Preferred or Series C Preferred
shall not be deemed to have converted such Series A Preferred, Series B
Preferred or Series C 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, with respect to the Series B Preferred, April 29, 1999 and
with respect to the Series C Preferred, the date the first share of Series C
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, Series B Preferred Conversion Price and the
Series C Preferred Conversion Price, as applicable, in effect immediately before
that subdivision shall be proportionately decreased (and each shall therefore be
adjusted pursuant hereto as a result of the stock split effected hereby).
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, the Series B Preferred
Conversion Price and the Series C 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, Series B Preferred Conversion Price and Series C
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, the Series B Preferred Conversion Price and
the Series C 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
9.
<PAGE> 10
paid or if such distribution is not fully made on the date fixed therefor, the
Series A Preferred Conversion Price, Series B Preferred Conversion Price and
Series C 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, Series B Preferred Conversion Price and
Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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,
Series B Preferred and Series C 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, Series B Preferred and Series C Preferred, as applicable, shall
thereafter be entitled to receive upon conversion of the Series A Preferred,
Series B Preferred and Series C 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, Series B
Preferred and Series C 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, Series B Preferred
Conversion Price and Series C Preferred Conversion Price then in effect and the
number of shares issuable upon conversion of the Series A Preferred, Series B
Preferred and Series C Preferred) shall be applicable after that event and be as
nearly equivalent as practicable.
10.
<PAGE> 11
(i) SALE OF SHARES BELOW SERIES A PREFERRED CONVERSION
PRICE, SERIES B PREFERRED CONVERSION PRICE OR SERIES C 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, Series B Preferred Conversion Price or Series C Preferred Conversion
Price, as applicable, then and in each such case the then existing Series A
Preferred Conversion Price, Series B Preferred Conversion Price or Series C
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, Series B Preferred
Conversion Price or Series C 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, Series B Preferred Conversion Price or
Series C 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, Series B Preferred and Series C
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.
11.
<PAGE> 12
(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, Series B
Preferred Conversion Price or Series C 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, the Series B Preferred Conversion Price and Series C
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, the Series B Preferred Conversion Price and the
Series C 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, the Series B Preferred Conversion
Price and the Series C 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
12.
<PAGE> 13
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, Series B Preferred and Series C 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, Series B Preferred or Series C 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 27, 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, Series B
Preferred Conversion Price or Series C Preferred Conversion Price for the number
of shares of Common Stock or other securities issuable upon conversion of the
Series A Preferred, Series B Preferred or Series C Preferred, if the Series A
Preferred, Series B Preferred or Series C 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, Series B Preferred and Series C 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
13.
<PAGE> 14
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, Series B Preferred Conversion Price or Series C
Preferred Conversion Price, as applicable, 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B
Preferred and Series C 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, Series B
Preferred and Series C Preferred shall automatically be converted into shares of
Common Stock, based on the then-effective Series A Preferred Conversion Rate,
Series B Preferred Conversion Rate and Series C 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, the Series
B Preferred and the Series C 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),
in the case of the Series B Preferred, is at least $8.54 (as adjusted for stock
splits, dividends, recapitalizations and the like) and in the case of the Series
C Preferred, is at least $10.76 (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).
14.
<PAGE> 15
(ii) Upon the occurrence of either of the events
specified in Section 4(l)(i) above, the outstanding shares of Series A
Preferred, Series B Preferred and/or Series C 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, Series B Preferred and/or Series C 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, Series B Preferred and/or Series C Preferred, the holders of Series A
Preferred, Series B Preferred and/or Series C 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, Series B Preferred and Series
C 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, Series B Preferred
and/or Series C 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, Series B Preferred
and Series C Preferred. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series A Preferred, Series B
Preferred and Series C 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, Series B Preferred and
Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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
15.
<PAGE> 16
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, Series B Preferred and Series C
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, Series B Preferred
and Series C Preferred so converted were registered.
(q) NO DILUTION OR IMPAIRMENT. Without the consent of
the holders of then outstanding Series A Preferred, Series B Preferred and
Series C 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, Series B Preferred and Series C Preferred against dilution
or other impairment.
5. NO REISSUANCE OF SERIES A PREFERRED, SERIES B PREFERRED AND
SERIES C PREFERRED.
No share or shares of Series A Preferred, Series B
Preferred and Series C 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.
16.
<PAGE> 17
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 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 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.
17.
<PAGE> 18
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) Subject to any limitations imposed by law, if the
Corporation is not subject to Section 2115(b) of the CGCL, then Section A.3(a)
above shall no longer apply and 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
18.
<PAGE> 19
(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.
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
19.
<PAGE> 20
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.
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 was _________ 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.
20.
<PAGE> 21
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
21.
<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 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.
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 10.19
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
MEMORANDUM OF AGREEMENT DATED MAY 12, 1999 BETWEEN MP3.COM,
INC. ("MP3") AND BOUTIT, INC., DBA NO LIMIT RECORDS, INC., A CALIFORNIA
CORPORATION ("NO LIMIT")
For good and valuable consideration, No Limit and MP3 agree as follows:
1. The term of this Agreement (the "Term") shall commence upon the date
hereof and continue thereafter for a period of three (3) years. Notwithstanding
anything to the contrary contained in the immediately-preceding sentence, if an
IPO (as defined in paragraph 26 below) does not take place within eight (8)
months after the date hereof, No Limit may terminate the Term by giving MP3
notice of its election to do so. Such termination shall be effective thirty (30)
days after the effective date of that notice; provided that such termination
shall terminate all of No Limit's rights and MP3's obligations under paragraph
26 below.
2. No Limit hereby licenses exclusively to MP3 the right during the
Term to host throughout the universe ("the Territory) the official No Limit's
website (the "Official Site"). MP3 may elect, in lieu of hosting the Official
Site, to create links between the Official Site and MP3's websites. Nothing
contained herein shall limit No Limit's right to establish additional websites;
provided that at all times during the Term (a) the Official Site shall remain
the principal website operated by No Limit and (b) all such additional websites
shall contain prominently placed links to MP3's websites, including, without
limitation a substantial and meaningful placement of links on the "home page" of
each such website. In addition, No Limit will use its reasonable good-faith
efforts to cause all No Limit Artists (as defined below) to include during the
Term prominently placed links on their official websites to MP3's websites,
including, without limitation a substantial and meaningful placement of links on
the "home page" of each such website. During the Term MP3 will accord No Limit
prominent "placement" on various pages of its website, including, without
limitation, one (1) visible "banner" or "logo thumbnail" on the "home page" of
MP3's website from time to time, it being understood and agreed that such "home
page" presence may alternate cyclically with other banners and/or "logo
thumbnails" not associated with No Limit at the discretion of MP3; provided that
MP3 agrees that No Limit's [***] during the Term shall be [***]. No Limit shall
have the right to approve the final design of the Official Site and all
substantial modifications thereto from time to time, provided that No Limit
agrees to act reasonably and expeditiously in the exercise of such approval
rights and not withhold its approval in a manner intended to frustrate the
intent of this Agreement.
3. No Limit licenses exclusively to MP3 during the Term all "on demand
streaming media rights" ("Streaming Rights") throughout the Territory with
respect to certain commercially satisfactory master recordings owned and
controlled by No Limit that are of [***] and embody the featured performances of
the [***] musical performing artists whose recording services are [***]
committed to No Limit ("No Limit Artists") of [***] to recordings by those [***]
previously-released by No Limit each of which shall have a playing time of no
less than [***] (each master recording complying with all of the specifications
described in the preceding portion of this sentence or otherwise acceptable to
MP3 shall be referred to as a "No Limit
<PAGE> 2
Master") and a [***] of music videos owned and controlled by No Limit ("No Limit
Videos"). No Limit warrants represents, and agrees that MP3 shall not be
obligated to make any payments to any person, firm or corporation in respect of
the exercise of Streaming Rights with respect to No Limit Masters or the musical
compositions embodied thereon hereunder.
4. No Limit licenses exclusively to MP3 the right during the Term to
distribute throughout the Territory the No Limit Masters and No Limit Videos
directly to consumers by means of digital file transfer ("Digital
Distribution"). Without limiting the generality of the immediately-preceding
sentence, MP3 may encode No Limit Masters in the mp3 "codec" and/or any other
"codec" selected by it for purposes of engaging in the Digital Distribution
hereunder. No Limit and MP3 shall mutually agree upon the reasonable selling
price of each No Limit Master or collection of No Limit Masters offered for sale
hereunder (which prices shall be selected from the generally-applicable pricing
schedule for Digital Distribution established by MP3 from time to time). MP3
shall solicit orders for Digital Distribution of No Limit Masters and shall
provide all credit and payment facilities. MP3 shall remit to No Limit on a
regular accounting schedule [***] of the gross receipts [***] derived from the
Digital Distribution of No Limit Masters. The right to engage in Digital
Distribution is sometimes referred to herein as "Digital Distribution Rights."
5. No Limit hereby licenses exclusively to MP3 the right during the
Term throughout the Territory to assemble, manufacture, distribute and sell
directly to the public customized compilation phonorecords in any media now
known or hereafter developed (e.g., CD, DVD, smartcard etc.); such compilations
may consist of No Limit Masters alone or together with other master recordings
("Custom Compilations"). No Limit acknowledges and agrees that MP3 shall be
entitled to reproduce the same No Limit Master more than once upon each Custom
Compilation at no additional cost to MP3 provided that each separate
reproduction shall be in a different "file format" (e.g., "redbook audio," mp3,
Windows Media Player etc.). MP3 shall determine, in its sole discretion, the
prices of the Custom Compilations and shall remit to No Limit on a regular
accounting schedule [***] of MP3's gross receipts from the sale of Custom
Compilations (excluding credit card fees, any fees payable to third party
digital security providers, and any fees for storage of No Limit Masters on
third-party servers) prorated on the basis that the number of No Limit Masters
contained on each Custom Compilation bears to the total number of master
recordings (including No Limit Masters) embodied upon that Custom Compilation.
Notwithstanding anything to the contrary contained in the immediately-preceding
sentence, if MP3's prorata gross receipts [***] attributable to No Limit Masters
exceed [***], then No Limit shall be entitled to receive [***] of MP3's such
prorata gross receipts [***] in excess of [***] attributable to No Limit
Masters. The right to assemble, manufacture, distribute and sell directly the
public Custom Compilations is sometimes referred to herein as "Custom
Compilation Rights."
2
* Confidential Treatment Request(ed)
<PAGE> 3
6. (a) No Limit hereby warrants, represents, and agrees that
during the first year of the Term (the "First Contract Year) MP3 shall
obtain exclusive unencumbered Streaming Rights, Digital Distribution
Rights, and Custom Compilation Rights throughout the Territory
(collectively "the Rights") hereunder with respect to no fewer than
[***] No Limit Masters each in its entirety and that during each of the
second and third years of the Term (the "Second Contract Year" and the
"Third Contract Year" respectively), MP3 shall obtain the exclusive
unencumbered Rights to no fewer than [***] additional No Limit Masters.
The No Limit Masters and No Limit Videos delivered hereunder shall
include reasonable numbers of master recordings and music videos
embodying the featured performances of each top-selling No Limit Artist
such as, without limitation, "Master P." and "Snoop Dog."
(b) The No Limit Masters required to be delivered to MP3
during the First Contract Year shall be delivered to MP3 promptly
following the complete execution of this Agreement. At least [***] of
the No Limit Masters required to be delivered to MP3 during each of the
Second and Third Contract Years shall be delivered to MP3 no later than
the date [***] after the commencement of the applicable Contract Year
and the balance of such No Limit Masters required to be delivered to
MP3 during each of the applicable Contract Years shall be delivered to
MP3 no later than the date [***] months after the commencement of the
applicable Contract Year. No Limit shall deliver to MP3 a reasonable
number of No Limit Videos in existence as of the date of this Agreement
and shall deliver to MP3 a reasonable number additional No Limit Videos
on a reasonably regular basis during the remainder of the Term. Without
limiting MP3's other rights and remedies in such instance, if No Limit
shall fail to deliver to MP3 the required number of No Limit Masters as
and when required during any Contract Year, the running of that
Contract Year shall be automatically suspended pending fulfillment of
No Limit's delivery obligation for that Contract Year.
7. No Limit shall be solely responsible for paying all third-parties
due any compensation in respect of the exploitation of No Limit Masters by means
of Digital Distribution or embodiment on Custom Compilations sold hereunder,
including, without limitation, all artists whose performances are embodied
thereon, the producers of such master recordings, the publishers of the musical
compositions embodied in such master recordings, the owners of any Samples (as
hereafter defined) contained in those master recordings, and any union, guild or
affiliated trust fund.
8. Without limiting the generality of any of No Limit's other
undertakings in this Agreement, No Limit hereby authorizes MP3 to make available
throughout the Territory for free Digital Distribution at least one (1) No Limit
Master during each day of the Term (either designated from among the No Limit
Masters in respect of which No Limit has granted to MP3 the unencumbered
exclusive Rights throughout the Territory or from among such other No Limit
Masters in respect of which No Limit is entitled to grant unencumbered Streaming
Rights and Digital Distribution Rights throughout the Territory) to be referred
to as "Master P's Pick(s) of the Day." MP3 shall not be obligated to make any
payment to any person, firm, or corporation in respect of the Digital
Distribution of No Limit Masters pursuant to this paragraph 8.
3
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 4
9. With respect to the initial commercial release (i.e., the initial
release for commercial distribution to the public) in the Territory during the
Term of each album or single consisting entirely of master recordings owned or
controlled by No Limit (any such album being referred to as a "No Limit Album"),
No Limit shall allow MP3, for a period of at least [***] preceding the date of
such release (the "[***] Pre-Release Streaming Window" with respect to a No
Limit Master), to exercise [***] Streaming Rights with respect to the master
recording constituting the "A-side" of that single or the emphasis track of that
album (if there is no single derived from that Album to be released by No
Limit). After the expiration of the [***] Pre-Release Streaming Window with
respect to any No Limit Master, MP3 shall continue to have [***] Streaming
Rights with respect to that No Limit Master. In addition, No Limit shall with
respect to each No Limit Album initially released in the Territory during the
Term deliver to MP3 no later than the date [***] after the initial commercial
release of that No Limit Album one (1) previously unreleased "bonus track" No
Limit Master embodying the featured performance by the No Limit Artist whose
featured performances are principally featured on such No Limit Album in respect
of which MP3 may exclusively exploit all of the Rights during the Term (a
"Designated Bonus Track"). Nothing contained in this paragraph 9 shall require
No Limit to record any additional master recordings for the sole purpose of
delivering a Designated Bonus Track to MP3. Each Designated Bonus Track shall
apply in partial fulfillment of the number of No Limit Masters is required to
deliver to MP3 in fulfillment of its obligations under subparagraph 6(a) above.
10. During the Term, MP3 will host and No Limit shall use its
reasonable good-faith efforts facilitate monthly "on-line chats" for one (1) or
more recording artists whose featured performances are embodied upon any of the
No Limit Masters or No Limit Videos ("No Limit Artists"), as mutually designated
by MP3 and No Limit. Without limiting the generality of anything contained in
the immediately-preceding sentence, with respect to each No Limit Album released
during the Term featuring the featured performances of only one (1) No Limit
Artist (whether a group or a solo artist), No Limit shall use its reasonable
good-faith efforts to cause that Artist to participate in an "on-line chat"
hosted or presented by MP3 during the period commencing five (5) days prior to
the initial release date of that No Limit Album and ending five (5) days after
the initial release date of that No Limit Album.
11. No Limit hereby licenses to MP3 the non-exclusive right during the
Term to use the names (including, without limitation, present or future legal,
professional, group, and other assumed or fictitious names) and approved
portraits, pictures and likenesses of all musical or vocal performers whose
performances are embodied upon any of the No Limit Masters or No Limit Videos,
including, without limitation, Percy Miller, professionally known as "Master P,"
as well as the producer(s) and all other persons performing services in
connection with the No Limit Masters and/or No Limit Videos and biographical
materials concerning such persons, as news or information, for the purposes of
trade, or for advertising purposes, in any manner and in any medium in
connection with the marketing and exploitation of the No Limit Masters and/or No
Limit Videos hereunder, and MP3's Institutional Advertising (i.e., advertising
designed to create goodwill and prestige and not for the purpose of selling any
specific product or service). No Limit shall furnish MP3 with reasonable
quantities of approved portraits, pictures and likenesses of and biographical
materials concerning the No Limit Artists. MP3 shall use only those materials
4
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 5
regarding Artist and the No Limit Artists provided by No Limit; provided that
inadvertent or casual failure by MP3 to use such materials shall not constitute
a breach of this Agreement, provided that upon receipt of notice from No Limit
MP3 uses reasonable efforts to effect prospective cure with respect to future
uses of such materials. MP3 shall, in referring to No Limit in its advertising
relating solely to No Limit or No Limit Artists (space permitting), use
reasonable efforts to include the slogan "The Number One Rap/Hip Hop Label" and
when referring to Master P. in such advertising, use reasonable efforts to
include the slogan "The King of Hip Hop", provided that MP3's casual or
inadvertent failure to include any such slogan in any advertisement shall not
constitute a breach of this Agreement.
12. (a) No Limit hereby licenses to MP3 the non-exclusive right
during the Term to use No Limit's name and any identifying trademark,
logo or device used by No Limit ("No Limit Names and Logos") for
purposes of trade and consumer advertising pertaining to MP3's
exploitation of the rights granted to it hereunder by No Limit. No
Limit also hereby licenses to MP3 the non-exclusive right during the
Term to use throughout the Territory the No Limit Names and Logos in
MP3's Institutional Advertising and on its websites to publicize its
relationship with No Limit hereunder. No Limit shall have the right to
impose written guidelines governing MP3's use of the No Limit Names and
Logos; provided that such guidelines are reasonable and not formulated
to frustrate MP3's rights under this paragraph 12(a).
(b) MP3 hereby licenses to No-Limit MP3 the non-exclusive
right during the Term to use MP3's name and any identifying trademark,
logo or device used by MP3 ("MP3 Names and Logos") in No Limit's
Institutional Advertising and on its websites to publicize its
relationship with MP3 hereunder. MP3 shall have the right to impose
written guidelines governing No Limit's use of the MP3's Names and
Logos; provided that such guidelines are reasonable and not formulated
to frustrate No Limit's rights under this paragraph 12(b).
13. MP3 and No Limit shall mutually approve all press releases issued
by MP3 or No Limit that relate to the relationship between them. Any such press
release that either party hereto desires to publish shall be submitted to the
other party in accordance with the notice provisions contained in paragraph 24
below and any such press release so submitted shall be deemed approved by the
receiving party if the submitting party shall not have received notice of the
receiving party's disapproval thereof within three (3) business days after the
effective date of the notice of submission.
14. No Limit shall use its reasonable good-faith efforts to cause each
No Limit Artist to display prominently at each of his, her, or their live
concert appearances throughout the Territory during the Term signage (prepared
and delivered by MP3 at its sole expense) mutually selected by MP3 and No Limit
featuring MP3's and No Limit's names and/or logos.
15. With respect to each concert tour undertaken during the Term in the
Territory by each No Limit Artist (a "No Limit Artist Tour"), No Limit and MP3
shall use their best efforts to designate one (1) or more artists who provide
digital recordings to MP3 through its website ("MP3 Artists") as an "opening
act" for all or a substantial portion of that No Limit Artist Tour.
5
<PAGE> 6
No Limit shall have the right to disapprove of any MP3 Artist submitted by MP3
as an "opening act" for any No Limit Artist Tour on any reasonable basis,
provided that it promptly notifies MP3 of the basis for such disapproval and
does not exercise its disapproval rights for the purpose of frustrating MP3's
rights under this paragraph 15. No Limit will provide representatives of MP3 and
their guests reasonable access to concerts by No Limit Artists during the Term.
Nothing contained in this paragraph 15 shall require No Limit to cause any No
Limit Artist to engage in any concert tour.
16. No Limit and MP3 shall develop various lines of co-branded
merchandise to be mutually agreed upon by MP3 and No Limit (e.g., hats,
T-shirts, sweatshirts etc.) that will be manufactured and sold or otherwise
distributed exclusively by MP3 throughout the Territory during the Term
("Subject Merchandise"). With respect to the product categories specified on
Schedule A, annexed hereto and, by this reference, made a part hereof, with
respect to which categories, No Limit warrants and represents that it is
currently a party to exclusive licensing arrangements with unaffiliated
merchandisers ("Previously Licensed Subject Merchandise"), MP3 shall, during the
remainder of the term of such licensing arrangement, purchase such merchandise
only from No Limit's exclusive merchandising licensee and No Limit shall use its
best efforts to cause its exclusive merchandising licensee to offer to sell such
merchandise to MP3 at a [***] price, not to exceed [***]. MP3 shall remit to No
Limit on a regular accounting schedule [***] of its [***] derived from the sale
of Previously Licensed Subject Merchandise and [***] of its [***] with respect
to all other Subject Merchandise. MP3 shall have the right for a period of four
(4) months after the end of the Term to sell or otherwise distribute its
remaining inventory of Subject Merchandise. In the event that any Subject
Merchandise shall embody the name, likeness, or other materials pertaining to
any No Limit Artist, No Limit shall be solely responsible for paying all
compensation due to that No Limit Artist in respect of the sale of such Subject
Merchandise.
17. If MP3 shall enter into any affiliate referral agreement with any
third party "on line" music retailer pursuant to which MP3 receives a commission
for sales of No Limit Albums (an "Affiliate Referral Agreement"), MP3 shall
remit to No Limit on a regular accounting schedule [***] of any commissions
received by it thereunder as a direct result of each sale of a No Limit Album
made by that "on line" music retailer occurring by reason of MP3's referral of
the purchaser to that "on line" retailer. As of the date hereof, MP3 is not a
party to any Affiliate Referral Agreement and makes no warranty or
representation that it will enter into any Affiliate Referral Agreement during
the Term.
18. No Limit shall, within a reasonable time after the execution of
this Agreement deliver to MP3 [***] pairs of Converse brand athletic shoes
autographed by "Master P" in a variety of adult and adolescent sizes for MP3 to
give away as promotional items. [***] pairs shall be furnished at No Limit's
sole cost; and No Limit shall use its best efforts to cause the remaining pairs
to be provided to MP3 at [***] price therefor.
* Confidential Treatment Request(ed)
6
<PAGE> 7
19. With respect to each album-length phonorecord or other compilation
of soundrecordings initially released by No Limit in the Territory during the
Term, No Limit shall provide and deliver to MP3 at No Limit's sole cost one
hundred (100) CDs autographed by the No Limit Artist(s) whose featured
performances are embodied on such phonorecord or other such compilation.
20. During the Term, MP3 shall [***] to No Limit organize and effect at
least [***] "directed e-mailings" for the benefit of No Limit to likely
prospective purchasers of No Limit Albums, singles or other related products as
determined by MP3 and prepare at least [***] demographic analyses of the
information contained in its data bases acquired in connection with the release
of No Limit Albums, singles or other related products. Notwithstanding the
generality of the immediately-preceding sentence, MP3 will not be required to
send more than one (1) "directed e-mailing" on behalf of No Limit during each
month of the Term. In addition MP3 will consider in good faith and discuss other
activities suggested by No Limit that involve the use of information contained
in MP3's databases. Nothing contained herein shall require MP3 to act in a
manner inconsistent with MP3's published privacy policy as such policy may be
amended from time to time during the Term.
21. No Limit and MP3 each warrants and represents that it has the full
right and power to enter into and fully perform this Agreement and grant all of
the rights herein granted by each of them. Without in any way limiting the
generality of No Limit's warranties and representation contained the
immediately-preceding sentence, nothing contained in this Agreement is intended
or shall be construed to require No Limit to violate any of the terms pertaining
to the distribution of phonorecords embodying master recordings owned or
controlled by No Limit contained in any pre-existing phonograph record
distribution agreement currently in effect to which No Limit is a party (a
"Distribution Agreement"). No Limit warrants and represents that neither the
Materials, as hereinafter defined, nor any use thereof, will violate any law or
infringe upon or violate the rights of any person or entity. "Materials," as
used in this paragraph 17, means: (1) the No Limit Masters and No Limit Videos
furnished under this Agreement, (2) the No Limit Names and Logos, (3) each name
used by each No Limit Artist, individually or as a group, in connection with No
Limit Masters or No Limit Videos furnished hereunder or any Subject Merchandise,
(4) all other musical, dramatic, artistic and literary materials, ideas, and
other intellectual properties, contained in or used in connection with any No
Limit Masters or No Limit Videos furnished hereunder or their packaging for use
in connection with sale, distribution, advertising, publicizing or other
exploitation of the No Limit Masters or No Limit Videos furnished hereunder, and
(5) all artistic and literary materials, ideas, and other intellectual
properties, furnished or selected by No Limit and contained in or used in
connection with any of the Subject Merchandise.
22. No Limit warrants and represents that the No Limit Masters and No
Limit Videos furnished hereunder contain no Samples that have not been
authorized by the owner(s) of the musical composition, master recording, or
other material or portion thereof from which such Sample is derived (the
"Sampled Party"). The term "Sample" shall mean the use, inclusion or
interpolation (the "Interpolation") in a No Limit Master or No Limit Video of
any musical composition, soundrecording, or any other material or intellectual
property, or portion of any such property or material that is not owned and
controlled solely by No Limit. MP3 shall have
* Confidential Treatment Requested
7
<PAGE> 8
the right to require No Limit to furnish it with instruments or other documents
evidencing that the Interpolation of such Sample has been authorized by the
Sampled Party; provided that MP3's failure to do so or election not to do so
shall not constitute MP3's waiver of its right to rely upon No Limit's
warranties and representations contained herein in proceeding with the full
exercise of the rights granted to MP3 hereunder.
23. (a) No Limit will at all times indemnify and hold harmless MP3
and any of its licensees (collectively the "Indemnitee") from and
against any and all claims, damages, liabilities, costs and expenses,
including legal expenses and reasonable counsel fees, arising out of
any breach or alleged breach of any warranty or representation made by
No Limit in this Agreement or any other act or omission by No Limit,
provided the claim concerned has been settled or has resulted in a
judgment against any Indemnitee. MP3 will notify No Limit of any action
commenced on such a claim. No Limit may participate in the defense of
any such claim through counsel of its selection at its own expense, but
MP3 will have the right at all times, in its sole discretion, to retain
or resume control of the conduct of the defense. If any claim involving
such subject matter has not been resolved, or has been resolved by a
judgment or other disposition which is not adverse to any Indemnitee,
No Limit will reimburse Indemnitee for sixty-six and two-thirds percent
(66.67%) of the expenses actually incurred by Indemnitee in connection
with that claim. Pending the resolution of any such claim, MP3 will
have the right to withhold monies which would otherwise be payable to
No Limit under this Agreement in an amount not exceeding No Limit's
potential liability to MP3 and/or its licensees under this paragraph.
(b) MP3 will at all times indemnify and hold harmless No Limit
and any of its licensees (collectively the "Indemnitee") from and
against any and all claims, damages, liabilities, costs and expenses,
including legal expenses and reasonable counsel fees, arising out of
any breach or alleged breach of any warranty or representation made by
MP3 in this Agreement or any other act or omission by MP3, provided the
claim concerned has been settled or has resulted in a judgment against
any Indemnitee. No Limit will notify MP3 of any action commenced on
such a claim. MP3 may participate in the defense of any such claim
through counsel of its selection at its own expense, but No Limit will
have the right at all times, in its sole discretion, to retain or
resume control of the conduct of the defense. If any claim involving
such subject matter has not been resolved, or has been resolved by a
judgment or other disposition which is not adverse to any Indemnitee,
MP3 will reimburse Indemnitee for sixty-six and two-thirds percent
(66.67%) of the expenses actually incurred by Indemnitee in connection
with that claim.
24. Except as otherwise specifically provided in this Agreement, all
notices under this Agreement shall be in writing and shall be given by courier
or other personal delivery or by registered or certified mail at the appropriate
address below or at a substitute address designated by notice by the party
concerned:
To MP3: 10350 Science Center Drive
Bldg. 19
San Diego, California 92121
Attn: President
8
<PAGE> 9
With a copy to: Hansen, Jacobson, Teller, Hoberman, Newman & Warren/
Hertz & Goldring, LLP
450 North Roxbury Drive, 8th Floor
Beverly Hills, California 90210-4222
Attn: Kenneth B. Hertz, Esq. and Jonathan D. Haft, Esq.
To No Limit: c/o Endeavor Entertainment
9701 Wilshire Boulevard
10th Floor
Beverly Hills, California 90212
Attn: Roger Pliakas, Lon Rosen and Ariel Emanuel
with a copy to: Darrell D. Miller, Esq.
1620 26th Street
Suite 150 South
Santa Monica, California 90404
Notices shall be deemed given when mailed, except that a notice of change of
address shall be effective only from the date of its receipt. All royalties,
royalty statements and/or payments to No Limit hereunder may also be sent to No
Limit at its address above via regular mail and shall be deemed sent on the date
the applicable statement is mailed.
25. The parties hereby agree that at the request of either party they
shall execute more formal documentation of this Agreement containing additional
standard terms and provisions customarily contained in agreements of this
nature, including, without limitation, additional standard warranties and
representations consistent with the terms hereof, force majeure provisions, and
reasonable "notice and cure" provisions. Each party hereto agrees that it shall
negotiate expeditiously and in good faith with respect to any reasonable changes
that the other party may request in connection with such standard provisions, to
the extent not inconsistent with the terms hereof. Until such time as MP3 and No
Limit enter into such more formal documentation, this Agreement shall constitute
a fully binding and enforceable agreement embodying the entire agreement of the
parties hereto with respect to the subject matter hereof, and shall be governed
by the laws of the State of California applicable to contracts entered into and
intended to be performed entirely within the State of California. Any and all
disputes, claims, or proceedings between the parties hereto arising out of or
relating to this Agreement, or the validity or breach thereof, shall be settled
by binding and final arbitration held before a single arbitrator from the
Judicial Arbitration Mediation Service. Any such arbitration shall be held in
the County of Los Angeles, California and shall be pursuant to the laws of the
State of California. The arbitrator shall also have the power to impose any
sanction against any party permitted by California law. The arbitration award
shall be final. Judgment on any arbitration award may be entered in any court in
the County of Los Angeles. Any process in any such action or proceeding may,
among other methods, be served upon either party hereto by delivering it or
mailing it, by registered or certified mail, directed to the address designated
in paragraph 24 or such other address as that party may designate pursuant to
paragraph 24. Any such delivery or
9
<PAGE> 10
mail service shall be deemed to have the same force and effect as personal
service within the state of California.
26. As additional consideration for the rights conveyed to MP3
hereunder, if and when MP3.com, Inc. completes an underwritten initial public
offering (an "IPO") of its Common Stock under the Securities Act of 1933, as
amended (the "Act"), during the Term, No Limit shall receive the supplemental
consideration set forth in this section. Upon the effective date of the IPO,
MP3.com, Inc. shall issue to No Limit in a private placement to be completed
contemporaneously with the IPO that number of shares of its Common Stock (the
"Shares") equal to Two Million Five Hundred Thousand Dollars ($2,500,000)
divided by the per share price at which the Common Stock is offered to the
public in the IPO (the "Private Placement"). No Limit acknowledges and agrees
that (i) there can be no assurance that MP3.com, Inc. will be able to
successfully complete an IPO in the near future or at any time and (ii) whether
or not MP3.com, Inc. is able to successfully complete an IPO, all other rights
and obligations contained within this Agreement will remain in full force and
effect.
27. INVESTMENT REPRESENTATIONS.
(a) PURCHASE FOR OWN ACCOUNT. No Limit represents that it is
acquiring the Shares to be issued in the Private Placement solely for
its own account and beneficial interest for investment and not for sale
or with a view to distribution of the Shares 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.
(b) ACCREDITED INVESTOR. No Limit is an "accredited investor"
as such term is defined in Rule 501 under the Act.
(c) LEGENDS. No Limit understands that the certificates
evidencing the Shares may bear the following legend:
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.
(d) RULE 144. No Limit acknowledges and agrees that the Shares must be
held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. No
Limit has been advised or is aware of the provisions of Rule 144
promulgated under the Securities Act as in effect from time to time,
which permits limited resale of shares purchased in a private placement
subject to the satisfaction of certain conditions, including, among
other things: the availability of
10
<PAGE> 11
certain current public information about MP3, the resale occurring
following the required holding period under Rule 144 and the number of
shares being sold during any three-month period not exceeding specified
limitations.
(e) MARKET STANDOFF. No Limit agrees that MP3 (or a
representative of the underwriters) may, in connection with the IPO,
require that it 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 MP3 held by it, 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. No Limit further agrees
to execute and deliver such other agreements as may be reasonably
requested by MP3 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, MP3 may impose stop-transfer
instructions with respect to No Limit's common stock until the end of
such period.
28. MP3 AFFILIATES: "MP3" as used herein shall be deemed to include any
and all affiliates and/or joint ventures of MP3.Com, Inc. now in existence or
hereafter established.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the date specified on page 1 hereof.
MP3.COM, INC. BOUTIT, INC.,
dba NO LIMIT RECORDS, INC.,
A CALIFORNIA CORPORATION
By: By:
Its: Its:
11
<PAGE> 12
SCHEDULE A
Category of Merchandise Name of Merchandiser Expiration Date of Agreement
12
<PAGE> 1
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
EXHIBIT 10.21
MP3.COM, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
MAY 19, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. AGREEMENT TO SELL AND PURCHASE.......................................................1
1.1 Authorization of Shares.......................................................1
1.2 Sale and Purchase.............................................................1
2. CLOSING, DELIVERY AND PAYMENT........................................................1
2.1 Closing.......................................................................1
2.2 Delivery......................................................................2
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.............................2
3.1 Organization, Good Standing and Qualification.................................2
3.2 Subsidiaries..................................................................2
3.3 Capitalization; Voting Rights.................................................2
3.4 Authorization; Binding Obligations............................................3
3.5 Financial Statements..........................................................3
3.6 Liabilities...................................................................4
3.7 Agreements; Action............................................................4
3.8 Disclosure....................................................................5
3.9 Obligations to Related Parties................................................5
3.10 Changes.......................................................................5
3.11 Title to Properties and Assets; Liens, Etc....................................6
3.12 Patents and Trademarks........................................................6
3.13 Compliance with Other Instruments.............................................7
3.14 Litigation....................................................................7
3.15 Employees.....................................................................8
3.16 Proprietary Information and Inventions Agreements.............................8
3.17 Obligations of Management.....................................................8
3.18 Registration Rights and Voting Rights.........................................8
3.19 Compliance with Laws; Permits.................................................9
3.20 Offering Valid................................................................9
3.21 Minute Books..................................................................9
3.22 Insurance.....................................................................9
3.23 Tax Returns and Payments......................................................9
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
3.24 Qualified Small Business......................................................9
3.25 Board of Directors............................................................9
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.....................................10
4.1 Requisite Power and Authority................................................10
4.2 Investment Representations...................................................10
4.3 Transfer Restrictions........................................................11
4.4 Legends......................................................................11
5. CONDITIONS TO CLOSING...............................................................12
5.1 Conditions to the Purchaser's Obligations at the Closing.....................12
5.2 Conditions to Obligations of the Company.....................................13
6. MISCELLANEOUS.......................................................................14
6.1 Governing Law................................................................14
6.2 Survival.....................................................................14
6.3 Successors and Assigns.......................................................14
6.4 Entire Agreement.............................................................14
6.5 Severability.................................................................15
6.6 Amendment and Waiver.........................................................15
6.7 Delays or Omissions..........................................................15
6.8 Notices......................................................................15
6.9 Expenses.....................................................................15
6.10 Attorneys' Fees..............................................................15
6.11 Titles and Subtitles.........................................................16
6.12 Counterparts.................................................................16
6.13 Broker's Fees................................................................16
6.14 Reliance by the Purchaser....................................................16
6.15 Confidentiality..............................................................16
6.16 Pronouns.....................................................................16
6.17 Stock Split..................................................................16
6.18 Initial Public Offering......................................................16
6.19 Standstill Agreement.........................................................17
</TABLE>
II.
<PAGE> 4
MP3.COM, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is
entered into as of May 19, 1999, by and among MP3.COM, INC., a Delaware
corporation (the "Company"), and COX INTERACTIVE MEDIA, INC., a Delaware
corporation (the "Purchaser").
RECITALS
WHEREAS, the Company has authorized the issuance and sale of an
aggregate of four million one hundred eighty-two thousand five hundred
seventy-eight (4,182,578) shares of its Series C Preferred Stock pursuant to
this Agreement (the "Shares");
WHEREAS, the Purchaser desires to purchase the Shares on the terms and
conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Shares to the
Purchaser on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as
defined in Section 2 below), the Company shall have authorized (a) the sale and
issuance to the Purchaser of the Shares and (b) the issuance of such shares of
Common Stock to be issued upon conversion of the Shares (the "Conversion
Shares"). The Shares and the Conversion Shares shall have the rights,
preferences, privileges and restrictions set forth in the Restated Certificate
of Incorporation of the Company, in the form attached hereto as Exhibit A (the
"Restated Charter").
1.2 SALE AND PURCHASE. Subject to the terms and conditions
hereof, at the Closing (as defined below) the Company hereby agrees to issue and
sell to the Purchaser, and the Purchaser agrees to purchase from the Company,
the Shares, for an aggregate of forty-five million four thousand five hundred
thirty-nine dollars and twenty-eight cents ($45,004,539.28) based on a per share
purchase price of ten dollars and seventy-six cents ($10.76) (the "Purchase
Price").
2. CLOSING, DELIVERY AND PAYMENT.
2.1 CLOSING. The closing of the sale and purchase of the Shares
under this Agreement (the "Closing") shall take place as promptly as possible
after satisfaction or waiver of the conditions set forth in Section 5 to the
respective obligations of the Company and the Purchaser hereunder, but in any
event not later than three (3) business days following the later to occur of (i)
the execution of that certain Limited Liability Company Agreement of
MP3Radio.com L.L.C., between the Company and the Purchaser and (ii) the
expiration or
1.
<PAGE> 5
termination of the waiting period applicable to the consummation of this
Agreement and the transactions contemplated hereby under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92121-2128 or at such other time or place as the Company and the Purchaser may
mutually agree (such date is hereinafter referred to as the "Closing Date").
2.2 DELIVERY. At the Closing, subject to the terms and
conditions hereof, the Company will deliver to the Purchaser a certificate
representing the number of Shares to be purchased at the Closing by the
Purchaser, against payment of the Purchase Price therefor by check, wire
transfer made payable to the order of the Company, cancellation of indebtedness
or any combination of the foregoing.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
Except as set forth on a Schedule of Exceptions delivered by the
Company to THE Purchaser on the date hereof, the Company represents, warrants
and covenants to the Purchaser as follows:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement, the Second Amended and Restated Investor Rights Agreement in the
form attached hereto as Exhibit B (the "Investor Rights Agreement") and the
Second Amended and Restated Co-Sale Agreement in the form attached hereto as
Exhibit C (the "Co-Sale Agreement") (collectively, the "Related Agreements"), to
issue and sell the Shares and the Conversion Shares, and to carry out the
provisions of this Agreement, the Related Agreements and the Restated Charter
and to carry on its business as presently conducted and as presently proposed to
be conducted. The Company is duly qualified and is authorized to do business and
is in good standing as a foreign corporation in all jurisdictions in which the
nature of its activities and of its properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions in which failure to
do so would not have a material adverse effect on the Company or its business.
3.2 SUBSIDIARIES. The Company does not own or control any equity
security or other interest of any other corporation, limited partnership or
other business entity. The Company is not a participant in any joint venture,
partnership or similar arrangement.
3.3 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock
of the Company as of the date of this Agreement consists of 51,000,000 shares of
Common Stock, par value $0.001 per share, 22,428,065 shares of which are issued
and outstanding; and 15,500,000 shares of Preferred Stock, par value $0.001 per
share, 8,250,000 of which are designated Series A Preferred Stock, all of which
are issued and outstanding, 439,103 of which are designated Series B Preferred
Stock, all of which are issued and outstanding, and 4,182,578 of which are
designated Series C Preferred Stock, none of which are issued and outstanding.
All issued and outstanding shares of the Company's Common Stock (a) have been
duly authorized and validly issued, (b) are fully paid and nonassessable and (c)
were issued in compliance with all applicable
2.
<PAGE> 6
state and federal laws concerning the issuance of securities. The rights,
preferences, privileges and restrictions of the Shares are as stated in the
Restated Charter. The Conversion Shares have been duly and validly reserved for
issuance. As of the date of this Agreement, other than the 8,500,000 shares of
Common Stock reserved for issuance under the Company's 1998 Equity Incentive
Plan, of which options to purchase 2,021,750 shares of Common Stock are issued
and outstanding, the 200,000 shares of Common Stock reserved for issuance under
the Company's Employee Stock Purchase Plan, of which no shares are issued and
outstanding, and except as may be granted pursuant to the Related Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder agreements,
or agreements of any kind for the purchase or acquisition from the Company of
any of its securities. When issued in compliance with the provisions of this
Agreement and the Restated Charter, the Shares and the Conversion Shares will be
validly issued, fully paid and nonassessable, and will be free of any liens or
encumbrances other than liens and encumbrances created by the Purchaser;
provided, however, that the Shares and the Conversion Shares may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
The sale of the Shares and the subsequent conversion thereof are not and will
not be subject to any preemptive rights or rights of first refusal that have not
been properly waived or complied with. Except as set forth on the Schedule of
Exceptions, no stock plan, stock purchase, stock option or other agreement or
understanding between the Company and any holder of any equity securities or
rights to purchase equity securities provides for acceleration or other changes
in the vesting provisions or other terms of such agreement or understanding as
the result of any merger, consolidated sale of stock or assets, change in
control or any other transaction(s) by the Company.
3.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on
the part of the Company, its officers, directors and stockholders necessary for
the authorization of this Agreement and the Related Agreements, the performance
of all obligations of the Company hereunder and thereunder at the Closing and
the authorization, sale, issuance and delivery of the Shares pursuant hereto and
the Conversion Shares pursuant to the Restated Charter has been taken or will be
taken prior to the Closing. The Agreement and the Related Agreements, when
executed and delivered, will be valid and binding obligations of the Company
enforceable in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, (b) general principles
of equity that restrict the availability of equitable remedies, and (c) to the
extent that the enforceability of the indemnification provisions in Section 2.9
of the Investor Rights Agreement may be limited by applicable laws. The sale of
the Shares and the subsequent conversion of the Shares into Conversion Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.
3.5 FINANCIAL STATEMENTS. The Company has made available to the
Purchaser its unaudited balance sheet as at March 31, 1999 (the "Statement
Date"), unaudited statement of income and cash flows for the three months ended
March 31, 1999, audited balance sheet as at December 31, 1998 and audited
statement of income and cash flows for the fiscal year ended December 31, 1998
(collectively, the "Financial Statements"), copies of which are attached hereto
as Exhibit D. The Financial Statements, together with the notes thereto, have
been prepared in accordance with generally accepted accounting principles
applied on a consistent
3.
<PAGE> 7
basis throughout the periods indicated, except as disclosed therein, and present
fairly the financial condition and position of the Company as of the Statement
Date or fiscal year end, as applicable; provided, however, that the unaudited
financial statements are subject to normal recurring year-end audit adjustments
(which are not expected to be material), and do not contain all footnotes
required under generally accepted accounting principles.
3.6 LIABILITIES. The Company has no material liabilities and, to
the best of its knowledge, knows of no material contingent liabilities not
disclosed in the Financial Statements, except current liabilities incurred in
the ordinary course of business subsequent to the Statement Date which have not
been, either in any individual case or in the aggregate, materially adverse.
3.7 AGREEMENTS; ACTION.
(a) Except for agreements explicitly contemplated hereby
and agreements between the Company and its employees with respect to the sale of
the Company's Common Stock, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates
or any affiliate thereof.
(b) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which the Company is a party or to its knowledge by which it is bound
which may involve (i) obligations (contingent or otherwise) of, or payments to,
the Company in excess of $100,000 (other than obligations of, or payments to,
the Company arising from purchase or sale agreements entered into in the
ordinary course of business), or (ii) the transfer or license of any patent,
copyright, trade secret or other proprietary right to or from the Company (other
than licenses arising from the purchase of "OFF THE SHELF" or other standard
products), or (iii) provisions restricting the development, manufacture or
distribution of the Company's products or services, or (iv) indemnification by
the Company with respect to infringements of proprietary rights (other than
indemnification obligations arising from purchase or sale or license agreements
entered into in the ordinary course of business).
(c) The Company has not (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than with respect to dividend
obligations, distributions, indebtedness and other obligations incurred in the
ordinary course of business or as disclosed in the Financial Statements)
individually in excess of $100,000 or, in the case of indebtedness and/or
liabilities individually less than $100,000, in excess of $200,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights, other than the sale of its inventory in the
ordinary course of business.
(d) For the purposes of subsections (b) and (c) above,
all indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same person or entity
(including persons or entities the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.
4.
<PAGE> 8
3.8 DISCLOSURE. The Company has fully provided the Purchaser
with all the information which the Purchaser has requested for deciding whether
to acquire the Shares and all information which the Company believes is
reasonably necessary to enable the Purchaser to make such a decision. No
representation or warranty of the Company contained in this Agreement and the
exhibits attached hereto, or any certificate furnished or to be furnished to
Purchaser at the Closing, contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made.
3.9 OBLIGATIONS TO RELATED PARTIES. There are no obligations of
the Company to officers, directors, stockholders, or employees of the Company
other than (a) for payment of salary for services rendered, (b) reimbursement
for reasonable expenses incurred on behalf of the Company and (c) for other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any stock option plan approved by the
Board of Directors of the Company). None of the officers, directors or
stockholders of the Company, or any members of their immediate families, are
indebted to the Company or, to the Company's knowledge, have any direct or
indirect ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company, except that officers, directors
and/or stockholders of the Company may own stock in publicly traded companies
which may compete with the Company. No officer, director or stockholder, or any
member of their immediate families, is, directly or indirectly, interested in
any material contract with the Company (other than such contracts as relate to
any such person's ownership of capital stock or other securities of the
Company). Except as may be disclosed in the Financial Statements, the Company is
not a guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
3.10 CHANGES. Since the Statement Date, there has not been to
the Company's knowledge:
(a) Any change in the assets, liabilities, financial
condition or operations of the Company from that reflected in the Financial
Statements, other than changes in the ordinary course of business, none of which
individually or in the aggregate has had or is expected to have a material
adverse effect on such assets, liabilities, financial condition, operations or
prospects of the Company;
(b) Any resignation or termination of any officer or key
employee of the Company; and the Company, to the best of its knowledge, does not
know of the impending resignation or termination of employment of any such
officer or key employee;
(c) Any material change, except in the ordinary course
of business, in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise;
(d) Any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties,
business or prospects or financial condition of the Company;
5.
<PAGE> 9
(e) Any waiver by the Company of a valuable right or of
a material debt owed to it;
(f) Any direct or indirect loans made by the Company to
any stockholder, employee, officer or director of the Company, other than
advances made in the ordinary course of business;
(g) Any material change in any compensation arrangement
or agreement with any employee, officer, director or stockholder;
(h) Any declaration or payment of any dividend or other
distribution of the assets of the Company;
(i) Any labor organization activity;
(j) Any debt, obligation or liability incurred, assumed
or guaranteed by the Company, except those for immaterial amounts and for
current liabilities incurred in the ordinary course of business;
(k) Any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(l) Any change in any material agreement to which the
Company is a party or by which it is bound which materially and adversely
affects the business, assets, liabilities, financial condition, operations or
prospects of the Company;
(m) Any other event or condition of any character that,
either individually or cumulatively, has materially and adversely affected the
business, assets, liabilities, financial condition, operations or prospects of
the Company; or
(n) Any arrangement or commitment by the Company to do
any of the acts described in subsection (a) through (m) above.
3.11 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has
good and marketable title to its properties and assets, including the properties
and assets reflected in the most recent balance sheet included in the Financial
Statements, and good title to its leasehold estates, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those
resulting from taxes which have not yet become delinquent, (b) minor liens and
encumbrances which do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company, and (c)
those that have otherwise arisen in the ordinary course of business. All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company are in good operating condition and repair and are
reasonably fit and usable for the purposes for which they are being used. The
Company is in compliance with all material terms of each lease to which it is a
party or is otherwise bound.
3.12 PATENTS AND TRADEMARKS. To the best of its knowledge, the
Company owns or possesses sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information and
other proprietary rights and processes
6.
<PAGE> 10
necessary for its business as now conducted and as presently proposed to be
conducted, without any known infringement of the rights of others. There are no
outstanding options, licenses or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes of any other person or entity other than such
licenses or agreements arising from the purchase of "OFF THE SHELF" or standard
products. The Company has not received any communications alleging that the
Company has violated or, by conducting its business as presently proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity. The
Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with their duties to the Company or that would
conflict with the Company's business as presently proposed to be conducted.
Neither the execution nor delivery of this Agreement or the Related Agreements,
nor the carrying on of the Company's business by the employees of the Company,
nor the conduct of the Company's business as presently proposed, will, to the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any employee is now obligated. The Company
does not believe it is or will be necessary to utilize any inventions, trade
secrets or proprietary information of any of its employees made prior to their
employment by the Company, except for inventions, trade secrets or proprietary
information that have been assigned to the Company.
3.13 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any term of its Restated Charter or Bylaws, or of any
provision of any mortgage, indenture, contract, agreement, instrument or
contract to which it is party or by which it is bound or of any judgment,
decree, order or writ. The execution, delivery, and performance of and
compliance with this Agreement and the Related Agreements, and the issuance and
sale of the Shares pursuant hereto and of the Conversion Shares pursuant to the
Restated Charter, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or
constitute a default under any such term, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
3.14 LITIGATION. There is no action, suit, proceeding or
investigation pending or to the Company's knowledge currently threatened against
the Company that questions the validity of this Agreement, or the Related
Agreements or the right of the Company to enter into any of such agreements, or
to consummate the transactions contemplated hereby or thereby, or which might
result, either individually or in the aggregate, in any material adverse change
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for any of the foregoing. The
foregoing includes, without limitation, actions pending or threatened (or any
basis therefor known to the Company) involving the prior employment of any of
the Company's employees, their use in connection with the Company's business of
any
7.
<PAGE> 11
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company intends to initiate.
3.15 EMPLOYEES. The Company has no collective bargaining
agreements with any of its employees. There is no labor union organizing
activity pending or, to the Company's knowledge, threatened with respect to the
Company. No employee has any agreement or contract, written or verbal, regarding
his employment. To the Company's knowledge, no employee of the Company, nor any
consultant with whom the Company has contracted, is in violation of any term of
any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company because of the nature of the business to be conducted
by the Company; and to the Company's knowledge the continued employment by the
Company of its present employees, and the performance of the Company's contracts
with its independent contractors, will not result in any such violation. The
Company has not received any notice alleging that any such violation has
occurred. No employee of the Company has been granted the right to continued
employment by the Company or to any material compensation following termination
of employment with the Company. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate his, her or
their employment with the Company, nor does the Company have a present intention
to terminate the employment of any officer, key employee or group of key
employees.
3.16 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each
employee and officer of the Company has executed an agreement with the Company
regarding confidentiality and proprietary information, in the form of Exhibit E
attached hereto. The Company is not aware that any of its employees is in
violation thereof, and the Company will use its best efforts to prevent any such
violation. All consultants to or vendors of the Company with access to material
confidential information of the Company are parties to a written agreement
pursuant to which, among other things, each such consultant or vendor is
obligated to maintain the confidentiality of confidential information of the
Company. The Company is not aware that any of its consultants or vendors are in
violation thereof, and the Company will use its best efforts to prevent any such
violation.
3.17 OBLIGATIONS OF MANAGEMENT. Each officer of the Company is
currently devoting one hundred percent (100%) of his or her business time to the
conduct of the business of the Company. The Company is not aware that any
officer or key employee of the Company is planning to work less than full time
at the Company in the future. No officer or key employee is currently working
or, to the Company's knowledge, plans to work for a competitive enterprise,
whether or not such officer or key employee is or will be compensated by such
enterprise.
3.18 REGISTRATION RIGHTS AND VOTING RIGHTS.
(a) Except as required pursuant to the Investor Rights
Agreement, the Company is presently not under any obligation, and has not
granted any rights, to register (as
8.
<PAGE> 12
defined in Section 1.1 of the Investor Rights Agreement) any of the Company's
presently outstanding securities or any of its securities that may hereafter be
issued.
(b) To the Company's knowledge, no stockholder of the
Company has entered into any agreement with respect to the voting of equity
securities of the Company.
3.19 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the
Company is not in violation of any applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Agreement and the issuance of the Shares or the Conversion Shares, except such
as has been duly and validly obtained or filed, or with respect to any filings
that must be made after the Closing, as will be filed in a timely manner. The
Company has all franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by it, the lack
of which could materially and adversely affect the business, properties,
prospects or financial condition of the Company and believes it can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted.
3.20 OFFERING VALID. Assuming the accuracy of the
representations and warranties of the Purchaser contained in Section 4.2 hereof,
the offer, sale and issuance of the Shares and the Conversion Shares will be
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and will have been registered or qualified (or
are exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities laws. Neither
the Company nor any agent on its behalf has solicited or will solicit any offers
to sell or has offered to sell or will offer to sell all or any part of the
Shares to any person or persons so as to bring the sale of such Shares by the
Company within the registration provisions of the Securities Act or any state
securities laws.
3.21 MINUTE BOOKS. The minute books of the Company made
available to the Purchaser contain a complete summary of all meetings of
directors and stockholders since the time of incorporation.
3.22 INSURANCE. The Company has obtained fire and casualty
insurance policies with coverage customary for companies similarly situated to
the Company.
3.23 TAX RETURNS AND PAYMENTS. The Company has filed all tax
returns and reports as required by law. These returns and reports were true and
correct in all material respects when filed. The Company has paid all taxes and
other assessments due.
3.24 QUALIFIED SMALL BUSINESS. To the Company's knowledge, the
Shares should qualify as "Qualified Small Business Stock" as defined in Section
1202(c) of the Internal Revenue Code of 1986, as amended (the "Code"), as of the
date hereof.
3.25 BOARD OF DIRECTORS. The Company covenants that, if the
Company adopts a "staggered" Board of Directors in connection with the Company's
initial public offering
9.
<PAGE> 13
(the "IPO"), it will name the Purchaser's designee, selected in accordance with
the Restated Charter, on the Board of Directors of the Company as one of the
directors of the Company in the class serving a full three-year term prior to
re-election. In addition, the Company covenants following the IPO to nominate
the Purchaser's designee to serve two additional three-year terms as a director
as long as Purchaser still owns shares representing at least five percent (5%)
of the Company's outstanding Common Stock (assuming the conversion of all
Preferred Stock and similar convertible securities).
3.26 RIGHT OF FIRST REFUSAL. The Company covenants that in the
event that, between the execution of this Agreement and the Closing Date, the
Company shall issue Equity Securities (as defined in Section 4.1 of the Investor
Rights Agreement) and such Equity Securities are not excluded pursuant to
Section 4.7 of the Investor Rights Agreement, then the Purchaser shall have the
rights of a Right of First Refusal Investor (as defined in the Investor Rights
Agreement) as described in Section 4 of the Investor Rights Agreement, subject
to the following limitations:
(a) The Purchaser shall have the right to purchase only
that number of Equity Securities which are necessary for Purchaser to own 10% of
the outstanding capital stock of the Company (calculated on a fully diluted
basis including all options, warrants and convertible securities outstanding or
reserved for issuance under any stock option plan or stock purchase plan) as of
the Closing Date;
(b) The Equity Securities purchased by Purchaser
pursuant to this Section 3.26 shall be for the price and upon the terms and
conditions as specified in the notice provided to Purchaser in the manner
contemplated by Section 4.2 or 4.4 of the Investor Rights Agreement;
(c) The Purchaser must comply with the response to
notice provisions set forth in Sections 4.2, 4.3 and 4.4 of the Investor Rights
Agreement; however, the closing of any sale of Equity Securities to the
Purchaser pursuant to Section 4 of the Investor Rights Agreement will occur on
the Closing Date;
(d) Solely for the purpose of Section 4.5 of the
Investor Rights Agreement, the Shares shall be included in the definition of
Registrable Securities;
(e) Solely for the purpose of calculating the number of
shares the Purchaser may purchase under Section 4.1 of the Investor Rights
Agreement, Purchaser shall be deemed to hold 4,182,578 shares of the Company's
Common Stock (as such number may be adjusted as a result of Purchaser's exercise
of its rights under this Section 3.26 to purchase additional shares); and
(f) Solely for the purpose of calculating the number of
shares each Right of First Refusal Investor may purchase under Section 4.1, the
Shares shall be deemed outstanding shares immediately prior to the issuance of
the Equity Securities.
Except as stated in this Section 3.26, all of the provisions of Section 4 of the
Investor Rights Agreement shall apply to the Purchaser, including the early
termination provisions set forth in Section 4.5 of the Investor Rights
Agreement.
10.
<PAGE> 14
3.27 COMPANY RIGHT OF FIRST REFUSAL The Company covenants to use
its best efforts to obtain a waiver of its Board of Directors of the provisions
of Article XIV, Section 46 of the Company's Amended and Restated Bylaws with
respect to any transfer by the Purchaser (or any transferee of the Purchaser
that is an affiliate of Cox Enterprises, Inc. ("Cox")) of any shares of the
Company's capital stock to Cox or to an affiliate of Cox.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser hereby represents and warrants to the Company as
follows (such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):
4.1 REQUISITE POWER AND AUTHORITY. The Purchaser has all
necessary corporate power and authority under all applicable provisions of law
to execute and deliver this Agreement and the Related Agreements and to carry
out their provisions. All corporate action on the Purchaser's part required for
the lawful execution and delivery of this Agreement and the Related Agreements
has been or will be effectively taken prior to the Closing. Upon their execution
and delivery, this Agreement and the Related Agreements will be valid and
binding obligations of the Purchaser, enforceable in accordance with their
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights, (b) general principles of equity that restrict
the availability of equitable remedies, and (c) to the extent that the
enforceability of the indemnification provisions of Section 2.9 of the Investor
Rights Agreement may be limited by applicable laws.
4.2 INVESTMENT REPRESENTATIONS. The Purchaser understands that
neither the Shares nor the Conversion Shares have been registered under the
Securities Act. Purchaser also understands that the Shares are being offered and
sold pursuant to an exemption from registration contained in the Securities Act
based in part upon the Purchaser's representations contained in the Agreement.
The Purchaser hereby represents and warrants as follows:
(a) PURCHASER BEARS ECONOMIC RISK. The Purchaser has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Company so that it is
capable of evaluating the merits and risks of its investment in the Company and
has the capacity to protect its own interests. The Purchaser must bear the
economic risk of this investment indefinitely unless the Shares (or the
Conversion Shares) are registered pursuant to the Securities Act, or an
exemption from registration is available. The Purchaser understands that the
Company has no present intention of registering the Shares or the Conversion
Shares. The Purchaser also understands that there is no assurance that any
exemption from registration under the Securities Act will be available and that,
even if available, such exemption may not allow the Purchaser to transfer all or
any portion of the Shares or the Conversion Shares under the circumstances, in
the amounts or at the times the Purchaser might propose.
11.
<PAGE> 15
(b) ACQUISITION FOR OWN ACCOUNT. The Purchaser is
acquiring the Shares and the Conversion Shares for the Purchaser's own account
for investment only, and not with a view towards their distribution.
(c) PURCHASER CAN PROTECT ITS INTEREST. The Purchaser
represents that by reason of its, or of its management's, business or financial
experience, the Purchaser has the capacity to protect its own interests in
connection with the transactions contemplated in this Agreement, and the Related
Agreements. Further, the Purchaser is aware of no publication of any
advertisement in connection with the transactions contemplated in the Agreement.
(d) ACCREDITED INVESTOR. The Purchaser represents that
it is an accredited investor within the meaning of Regulation D under the
Securities Act.
(e) COMPANY INFORMATION. The Purchaser has received and
read the Financial Statements and Business Plan and has had an opportunity to
discuss the Company's business, management and financial affairs with directors,
officers and management of the Company and has had the opportunity to review the
Company's operations and facilities. The Purchaser has also had the opportunity
to ask questions of and receive answers from, the Company and its management
regarding the terms and conditions of this investment.
(f) RULE 144. The Purchaser acknowledges and agrees that
the Shares, and, if issued, the Conversion Shares must be held indefinitely
unless they are subsequently registered under the Securities Act or an exemption
from such registration is available. The Purchaser has been advised or is aware
of the provisions of Rule 144 promulgated under the Securities Act as in effect
from time to time, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things: the availability of certain current public information about the
Company, the resale occurring following the required holding period under Rule
144 and the number of shares being sold during any three-month period not
exceeding specified limitations.
(g) RESIDENCE. The office of the Purchaser in which its
investment decision was made is located at the address of the Purchaser set
forth on the signature page hereto.
4.3 TRANSFER RESTRICTIONS. The Purchaser acknowledges and agrees
that the Shares and, if issued, the Conversion Shares are subject to
restrictions on transfer as set forth in the Investor Rights Agreement.
4.4 LEGENDS. Purchaser acknowledges and agrees, that the
certificate(s) evidencing the Shares and/or the Conversion Shares may bear 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 REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
12.
<PAGE> 16
(b) Any legend imposed by the Company's Bylaws or
applicable state securities laws.
5. CONDITIONS TO CLOSING.
5.1 CONDITIONS TO THE PURCHASER'S OBLIGATIONS AT THE CLOSING.
The Purchaser's obligations to purchase the Shares at the Closing are subject to
the satisfaction, at or prior to the Closing Date, of the following conditions:
(a) SCHEDULE OF EXCEPTIONS. The Company shall have
delivered to the Purchaser, for informational purposes only, a Schedule of
Exceptions that has been updated as of the Closing Date.
(b) REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
(unless such representation and warranty is expressly limited by its terms to a
specific earlier date, in which case such representation and warranty shall
continue to be true and correct with respect to such earlier date), except as
set forth on the Schedule of Exceptions delivered upon execution of this
Agreement pursuant to Section 3 herein (it being understood that, for purposes
of determining the accuracy of such representations and warranties as of the
Closing Date, (i) any inaccuracy that does not, individually or in the aggregate
with any other such inaccuracies, have a material adverse effect on the business
or financial condition, results of operations, assets, management or prospects
of the Company shall be disregarded and (ii) any inaccuracy that results from or
relates to the taking of any action contemplated or permitted by this Agreement
shall be disregarded), and the Company shall have performed all obligations and
conditions herein required to be performed or observed by it on or prior to the
Closing.
(c) LEGAL INVESTMENT. On the Closing Date, the sale and
issuance of the Shares and the proposed issuance of the Conversion Shares shall
be legally permitted by all laws and regulations to which the Purchaser and the
Company are subject.
(d) FILING OF RESTATED CHARTER. The Restated Charter
shall have been filed with the Secretary of State of the State of Delaware and
shall continue to be in full force and effect as of the Closing Date.
(e) CORPORATE DOCUMENTS. The Company shall have
delivered to the Purchaser or its counsel, copies of all corporate documents of
the Company as the Purchaser shall reasonably request.
(f) RESERVATION OF CONVERSION SHARES. The Conversion
Shares issuable upon conversion of the Shares shall have been duly authorized
and reserved for issuance upon such conversion.
(g) COMPLIANCE CERTIFICATE. The Company shall have
delivered to THE Purchaser a Compliance Certificate, executed by the President
of the Company, dated the Closing Date, to the effect that the conditions
specified in subsections (b), (d), (e) and (g) of this Section 5.1 have been
satisfied.
13.
<PAGE> 17
(h) INVESTOR RIGHTS AGREEMENT. The Second Amended and
Restated Investor Rights Agreement substantially in the form attached hereto as
Exhibit B shall have been executed and delivered by the parties thereto.
(i) CO-SALE AGREEMENT. The Second Amended and Restated
Co-Sale Agreement substantially in the form attached hereto as Exhibit C shall
have been executed and delivered by the parties thereto.
(j) LEGAL OPINION. The Purchaser shall have received
from legal counsel to the Company an opinion addressed to the Purchaser, dated
as of the Closing Date, in substantially the form attached hereto as Exhibit F.
(k) PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
The Company and each of its employees shall have entered into the Company's
standard form of Proprietary Information and Inventions Agreement attached
hereto as Exhibit E.
(l) BOARD OF DIRECTORS. Upon the Closing, the Board of
Directors of the Company shall consist of Lawrence F. Probst III, Michael
Robertson, Mark Stevens, Theodore W. Waitt, Robin Richards and, as the
Purchaser's designee, David Easterly.
(m) HSR ACT. The waiting period applicable to the
consummation of this Agreement and the transactions contemplated hereby under
the HSR Act shall have expired or been terminated.
(n) LIMITED LIABILITY COMPANY AGREEMENT. That certain
Limited Liability Company Agreement of MP3Radio.com L.L.C., between the
Purchaser and the Company, in substantially the form attached hereto as
Exhibit G, shall have been executed and delivered by the parties thereto.
(o) TERMINATION DATE. The Closing shall have occurred on
or before September 1, 1999.
5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's
obligation to issue and sell the Shares at the Closing is subject to the
satisfaction, on or prior to the Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties in Section 4 made by the Purchaser shall be true
and correct in all material respects at the date of the Closing, with the same
force and effect as if they had been made on and as of said date.
(b) PERFORMANCE OF OBLIGATIONS. The Purchaser shall have
performed and complied with all agreements and conditions herein required to be
performed or complied with by the Purchaser on or before the Closing.
(c) FILING OF RESTATED CHARTER. The Restated Charter
shall have been filed with the Secretary of State of the State of Delaware.
14.
<PAGE> 18
(d) INVESTOR RIGHTS AGREEMENT. The Second Amended and
Restated Investor Rights Agreement substantially in the form attached hereto as
Exhibit B shall have been executed and delivered by the Purchaser.
(e) CO-SALE AGREEMENT. The Second Amended and Restated
Co-Sale Agreement substantially in the form attached hereto as Exhibit C shall
have been executed and delivered by the parties thereto.
(f) HSR ACT. The waiting period applicable to the
consummation of this Agreement and the transactions contemplated hereby under
the HSR Act shall have expired or been terminated.
(g) LIMITED LIABILITY COMPANY AGREEMENT. That certain
Limited Liability Company Agreement of MP3Radio.com L.L.C., between the
Purchaser and the Company, in substantially the form attached hereto as Exhibit
G, shall have been executed and delivered by the parties thereto.
(h) TERMINATION DATE. The Closing shall have occurred on
or before September 1, 1999.
6. MISCELLANEOUS.
6.1 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and performed entirely in
California.
6.2 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Purchaser and
the closing of the transactions contemplated hereby for a period of one (1) year
following the Closing; provided, however, the Company's covenants set forth in
Section 3.25 herein shall survive for the period of time specified therein. 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.
6.3 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 the Shares from time to time. Subject to
compliance with applicable federal and state securities laws, the Purchaser may
transfer its rights, but not its obligations, hereunder to its employees,
officers and affiliates, including affiliates of Cox Enterprises, Inc., (all of
such transferees shall thereafter constitute "Purchasers" with respect to all of
the rights of the Purchaser set forth in this Agreement).
6.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto, the Related Agreements and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof
15.
<PAGE> 19
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.
6.5 SEVERABILITY. In case any provision of the Agreement shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
6.6 AMENDMENT AND WAIVER.
(a) This Agreement may be amended or modified only upon
the written consent of the Company and the holder or holders of at least a
majority of the Shares (treated as if converted and including any Conversion
Shares into which the Shares have been converted that have not been sold to the
public).
(b) The obligations of the Company and the rights of the
holder or holders of the Shares and the Conversion Shares under the Agreement
may be waived only with the written consent of the holders of at least a
majority of the Shares (treated as if converted and including any Conversion
Shares into which the Shares have been converted that have not been sold to the
public).
6.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission
to exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement, the Related
Agreements or the Restated Charter, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent or approval of any kind or character on the Purchaser's
part of any breach, default or noncompliance under this Agreement, the Related
Agreements or under the Restated Charter or any waiver on such party's part of
any provisions or conditions of the Agreement, the Related Agreements, or the
Restated Charter must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, the Related Agreements, the Restated Charter, by law, or otherwise
afforded to any party, shall be cumulative and not alternative.
6.8 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 Company and the Purchaser at the addresses as set forth on the
signature page hereof or at such other address as the Company or Purchaser may
designate by ten (10) days advance written notice to the other parties hereto.
6.9 EXPENSES. Each party shall pay all costs and expenses that
it incurs with respect to the negotiation, execution, delivery and performance
of this Agreement and the Related Agreements.
16.
<PAGE> 20
6.10 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.
6.11 TITLES AND SUBTITLES. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
6.12 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.
6.13 BROKER'S FEES. Each party hereto represents and warrants
that no agent, broker, investment banker, person or firm acting on behalf of or
under the authority of such party hereto is or will be entitled to any broker's
or finder's fee or any other commission directly or indirectly in connection
with the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 6.13 being untrue.
6.14 RELIANCE BY THE PURCHASER. The Purchaser acknowledges that
it is not relying upon any person, firm, or corporation, other than the Company
and its officers and directors, in making its investment or decision to invest
in the Company.
6.15 CONFIDENTIALITY. Each party hereto agrees that, except with
the prior written consent of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement or the Related Agreements,
discussions or negotiations relating to this Agreement or the Related
Agreements, the performance of its obligations hereunder or the ownership of the
Shares purchased hereunder. The provisions of this Section 6.15 shall be in
addition to, and not in substitution for, the provisions of any separate
nondisclosure agreement executed by the parties hereto.
6.16 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.
6.17 STOCK SPLIT. The Company is contemplating, and its Board of
Directors has approved, a split of the Company's Common Stock whereby each
outstanding two shares of Common Stock would be split into three shares of
Common Stock. The transaction contemplated in this Agreement and the numbers
utilized herein are based on pre-split numbers. If for any reason the Company
effects the stock split prior to the consummation of the transactions
contemplated by this Agreement, the parties agree that all numbers herein and
the conversion rate of the Series C Preferred Stock will be adjusted
appropriately.
17.
<PAGE> 21
6.18 INITIAL PUBLIC OFFERING. The Company is contemplating, and
its Board of Directors has approved, the initial public offering of the
Company's Common Stock. If for any reason the initial public offering is
completed prior to the Closing Date, the parties agree that this Agreement shall
become an agreement for the Company to sell and the Purchaser to buy shares of
Common Stock of the Company. In all other respects, the terms and conditions of
this Agreement and the Related Agreements shall remain exactly the same and
shall not in any way be affected or impaired thereby.
[THIS SPACE INTENTIONALLY LEFT BLANK]
18.
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed the SERIES C
PREFERRED STOCK PURCHASE 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
PURCHASER:
COX INTERACTIVE MEDIA, INC.
By: /s/ DANIEL E. EASTERLY
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
--------------------------
--------------------------
--------------------------
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
SIGNATURE PAGE
<PAGE> 23
EXHIBIT A
RESTATED CHARTER
<PAGE> 24
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-six million five
hundred thousand (66,500,000). 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"). Fifteen million five hundred thousand (15,500,000) shares shall
be Preferred Stock, each having a par value of one-tenth of one cent ($0.001)
(the "Preferred Stock").
1.
<PAGE> 25
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"). four million
one hundred eighty-two thousand five hundred seventy-eight (4,182,578) of the
authorized shares of Preferred Stock are hereby designated "Series C Preferred
Stock" (the "Series C Preferred").
E. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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,
(ii) the Series B Preferred shall be five dollars and sixty-nine cents ($5.69)
per share and (i) the Series C Preferred shall be ten dollars and seventy-five
cents ($10.76) 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, Series
B Preferred or Series C 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
2.
<PAGE> 26
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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, the Series B Preferred and Series
C 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, Series B
Preferred and Series C 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, Series B
Preferred and Series C 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, SERIES B
PREFERRED AND SERIES C 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, Series B Preferred
and/or Series C Preferred (subject to adjustment for any stock split, reverse
stock split or other similar event affecting the Series A Preferred, Series B
Preferred and Series C 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, Series B
Preferred and Series C 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, Series B Preferred or Series C Preferred, or that otherwise
adversely affects the voting powers, preferences or other special rights,
privileges or restrictions of the Series A Preferred, Series B Preferred or
Series C 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, Series B Preferred or
Series C Preferred in right of redemption, liquidation
3.
<PAGE> 27
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 (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, Series B Preferred and Series C Preferred,
each consenting or voting (as the case may be) together as a single class,
increase the maximum number of directors constituting the Board of Directors to
a number in excess of six (6). 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. For so long as at least 3,500,000 shares of Series C Preferred
remain outstanding (subject to adjustment for any stock split, reverse stock
split or similar event affecting the Series C Preferred), the holders of Series
C Preferred, voting together as a separate class, shall be entitled to elect one
(1) member of the Company's Board of Directors (the "Series C Director") 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
4.
<PAGE> 28
holders of a majority of the then outstanding shares of Series A Preferred and a
majority of the then outstanding shares of Series C Preferred shall constitute a
quorum of the Series A Preferred and Series C Preferred, respectively, for the
election of directors to be elected solely by the holders of the Series A
Preferred and Series C Preferred, respectively. 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, Series B Preferred and
Series C 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 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, Series B Preferred and Series C 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.
5.
<PAGE> 29
(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, Series B Preferred and
Series C 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 time to time come into existence,
the holders of Series A Preferred, Series B Preferred and Series C Preferred
shall be entitled to be paid out of the assets of the Company an amount per
share of Series A Preferred, Series B Preferred and Series C Preferred,
respectively, equal to their respective Original Issue Price plus all declared
and unpaid dividends on the Series A Preferred, Series B Preferred and Series C
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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B
Preferred and Series C 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, Series B Preferred and Series C 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
6.
<PAGE> 30
(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
(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, Series B
Preferred and Series C Preferred shall have the following rights with respect to
the conversion of the Series A Preferred, Series B Preferred and Series C
Preferred, respectively, 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, Series
B Preferred and Series C 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,
Series B Preferred or Series C Preferred shall be entitled upon conversion shall
be the product obtained by multiplying the "Series A Preferred Conversion Rate,"
the "Series B Preferred Conversion Rate" or the "Series C 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, Series B Preferred or
Series C Preferred being converted.
(b) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED CONVERSION RATE. The conversion rate in effect at any time for
conversion of the Series A Preferred (the "Series A Preferred Conversion Rate"),
the Series B Preferred (the "Series B
7.
<PAGE> 31
Preferred Conversion Rate") and the Series C Preferred (the "Series C Preferred
Conversion Rate") respectively, shall be the quotient obtained by dividing the
Original Issue Price of the Series A Preferred, the Series B Preferred and
Series C Preferred, respectively, by the "Series A Preferred Conversion Price,"
the "Series B Preferred Conversion Price" and the "Series C Preferred Conversion
Price," respectively, calculated as provided in Section 4(c).
(c) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C
PREFERRED CONVERSION PRICE. The conversion price for the Series A Preferred, the
Series B Preferred and Series C Preferred, respectively, shall initially be the
respective Original Issue Price of the Series A Preferred (the "Series A
Preferred Conversion Price"), the Series B Preferred (the "Series B Preferred
Conversion Price") and the Series C Preferred (the "Series C Preferred
Conversion Price"). Such initial Series A Preferred Conversion Price, Series B
Preferred Conversion Price and Series C 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, Series B Preferred Conversion
Price and Series C Preferred Conversion Price shall mean the Series A Preferred
Conversion Price, Series B Preferred Conversion Price and Series C Preferred
Conversion Price, respectively, as so adjusted.
(d) MECHANICS OF CONVERSION. Each holder of Series A
Preferred, Series B Preferred or Series C 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, Series B Preferred and
Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B Preferred or Series C 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, Series B Preferred or
Series C Preferred shall not be deemed to have converted such Series A
Preferred, Series B Preferred or Series C Preferred until immediately prior to
the closing of such sale of securities.
8.
<PAGE> 32
(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. The
term "Original Issue Date" shall mean, with respect to the Series A Preferred,
January 21, 1999, with respect to the Series B Preferred, April 29, 1999 and
with respect to the Series C Preferred, the date the first share of Series C
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, Series B Preferred Conversion Price and the
Series C 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, the Series B Preferred Conversion Price and the Series C
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, Series B Preferred Conversion Price and Series C
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, the Series B Preferred Conversion Price and
the Series C 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, Series B Preferred
Conversion Price and Series C 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, Series B Preferred
Conversion Price and Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C Preferred, as applicable,
shall have the right thereafter to convert such stock into the kind and amount
of
9.
<PAGE> 33
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, Series B Preferred
and Series C 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, Series B Preferred and Series C Preferred, as applicable, shall
thereafter be entitled to receive upon conversion of the Series A Preferred,
Series B Preferred and Series C 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, Series B
Preferred and Series C 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, Series B Preferred
Conversion Price and Series C Preferred Conversion Price then in effect and the
number of shares issuable upon conversion of the Series A Preferred, Series B
Preferred and Series C Preferred) shall be applicable after that event and be as
nearly equivalent as practicable.
(i) SALE OF SHARES BELOW SERIES A PREFERRED CONVERSION
PRICE, SERIES B PREFERRED CONVERSION PRICE OR SERIES C 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, Series B Preferred Conversion Price or Series C Preferred Conversion
Price, as applicable, then and in each such case the then existing Series A
Preferred Conversion Price, Series B Preferred Conversion Price or Series C
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, Series B Preferred
Conversion Price or Series C 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, Series B Preferred
10.
<PAGE> 34
Conversion Price or Series C 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, Series B Preferred and
Series C 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, 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, Series B
Preferred Conversion Price or Series C 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
11.
<PAGE> 35
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, the Series B Preferred
Conversion Price and Series C 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, the Series B
Preferred Conversion Price and the Series C 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, the
Series B Preferred Conversion Price and the Series C 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, Series B Preferred and Series C 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, Series B Preferred or Series C 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
12.
<PAGE> 36
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 27, 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, Series B
Preferred Conversion Price or Series C Preferred Conversion Price for the number
of shares of Common Stock or other securities issuable upon conversion of the
Series A Preferred, Series B Preferred or Series C Preferred, if the Series A
Preferred, Series B Preferred or Series C 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, Series B Preferred and Series C 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, Series B Preferred
Conversion Price or Series C Preferred Conversion Price, as applicable, 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, Series B Preferred and
Series C 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, Series B Preferred and Series C 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, Series B
Preferred and Series C 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,
13.
<PAGE> 37
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, Series B
Preferred and Series C Preferred shall automatically be converted into shares of
Common Stock, based on the then-effective Series A Preferred Conversion Rate,
Series B Preferred Conversion Rate and Series C 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, the Series
B Preferred and the Series C 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), in the case of the Series B Preferred, is at
least $8.54 (as adjusted for stock splits, dividends, recapitalizations and the
like) and in the case of the Series C Preferred, is at least $10.76 (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, Series B Preferred and/or Series C 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, Series B Preferred and/or Series C 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, Series B Preferred and/or Series C Preferred, the holders of Series A
Preferred, Series B Preferred and/or Series C 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, Series B Preferred and Series
C 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, Series B Preferred
and/or Series C 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).
14.
<PAGE> 38
(m) FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of Series A Preferred, Series B Preferred
and Series C Preferred. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series A Preferred, Series B
Preferred and Series C 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, Series B Preferred and
Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C 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, Series B Preferred and Series C
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, Series B Preferred
and Series C Preferred so converted were registered.
(q) NO DILUTION OR IMPAIRMENT. Without the consent of
the holders of then outstanding Series A Preferred, Series B Preferred and
Series C 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
15.
<PAGE> 39
the Series A Preferred, Series B Preferred and Series C Preferred against
dilution or other impairment.
5. NO REISSUANCE OF SERIES A PREFERRED, SERIES B PREFERRED AND
SERIES C PREFERRED.
No share or shares of Series A Preferred, Series B Preferred and
Series C 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.
C. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
16.
<PAGE> 40
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-two million four hundred
twenty-eight thousand sixty-five (22,428,065) shares of Common Stock, eight
million two hundred fifty thousand (8,250,000) shares of Series A Preferred
Stock and four hundred thirty-nine thousand one hundred three (439,103) shares
of Series B 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.
17.
<PAGE> 41
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 19th day of May 1999.
MP3.COM, INC.
____________________________________
ROBIN RICHARDS,
President and Chief Operating
Officer
____________________________________
STEVEN M. PRZESMICKI,
Secretary
18.
<PAGE> 42
EXHIBIT B
SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 43
MP3.COM, INC.
SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
__________, 1999
<PAGE> 44
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
SECTION 1. GENERAL.......................................................................2
1.1 Definitions...................................................................2
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.........................................................7
2.5 Expenses of Registration......................................................8
2.6 Obligations of the Company....................................................8
2.7 Termination of Registration Rights............................................9
2.8 Delay of Registration; Furnishing Information................................10
2.9 Indemnification..............................................................10
2.10 Assignment of Registration Rights............................................12
2.11 Amendment of Registration Rights.............................................12
2.12 [Reserved]...................................................................13
2.13 "Market Stand-Off" Agreement; Agreement to Furnish Information...............13
2.14 Rule 144 Reporting...........................................................13
SECTION 3. COVENANTS OF THE COMPANY.....................................................14
3.1 Basic Financial Information and Reporting....................................14
3.2 Inspection Rights............................................................15
3.3 Limits on Access; Confidentiality of Records.................................15
3.4 Reservation of Common Stock..................................................15
3.5 Stock Vesting................................................................15
3.6 Key Man Insurance............................................................16
3.7 Proprietary Information and Inventions Agreement.............................16
3.8 Assignment of Right of First Refusal.........................................16
3.9 Election and Removal of Directors............................................16
3.10 Qualified Small Business.....................................................16
3.11 Termination of Covenants.....................................................17
</TABLE>
i.
<PAGE> 45
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
SECTION 4. RIGHTS OF FIRST REFUSAL......................................................17
4.1 Subsequent Offerings.........................................................17
4.2 Exercise of Rights...........................................................17
4.3 Issuance of Equity Securities to Other Persons...............................17
4.4 Sale Without Notice..........................................................18
4.5 Termination and Waiver of Rights of First Refusal............................18
4.6 Transfer of Rights of First Refusal..........................................18
4.7 Excluded Securities..........................................................18
SECTION 5. MISCELLANEOUS................................................................19
5.1 Governing Law................................................................19
5.2 Survival.....................................................................19
5.3 Successors and Assigns.......................................................19
5.4 Entire Agreement.............................................................20
5.5 Severability.................................................................20
5.6 Amendment and Waiver.........................................................20
5.7 Delays or Omissions..........................................................20
5.8 Notices......................................................................20
5.9 Attorneys' Fees..............................................................21
5.10 Titles and Subtitles.........................................................21
5.11 Additional Investors.........................................................21
5.12 Counterparts.................................................................21
</TABLE>
ii.
<PAGE> 46
MP3.COM, INC.
SECOND AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THIS SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the
"AGREEMENT") is entered into as of the _______ day of _____, 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"), certain holders of the Company's Series B
Preferred Stock ("SERIES B STOCK") set forth on Exhibit B hereto (the "SERIES B
INVESTORS"), certain holders of warrants to purchase the Company's Common Stock
(and holders of Common Stock issued upon exercise of such warrants) set forth on
Exhibit B-1 hereto (the "WARRANTHOLDERS") and the purchaser of the Company's
Series C Preferred Stock ("SERIES C STOCK") purchased pursuant to that certain
Series C Preferred Stock Purchase Agreement, dated May 19, 1999 (the "PURCHASE
AGREEMENT"), as set forth on Exhibit C hereto (the "SERIES C INVESTOR"). The
Series A Investors, the Series B Investors, the Warrantholders and the Series C
Investor 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 and in
connection with the Company's prior sale and issuance of Series B Preferred
Stock, the Company, the Series A Investors and the Series B Investors previously
entered into the Amended and Restated Investor Rights Agreement, dated as of
April 29, 1999 (the "PRIOR AGREEMENT");
WHEREAS, the Company has issued warrants (the "WARRANTS"), dated as of
April 27, 1999, to purchase a total of 439,103 shares of Common Stock of the
Company to the holders set forth on Exhibit B-1;
WHEREAS, the Company proposes to sell and issue 4,182,578 shares of its
Series C Stock pursuant to the Purchase Agreement;
WHEREAS, the Series A Investors, the Series B Investors and the
Warrantholders consent, by their execution of this Agreement, to waive their
rights of first refusal pursuant to Section 4 of the Prior Agreement with
respect to the Series C Preferred; and
WHEREAS, as a condition of entering into the Purchase Agreement, the
Series C 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:
1.
<PAGE> 47
SECTION 1. GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"AFFILIATE" means, with respect to a person or entity, any other
person or entity directly or indirectly controlling, controlled by or under
common control with such person or entity.
"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.
"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
2.
<PAGE> 48
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 Third 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, Series B Stock
and Series C Stock held by (i) the Investors listed on Exhibit A, Exhibit B and
Exhibit C 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.
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, (C) to the Holder's family member or
trust for the benefit of an individual Holder, or (D) an Affiliate of Cox
Enterprises, Inc. ("Cox") to any other Affiliate of Cox; 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.
3.
<PAGE> 49
(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 REASONABLY 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.
(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
4.
<PAGE> 50
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;
(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
5.
<PAGE> 51
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 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 the Initial Offering and
such registration does not include shares of any other selling shareholders, in
which event 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 persons 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.
6.
<PAGE> 52
(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 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
7.
<PAGE> 53
(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 (other than as required under the Securities Act) 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 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.
8.
<PAGE> 54
(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.
(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 without limitation under Rule 144 during
any ninety (90) day period.
9.
<PAGE> 55
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 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
10.
<PAGE> 56
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 the
aggregate 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.
11.
<PAGE> 57
(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 the aggregate
contributions 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 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), (d)
with respect to Cox Interactive Media, Inc., an Affiliate of Cox, or (e) 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
12.
<PAGE> 58
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 and other than a transfer to an Affiliate of such
Holder if such Affiliate agrees to be bound by the terms hereof) 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 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
13.
<PAGE> 59
(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 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 Investor (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.
14.
<PAGE> 60
(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 Warrants, 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 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 Warrants, 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
15.
<PAGE> 61
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, the holders
of at least a majority of the then outstanding shares of Series A Stock, or the
holders of at least a majority of the then outstanding shares of Series C Stock,
respectively, notify the Company that an individual has been designated to serve
as a director which the holders of Common Stock, Series A Stock or Series C
Stock, 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, the holders of at least a majority
of the then outstanding shares of Series A Stock, or the holders of at least a
majority of the then outstanding shares of Series C Preferred Stock,
respectively, notify the Company that they desire to remove a director which the
holders of Common Stock, Series A Stock or Series C 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
16.
<PAGE> 62
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 Warrantholder (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 Warrants) which such Investor is deemed to be a holder of
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 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)
17.
<PAGE> 63
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 Warrantholders, 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.
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 8,500,000 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,
18.
<PAGE> 64
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 Warrants, the Shares or the shares of Common Stock
issued upon conversion of the Shares or exercise of the Warrants;
(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.
4.8 WAIVER WITH RESPECT TO SERIES C PREFERRED STOCK. The Series A
Holders, Series B Holders and the Warrantholders consent, by their execution of
this Agreement, to waive their rights of first refusal pursuant to Section 4 of
the Prior Agreement with respect to the Series C Preferred and also agree to
waive their rights of first refusal to the extent necessary to permit the
Purchaser to exercise its rights pursuant to this Section 4 as set forth in
Section 3.26 of that certain Series C Preferred Stock Purchase Agreement dated
May 19, 1999 between the Company and the Series C Investor.
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.
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.
19.
<PAGE> 65
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 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.
20.
<PAGE> 66
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, Exhibit B or Exhibit C 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]
21.
<PAGE> 67
IN WITNESS WHEREOF, the parties hereto have executed this SECOND AMENDED
AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first
paragraph hereof.
COMPANY:
MP3.COM, INC.
By:_________________________________
Name: Robin Richards
Title: President and Chief Operating
Officer
Address: 10350 Science Center Drive
Building No. 14
San Diego, CA 92121
<PAGE> 68
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:_________________________________
Name:_______________________________
Title: Managing Member
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
CMS PARTNERS LLC
SEQUOIA 1997
By:_________________________________
Name:_______________________________
Title:______________________________
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
<PAGE> 69
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: idealab! Capital Management I, LLC,
its General Partner
By:_________________________________
Name: William S. Elkus
Title: Managing Member
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: idealab! Capital Management I, LLC,
its General Partner
By:_________________________________
Name: William S. Elkus
Title: Managing Member
Address: 130 West Union Street
Pasadena, CA 91103
GC&H INVESTMENTS
By:_________________________________
Name: John L. Cardoza
Title: Executive Partner
Address: c/o Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA
94111-3580
<PAGE> 70
STANFORD UNIVERSITY
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
PSERD TRUST DATED 3/11/86
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
BURCHAM COMMUNITY PROPERTY
TRUST DATED 5/23/90
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
TIMARK L.P.
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
<PAGE> 71
____________________________________
SCOTT TAYLOR SMITH
Address:____________________________
____________________________
GETTING THERE, LLC
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
BERG FAMILY TRUST DATED 1/17/89
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
SCOTT M. HARVEY
Address:____________________________
____________________________
<PAGE> 72
ATLAS/THIRD RAIL MANAGEMENT, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
9169 Sunset Blvd.
Los Angeles, CA 90069
Attn: Dennis Gore
DENNIS GORE
____________________________________
2044 Coldwater Canyon Drive
Beverly Hills, CA 90210
THE COLUMBIA CHARITABLE FOUNDATION
By:_________________________________
Name:_______________________________
Title:______________________________
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Thomas Spiegel, Chairman
ALANIS MORISSETTE
____________________________________
121 D West Prarie Avenue #381
Hayden, ID 83835
CHARLES V. ROVEN
____________________________________
9169 Sunset Boulevard
Los Angeles, CA 90069
<PAGE> 73
THE STEEL ROVEN EXEMPTION TRUST
By:_________________________________
Name:_______________________________
Title:______________________________
9169 Sunset Boulevard
Los Angeles, CA 90069
Attn: Charles V. Roven
SPIEGEL 1982 GRANDCHILDREN'S TRUST
FBO EVAN SPIEGEL, HELENE SPIEGEL TRUSTEE
By:_________________________________
Name:_______________________________
Title:______________________________
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Helene Spiegel
SPIEGEL 1982 GRANDCHILDREN'S TRUST
FBO ANTHONY SPIEGEL, HELENE SPIEGEL TRUSTEE
By:_________________________________
Name:_______________________________
Title:______________________________
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Helene Spiegel
BANK STREET PARTNERS
By:_________________________________
Name:_______________________________
Title:______________________________
15 Bank Street
San Anselmo, CA 94960
Attn: Jay Martin, General Partner
<PAGE> 74
KENNY WELCH
__________________________________
20 Newport Drive
Princeton Junction, NJ 08550
HENRY WELCH
__________________________________
38109 Greywalle Drive
Murrieta , CA 92562
RAY WRIGHT
__________________________________
1826 3rd Street
Manhattan Beach, CA 90266
BRIAN MCLAUGHLIN
__________________________________
1510 Anden Way, Suite 305
Sacramento, CA 95615
MIHAELA EVANS
__________________________________
2400 South Hayden Lake Road
Hayden, ID 83835
LESTER KNISPEL
__________________________________
16130 Ventura Boulevard, No. 550
Encino, CA 91436
<PAGE> 75
SCOTT WELCH
__________________________________
1417 2nd Street
Manhattan Beach, CA 90266
COX INTERACTIVE MEDIA, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Address:____________________________
____________________________
<PAGE> 76
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> 77
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> 78
EXHIBIT B-1
SCHEDULE OF WARRANTHOLDERS
Alanis Morissette
Rebecca Mostow
Charles V. Roven
The Steel Roven Exemption Trust
Thomas Spiegel 1982 Trust
Charles Scott Welch
Atlas/Third Rail Management, Inc.
<PAGE> 79
EXHIBIT C
SCHEDULE OF SERIES C INVESTOR
Cox Interactive Media, Inc.
<PAGE> 80
EXHIBIT C
SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 81
MP3.COM, INC.
SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
THIS SECOND AMENDED AND RESTATED CO-SALE AGREEMENT (the "AGREEMENT") is
made and entered into as of this ________ day of _______, 1999, by and among
MP3.COM, INC., a Delaware corporation (the "COMPANY") , each of the persons and
entities listed on Exhibit A hereto (the "INVESTORS") , and Michael Robertson
("FOUNDER") .
RECITALS
WHEREAS, in connection with the Company's prior sale and issuance of
Series A Preferred Stock, the Company and certain of the Investors previously
entered into a Co-Sale Agreement, dated as of January 21, 1999 and in connection
with the Company's prior sale and issuance of Series B Preferred Stock, the
Company and certain of the Investors previously entered into an Amended and
Restated Co-Sale Agreement, dated as of April 29, 1999 (the "PRIOR AGREEMENT") ;
WHEREAS, certain Investors are purchasing shares of the Company's Series
C Preferred Stock pursuant to that certain Series C Preferred Stock Purchase
Agreement (the "PURCHASE AGREEMENT") dated May 19, 1999;
WHEREAS, it is a condition to the closing of the sale of the Series C
Preferred Stock that the Founder, the Company and the Investors shall amend and
restate the Prior Agreement and enter into this Agreement; and
WHEREAS, the parties desire to enter into this Agreement in order to
grant and restate rights of co-sale to each Investor.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby amend and restate the Prior Agreement in its
entirety and agree hereto as follows:
1. DEFINITIONS.
(a) "CO-SALE STOCK" shall mean shares of the Company's Common
Stock now owned or subsequently acquired by the Founder by gift, purchase,
dividend, option exercise or any other means whether or not such securities are
only registered in Founder's name or beneficially or legally owned by Founder,
including any interest of a spouse in any of the Co-Sale Stock, whether that
interest is asserted pursuant to marital property laws or otherwise. The number
of shares of Co-Sale Stock owned by the Founder as of the date hereof are set
forth on Exhibit B, which Exhibit may be amended from time to time by the
Company to reflect changes in the number of shares owned by the Founder, but the
failure to so amend shall have no effect on such Co-Sale Stock being subject to
this Agreement.
(b) "COMMON STOCK" shall mean the Company's Common Stock and
shares of Common Stock issued or issuable upon conversion of the Company's
outstanding preferred
1.
<PAGE> 82
stock or exercise of any option, warrant or other security or right of any kind
convertible into or exchangeable for Common Stock.
(c) "PREFERRED STOCK" shall mean the Company's Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock.
(d) For the purpose of this Agreement, the term "TRANSFER" shall
include any sale, assignment, encumbrance, hypothecation, pledge, conveyance in
trust, gift, transfer by request, devise or descent, or other transfer or
disposition of any kind, including, but not limited to, transfers to receivers,
levying creditors, trustees or receivers in bankruptcy proceedings or general
assignees for the benefit of creditors, whether voluntary or by operation of
law, directly or indirectly, of any of the Co-Sale Stock.
2. TRANSFERS BY FOUNDER.
(a) If Founder proposes to Transfer any shares of Co-Sale Stock,
then the Founder shall promptly give written notice (the "NOTICE")
simultaneously to the Company and to each of the Investors at least thirty (30)
days prior to the closing of such Transfer. The Notice shall describe in
reasonable detail the proposed Transfer including, without limitation, the
number of shares of Co-Sale Stock to be transferred, the nature of such
Transfer, the consideration to be paid, and the name and address of each
prospective purchaser or transferee. In the event that the Transfer is being
made pursuant to the provisions of Section 3(a) , the Notice shall state under
which section the Transfer is being made.
(b) Each Investor shall have the right, subject to Section 2(h)
herein, exercisable upon written notice to the Founder within fifteen (15) days
after the Notice, to participate in such Transfer of Co-Sale Stock on the same
terms and conditions. Such notice shall indicate the number of shares of Common
Stock such Investor wishes to sell under his or her right to participate. To the
extent one or more of the Investors exercise such right of participation in
accordance with the terms and conditions set forth below, the number of shares
of Co-Sale Stock that the Founder may sell in the transaction shall be
correspondingly reduced.
(c) Each Investor may sell all or any part of that number of
shares equal to the product obtained by multiplying (i) the aggregate number of
shares of Co-Sale Stock covered by the Notice by (ii) a fraction, the numerator
of which is the number of shares of Common Stock owned by such Investor at the
time of the Transfer and the denominator of which is the total number of shares
of Common Stock owned by the Founder and the Investors at the time of the
Transfer.
(d) Each Investor who elects to participate in the Transfer
pursuant to this Section 2 (a "PARTICIPANT") shall effect its participation in
the Transfer by promptly delivering to the Founder for transfer to the
prospective purchaser one or more certificates, properly endorsed for transfer,
which represent:
(i) the type and number of shares of Common Stock which
such Participant elects to sell; or
2.
<PAGE> 83
(ii) that number of shares of Preferred Stock which is
at such time convertible into the number of shares of Common Stock which such
Participant elects to sell; provided, however, that if the prospective purchaser
objects to the delivery of Preferred Stock in lieu of Common Stock, such
Participant shall convert such Preferred Stock into Common Stock and deliver
Common Stock as provided in Section 2(d) (i) above. The Company agrees to make
any such conversion concurrent with the actual transfer of such shares to the
purchaser.
(e) The stock certificate or certificates that the Participant
delivers to the Founder pursuant to Section 2(d) shall be transferred to the
prospective purchaser in consummation of the sale of the Common Stock pursuant
to the terms and conditions specified in the Notice, and the Founder shall
concurrently therewith remit to such Participant that portion of the sale
proceeds to which such Participant is entitled by reason of its participation in
such sale. To the extent that any prospective purchaser or purchasers prohibits
such assignment or otherwise refuses to purchase shares or other securities from
a Participant exercising its rights of co-sale hereunder, the Founder shall not
sell to such prospective purchaser or purchasers any Co-Sale Stock unless and
until, simultaneously with such sale, the Founder shall purchase such shares or
other securities from such Participant on the same terms and conditions
specified in the Notice.
(f) The exercise or non-exercise of the rights of the Investors
hereunder to participate in one or more Transfers of Co-Sale Stock made by the
Founder shall not adversely affect their rights to participate in subsequent
Transfers of Co-Sale Stock subject to Section 2(a) .
(g) If none of the Investors elect to participate in the sale of
the Co-Sale Stock subject to the Notice, the Founder may, not later than sixty
(60) days following delivery to the Company of the Notice, enter into an
agreement providing for the closing of the Transfer of the Co-Sale Stock covered
by the Notice within thirty (30) days of such agreement on terms and conditions
not more materially favorable to the transferor than those described in the
Notice. Any proposed transfer on terms and conditions materially more favorable
than those described in the Notice, as well as any subsequent proposed transfer
of any of the Co-Sale Stock by a Founder, shall again be subject to the co-sale
rights of the Investors and shall require compliance by a Founder with the
procedures described in this Section 2.
(h) Notwithstanding anything contained in Sections 2(a) through
2(g) to the contrary, any Investor that is a holder of the Company's Series B
Preferred Stock or Series C Preferred Stock shall not have the right to
participate in any Transfer of Co-Sale Stock set forth in this Section 2 unless
at least one of Sequoia Capital VIII, Sequoia International Technology Partners
VIII, Sequoia International Technology Partners VIII(Q) , CMS Partners LLC or
Sequoia 1997 also elects to exercise its co-sale rights in connection with such
Transfer.
3. EXEMPT TRANSFERS.
(a) Notwithstanding the foregoing, the co-sale rights of the
Investors shall not apply to (i) any transfer or transfers by a Founder which in
the aggregate, over the term of this Agreement, amount to no more than one
million five hundred thousand (1,500,000) shares of Co-Sale Stock held by a
Founder as of the date hereof (as adjusted for stock splits, dividends and the
like) , (ii) any transfer to the Founder's ancestors, descendants, spouse or
in-laws, or to trusts
3.
<PAGE> 84
for the benefit of such persons or the Founder, (iii) any pledge of Co-Sale
Stock made pursuant to a bona fide loan transaction that creates a mere security
interest, or (iv) any bona fide gift; provided that in the event of any transfer
made pursuant to one of the exemptions provided by clauses (ii) , (iii) and (iv)
, (A) the Founder shall inform the Investors of such pledge, transfer or gift
prior to effecting it and (B) the pledgee, transferee or donee shall furnish the
Investors with a written agreement to be bound by and comply with all provisions
of Section 2. Except with respect to Co-Sale Stock transferred under clause (i)
above (which Co-Sale Stock shall no longer be subject to the co-sale rights of
the Investors) , such transferred Co-Sale Stock shall remain "CO-SALE STOCK"
hereunder, and such pledgee, transferee or donee shall be treated as the
"FOUNDER" for purposes of this Agreement.
(b) Notwithstanding the foregoing, the provisions of Section 2
shall not apply to the sale of any Co-Sale Stock to the public pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"SECURITIES ACT") .
(c) This Agreement is subject to, and shall in no manner limit
the right which the Company may have to repurchase securities from the Founder
pursuant to (i) a stock restriction agreement or other agreement between the
Company and the Founder and (ii) any right of first refusal set forth in the
Bylaws of the Company.
4. PROHIBITED TRANSFERS.
(a) In the event that a Founder should Transfer any Co-Sale Stock
in contravention of the co-sale rights of each Investor under this Agreement (a
"PROHIBITED TRANSFER") , each Investor, in addition to such other remedies as
may be available at law, in equity or hereunder, shall have the put option
provided below, and the Founder shall be bound by the applicable provisions of
such option.
(b) In the event of a Prohibited Transfer, each Investor shall
have the right to sell to the Founder the type and number of shares of Common
Stock equal to the number of shares each Investor would have been entitled to
transfer to the purchaser under Section 2(c) hereof had the Prohibited Transfer
been effected pursuant to and in compliance with the terms hereof. Such sale
shall be made on the following terms and conditions:
(i) The price per share at which the shares are to be
sold to the Founder shall be equal to the price per share paid by the purchaser
to the Founder in such Prohibited Transfer. The Founder shall also reimburse
each Investor for any and all fees and expenses, including legal fees and
expenses, incurred pursuant to the exercise or the attempted exercise of the
Investor's rights under Section 2.
(ii) Within ninety (90) days after the date on which an
Investor received notice of the Prohibited Transfer, such Investor shall, if
exercising the option created hereby, deliver to the Founder the certificate or
certificates representing shares to be sold, each certificate to be properly
endorsed for transfer.
(iii) The Founder shall, upon receipt of the certificate
or certificates for the shares to be sold by an Investor, pursuant to this
Section 4(b) , pay the aggregate purchase
4.
<PAGE> 85
price therefor and the amount of reimbursable fees and expenses, as specified in
Section 4(b) (i) , in cash or by other means acceptable to the Investor.
(iv) Notwithstanding the foregoing, any attempt by a
Founder to transfer Co-Sale Stock in violation of Section 2 hereof shall be
voidable at the option of a majority in interest of the Investors if the
Investors do not elect to exercise the put option set forth in this Section 4,
and the Company agrees it will not effect such a transfer nor will it treat any
alleged transferee as the holder of such shares without the written consent of a
majority in interest of the Investors.
5. CHANGES IN STOCK. If, from time to time during the term of this
Agreement: (i) there is a dividend of any security, stock split or other change
in the character or amount of any of the outstanding securities of the Company,
or (ii) there is any consolidation or merger immediately following which
stockholders of the Company hold more than 50% of the voting equity securities
of the surviving corporation in substantially the same relative proportions as
they hold prior to such event, then, in such event, any and all new, substituted
or additional securities or other property to which the Founder is entitled by
reason of his ownership of the Co-Sale Stock shall be immediately subject to the
provisions of this Agreement and be included in the definition of "Co-Sale
Stock" for all purposes of the Agreement with the same force and effect as the
Co-Sale Stock presently subject to this Agreement.
6. LEGEND.
(a) Each certificate representing shares of Co-Sale Stock now or
hereafter owned by the Founder or issued to any person in connection with a
transfer pursuant to Section 3(a) hereof shall be endorsed with the following
legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY
AND BETWEEN THE STOCKHOLDER, THE COMPANY AND CERTAIN
HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF
THE COMPANY."
(b) The Founder agrees that the Company may instruct its transfer
agent to impose transfer restrictions on the shares represented by certificates
bearing the legend referred to in Section 5(a) above to enforce the provisions
of this Agreement and the Company agrees to promptly do so. The legend shall be
removed upon termination of this Agreement.
7. MISCELLANEOUS.
(a) CONDITIONS TO EXERCISE OF RIGHTS. Exercise of the Investors'
rights under this Agreement shall be subject to and conditioned upon, and the
Founder and the Company shall use their best efforts to assist each Investor in,
compliance with applicable laws.
5.
<PAGE> 86
(b) 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.
(c) AMENDMENT. Any provision of this Agreement may be amended and
the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) , only by the written
consent of (i) as to the Company, only by the Company, (ii) as to the Investors,
by persons holding more than a majority in interest of the Common Stock held by
the Investors and their assignees, pursuant to Section 6(d) hereof, and (iii) as
to the Founder, only by the Founder. Any amendment or waiver effected in
accordance with clauses (i) , (ii) , and (iii) of this Section 6(c) shall be
binding upon each Investor, its successors and assigns, the Company and the
Founder.
(d) ASSIGNMENT OF RIGHTS. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
(e) TERM. This Agreement shall continue in full force and effect
from the date hereof through the earliest of the following dates, on which date
it shall terminate in its entirety:
(i) the date of the closing of a firmly underwritten
public offering of the Common Stock pursuant to a registration statement filed
with the Securities and Exchange Commission, and declared effective under the
Securities Act of 1933, as amended, which results in the Series A Preferred
Stock being converted into Common Stock;
(ii) the date of the closing of a sale, lease, or other
disposition of all or substantially all of the Company's assets or the Company's
merger into or consolidation with any other corporation or other entity, or any
other corporate 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,
provided that this Section 6(e) (ii) shall not apply to a merger effected
exclusively for the purpose of changing the domicile of the Company; or
(iii) the date as of which the parties hereto terminate
this Agreement by written consent of the Founder and a majority in interest of
the Investors.
(f) OWNERSHIP. The Founder represents and warrants that he is the
sole legal and beneficial owner of those shares of Co-Sale Stock he currently
holds subject to this Agreement and that no other person has any interest (other
than a community property interest) in such shares.
(g) NOTICES. All notices required or permitted hereunder 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
6.
<PAGE> 87
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 page hereof or at
such other address as such party may designate by ten (10) days advance written
notice to the other parties hereto.
(h) 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.
(i) 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.
(j) ENTIRE AGREEMENT. This Agreement and the Exhibits hereto,
along with the Purchase Agreement and each of the Exhibits thereto, constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof 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 Founder, the Company
and a majority of the Investors to the Prior Agreement, 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.
(k) 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.
(l) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
7.
<PAGE> 88
The foregoing SECOND AMENDED AND RESTATED CO-SALE AGREEMENT is hereby
executed as of the date first above written.
COMPANY: FOUNDER:
MP3.COM, INC.
By:
---------------------------------- -----------------------------
Name: Robin Richards MICHAEL ROBERTSON
Title: President and Chief
Operating Officer
Address: c/o Company Address
Address: 10350 Science Center Drive
Building No. 14
San Diego, CA 92121-0091
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 89
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:
--------------------------------------------
Name:
------------------------------------------
Title: Managing Member
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
CMS PARTNERS LLC
SEQUOIA 1997
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 90
IDEALAB! CAPITAL PARTNERS I-A, L.P.
By: idealab! Capital Management I, LLC,
its General Partner
By:
--------------------------------------------
Name: William S. Elkus
Title: Managing Member
Address: 130 West Union Street
Pasadena, CA 91103
IDEALAB! CAPITAL PARTNERS I-B, L.P.
By: idealab! Capital Management I, LLC,
its General Partner
By:
--------------------------------------------
Name: William S. Elkus
Title: Managing Member
Address: 130 West Union Street
Pasadena, CA 91103
GC&H INVESTMENTS
By:
--------------------------------------------
Name: John L. Cardoza
Title: Executive Partner
Address: c/o Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111-3580
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 91
STANFORD UNIVERSITY
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
PSERD TRUST DATED 3/11/86
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
BURCHAM COMMUNITY PROPERTY
TRUST DATED 5/23/90
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
TIMARK L.P.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 92
------------------------------------------------
SCOTT TAYLOR SMITH
Address:
----------------------------------------
----------------------------------------
GETTING THERE, LLC
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
BERG FAMILY TRUST DATED 1/17/89
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
------------------------------------------------
SCOTT M. HARVEY
Address:
----------------------------------------
----------------------------------------
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 93
DENNIS GORE
------------------------------------------------
2044 Coldwater Canyon Drive
Beverly Hills, CA 90210
THE COLUMBIA CHARITABLE FOUNDATION
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Thomas Spiegel, Chairman
ALANIS MORISSETTE
------------------------------------------------
121 D West Prarie Avenue #381
Hayden, ID 83835
CHARLES V. ROVEN
------------------------------------------------
9169 Sunset Boulevard
Los Angeles, CA 90069
THE STEEL ROVEN EXEMPTION TRUST
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
9169 Sunset Boulevard
Los Angeles, CA 90069
Attn: Charles V. Roven
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 94
SPIEGEL 1982 GRANDCHILDREN'S TRUST
FBO EVAN SPIEGEL, HELENE SPIEGEL TRUSTEE
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Helene Spiegel
SPIEGEL 1982 GRANDCHILDREN'S TRUST
FBO ANTHONY SPIEGEL, HELENE SPIEGEL TRUSTEE
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
9465 Wilshire Boulevard, Suite 900
Beverly Hills, CA 90212
Attn: Helene Spiegel
BANK STREET PARTNERS
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
15 Bank Street
San Anselmo, CA 94960
Attn: Jay Martin, General Partner
KENNY WELCH
------------------------------------------------
20 Newport Drive
Princeton Junction, NJ 08550
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 95
HENRY WELCH
------------------------------------------------
38109 Greywalle Drive
Murrieta , CA 92562
RAY WRIGHT
------------------------------------------------
1826 3rd Street
Manhattan Beach, CA 90266
BRIAN MCLAUGHLIN
------------------------------------------------
1510 Anden Way, Suite 305
Sacramento, CA 95615
MIHAELA EVANS
------------------------------------------------
2400 South Hayden Lake Road
Hayden, ID 83835
LESTER KNISPEL
16130 Ventura Boulevard, No. 550
Encino, CA 91436
SCOTT WELCH
------------------------------------------------
1417 2nd Street
Manhattan Beach, CA 90266
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 96
COX INTERACTIVE MEDIA, INC.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Address:
----------------------------------------
----------------------------------------
SIGNATURE PAGE TO SECOND AMENDED AND RESTATED CO-SALE AGREEMENT
<PAGE> 97
EXHIBIT A
LIST OF 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
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
<PAGE> 98
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
Cox Interactive Media, Inc.
<PAGE> 99
EXHIBIT B
CO-SALE STOCK OWNERSHIP
<TABLE>
<CAPTION>
NAME OF FOUNDER CO-SALE STOCK
- ------------------------------------------------ ---------------------------
<S> <C>
Michael Robertson 17,091,340
</TABLE>
<PAGE> 100
EXHIBIT D
FINANCIAL STATEMENTS
<PAGE> 101
EXHIBIT E
FORM OF PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 102
EXHIBIT F
FORM OF LEGAL OPINION
<PAGE> 103
EXHIBIT G
FORM OF
LIMITED LIABILITY COMPANY AGREEMENT OF MP3RADIO.COM L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
<PAGE> 104
LIMITED LIABILITY COMPANY AGREEMENT
OF
MP3RADIO.COM L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
<PAGE> 105
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 DEFINITIONS
1.1 Definitions...........................................................1
ARTICLE 2 FORMATION OF COMPANY
2.1 Formation............................................................10
2.2 Name.................................................................10
2.3 Principal Place of Business..........................................10
2.4 Registered Office and Registered Agent...............................10
2.5 Term.................................................................10
ARTICLE 3 NAMES AND ADDRESSES OF MEMBERS
3.1 Names and Addresses of Members.......................................10
ARTICLE 4 BUSINESS OF COMPANY
4.1 Permitted Businesses.................................................11
4.2 Partnership..........................................................11
ARTICLE 5 CAPITAL CONTRIBUTIONS; ISSUANCES OF UNITS; CAPITAL ACCOUNTS
5.1 Capital Contributions................................................11
5.2 Issuances of Additional Membership Interests.........................12
5.3 Capital Accounts.....................................................12
5.4 Effect of Failure to Make Required Contributions.....................13
5.5 Capital Contribution Defaults........................................13
ARTICLE 6 ALLOCATION OF INCOME, GAINS AND LOSSES
6.1 Allocations of Net Profit and Net Loss...............................16
6.2 Regulatory Allocations...............................................16
6.3 Curative Allocations.................................................18
6.4 Other Allocation Rules...............................................18
6.5 Tax Allocations:Code Section 704(c)..................................19
6.6 Allocations in Event of Sale.........................................19
6.7 Deficit Capital Account Balances.....................................19
ARTICLE 7 DISTRIBUTIONS
7.1 Current Distributions ..............................................19
</TABLE>
-i-
<PAGE> 106
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
7.2 Amounts Withheld From Distributions..................................20
7.3 Distributions Upon Liquidation.......................................20
7.4 Distributions In Kind................................................20
7.5 Limitation Upon Distributions........................................20
ARTICLE 8 RIGHTS AND DUTIES OF MANAGER, MEMBERS, REPRESENTATIVES AND OFFICERS
8.1 Management...........................................................20
8.2 Manager..............................................................21
8.3 Appointment, Tenure and Voting of the Management Committee...........22
8.4 Management Committee Approval........................................23
8.5 Certain Special Voting Requirements..................................23
8.6 Default Budget.......................................................24
8.7 Resignation..........................................................25
8.8 Removal..............................................................25
8.9 Vacancies............................................................25
8.10 Meetings.............................................................25
8.11 Action by Consent....................................................26
8.12 Officers.............................................................26
8.13 Salaries.............................................................26
8.14 Limitation of Liability of Members, Managers and Representatives.....26
8.15 Manager and Representative Standard of Care; Liability to Members....27
8.16 Indemnity of Members, Managers, Representatives, Officers, Employees and
Other Agents.........................................................27
8.17 Tax Matters Partner..................................................27
ARTICLE 9 RECORDS AND REPORTS
9.1 Records, Audits, and Reports.........................................28
9.2 Financial Statements.................................................29
9.3 Notice of Material Litigation........................................29
9.4 Bank Accounts........................................................30
ARTICLE 10 TRANSFERABILITY
</TABLE>
-ii-
<PAGE> 107
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
10.1 No Pledge of Membership Interests....................................30
10.2 General Restrictions on Transfer.....................................30
10.3 Right of First Refusal...............................................30
10.4 Right of First Offer.................................................32
10.5 Preemptive Rights....................................................33
10.6 Conditions to Transfer...............................................34
10.7 Buy/Sell Provisions..................................................35
10.8 Termination of a Member..............................................38
10.9 Termination of Article 10 Provisions.................................39
ARTICLE 11 DISSOLUTION AND TERMINATION
11.1 Dissolution..........................................................39
11.2 Effect of Commencement of Dissolution Proceedings....................39
11.3 Winding Up, Liquidation, and Distribution of Assets..................39
11.4 Distributions In Kind on Liquidation.................................40
11.5 Certificate of Cancellation..........................................41
11.6 Effect of Filing Certificate of Cancellation.........................41
11.7 Return of Contribution Nonrecourse to Other Members..................41
11.8 Withdrawal or Reduction of Members' Contributions to Capital.........41
ARTICLE 12 CERTAIN ADDITIONAL COVENANTS AND REPRESENTATIONS OF THE MEMBERS
12.1 Noncompetition.......................................................41
12.2 Confidentiality......................................................42
12.3 Transactions Between a Member or Manager and the Company Generally...43
12.4 Publicity............................................................43
12.5 Independent Activities...............................................43
12.6 Representations and Warranties of the Members........................44
ARTICLE 13 CERTAIN MATTERS RELATING TO THE OPERATION OF THE COMPANY'S BUSINESS
13.1 Integration of MP3 Website and the Affiliate Websites................45
13.2 Additional Services and Licenses to be Provided by MP3 ..............47
</TABLE>
-iii-
<PAGE> 108
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
13.3 User Data............................................................49
13.4 E-Commerce Transactions Revenue......................................50
13.5 Payments; Audits.....................................................50
13.6 Cox Radio Stations; Other Radio Affiliates...........................51
ARTICLE 14 MISCELLANEOUS PROVISIONS
14.1 Incorporation; Public Offering.......................................52
14.2 Notices..............................................................53
14.3 Application of Delaware Law..........................................54
14.4 Waiver of Action for Partition.......................................54
14.5 Amendments...........................................................55
14.6 Execution of Additional Instruments; Power of Attorney...............55
14.7 Severability.........................................................55
14.8 Successors, and Assigns..............................................55
14.9 Creditors............................................................56
14.10 Counterparts.........................................................56
14.11 Private Placement....................................................56
14.12 Integration .........................................................56
</TABLE>
-iv-
<PAGE> 109
LIMITED LIABILITY COMPANY AGREEMENT OF
MP3RADIO.COM L.L.C,
A DELAWARE LIMITED LIABILITY COMPANY
THIS LIMITED LIABILITY COMPANY AGREEMENT of MP3Radio.com L.L.C., dated
as of May ___, 1999, is entered into by and among Cox Interactive Media, Inc., a
Delaware corporation ("Cox"), and MP3.com, Inc., a Delaware corporation ("MP3")
(each of Cox and MP3, together with any other Person who is admitted to the
Company as a Member in accordance with the terms of this Agreement, individually
referred to herein as a "Member" and collectively as the "Members").
W I T N E S S E T H :
WHEREAS, subject to the terms and conditions set forth herein, the
Members desire to form a limited liability company (the "Company") under the
laws of the State of Delaware for the purpose of creating, developing, marketing
and licensing templated websites for over-the-air commercial radio broadcast
stations, which websites will contain digitally embedded music differentiated by
radio station format and provide functionalities as determined by the Management
Committee (as defined below), and will present music and special radio events
and other related content that focus on major artists, hit music and local
artists and local content associated with the particular radio station format,
as well as local artists and local MP3 artists within such format; and
WHEREAS, the Members desire to set forth their mutual agreements with
respect to the contributions to be made to the Company by the Members, the
allocation of profits and losses and the distribution of Distributable Cash (as
defined below) among the Members, the management and governance of the Company,
the respective rights, obligations and interests of the Members to each other
and to the Company, and certain other matters;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein made, the Members hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. The following terms used in this Agreement shall have
the following meanings (unless otherwise expressly provided herein):
"Adjusted Capital Account Deficit" shall mean, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant Fiscal Year or other period, after giving effect to the
following adjustments:
(a) Crediting to such Capital Account any amounts which such
Member is obligated to restore to the Company pursuant to any provision
of this Agreement or is deemed to be obligated to restore pursuant to
the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1)
and 1.704-2(i)(5); and
<PAGE> 110
(b) Debiting to such Capital Account the items described in
Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6).
This definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
"Affiliate," with respect to any Person or Member, shall mean any other
Person or Member directly or indirectly controlling, controlled by or under
common control with, such Person or Member. For purposes of this Agreement,
"control" (including with correlative meanings, the terms "controlling",
"controlled by" or "under common control with") as used with respect to any
Person or Member, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person or Member, whether through the ownership of voting securities or by
contract or otherwise.
"Affiliate Website" shall mean a templated website created and licensed
by the Company to a Radio Affiliate, which website contains digitally embedded
music differentiated by radio station format and provides functionalities as
determined by the Management Committee and which presents music and special
radio events and other related content that focus on the major artists, hit
music and local content associated with the particular radio station format, as
well as local artists and local MP3 artists within such format.
"Agreement" shall mean this Limited Liability Company Agreement of
MP3Radio.com L.L.C., as it may be amended, restated, modified or supplemented
from time to time in accordance with its terms.
"Alternate" shall have the meaning given such term in Section 8.3.4.
"Annual Budget" shall mean the Company's annual operating and capital
expenditures budget for each Fiscal Year, in the form approved by a
Supermajority Vote of the Management Committee or as otherwise provided for
under Section 8.6; provided, however, that the Annual Budget for Fiscal Year
1999 shall be the annual operating and capital expenditures budget included as
part of the Initial Business Plan.
"Audience Reach" shall have the meaning given such term in Section
13.1.2.
"Band Page" shall mean a co-branded webpage hosted on MP3 servers
featuring specific music group or band related information, including audio and
graphical files, background information and such other content as shall be
determined by the Company and MP3 and conforming to the specifications of
Section 13.1.4 hereof.
"Business Day" shall mean any day that is not a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies in the
State of Georgia or the State of California are authorized or obligated by law
to close.
"Capital Account" shall have the meaning given such term in Section
5.3.1.
-2-
<PAGE> 111
"Capital Contributions" shall mean the contributions (including, without
limitation, the Initial Capital Contributions) in cash or property to the
capital of the Company made by the Members.
"Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's capital stock or other equity
interests, including, without limitation, partnership interests and limited
liability company interests, whether now outstanding or issued after the date
hereof.
"Certificate of Formation" shall mean the Certificate of Formation of
MP3Radio.com L.L.C., as filed with the Secretary of State of the State of
Delaware, as the same may be amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time (or any corresponding provisions of succeeding law).
"Company" shall mean MP3Radio.com L.L.C., a Delaware limited liability
company.
"Company Confidential Information" shall mean any and all trade secrets
and other confidential proprietary information, data or know-how of the Company,
or of other Persons that is in the possession of the Company, relating to the
business or operations of the Company, including, without limitation, any
software, system, technology, tools, list of customers, list of advertisers
and/or advertising pricing, business plans, marketing plans, financial
information, source codes, programs, inventions, techniques, budgets,
projections, licenses, prices, costs, or compilations of information or
databases used in the Company's business or operations or any other information
of the Company or concerning its business and operations that is not publicly
available.
"Company Minimum Gain" shall have the meaning of "partnership minimum
gain" that is set forth in Treasury Regulations Section 1.704-2(b)(2). The
amount of Company Minimum Gain shall be determined in accordance with Treasury
Regulations Section 1.704-2(d).
"Cox" shall have the meaning given such term in the Preamble to this
Agreement.
"Database Marketing Functionality" shall have the meaning given such
term in Section 13.3.
"Default Budget" shall have the meaning given such term in Section 8.6.
"Delaware Act" shall mean the Delaware Limited Liability Company Act, as
amended from time to time.
"De Minimis" shall mean less than or equal to $1,000.00.
"Depreciation" shall mean, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset Value
of an asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be determined in
-3-
<PAGE> 112
the manner described in Treasury Regulations Section 1.704-1(b)(2)(iv)(g)(3) or
Treasury Regulations Section 1.704-3(d)(2), as applicable.
"Distributable Cash" shall mean all cash, revenues and funds received by
the Company from the Company's business and operations, less the sum of the
following to the extent paid or set aside by the Company:
(a) all principal and interest payments on indebtedness of the
Company and all other sums paid to lenders;
(b) all cash expenditures incurred incident to the operation of
the Company's business in the ordinary course;
(c) such Reserves as the Representatives deem necessary, in
accordance with Article 8 hereof, to the proper operation and
development of the Company's business;
(d) the amount of Company gross revenues distributed to MP3
pursuant to Sections 13.4.2 and 13.5.1; and
(e) the amount of any Tax Distribution.
"Economic Risk of Loss" shall have the meaning defined in Treasury
Regulations Section 1.704-2(b)(4).
"Entity" shall mean any general partnership, limited partnership,
limited liability company, corporation, joint venture, trust, business trust,
cooperative or association, or any foreign trust, foreign business organization
or Governmental Agency.
"Exchange Act" shall have the meaning given such term in Section 12.2.1.
"Fiscal Year" shall mean the calendar year or, in the case of the first
and the last fiscal years, the fraction thereof commencing on the date on which
the Company is formed under the Delaware Act or ending on the date on which the
winding up of the Company is completed, as the case may be.
"Governmental Agency" shall mean any agency or department or subdivision
of the United States federal government or any state or local government.
"Gross Asset Value" shall mean with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(1) The initial Gross Asset Value of any asset contributed
by a Member to the Company shall be the fair market value of such asset as
determined by the Management Committee;
(2) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective fair market values, as of the following
times: (i) the acquisition of an additional Membership Interest in the Company
by any new or existing Member in
-4-
<PAGE> 113
exchange for more than a De Minimis Capital Contribution; (ii) the distribution
by the Company to a Member of more than a De Minimis amount of Company property
as consideration for a Membership Interest in the Company; and (iii) the
liquidation of the Company within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to
clauses (i) and (ii) above shall be made only if the Representatives reasonably
determine in accordance with Article 8 that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Members in the
Company;
(3) The Gross Asset Value of any Company asset distributed
to any Member shall be adjusted to equal the fair market value of such asset on
the date of distribution; and
(4) The Gross Asset Value of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and
Section 6.2.7; provided, however, that Gross Asset Value shall not be adjusted
pursuant to this clause (4) to the extent the Representatives determine that an
adjustment pursuant to clause (2) is necessary or appropriate in connection with
a transaction that would otherwise result in an adjustment pursuant to this
clause (4).
For purposes of this definition, the "fair market value" of any asset
shall be determined by the Management Committee. If the Gross Asset Value of an
asset has been determined or adjusted pursuant to clauses (1), (2) or (4) of
this definition, such Gross Asset Value shall thereafter be adjusted by the
Depreciation taken into account with respect to such asset for purposes of
computing Net Profit and Net Loss.
"Initial Business Plan" means the Company's initial business plan
attached hereto as Exhibit B.
"Initial Capital Contributions" shall mean, with respect to Cox and MP3,
the respective aggregate amount of capital contributions to be made by such
Member pursuant to Section 5.1.1.
"Intellectual Property" shall mean any or all of the following: (a)
works of authorship, including without limitation computer programs, source code
and executable code, whether embodied in software, firmware or otherwise,
documentation, designs, files, records, data and mask works; (b) copyrights and
patents (and applications therefor), inventions (whether or not patentable),
improvements and technology; (c) proprietary and confidential information, trade
secrets and know how; (d) databases, customer lists, data compilations and
collections and technical data; (e) logos, trade names, trade dress, trademarks
and service marks (and applications therefor); (f) domain names, website
addresses and sites; and (g) tools, methods and processes, including object
libraries.
" Local Genre Page" shall mean a webpage hosted on MP3 servers featuring
genre-specific music information connected to a particular geographic region and
conforming to the specifications of Section 13.1.2 hereof.
"Majority Vote" shall have the meaning given such term in Section 8.4.
-5-
<PAGE> 114
"Management Committee" shall have the meaning given such term in Section
8.1.
"Manager" shall mean Cox.
"Member" shall mean each of Cox and MP3 and each other Person who may
hereafter become a Member pursuant to this Agreement.
"Member Nonrecourse Debt" shall have the meaning of "partner nonrecourse
debt" that is set forth in Treasury Regulations Section 1.704-2(b)(4).
"Member Nonrecourse Debt Minimum Gain" shall have the meaning of
"partner nonrecourse debt minimum gain" that is set forth in Treasury
Regulations Section 1.704-2(i)(2). The amount of Member Nonrecourse Debt Minimum
Gain shall be determined in accordance with Treasury Regulations Section
1.704-2(i)(3).
"Member Nonrecourse Deductions" shall have the meaning of "partner
nonrecourse deductions" that is set forth in Treasury Regulations Sections
1.704-2(i)(1) and 1.704-2(i)(2). The amount of Member Nonrecourse Deductions
shall be determined in accordance with Treasury Regulations Section
1.704-2(i)(2).
"Membership Interest" shall mean an ownership interest in the Company
and includes any and all benefits to which the holder of such Membership
Interest may be entitled as provided in this Agreement, together with all
obligations of such Person to comply with the terms and provisions of this
Agreement. A Membership Interest may be expressed as a number of Units.
"MP3" shall have the meaning set forth in the preamble of this
Agreement.
"MP3 Files" shall mean files containing audio and related content which
is compressed or distributed by or through MP3 using any compression technology
or file format now existing or created in the future.
"MP3 Genre Page" shall mean a webpage on the MP3 Website featuring
genre-specific music information and content and conforming to the
specifications of Section 13.1.1 hereof.
"MP3 Website" shall mean the website operated by MP3 at the URL
http://www.mp3.com (or any successor website thereto).
"Net Profit and Net Loss" shall mean, for each Fiscal Year, an amount
equal to the Company taxable income or loss for such Fiscal Year, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing such Net Profit or
Net Loss shall be added to such taxable income or loss;
-6-
<PAGE> 115
(b) Any expenditures of the Company described in Code Section
705(a)(2)(B), or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and which
are not otherwise taken into account in computing such Net Profit or Net
Loss, shall be subtracted from such taxable income or loss;
(c) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to clause (2) or (3) of the definition of Gross Asset
Value, the amount of such adjustment shall be taken into account as gain
or loss from the disposition of such asset for purposes of computing Net
Profit or Net Loss;
(d) Gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Gross Asset
Value of the property disposed of, notwithstanding that the adjusted tax
basis of such property differs from its Gross Asset Value;
(e) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income
or loss, there shall be taken into account Depreciation for such Fiscal
Year;
(f) Notwithstanding anything to the contrary in the definition of
the terms "Net Profit" and "Net Loss", any items which are specially
allocated pursuant to Section 6.2 (other than as provided in Section
6.2.7), Section 6.3, or Section 6.4 hereof shall not be taken into
account in computing such Net Profit or Net Loss; and
(g) For purposes of this Agreement, any deduction for a loss on a
sale or exchange of Company property which is disallowed to the Company
under Code Section 267(a)(1) or 707(b) shall be treated as a Code
Section 705(a)(2)(B) expenditure.
The amounts of the items of Company income, gain, loss, or deduction
available to be specially allocated pursuant to Sections 6.2, 6.3 and 6.4 shall
be determined by applying rules analogous to those set forth in this definition
of Net Profit and Net Loss.
"Nonrecourse Deductions" shall have the meaning set forth in Treasury
Regulations Section 1.704-2(b)(1).
"Nonrecourse Liability" shall have the meaning set forth in Treasury
Regulations Sections 1.704-2(b)(3) and 1.752-1(a)(2).
"Percentage Interest" shall mean, as to a Member, such Member's
percentage interest in the Company as determined by dividing the Units owned by
such Member by the total number of Units then outstanding and as specified in
Exhibit A attached hereto, as such Exhibit A may be amended from time to time.
"Permitted Transfer" shall mean (a) in the case of Cox, a Sale by Cox to
any Person that is a direct or indirect controlled Affiliate of Cox Enterprises,
Inc., (b) in the case of MP3, a Sale by MP3 to any Person that is a direct or
indirect controlled Affiliate of MP3, (c) in the case of
-7-
<PAGE> 116
any other Member, a Sale by such Member to a direct or indirect controlled
Affiliate of such Member, (d) a Sale by one Member to another Member, or (e) any
Sale permitted by a Supermajority Vote of the Management Committee.
"Person" shall mean any individual or Entity, and the heirs, executors,
administrators, successors and assigns of the "Person" when the context so
permits.
"Prime Rate" shall mean the prime commercial lending rate as announced
from time to time by The Chase Manhattan Bank, N.A.
"Radio Affiliate" shall mean any over-the-air commercial radio
broadcasting station which enters into an affiliation agreement or arrangement
with the Company for purposes of licensing one of the templated websites
developed by the Company featuring digitally embedded music differentiated by
radio station format.
"Radio Affiliates Pages" shall mean one or more webpages hosted on MP3
servers featuring information regarding the Radio Affiliates and conforming to
the specifications of Section 13.1.2 hereof.
"Regulatory Allocations" shall have the meaning given such term in
Section 6.3.
"Remaining Members" shall have the meaning given such term in Section
10.6.1.
"Representatives" shall mean those natural Persons appointed to the
Management Committee by the Members as their respective agents to manage the
business and affairs of the Company pursuant to Article 8, and who shall also be
officers, directors or employees of the Members that designated them.
"Reserves" shall mean, for any fiscal period, funds set aside or amounts
allocated during such period to reserves that shall be maintained in amounts
deemed sufficient by the Management Committee in accordance with Article 8 for
working capital and to pay taxes, insurance, debt service, or other costs or
expenses incident to the ownership or operation of the Company's business.
"Sale" (including the correlative terms "Sell," "Selling," and "Sold")
shall mean a sale, exchange, transfer, assignment, lease, pledge or other
disposition, with or without consideration, of all or any portion of a Member's
Units or Membership Interest.
"Securities Act" shall have the meaning given such term in Section 12.2.
"Senior Executive Officers" shall have the meaning given such term in
Section 8.12.1.
"Series C Financing" shall mean the purchase of Series C Preferred
Stock of MP3 by Cox Interactive Media, Inc. pursuant to that certain Series C
Preferred Stock Purchase Agreement, dated as of May 19, 1999.
"Subsidiary" shall mean, in respect of any Person, any corporation,
association, partnership, limited liability company or other Entity of which the
majority of each class of
-8-
<PAGE> 117
Voting Stock or other voting equity and the majority of each other class of
Capital Stock is owned by either (a) such Person or (b) another Subsidiary of
such Person.
"Supermajority Vote" shall have the meaning given such term in Section
8.5.
"Tax Distribution" shall mean, for any given Fiscal Year, an amount
equal to the product of (a) the higher of the combined marginal federal, state
and city tax rate applicable as of the close of such Fiscal Year to a
corporation located in Atlanta, Georgia or San Diego, California, multiplied by
(b) the amount of net taxable income, if any, allocated for such Fiscal Year to
the Members.
"Terminating Member" shall have the meaning given such term in Section
10.8.
"Termination" shall mean, as to any Entity, the bankruptcy, involuntary
dissolution or liquidation of such Entity. The "bankruptcy" of an Entity shall
mean that such Entity (a) shall have suffered the entry of a decree or order by
a court having jurisdiction adjudging such Entity bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, readjustment,
arrangement, composition or similar relief for such Entity under bankruptcy
laws, or any other similar applicable law, or (b) shall have suffered the entry
of a decree or order of a court having jurisdiction for the appointment of a
receiver, liquidator, trustee, assignee or custodian in bankruptcy or insolvency
for the winding up or liquidation of its affairs, and such decree or order shall
have remained in force and undischarged and unstayed for a period of ninety (90)
calendar days, or (c) shall institute proceedings to be adjudicated a voluntary
bankrupt or shall consent to the filing of a bankruptcy proceeding against it,
or shall file a petition or answer or consent seeking reorganization,
readjustment, arrangement, composition or similar relief under bankruptcy laws,
or any other similar or applicable law, or shall consent to the filing of any
such petition, or (d) shall consent to the appointment of a receiver,
liquidator, trustee, assignee or custodian in bankruptcy or insolvency, or (e)
shall make an assignment for the benefit of creditors, or (f) shall admit in
writing its inability generally to pay its debts as they become due.
"Treasury Regulations" shall include proposed, temporary and final
regulations promulgated under the Code in effect as of the date of filing the
Certificate of Formation and the corresponding sections of any regulations
subsequently issued that amend or supersede those regulations..
"Unit" shall mean an undivided share of the Membership Interests of all
Members issued pursuant to Article 5 in such number as set forth on Exhibit A
attached hereto, as such Exhibit A may be amended from time to time. The Company
may issue fractional Units to Members.
"Voting Stock" shall mean, with respect to any Person, the Capital Stock
of any class or kind ordinarily having the power to vote for the election of
directors, representatives or other members of the governing body of such
Person.
"Withdrawal Event" shall have the meaning given such term in Section
11.1.2.
-9-
<PAGE> 118
ARTICLE 2
FORMATION OF COMPANY
2.1 Formation. As soon as practicable after the execution of this
Agreement, the Manager shall cause the Company to be formed as a Delaware
limited liability company, by executing and delivering a Certificate of
Formation to the Delaware Secretary of State in accordance with and pursuant to
the Delaware Act.
2.2 Name. The name of the Company is MP3Radio.com L.L.C. Concurrently
with the execution of this Agreement, MP3 has licensed (or shall have caused
Michael L. Robertson, its Chief Executive Officer, to license) to the Company,
on an exclusive, perpetual, royalty-free worldwide basis, all of its (or his, as
the case may be) rights and goodwill in and to the name "MP3Radio.com" and its
corresponding URL address name; provided, however, that the Company shall hold
such license to all of the rights and goodwill in and to such name on the terms
set forth in Section 13.2.4. The Manager shall cause the Company to file such
assumed name certificates and similar filings, and any amendments thereto, in
such jurisdictions as the Manager considers appropriate or advisable.
2.3 Principal Place of Business. The principal place of business of the
Company initially shall be 1400 Lake Hearn Drive, N.E., Atlanta, Georgia 30319.
The Company may locate its place of business and registered office at any other
place or places as the Management Committee may from time to time deem
advisable.
2.4 Registered Office and Registered Agent. The Company's initial
registered office shall be at the office of its registered agent at 1013 Centre
Road, Wilmington, Delaware 19805, and the name of its initial registered agent
at such address shall be Corporation Service Company. The registered office and
registered agent may be changed from time to time by filing the address of the
new registered office and/or the name of the new registered agent with the
Delaware Secretary of State pursuant to the Delaware Act.
2.5 Term. The term of the Company shall continue for a term of fifty
(50) years from the date hereof, subject to earlier termination upon a
Supermajority Vote of the Management Committee.
ARTICLE 3
NAMES AND ADDRESSES OF MEMBERs
3.1 Names and Addresses of Members. The names and addresses of the
Members are set forth on Exhibit A, as it may be amended from time to time.
-10-
<PAGE> 119
ARTICLE 4
BUSINESS OF COMPANY
4.1 Permitted Businesses.
The business of the Company shall be:
4.1.1 To create, develop, market and license templated websites
for over-the-air commercial radio broadcasting stations, which websites will
contain digitally embedded music differentiated by radio station format and
provide functionalities as determined by the Management Committee and will
present music and special radio events and other related content that focus on
major artists, hit music and local content associated with the particular radio
station format, as well as local artists and local MP3 artists within such
format.
4.1.2 To license to, and enter into affiliation agreements with,
Radio Affiliates for Affiliate Websites, as contemplated under the Initial
Business Plan, and to create a network of Affiliate Websites with common
programming and content features differentiated on the basis of radio station
format and local content.
4.1.3 To exercise all other powers and to engage in all
activities necessary to or reasonably connected with the foregoing business and
operations.
4.2 Partnership. The parties hereto intend that the Company shall be
taxable as a partnership for federal income tax purposes unless otherwise agreed
to by a Supermajority Vote of the Management Committee.
ARTICLE 5
CAPITAL CONTRIBUTIONS; ISSUANCES OF UNITS; CAPITAL ACCOUNTS
5.1 Capital Contributions.
5.1.1 Initial Capital Contribution. Each of Cox and MP3 shall
make the Initial Capital Contributions, payable to the Company in cash, in the
aggregate amount set forth on Exhibit A with respect to such Member. Concurrent
with the execution of this Agreement and the closing of the Series C Financing,
Cox and MP3 shall make, as part of their Initial Capital Contribution
commitment, a Capital Contribution in the aggregate amount of five million
dollars ($5,000,000), funded pro rata by Cox and MP3, in proportion to their
respective Percentage Interests. Additional Initial Capital Contributions shall
be funded pro rata by Cox and MP3, in proportion to their respective Percentage
Interests, on an as needed quarterly basis at such times as shall be specified
by the Management Committee by written notice to Cox and MP3. MP3 agrees that it
shall maintain liquid cash reserves in an amount sufficient to enable it to fund
all of its remaining Initial Capital Contribution commitment as set forth on
Exhibit A.
5.1.2 Units and Percentage Interest. The Members initially shall own
Units in the amounts set forth on Exhibit A and shall have an initial Percentage
Interest in the Company as set forth on Exhibit A. The number of Units and
Percentage Interest shall be adjusted from
-11-
<PAGE> 120
time to time by the Management Committee to the extent necessary to reflect
accurately the issuance of additional Units, defaults in the making of required
Capital Contributions, Sales of Units permitted under Article 10, or other
events having an effect on a Member's Percentage Interest and corresponding
number of Units.
5.1.3 Additional Capital Contributions. The Management Committee
may require, by Supermajority Vote, the Members to make additional Capital
Contributions to the Company in cash. Each call for such a required additional
Capital Contribution shall be in writing and specify the due date therefor,
which in no event shall be less than ten (10) Business Days after the date of
such call.
5.2 Issuances of Additional Membership Interests. The Management
Committee is authorized to cause the Company to issue such additional Membership
Interests in the form of Units, at any time or from time to time, to the Members
or to other Persons for such consideration and on such terms and conditions as
shall be established by Supermajority Vote of the Management Committee. The
Management Committee may, at its option, at the time a Member is admitted, close
the Company books (as though the Company's tax year had ended) or make pro rata
allocations of loss, income and expense deductions to a new Member for that
portion of the Company's tax year in which a Member was admitted in accordance
with the provisions of Code Section 706(d) and the Treasury Regulations
promulgated thereunder.
5.3 Capital Accounts.
5.3.1 A separate Capital Account will be maintained for each
Member. With respect to each Member, "Capital Account" shall mean that portion
of such Member's Initial Capital Contribution that has been contributed to the
Company as of the date hereof increased by (i) any other cash contributed after
the date hereof by such Member to the Company; (ii) the fair market value, as
determined by the Management Committee, of any property contributed after the
date hereof by such Member to the Company (net of liabilities that are secured
by such contributed property or that the Company or any other Member is
considered to assume or take subject to under Code Section 752); (iii)
allocations to such Member of Net Profit pursuant to Article 6; and (iv) other
additions allocated to such Member in accordance with the Code; and decreased by
(i) the amount of cash distributed to such Member by the Company; (ii)
allocations to such Member of Net Loss pursuant to Article 6; (iii) the fair
market value, as determined by the Management Committee, of property distributed
to such Member by the Company (net of liabilities that are secured by such
distributed property or that such Member is considered to assume or take subject
to under Code Section 752); and (iv) other deductions allocated to such Member
in accordance with the Code.
5.3.2 The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Code Section 704(b) and Treasury Regulations Section 1.704-1(b)(2)(iv), and
shall be interpreted and applied in a manner consistent with such regulations.
5.3.3 In the event of a permitted Sale of Units, the Capital
Account of the transferor shall become the Capital Account of the transferee to
the extent it relates to the transferred Units in accordance with Treasury
Regulations Section 1.704-1(b)(2)(iv).
-12-
<PAGE> 121
5.4 Effect of Failure to Make Required Contributions. If any Member
fails or is unable to provide all or part of its proportionate share of any
Initial Capital Contribution or any additional Capital Contribution required
pursuant to Section 5.1.2 within ten (10) Business Days from the date of a
written notice of the Management Committee calling for such Initial Capital
Contribution or additional Capital Contribution, the Membership Interest, number
of Units and Percentage Interest of that Member (the "Defaulting Member") shall
be reduced as provided under Section 5.5.4, which in turn, shall effect a
dilution in the relative voting power exercisable under Article 8 by the
Representatives appointed by such Defaulting Member to the Management Committee.
5.5 Capital Contribution Defaults.
5.5.1 In the event that a Defaulting Member shall fail to make
all or any part of any Initial Capital Contribution or additional Capital
Contribution required of such Member pursuant to a written notice of the
Management Committee calling for such Capital Contribution on or prior to the
due date therefor, the other Members that have timely made their respective
share of such Capital Contributions required of such other Members (a
"Non-Defaulting Member") may either (i) loan amounts to the Defaulting Member to
cover the Defaulting Member's Capital Contribution, or (ii) contribute to the
Company the Capital Contribution otherwise required by the Defaulting Member, in
each case pursuant to Sections 5.5.2 and 5.5.3, respectively.
5.5.2 Additional Capital Contribution by Non-Defaulting Member.
(a) If a Defaulting Member fails to make any Initial
Capital Contribution as required in Section 5.1.1 (an "Initial Capital
Defaulting Member"), the other Non-Defaulting Member required to make Initial
Capital Contributions (an "Initial Capital Non-Defaulting Member") will have the
right, exercisable by giving notice to the Initial Capital Defaulting Member
within fifteen (15) calendar days after the due date for making the Initial
Capital Contribution under Section 5.1.1, to contribute the amount not
contributed by the Initial Capital Defaulting Member, pro rata based on the
Initial Capital Non-Defaulting Member's then existing Units. To the extent that
the Initial Capital Non-Defaulting Member does not exercise the right to make
such contribution in full, such right will be exercisable by the other
Non-Defaulting Members by giving notice to the other Members within twenty (20)
calendar days after the end of such fifteen (15) day period. If the other
Non-Defaulting Members elect to make, in the aggregate, more than the remaining
amount of the contribution required of the Initial Capital Defaulting Member,
then each Member who elects to contribute more than its pro rata share will, in
addition, be entitled to contribute a pro rata share of the remaining amount of
such contribution (based on the Units of those Members who elected to make such
contribution). The Initial Capital Defaulting Member's Percentage Interest and
number of Units shall be decreased (and the Non-Defaulting Members' Percentage
Interest and number of Units shall be increased commensurately) in accordance
with Section 5.5.4(a).
(b) If a Defaulting Member fails to make a Capital
Contribution as provided in Section 5.1.3, the Non-Defaulting Members will have
the right, exercisable by giving notice to the other Members within fifteen (15)
calendar days after the due date for making the Capital Contribution under
Section 5.1.3, to contribute the amount not contributed
-13-
<PAGE> 122
by the Defaulting Member, pro rata based on the Non-Defaulting Members' then
existing Units. To the extent that one or more of the Non-Defaulting Members do
not exercise the right to make such contribution in full, such right will be
exercisable by the other Non-Defaulting Members by giving notice to the other
Members within twenty (20) calendar days after the end of such fifteen (15) day
period. If the other Non-Defaulting Members elect to make, in the aggregate,
more than the remaining amount of the contribution required of the Defaulting
Member, then each Member who elects to contribute more than its pro rata share
will, in addition, be entitled to contribute a pro rata share of the remaining
amount of such contribution (based on the Units of those Members who elected to
make such contribution). Each Non-Defaulting Member that contributes all or a
portion of the amount not contributed by the Defaulting Member will also have
the right to (i) cause the Defaulting Member's Percentage Interest and number of
Units to be decreased (and the Non-Defaulting Members' Percentage Interest and
number of Units to be increased commensurately) in accordance with Section
5.5.4(b), or (ii) cause the amount not contributed by the Defaulting Member that
was contributed by the Non-Defaulting Member to be treated as a loan to the
Defaulting Member under Section 5.5.3 (a "Contribution Loan"). Each
Non-Defaulting Member that contributes all or part of the Capital Contribution
not made by the Defaulting Member will have the right to elect, by written
notice to the Defaulting Member within thirty (30) calendar days after the date
that the Non-Defaulting Member makes such contribution, which of clause (i) or
clause (ii) will apply with respect to the portion of the Capital Contribution
not made by the Defaulting Member that was contributed by the Non-Defaulting
Member. If a Non-Defaulting Member fails to make such an election within such
thirty (30) day period, clause (i) will apply with respect to the portion of the
Capital Contribution not made by the Defaulting Member that was contributed by
the Non-Defaulting Member.
5.5.3 Contribution Loans.
(a) A Contribution Loan will bear interest at an annual
rate of two percent per annum above the Prime Rate in effect on the date the
Contribution Loan is made, compounded annually based on a 365-day year, and will
be due on the first anniversary of the making of the loan. All expenses and
costs of collection, including without limitation attorneys' fees, incurred in
connection with a Contribution Loan will be paid by the Defaulting Member and
will also bear interest at the rate of the Contribution Loan.
(b) As long as a Contribution Loan is outstanding, all
distributions which would otherwise be made to the Defaulting Member pursuant to
Article 7 or Article 11 will be deemed to be distributions for all purposes of
this Agreement to the Defaulting Member, but such amounts will instead be
applied to the Contribution Loans by the Non-Defaulting Member until all amounts
of principal and interest owing in respect of all Contribution Loans have been
paid or satisfied. All repayments of the Contribution Loan will be applied first
to attorneys' fees, then interest and finally to principal.
(c) A Contribution Loan made pursuant to Section 5.5.3(a)
above will be secured by, and the Defaulting Member, by its failure to make a
required Capital Contribution, will have automatically granted (without any
further action by the Defaulting Member) a security interest in, and a general
lien on, the Defaulting Member's Membership Interest and Units in the Company,
including (but not limited to) its interest in distributions from
-14-
<PAGE> 123
the Company pursuant to Article 7 and Article 11, all under the applicable
provisions of the Uniform Commercial Code. On any default in the payment of such
a Contribution Loan (whether from distributions or otherwise), the
Non-Defaulting Member is entitled to all the rights and remedies of a secured
party under the Uniform Commercial Code with respect to the security interest
granted in this Section 5.5.3(c) and shall have a power of attorney to execute
and file, in the name of and on behalf of the Defaulting Member, all UCC-1
Financing Statements necessary to evidence the security interest that may be
granted pursuant to this Section 5.5.3(c).
(d) If the Defaulting Member fails to pay all or any part
of a given Contribution Loan, including any accrued interest on such loan, at
any time after the first anniversary of the date that the Contribution Loan was
made or deemed made, the Non-Defaulting Member that made the Contribution Loan
may elect, at its sole discretion and by giving notice to the Defaulting Member
and the other Members to cause the Defaulting Member's Percentage Interest and
number of Units to be decreased (and the Non-Defaulting Member's Percentage
Interest and number of Units will be increased commensurately) as provided under
Section 5.5.4. If the Non-Defaulting Member makes the election described in the
preceding sentence, the Contribution Loan will be canceled and the Defaulting
Member will have no further obligations with respect to such Contribution Loan,
except with respect to attorneys' fees incurred in connection with such loan.
5.5.4 Recalculation of Percentage Interest and Number of Units.
(a) In the event an Initial Capital Defaulting Member
fails to make any Initial Capital Contribution, the Percentage Interest and
number of Units of each Member shall be recalculated as of the due date of such
Initial Capital Contribution in accordance with this Section 5.5.4(a) in order
to effect a special penalty dilution on such Initial Capital Defaulting Member.
First, the recalculated Percentage Interest of the Initial Capital Defaulting
Member shall be recalculated to equal the percentage represented by a fraction,
the numerator of which shall be (x) one-half of the total Capital Contributions
of such Initial Capital Defaulting Member made to the Company on or prior to
such date, and the denominator of which shall be (y) the aggregate Capital
Contributions of all Members made to the Company on or prior to such date. The
Percentage Interests of the remaining Members shall thereupon be recalculated by
allocating to such remaining Members and adding to their then existing
Percentage Interests, on a pro rata basis in accordance with their relative
Percentage Interests as they then existed immediately prior to such
recalculation, the additional Percentage Interests that became available as a
result of the dilution imposed on the Initial Capital Defaulting Member under
the preceding sentence (and assuming that the total amount of Percentage
Interests of all Members must always equal 100%). The number of Units held by
each Member shall also be adjusted to reflect the relative Percentage Interests
of each Member, as so adjusted in accordance with the preceding sentence.
(b) In the event a Defaulting Member fails to make any
required Capital Contribution (other than an Initial Capital Contribution, which
shall be governed by Section 5.5.4(a)), the Percentage Interest and number of
Units of each Member shall be recalculated as of the date of such Capital
Contribution. The recalculated Percentage Interest of each Member shall be equal
to the percentage represented by a fraction, the numerator of which shall be the
total Capital Contributions of such Member made to the Company on or prior to
such date and the denominator of which shall be the aggregate Capital
Contributions of all
-15-
<PAGE> 124
Members made to the Company on or prior to such date. The number of Units held
by each Member shall also be adjusted to reflect the relative Percentage
Interests of each Member, as so adjusted in accordance with the preceding
sentence.
ARTICLE 6
ALLOCATION OF INCOME, GAINS AND LOSSES
6.1 Allocations of Net Profit and Net Loss.
6.1.1 In General. Except as otherwise provided in this Agreement,
Net Profit and Net Loss of the Company for a Fiscal Year shall be allocated to
the Members in accordance with their Percentage Interests.
6.1.2 Special Allocation of Certain E-Commerce Revenues. To the
extent provided in Section 13.4.2 (subject to Sections 13.4.3 and 13.4.4) and
Section 7.1 hereof, [***] of the gross revenue earned and collected by the
Company from Company e-commerce transactions (as further described in Section
13.4.2) generated from end user traffic that originates from the MP3 Website
shall be specially allocated to MP3.
6.1.3 Loss Limitation. To the extent an allocation of Net Loss
pursuant to Section 6.1.1 would cause a Member to have an Adjusted Capital
Account Deficit as of the end of the Fiscal Year to which the allocation relates
(or would increase any such Adjusted Capital Account Deficit), then such Net
Loss shall be reallocated to the other Members in proportion to their respective
Percentage Interests.
6.2 Regulatory Allocations.
6.2.1 Minimum Gain Chargeback. Except as otherwise provided in
Treasury Regulations Section 1.704-2(f), notwithstanding any other provision of
this Article 6, if there is a net decrease in Company Minimum Gain during any
Company Fiscal Year, each Member shall be specially allocated items of Company
income and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal
Years) in an amount equal to such Member's share of the net decrease in Company
Minimum Gain, determined in accordance with Treasury Regulations Section
1.704-2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items of Company income and gain to be allocated pursuant
to this Section 6.2.1 shall be determined in accordance with Treasury
Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.2.1 is
intended to comply with the minimum gain chargeback requirement in Treasury
Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.
6.2.2 Member Minimum Gain Chargeback. Except as otherwise
provided in Treasury Regulations Section 1.704-2(i)(4), notwithstanding any
other provision of this Article 6, if there is a net decrease in Member
Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during
any Fiscal Year, each Member with a share of the Member Nonrecourse Debt Minimum
Gain attributable to such Member Nonrecourse Debt, determined in accordance with
Treasury Regulations Section 1.704-2(i)(5), shall be specially allocated items
of Company income and gain for the year (and, if necessary, for subsequent
Fiscal Years) in an
* CONFIDENTIAL TREATMENT REQUEST(ED)
-16-
<PAGE> 125
amount equal to such Member's share of the net decrease in Member Nonrecourse
Debt Minimum Gain attributable to such Member Nonrecourse Debt (determined in
accordance with Treasury Regulations Section 1.704-2(i)(4)). Allocations
pursuant to the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Member pursuant thereto. The items of
Company income and gain to be allocated pursuant to this Section 6.2.2 shall be
determined in accordance with Treasury Regulations Sections 1.704-2(i)(4) and
1.704-2(j)(2). This Section 6.2.2 is intended to comply with the minimum gain
chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall
be interpreted consistently therewith.
6.2.3 Qualified Income Offset. In the event any Member
unexpectedly receives any adjustments, allocations, or distributions described
in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Company income and
gain shall be specially allocated to each such Member in an amount and manner
sufficient to eliminate, to the extent required by the Treasury Regulations, the
Adjusted Capital Account Deficit of such Member as quickly as possible;
provided, however, that an allocation pursuant to this Section 6.2.3 shall be
made only if and to the extent that such Member would have an Adjusted Capital
Account Deficit after all other allocations provided for in this Article 6 have
been tentatively made as if this Section 6.2.3 were not in the Agreement.
6.2.4 Gross Income Allocation. In the event any Member has a
deficit Capital Account at the end of any Fiscal Year that is in excess of the
sum of (i) the amount such Member is obligated to restore to the Company
pursuant to any provision of this Agreement, (ii) the amount such Member is
deemed to be obligated to restore pursuant to the penultimate sentence of
Treasury Regulations Section 1.704-2(g)(1) and (iii) the amount such Member is
deemed to be obligated to restore pursuant to the penultimate sentence of
Treasury Regulations Section 1.704-2(i)(5), each such Member shall be specially
allocated items of Company income and gain in the amount of such excess as
quickly as possible; provided, however, that an allocation pursuant to this
Section 6.2.4 shall be made only if and to the extent that such Member would
have a deficit Capital Account in excess of such sum after all other allocations
provided for in this Article 6 have been tentatively made as if Section 6.2.3
and this Section 6.2.4 were not in the Agreement.
6.2.5 Nonrecourse Deductions. Nonrecourse Deductions for any
Fiscal Year or other period shall be specially allocated to the Members in
accordance with their Percentage Interests.
6.2.6 Member Nonrecourse Deductions. Any Member Nonrecourse
Deductions for any Fiscal Year or other period shall be specially allocated to
the Member who bears the Economic Risk of Loss with respect to the Member
Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in
accordance with Treasury Regulations Section 1.704-2(i).
6.2.7 Section 754 Adjustment.
6.2.7.1 To the extent an adjustment to the adjusted tax
basis of any Company asset pursuant to Code Section 734(b) or 743(b) is required
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken
into account in determining Capital
-17-
<PAGE> 126
Accounts as a result of a distribution other than in liquidation of a Member's
Membership Interest, the amount of such adjustment shall be treated as an item
of gain (if the adjustment increases the basis of such asset) or loss (if the
adjustment decreases the basis of the asset) from the disposition of the asset
and shall be taken into account for purposes of computing Net Profit and Net
Loss.
6.2.7.2 To the extent an adjustment to the adjusted tax
basis of any Company asset pursuant to Code Section 734(b) or Code Section
743(b) is required, pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Accounts as the result of a distribution to a Member in
complete liquidation of its interest, the amount of such adjustment to Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis), and such
gain or loss shall be specially allocated to the Members in accordance with
their Percentage Interests in the Company in the event Treasury Regulations
Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such
distribution is made in the event Treasury Regulations Section
1.704-1(b)(2)(iv)(m)(4) applies.
6.3 Curative Allocations. The allocations set forth in Section 6.1.2 and
Section 6.2 hereof (the "Regulatory Allocations") are intended to comply with
certain requirements of the Treasury Regulations. It is the intent of the
Members that, to the extent possible, all Regulatory Allocations shall be offset
either with other Regulatory Allocations or with special allocations of other
items of Company income, gain, loss, or deduction pursuant to this Section 6.3.
Therefore, notwithstanding any other provision of this Article 6 (other than the
Regulatory Allocations), the Management Committee shall cause the Company to
make such offsetting special allocations of Company income, gain, loss, or
deduction in whatever manner it determines appropriate so that, after such
offsetting allocations are made, each Member's Capital Account balance is, to
the extent possible, equal to the Capital Account balance such Member would have
had if the Regulatory Allocations were not in this Agreement. In exercising its
discretion under this Section 6.3, the Management Committee shall take into
account future Regulatory Allocations under Sections 6.2.1 and 6.2.2 that,
although not yet made, are likely to offset other Regulatory Allocations
previously made under Sections 6.2.5 and 6.2.6.
6.4 Other Allocation Rules.
6.4.1 To the extent permitted by Treasury Regulations Section
1.704-2(h)(3), the Management Committee shall endeavor to treat distributions of
Distributable Cash as having been made from the proceeds of a Nonrecourse
Liability or a Member Nonrecourse Debt only to the extent that such
distributions would cause or increase an Adjusted Capital Account Deficit for
any Member.
6.4.2 If any fees or other payments deducted for federal income
tax purposes by the Company are recharacterized by a final determination of the
Internal Revenue Service as nondeductible distributions to any Member, then,
notwithstanding all other allocation provisions, gross income shall be allocated
to such Member (for the year(s) of adjustment) in an amount equal to the fees or
payments recharacterized. Recharacterization of any fees or other payments by
the Internal Revenue Service shall not affect the amount of distributions from
the Company to which the Members would otherwise be entitled pursuant to this
Agreement.
-18-
<PAGE> 127
6.5 Tax Allocations: Code Section 704(c).
6.5.1 In accordance with Code Section 704(c) and the Treasury
Regulations thereunder, income, gain, loss, and deduction with respect to any
property contributed to the capital of the Company shall, solely for income tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its initial Gross Asset Value.
6.5.2 In the event the Gross Asset Value of any Company asset is
adjusted pursuant to clause (b) of the definition of Gross Asset Value,
subsequent allocations of income, gain, loss, and deduction with respect to such
asset shall take account of any variation between the adjusted basis of such
asset for federal income tax purposes and its Gross Asset Value in the same
manner as under Code Section 704(c) and the Treasury Regulations thereunder.
6.5.3 Any elections or other decisions relating to such
allocations shall be made by the Management Committee in any manner that
reasonably reflects the purpose and intention of this Agreement.
6.6 Allocations in Event of Sale. If an interest in the Company is Sold
in accordance with Article 10 of this Agreement, the Net Profit and Net Loss of
the Company shall be calculated as of the end of the month immediately prior to
the month in which the sale occurs. The transferor Member shall be allocated an
amount equal to the Net Profit and Net Loss of the Company allocable to the
period ending on the last day of the month immediately prior to the Sale. The
transferee of the interest in the Company to be so Sold shall be allocated an
amount equal to the Net Profit and Net Loss of the Company allocable to the
remainder of the calendar year. This paragraph shall apply for purposes of
computing a Member's Capital Account and for federal income tax purposes.
6.7 Deficit Capital Account Balances. The Members shall not be obligated
at any time to repay or restore to the Company all or any part of any
distributions made to the Members by the Company, nor shall any Member be
required to restore a deficit Capital Account balance to the Company.
ARTICLE 7
DISTRIBUTIONS
7.1 Current Distributions. The Management Committee shall cause the
Company to make distributions to the Members as follows:
(a) E-Commerce Revenue. In accordance with Section 13.5.1, the
Company shall distribute to MP3 its [***] share of certain e-commerce revenue as
described in Section 13.4.2.
(b) Tax Distribution. Subject to any applicable restrictions in
the Company's loan agreements, within ninety (90) calendar days after the end of
each Fiscal Year, the Management Committee shall use reasonable efforts to cause
the Company to distribute to the Members an amount equal to the Tax Distribution
for the preceding Fiscal Year. The Tax
-19-
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 128
Distribution shall be distributed to the Members in accordance with their
respective Percentage Interests.
(c) Distributions of Distributable Cash. The Company shall make
distributions of Distributable Cash to the Members from time to time in the
discretion of the Management Committee, which distributions shall be made to the
Members in accordance with their respective Percentage Interests.
7.2 Amounts Withheld From Distributions. All amounts withheld pursuant
to the Code or any provisions of any state, local, or foreign tax law with
respect to any distribution to the Members shall be treated as amounts
distributed to the Members pursuant to this Article 7 for all purposes under
this Agreement.
7.3 Distributions Upon Liquidation. Notwithstanding anything to the
contrary in this Article 7, upon the dissolution of the Company for any reason,
or its liquidation within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g), the debts and obligations of the Company shall be paid or
provided for in accordance with Section 11.3, and the remaining assets of the
Company shall be distributed (or deemed distributed in the event of a
termination under Section 708(b)(1)(B) of the Code) to the Members (after giving
effect to all contributions, distributions, allocations and other Capital
Account adjustments for all taxable years, including the year during which such
liquidation or dissolution occurs) pursuant to the provisions of Section 11.3.
7.4 Distributions In Kind. No Member shall have the right to demand and
receive property other than cash as a distribution from the Company. Except as
explicitly provided in accordance with this Article 7, no Member shall have the
right to demand and receive cash from the Company.
7.5 Limitation Upon Distributions. No distribution shall be declared and
paid to a Member in violation of the Delaware Act; a Member who receives a
distribution in violation of the Delaware Act shall be liable to the Company for
the amount of the distribution to the extent provided under the Delaware Act.
ARTICLE 8
RIGHTS AND DUTIES OF MANAGER, MEMBERS, REPRESENTATIVES AND OFFICERS
8.1 Management. The Members agree that the Company shall constitute a
manager managed limited liability company for purposes of the Delaware Act. The
day-to-day business and affairs of the Company shall be managed by the Manager
to the extent provided in Section 8.2, and the Manager shall be subject to the
ultimate oversight and control of a committee (the "Management Committee"),
which shall consist of individual representatives appointed by the Members and
referred to herein as the "Representatives." Except for the duties delegated to
the Manager in Section 8.2 and as specified in Section 8.5, the Management
Committee shall have full and complete authority, power and discretion to manage
and control the business, affairs and properties of the Company, to make all
decisions regarding those matters and to perform any and all other acts or
activities customary or incident to the management of the Company's business.
-20-
<PAGE> 129
The parties acknowledge that the Representatives are designees of the Members
that appoint them, and are acting as proxies for such Members with respect to
the management of the Company.
8.2 Manager.
8.2.1 Appointment. The Members agree that Cox shall be the
"Manager" of the Company, as such term is defined in Section 18-101(10) of the
Delaware Act.
8.2.2 Authority and Duties of Cox. Cox shall act as the manager
of the Company as contemplated by and in accordance with this Agreement and
subject to ultimate supervision and control by the Management Committee. Cox
shall use its reasonable efforts to perform its obligations and duties
hereunder, but in no event shall Cox be required or permitted to take any action
that would violate this Agreement. As Manager, Cox shall:
(1) define and develop the Company's business and
operating strategy in conjunction with the Management Committee and the Senior
Executive Officers;
(2) provide day-to-day oversight of the Company and
its business, operations and affairs, consistent with the Company's business
strategy and budgets, by providing the Company with general corporate support,
including negotiating and establishing the terms of affiliation agreements with
Radio Affiliates, assisting the Company with its press and public relations,
evaluating staff effectiveness and productivity, monitoring the operating goals
and financial results of the Company, selecting office sites and office/facility
management, taking such other actions (in the ordinary course of the Company's
business and within the scope of the authority granted by the Management
Committee) as necessary to accomplish the purpose and business of the Company;
(3) recruit and nominate for approval by the
Management Committee candidates for the position of Chief Executive Officer and
Chief Financial Officer (the Members hereby agree that the Company will not
appoint any person to such positions who has not been nominated by Cox in
accordance with this Agreement), and assist the Company in recruiting and hiring
other employees;
(4) annually evaluate the Chief Executive Officer
of the Company with the Management Committee, and recommend for approval by the
Management Committee a compensation package for the Chief Executive Officer and
other key employees;
(5) perform the duties of the Tax Matters Partner
set forth in Section 8.17 of this Agreement;
(6) consult with the Company regarding financial,
business matters and operational matters affecting the Company; and
(7) assist the Company in negotiating financings,
leases and other material contracts.
-21-
<PAGE> 130
8.2.3 Appointment as Attorney-in-Fact. In furtherance of the
foregoing, the Company hereby designates and appoints Cox as its agent and
attorney-in-fact, and authorizes it to take any and all actions necessary to
fulfill its obligations pursuant to Section 8.2.2.
8.2.4 Reimbursement. Cox shall be reimbursed by the Company on
demand for its reasonable out-of-pocket costs and expenses in its capacity as
Manager (including travel and other disbursements) reasonably incurred in
performing its services hereunder, subject to presentation of reasonable
supporting documentation of such costs and expenses.
8.3 Appointment, Tenure and Voting of the Management Committee.
8.3.1 Appointment.
(1) The Management Committee initially shall be
composed of the Chief Executive Officer of the Company plus six (6)
Representatives, to be designated as follows: three (3) Representatives shall be
designated by Cox and three (3) Representatives shall be designated by MP3.
Initially, the Cox Representatives shall be ________________, _______________
and __________________, and the MP3 Representatives shall be Michael Robertson,
Robin Richards and Tom Spiegel. The Management Committee may determine, by
Supermajority Vote, to increase or decrease the number of Representatives
serving on the Management Committee, including, without limitation in connection
with the issuance of new Units or Membership Interests.
(2) A Member shall nominate its designated
Representatives by providing written notice to the Company and the other Members
of the names of its designated Representatives.
8.3.2 Tenure and Qualification. Each Representative shall hold
office until his or her death, disability, resignation or removal by the Member
which designated such Representative. Representatives need not be residents of
the State of Delaware.
8.3.3 Voting. The Representatives appointed by a Member shall
together have voting power for purposes of all Management Committee actions
equal to the Percentage Interest held by such Member as in effect from time to
time. If a Member designates only one Representative, such Representative shall
be entitled to vote the entire voting power held by such Member. If a Member
designates more than one Representative, such Representatives collectively shall
vote the entire voting power of such Member as a single unit.
8.3.4 Alternates and Proxies.
(1) Pursuant to a written notice to the Company,
any Representative may appoint an alternate (an "Alternate") who may attend,
participate and serve as a proxy for the absent Representative which appointed
such Alternate at any Management Committee meeting or for a stated period of
time. Alternates shall exercise the same voting rights as the absent
Representative could have exercised.
(2) Any Representatives designated by a Member
shall automatically and without written notice serve as a proxy for the other
Representatives
-22-
<PAGE> 131
designated by such Member in the event that the other Representatives of such
Member are not present at any Management Committee meeting. By way of example, a
single Representative designated by Cox shall have the maximum number of votes
which could be cast by all Representatives designated by Cox when serving as a
proxy for the other Representatives designated by Cox.
8.4 Management Committee Approval. Except for matters expressly
specified in this Agreement as requiring a Supermajority Vote of the Management
Committee, any action required or permitted to be taken by the Management
Committee may be taken upon the affirmative approval, at a duly called meeting
or, upon ten (10) calendar days prior notice to all Representatives, by written
consent in lieu of a meeting, of Representatives appointed by Members
representing more than 50% of the Percentage Interests of all Members (a
"Majority Vote"). Unless authorized to do so by this Agreement or by a Majority
Vote of the Management Committee and except for the power delegated to the
Manager pursuant to Section 8.2, no Member, attorney-in-fact, officer, employee
or other agent of the Company shall have any power or authority to bind the
Company in any way.
8.5 Certain Special Voting Requirements. Notwithstanding anything to the
contrary herein and in addition to any other matters specified in this Agreement
that may require a Supermajority Vote of the Management Committee, the
affirmative approval, at a duly called meeting or by written consent in lieu of
a meeting, of Representatives appointed by Members representing at least 75% of
the aggregate Percentage Interests of all Members (a "Supermajority Vote") shall
be required for the Company to undertake any of the following:
8.5.1 The dissolution, winding up or liquidation of the Company
pursuant to Section 11.1.1.
8.5.2 The sale or other disposition of any assets of the Company
outside the ordinary course of business.
8.5.3 The adoption and approval of the Company's Annual Budget,
including, without limitation any amendment to any Annual Budget previously
approved by the Management Committee.
8.5.4 The appointment or discharge of the Chief Executive Officer
of the Company or the Chief Financial Officer of the Company, or the Company's
entry into, amendment or modification of the terms of any employment agreement
with such persons.
8.5.5 The borrowing of money by the Company or the granting of a
security interest in assets of the Company, or the issuance of any guaranty, to
secure indebtedness or other obligations of the Company or other Persons.
8.5.6 The creation of any Subsidiary of the Company or the entry
by the Company into any joint ventures, general or limited partnerships or other
material participations or agreements, including, without limitation, the
approval of any amendment of the foregoing previously approved by the Management
Committee.
-23-
<PAGE> 132
8.5.7 Any call or requirement for any Capital Contributions by
the Members other than the Initial Capital Contributions.
8.5.8 Any admission of new Members of the Company or any issuance
of new Units or Membership Interests.
8.5.9 Any transaction or contract between the Company and a
Member (or an Affiliate of a Member); provided, however, that this provision
shall not apply to (i) any affiliation agreement between the Company and a Cox
Radio Station entered into pursuant to Section 13.6, which agreement does not
otherwise contravene any provision of this Agreement and does not otherwise
contain terms that are more favorable to the Cox Radio Station than those that
would be obtained in an arms-length transaction between unrelated parties or
(ii) any other transaction or contract that is expressly authorized or
contemplated under this Agreement.
8.6 Default Budget.
(a) If on November 1 of any Fiscal Year no Annual Budget has been
approved for the following Fiscal Year, then the Annual Budget for the then
current Fiscal Year, adjusted (without duplication) to reflect increases or
decreases resulting from the following events, shall govern the Fiscal Year
beginning on the January 1 following the aforesaid November 1, subject to the
limitations set forth in Section 8.6(b) below:
(i) the operation of escalation or de-escalation
provisions in contracts in effect at the time of approval of the then current
Fiscal Year's Annual Budget solely as a result of the passage of time or the
occurrence of events beyond the control of the Company to the extent such
contracts are still in effect;
(ii) elections made in any current or prior Fiscal
Year under contracts contemplated by the Annual Budget for the then current
Fiscal Year regardless of which party to such contracts made such elections;
(iii) increases or decreases in expenses
attributable to the annualized effect of employee additions or reductions during
the then current Fiscal Year contemplated by the Annual Budget for the then
current Fiscal Year;
(iv) changes in interest expense attributable to
any loans made to or retired by the Company;
(v) increases in overhead expenses in an amount
equal to the total of overhead expenses reflected in the Annual Budget for the
then current Fiscal Year multiplied by the increase in the Consumer Price Index
for the then current year, but in no event more than five percent (5%);
(vi) the anticipated incurrence of costs during
such following Fiscal Year for any legal, accounting and other professional fees
or disbursements in connection with events or changes not contemplated at the
time of preparation of the Annual Budget for the then current Fiscal Year; and
-24-
<PAGE> 133
(vii) decreases in expense attributable to
non-recurring items reflected in the then current Fiscal Year's Annual Budget.
(b) Any Annual Budget established pursuant to this
Section 8.6 is herein referred to as a "Default Budget." Default Budgets shall
not be in effect for more than two consecutive Fiscal Years. In the event a new
Annual Budget is not approved by the time such two-year period shall have
expired, the Company shall have no Annual Budget, and no Capital Contributions
shall be required to be made thereafter.
8.7 Resignation. Any Representative may resign at any time by giving
written notice to the Member who designated such Representative, and such
Representative shall immediately give written notice to the Manager and the
other Representatives. The resignation of any Representative shall take effect
upon receipt of such notice by the Member who designated such Representative or
at such later time as shall be specified in the notice; and, unless otherwise
specified in such notice, the acceptance of the resignation by the Company, the
Members or the remaining Representatives shall not be necessary to make it
effective.
8.8 Removal. A Member shall at any time be entitled to remove and
replace any Representative designated by such Member. In the event any Member
(i) shall cease to be a Member for any reason, (ii) shall cease to own a
Percentage Interest of greater than 10%, or (iii) shall lose its right to
appoint Representatives pursuant to Section 10.1, the Representatives designated
by such Member shall be automatically removed as Representatives without any
further action required to be taken by any party.
8.9 Vacancies. Upon the death, disability, resignation or removal of a
Representative, the Member that designated such Representative shall designate a
replacement Representative to fill the vacancy. A Representative elected to fill
a vacancy shall hold office until the Representative's death, disability,
resignation or removal.
8.10 Meetings. The Management Committee may hold any of its meetings at
such place or places within or without the State of Delaware as the Management
Committee may from time to time by resolution designate or as shall be
designated by the Person or Persons calling the meeting or in the notice or
waiver of notice of any such meeting. Representatives or their Alternates may
participate in any regular or special meeting of the Management Committee by
means of conference telephone or similar communications equipment pursuant to
which all Persons participating in the meeting can hear each other, and such
participation shall constitute presence in person at such meeting. Regular
meetings of the Management Committee may be held at such times as the
Representatives shall from time to time by resolution determine, but no less
frequently than monthly (subject to the right of the Management Committee to
determine, by Supermajority Vote, to meet less frequently). Notice of the time
and place of each such regular meeting shall be mailed to each Representative,
addressed to him or her at his or her residence or usual place of business, at
least ten (10) Business Days before the day on which the meeting is to be held,
or shall be sent to him or her at such place by telecopy or overnight courier or
be delivered personally not less than 72 hours before the time at which the
meeting is to be held. If any date fixed for a regular meeting shall be a legal
holiday at the place where the meeting is to be held, then the meeting shall be
held at the same hour and place on the succeeding Business Day not a legal
holiday. Special meetings of the Management Committee shall be held
-25-
<PAGE> 134
whenever called by any Senior Executive Officer or any Representative. Notice of
the time and place of each such special meeting shall be mailed to each
Representative, addressed to him or her at his or her residence or usual place
of business, at least five (5) Business Days before the day on which the meeting
is to be held, or shall be sent to him or her at such place by telecopy or
overnight courier or be delivered personally not less than 48 hours before the
time at which the meeting is to be held. Notice of the purpose of a special
meeting must be given. Notice of any meeting of the Management Committee shall
not be required to be given to any Representative who is present at such
meeting, except a Representative who shall attend such 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.
8.11 Action by Consent. Any action required or permitted to be taken at
any meeting of the Management Committee or of any committee thereof may be taken
without a meeting if a written consent thereof is signed by the number of
Representatives needed to approve the matter. Any such actions by written
consent shall be filed with the minutes of the proceedings of the Management
Committee. At least ten (10) Business Days prior notice shall be required for an
action by consent without a meeting to be effective, unless such consent is a
unanimous consent executed by all of the Representatives on the Management
Committee.
8.12 Officers.
8.12.1 The Company shall have a Chief Executive Officer, a Chief
Financial Officer and such other officers as the Management Committee shall
determine (the "Senior Executive Officers"). Officers shall have such powers and
duties as may be specified by, or in accordance with, resolutions adopted by the
Management Committee. In the absence of any contrary determination by the
Management Committee, the Senior Executive Officers shall, subject to the power
and the authority of the Management Committee, have general supervision,
direction and control of the officers, employees, business and affairs of the
Company. Notwithstanding the foregoing, no officer of the Company shall have any
power or authority outside the normal day-to-day business of the Company to bind
the Company by any contract or engagement or to pledge its credit or to render
it liable in connection with any transaction unless expressly so authorized by
the Management Committee or the Annual Budget.
8.12.2 The Management Committee shall elect the Senior Executive
Officers. Each such officer shall serve until his or her respective successor is
duly elected, or until his or her earlier death, resignation or removal.
8.13 Salaries. The Representatives shall not receive salaries or other
compensation for serving in their capacities as Representatives, except that the
Representatives shall be entitled to reimbursement by the Company for their
reasonable out-of-pocket expenditures incurred in connection with attending
meetings of the Management Committee or other actions taken at the request of
the Management Committee.
8.14 Limitation of Liability of Members, Managers and Representatives.
The debts, obligations and liabilities of the Company, whether arising in
contract, tort or otherwise, shall be solely the debts, obligations and
liabilities of the Company; and no Member, Manager or Representative shall be
obligated personally for any such debt, obligation or liability of the
-26-
<PAGE> 135
Company solely by reason of being a Member, Manager or Representative except as
otherwise required by law.
8.15 Manager and Representative Standard of Care; Liability to Members.
The Manager and Representatives shall perform their managerial duties in good
faith and with such care as an ordinarily prudent person in a like position
would use under similar circumstances. Neither the Manager nor any
Representative shall, in any way, be deemed to guarantee the return of the
Members' Capital Contributions or a profit for the Members from the operations
of the Company, and neither the Manager nor any Representative shall be liable
to the Company or to any Member for any loss or damage sustained by the Company
or any Member, unless the loss or damage shall have been the result of fraud,
deceit, gross negligence, willful misconduct or a wrongful taking by the Manager
or such Representative, respectively. It is expressly acknowledged and agreed
that a Representative shall act in the interests of the Member by whom he or she
was appointed in considering matters that may come before the Representatives
and that a Representative shall have no liability to the Company or the Members
for breach of the fiduciary duty of loyalty as a result of any action taken or
approval given by a Representative that inures to the benefit of the Member by
whom he or she was appointed.
8.16 Indemnity of Members, Managers, Representatives, Officers,
Employees and Other Agents. The Company shall, to the fullest extent permitted
by law, indemnify, defend and hold harmless any Person who was or is a party to,
or is threatened to be made a party to, a threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the Company,
whether civil, criminal, administrative, investigative or otherwise, by reason
of the fact that such Person is or was a Member, Manager, Representative,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a manager, director, officer, employee, agent or fiduciary of
another corporation, partnership, limited liability company, joint venture,
trust or other enterprise, from and against any and all claims, liabilities,
losses, damages, costs or expenses (including attorneys' fees, judgments, fines
and amounts paid in settlement) actually and reasonably incurred by such Person
in connection with such action, suit or proceeding. The Company may, to the
fullest extent permitted by law, purchase and maintain insurance on behalf of
any such Person against any liability which may be asserted against him or her.
Any expenses covered by the foregoing indemnification shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of the Persons seeking
indemnification to repay such amounts if it is ultimately determined that he or
she is not entitled to be indemnified. The indemnification provided herein shall
not be deemed to limit the right of the Company to indemnify any other Person
for any such expenses to the fullest extent permitted by law, nor shall it be
deemed exclusive of any other rights to which any Person seeking indemnification
from the Company may be entitled under any agreement, vote of disinterested
Managers or Representatives or otherwise, both as to action in his, her or its
official capacity and as to action in another capacity while serving as a
Member, Manager, Representative, officer, employee or agent.
8.17 Tax Matters Partner. Cox is designated as the "Tax Matters Partner"
in accordance with Code Section 6231(a)(7). As Tax Matters Partner, Cox shall
use its reasonable efforts to comply with the responsibilities outlined in Code
Section 6221 through 6233 (including the Treasury Regulations promulgated
thereunder) and shall have any powers necessary to perform fully in such
capacity. The Tax Matters Partner shall cause the preparation
-27-
<PAGE> 136
and timely filing of all tax returns required to be filed by the Company
pursuant to the Code and all other tax returns deemed necessary and required in
each jurisdiction in which the Company does business. No later than June 1 of
each Fiscal Year, the Tax Matters Partner shall cause to be furnished to each
Member a Federal Partner Income Tax Schedule "K-1," or any substitute therefor,
for such Member with respect to such Fiscal Year. All elections permitted to be
made by the Company under federal or state laws shall be made by the Tax Matters
Partner; provided that the Management Committee, upon a Supermajority Vote to do
so, may direct the Tax Matters Partner to make any tax election. The Tax Matters
Partner is authorized to represent the Company before taxing authorities and
courts in tax matters affecting the Company and the Members in their capacity as
such and shall keep the Members informed of any such administrative and judicial
proceedings. The Tax Matters Partner shall be entitled to be reimbursed by the
Company for all costs and expenses incurred by it in connection with any
administrative or judicial proceeding affecting tax matters of the Company and
the Members in their capacity as such and to be indemnified by the Company
(solely out of Company assets) with respect to any action brought against it in
connection with any judgment in or settlement of any such proceeding. Without a
Supermajority Vote of the Management Committee, the Tax Matters Partner shall
not enter into any agreement with the Internal Revenue Service settling tax
matters affecting the Company and its Members that would be binding on any
Member other than the Tax Matters Partner. Any Member who enters into a
settlement agreement with respect to any Company item shall notify the Tax
Matters Partner of such settlement agreement and its terms within thirty (30)
calendar days after the date of settlement.
ARTICLE 9
RECORDS AND REPORTS
9.1 Records, Audits, and Reports. At the expense of the Company, proper
and complete records and books of account shall be kept or shall be caused to be
kept by the Manager in which shall be entered fully and accurately all
transactions and other matters relating to the Company's business in the detail
and completeness customary and usual for businesses of the type engaged in by
the Company. The books and records shall at all times be maintained at the
principal executive office of the Company and shall be open to the inspection
and examination of the Members or their duly authorized agents during business
hours. At a minimum, the Company shall keep at its principal place of business
the following records:
9.1.1 A current list of the full name and last known business,
residence or mailing address of each Member, Manager and Representative, both
past and present;
9.1.2 A copy of the Certificate of Formation of the Company and
all amendments thereto, together with executed copies of any powers of attorney
pursuant to which any amendment has been executed;
9.1.3 Copies of the Company's federal, state and local income tax
returns and reports, if any, for the four most recent years;
-28-
<PAGE> 137
9.1.4 A copy of this Agreement, as amended to date, any
correspondence relating to any Member's obligation to contribute cash, property
or services, and copies of any financial statements of the Company for the three
most recent years;
9.1.5 Copies of the then current Annual Budget;
9.1.6 Minutes of meetings of the Management Committee or
committees of the Management Committee, or any written consents of
Representatives obtained in lieu of a meeting; and
9.1.7 Any written consents obtained from Members with respect to
any actions taken or approved by Members.
The Management Committee shall maintain and preserve, during the term of the
Company, and for five (5) years thereafter, all accounts, books and other
relevant Company documents.
9.2 Financial Statements. The Manager shall cause to be prepared and
delivered to each Member, at the expense of the Company, the following financial
statements:
(a) Within ten (10) Business Days after the end of each
calendar month (i) a balance sheet as of the end of such month; and (ii) the
related statements of income or loss and cash flows for the interim period
through the end of such month and for such month, and setting forth in
comparative form the figures for previous fiscal periods and comparisons to the
Annual Budget;
(b) Within ten (10) Business Days after the end of each
calendar quarter ending on March 31, June 30 and September 30 of each Fiscal
Year, (i) a balance sheet as of the end of each quarter; and (ii) the related
statements of income or loss and cash flows for the interim period through the
end of such quarter and for the quarter then ended, and setting forth in
comparative form the figures for previous fiscal periods and comparisons to the
Annual Budget;
(c) Within forty-five (45) calendar days of the end of
each Fiscal Year, a balance sheet of the Company as of the end of each Fiscal
Year, and the related statements of income or loss and cash flows for such
Fiscal Year, all in reasonable detail with appropriate notes to such financial
statements and supporting schedules, setting forth in each case in comparative
form the figures for the previous year, and, within seventy-five (75) calendar
days of the end of each Fiscal Year, the foregoing financial information as
audited by a certified public accountant;
(d) With reasonable promptness, such other financial
information or reports as any Member may reasonably request from time to time.
9.3 Notice of Material Litigation. The Manager shall cause to be
delivered to each Member prompt notice of the commencement or institution by or
against the Company or any Member of any dispute, litigation, suit, action or
other proceeding before any court or other governmental, administrative or
taxing authority which the Manager in good faith determines is reasonably likely
to have a material adverse effect upon a Member.
-29-
<PAGE> 138
9.4 Bank Accounts. The Company shall maintain bank accounts in such
banks or institutions as the Manager shall select, and such accounts shall be
drawn upon by check signed by such person or persons, and in such manner, as may
be designated by the Management Committee. All moneys of the Company shall be
deposited in the bank or other financial institution account or accounts of the
Company.
ARTICLE 10
TRANSFERABILITY
10.1 No Pledge of Membership Interests. No Member shall be entitled to
pledge, hypothecate, grant a security interest or lien in or against, or
otherwise encumber (collectively, "pledge") all or any part of its Membership
Interest unless such pledge is approved by a Supermajority Vote of the
Management Committee. In the event that a Member pledges all or any part of its
Membership Interest in violation of this Section 10.1, such Member shall
continue to be a Member but shall cease to hold any rights to participate in the
management of the business and affairs of the Company, as applicable, and shall
cease to have any right to elect or appoint a Representative until such pledge
is extinguished, and, if applicable, such defaulting Member's Representative
shall immediately cease to be a Representative on the Management Committee.
10.2 General Restrictions on Transfer.
10.2.1 Prior to June 1, 2001, no Member shall voluntarily or
involuntarily Sell all or any portion of its Units or Membership Interest except
for a Permitted Transfer. Any purported Sale in violation of this Agreement
shall be null and void and of no force or effect, and the Company shall not
record any such Sale on its transfer books. From and after June 1, 2001, any
voluntary or involuntary Sale of all or any portion of a Member's Units or
Membership Interest (other than a Permitted Transfer) may only be made subject
to compliance with the provisions of Sections 10.3 and 10.4.
10.2.2 During the period that Sales are restricted pursuant to
Section 10.2.1, and without limiting any other requirements set forth elsewhere
herein, in connection with any Permitted Transfer of any Units by any Member,
the transferee involved in such Permitted Transfer shall execute a counterpart
copy of this Agreement in accordance with Section 10.6 and shall agree to be
bound by all of the terms hereof, and the selling Member shall give written
notice to the Company and each other Member of such Sale within fifteen (15)
Business Days after such Sale describing the manner and circumstances of such
Sale.
10.3 Right of First Refusal.
10.3.1 After June 1, 2001 and until June 1, 2003, if a Member
desires to Sell all or any portion of its Units or Membership Interests, other
than in a Permitted Transfer, such member (the "Selling Member") shall be
required to obtain a bona fide, non-collusive, binding written offer (a "Third
Party Offer"), subject only to customary closing conditions with respect to the
proposed transfer from the proposed transferee (a "Third Party") which the
Selling Member desires to accept. The Third Party Offer shall contain a
description of all of the
-30-
<PAGE> 139
consideration, material terms and conditions for the proposed Sale. The Selling
Member shall send a copy of the Third Party Offer which shall include the
identity of the Third Party to the other Members, together with a written offer
to sell the offered Units and Membership Interests to the other Members, pro
rata based on their relative Percentage Interests, at the price and on the terms
and conditions specified in the Third Party Offer.
10.3.2 Upon receipt of the Third Party Offer and offer to sell
the offered Units and Membership Interests from the Selling Member pursuant to
the terms of Section 10.3.1 hereof, each of the other Members shall have thirty
(30) calendar days from the receipt of the written offer from the Selling Member
to notify the Selling Member in writing of other such Member's election to
purchase all but not less than all of such Member's pro rata share of the
offered Units and Membership Interests. If, upon the expiration of such thirty
(30) day period, some but not all of the other Members have elected to purchase
their pro rata shares of the offered Units and Membership Interests, such
electing Members shall have an additional fifteen (15) calendar days to elect to
acquire, based on their relative Percentage Interests or on such other basis as
the remaining Members may agree, to elect to purchase any remaining offered
Units and Membership Interests.
10.3.3 In the event the other Members make such election provided
under Section 10.3.2 hereof, the closing of the sale of the offered Units and
Membership Interests to the other Members shall be held at the offices of the
Company on the tenth Business Day after the end of the thirty (30) day period
(or forty-five (45) day period, as the case may be) described under Section
10.3.2. Contemporaneously with such closing, the Selling Member shall transfer
the offered Units and Membership Interests against receipt from the other
Members of the purchase price and on the terms and conditions specified in the
Third Party Offer. The obligation of the Selling Party and the other Members to
proceed with the closing on the scheduled date for closing of the sale shall be
conditioned upon and extended to a date which is ten (10) calendar days
following the last to occur of (i) the expiration (or earlier termination) of
any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and (ii) the receipt of all material governmental and
regulatory consents, approvals and waivers that may be required in connection
with the sale of the offered Units and Membership Interests. In the event that
such conditions have not been satisfied on or before one hundred twenty (120)
calendar days following the date of the notice to the Selling Member of the
other Members' election to purchase the offered Units and Membership Interests,
neither the Selling Member nor the other Members shall be obligated to proceed
with the closing of the sale of the offered Units and Membership Interests.
10.3.4 Notwithstanding the provisions of Section 10.3.3 hereof,
if (a) the other Members have not elected to purchase all of the offered Units
and Membership Interests within the applicable election period or (b) the
closing of the sale of all of the offered Units and Membership Interests to the
other Member has not been completed by the scheduled closing date, as extended
pursuant to the provisions of Section 10.3.3 hereof, the Selling Member shall
have the right for a period of ninety (90) calendar days after (i) the
expiration of the election period in Section 10.3.2 hereof or (ii) the last date
for closing of such sale under Section 10.3.3 hereof, as applicable, to sell all
but not less than all of the offered Units and Membership Interests, but only to
the Third Party for a price and on terms not more favorable to the Third Party
than those of the Third Party Offer.
-31-
<PAGE> 140
10.4 Right of First Offer.
10.4.1 After June 1, 2003, if a Member desires to Sell all or any
portion of its Units or Membership Interests other than in a Permitted Transfer,
such Member shall notify the other Members of its desire to effect such a Sale
and of the terms and conditions upon which the Selling Member would be willing
to effect such a proposed Sale (the "Offer Notice"). The Selling Member shall
not be required to have obtained a Third Party Offer in this instance. The Offer
Notice from the Selling Member to the other Members shall include a written
offer to sell the offered Units and Membership Interests to the other Members,
pro rata based on their relative Percentage Interests, at the price and on the
terms and conditions specified in the notice.
10.4.2 Each of the other Members shall have thirty (30) calendar
days from the receipt of the Offer Notice to notify the Selling Member in
writing of other such Member's election to purchase all but not less than all of
such Member's pro rata share of the offered Units and Membership Interests. If,
upon the expiration of such thirty (30) calendar day period, some but not all of
the other Members have elected to purchase their pro rata shares of the offered
Units and Membership Interests, such electing Members shall have an additional
fifteen (15) calendar days to elect to acquire, based on their relative
Percentage Interests or on such other basis as the remaining Members may agree,
to elect to purchase any remaining offered Units and Membership Interests.
10.4.3 In the event the other Members make such election provided
under Section 10.4.2 hereof, the closing of the sale of the offered Units and
Membership Interests to the other Members shall be held at the offices of the
Company on the tenth Business Day after the end of the thirty (30) day period
(or forty-five (45) day period, as the case may be) described under Section
10.4.2. Contemporaneously with such closing, the Selling Member shall transfer
the offered Units and Membership Interests against receipt from the other
Members of the purchase price and on the terms and conditions specified in the
Offer Notice. The obligation of the Selling Party and the other Members to
proceed with the closing on the scheduled date for closing of the sale shall be
conditioned upon and extended to a date which is ten (10) calendar days
following the last to occur of (i) the expiration (or earlier termination) of
any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and (ii) the receipt of all material governmental and
regulatory consents, approvals and waivers that may be required in connection
with the sale of the offered Units and Membership Interests. In the event that
such conditions have not been satisfied on or before one hundred twenty (120)
calendar days following the date of the notice to the Selling Member of the
other Members' election to purchase the offered Units and Membership Interests,
neither the Selling Member nor the other Members shall be obligated to proceed
with the closing of the sale of the offered Units and Membership Interests.
10.4.4 Notwithstanding the provisions of Section 10.4.3 hereof,
if (a) the other Members have not elected to purchase all of the offered Units
and Membership Interests within the applicable election period or (b) the
closing of the sale of all of the offered Units and Membership Interests to the
other Member has not been completed by the scheduled closing date, as extended
pursuant to the provisions of Section 10.4.3 hereof, the Selling Member shall
have the right for a period of ninety (90) calendar days after (i) the
expiration of the election period in Section 10.4.2 hereof or (ii) the last date
for closing of such sale under Section 10.4.3
-32-
<PAGE> 141
hereof, as applicable, to sell all but not less than all of the offered Units
and Membership Interests to any Person, but only for a price and on terms not
more favorable to such Person than those set forth in the Offer Notice.
10.5 Preemptive Rights.
10.5.1 If the Company at any time or from time to time makes any
offering of New Units (as defined in Section 10.5.5 below), each of Cox and MP3
shall first be offered the opportunity to acquire from the Company for the same
price and on the same terms as such securities are proposed to be offered to
others, up to the amount of New Units as is required to enable it to maintain
its proportionate interest in the Company. The amount of New Units each of Cox
and MP3 shall be entitled to purchase shall be determined by multiplying (x) the
total number of such offered Units (or, in the case of options, warrants or
other rights obligating the Company to issue Units or other equity interests,
the total number of such shares covered by such options, warrants or rights), by
(y) the Percentage Interest of Cox or MP3, as appropriate.
10.5.2 In the event the Company proposes to offer New Units, it
shall give each of Cox and MP3 a written notice of its intention, describing the
type of New Units to be offered, and the price and other terms upon which the
Company proposes to offer the same. Each of Cox and MP3 shall have ten (10)
Business Days from the date of receipt of any such notice to notify the Company
in writing that it intends to exercise such preemptive rights and as to the
amount of New Units such Member desires to purchase, up to the maximum amount
calculated pursuant to Section 10.5.1. Such notice shall constitute an agreement
of such Member to purchase the amount of New Units so specified upon the price
and other terms set forth in the Company's notice to it.
10.5.3 If Cox or MP3 exercises its preemptive right hereunder,
the closing of the purchase of the New Units with respect to which such right
has been exercised shall take place within forty-five (45) calendar days after
the giving of notice of such exercise, which period of time shall be extended
for a maximum of one hundred five (105) calendar days in order to comply with
applicable laws and regulations. Each of the Company, Cox and MP3, agrees to use
its commercially reasonable efforts to secure any regulatory approvals or other
consents, and to comply with any law or regulation necessary in connection with
the offer, Sale and purchase of, such New Units.
10.5.4 In the event a Member fails to exercise its preemptive
rights provided in this Section 10.5 within said ten (10) Business Day period
or, if so exercised, such Member is unable to consummate such purchase within
the time period specified in Section 10.5.3 above because of its failure to
obtain any required regulatory consent or approval, the Company shall thereafter
be entitled during the period of ninety (90) calendar days following the
conclusion of the applicable period to Sell or enter into an agreement (pursuant
to which the Sale of New Units covered thereby shall be consummated, if at all,
within thirty (30) calendar days from the date of said agreement) to Sell the
New Units not elected to be purchased pursuant to this Section 10.5, at a price
and upon terms no more favorable to the purchasers of such securities than were
specified in the Company's notice to Cox and MP3. Notwithstanding the foregoing,
if such Sale is subject to the receipt of any regulatory approval or expiration
of any waiting period, the time period during which such Sale may be consummated
shall be extended until the expiration of
-33-
<PAGE> 142
five (5) Business Days after all such approvals have been obtained or waiting
periods expired, but in no event shall such time period exceed ninety (90)
calendar days from the date of the applicable agreement with respect to such
Sale. In the event the Company has not Sold the New Units or entered into an
agreement to Sell the New Units within said ninety (90) day period (or Sold and
issued New Units in accordance with the foregoing within thirty (30) calendar
days (or ninety (90) calendar days, as applicable) from the date of said
agreement), the Company shall not thereafter offer, issue or Sell such New Units
without first offering such securities to Cox and MP3 in the manner provided
above.
10.5.5 As used herein, "New Units" means Units or classes or
series thereof, or other equity securities of the Company which the Company
proposes to offer, issue or Sell following the date of this Agreement (including
any options, warrants or other rights obligating the Company to issue Units or
other equity interests), provided, however, that the following shall be excluded
from the definition of "New Units": (i) units or securities to be issued
pursuant to any public offering by the Company registered with the Securities
and Exchange Commission; (ii) units or securities to be issued pursuant to any
incentive stock option or purchase plan or other plan or agreement of the
Company for the benefit of its employees, directors or consultants, including
any securities issuable pursuant to the exercise of any options, warrants or
other rights issued pursuant to such plans or agreements; (iii) units or
securities to be issued by the Company in connection with an acquisition
(including, without limitation, by way of merger, consolidation or binding share
exchange) by the Company of the Capital Stock of any corporation, partnership,
company or other entity in a transaction pursuant to which all or part of the
consideration payable in connection with such acquisition consists of securities
of the Company; or (iv) securities to be issued in connection with a strategic
transaction, joint venture or other business combination.
10.6 Conditions to Transfer.
10.6.1 In the event of the Sale of a Member's Units to a Person
who is not a Member, and as a condition to recognizing the effectiveness and
binding nature of any such Sale and substitution of a new Member, as against the
Company or otherwise, the Members who are not Selling their Membership Interests
(the "Remaining Members") which hold a majority of the Units held, may require
the Selling Member and the proposed purchaser or transferee to execute,
acknowledge and deliver to the Remaining Members and the Company such
instruments of transfer, assignment and assumption and such other certificates,
representations, documents and opinions of counsel, and to perform all the other
acts that the Remaining Members may in their reasonable discretion deem
necessary or desirable to:
10.6.1.1 Confirm the status of the purchaser or transferee
as a Member, if appropriate;
10.6.1.2 Confirm that the Person desiring to acquire the
Units has accepted, assumed and agreed to be subject to and bound by all of the
terms, obligations and conditions of the Agreement, as the same may have been
further amended (whether such Person is to be admitted as a new Member or will
merely be an assignee of an interest of a Member);
-34-
<PAGE> 143
10.6.1.3 Unless the Management Committee shall determine
otherwise, preserve the Company's status as a limited liability company after
the completion of such Sale or substitution under the laws of each jurisdiction
in which the Company is qualified, organized or does business;
10.6.1.4 Maintain the status of the Company as a
partnership for federal tax purposes unless otherwise agreed to by the
Management Committee; and
10.6.1.5 Comply with any material applicable state and
federal laws and regulations, including securities laws and regulations.
10.7 Buy/Sell Provisions.
10.7.1 Definitions. The following terms used in this Section 10.7
have the meanings specified below:
(a) "Initiating Member" means the Member that elects
pursuant to Section 10.7.2 to commence the process described in this Section
10.7.
(b) "Other Member" means any Member other than the Cox or
MP3.
(c) "Responding Member" means MP3, if Cox is the
Initiating Member, and Cox, if MP3 is the Initiating Member.
10.7.2 Commencement of the Buy/Sell Process.
(a) At any time during the forty-five (45) calendar day
period commencing on the seventh anniversary of the date of this Agreement, and
during the forty-five (45) calendar day period commencing on each second
anniversary of such date thereafter, either Cox or MP3 may elect to commence the
process described in this Section 10.7 by sending written notice (the "Buy/Sell
Notice") of its election to the Responding Member, with a copy to each Other
Member, offering to sell to the Responding Member all, but not less than all, of
the Initiating Member's Units and Membership Interest and offering to purchase
all, but not less than all, of the Responding Member's Units and Membership
Interest, in each case for a price per Unit which shall be specified by the
Initiating Member in its notice (the "Unit Price") and otherwise on the terms
and subject to the conditions set forth in this Section 10.7.
(b) A Member may not elect to commence the process
described in this Section 10.7 at any time following the delivery of a Buy/Sell
Notice pursuant to Section 10.7.2(a) and prior to such time, if any, that the
Initiating Member and the Responding Member agree to abandon the purchase and
sale of the Units and Membership Interests pursuant to such Buy/Sell Notice.
(c) The purchase and sale of Units and Membership
Interests pursuant to this Section 10.7 may be abandoned at any time following
the delivery of a Buy/Sell Notice pursuant to Section 10.7.2(a) and prior to the
closing thereof by agreement between the Initiating Member and the Responding
Member. If the Initiating Member and the Responding Member agree to abandon any
such purchase and sale of Units and Membership Interests pursuant to this
-35-
<PAGE> 144
Section 10.7, none of the Other Members shall have any rights under Section
10.7.5 with respect to the purchase and sale of their Units and Membership
Interests as part of such abandoned purchase and sale, notwithstanding any
elections previously made by any Member pursuant to the provisions of Section
10.7.6.
10.7.3 Election by Responding Member. The Responding Member may
accept either the Initiating Member's offer to sell the Initiating Member's
Units and Membership Interest or the Initiating Member's offer to purchase the
Responding Member's Units and Membership Interest, each as set forth in the
Buy/Sell Notice, by sending written notice (the "Acceptance Notice") of its
acceptance of either such offer to the Initiating Member, with a copy to each
Other Member, within forty-five (45) calendar days after its receipt of the
Buy/Sell Notice. If the Responding Member fails to send the Acceptance Notice to
the Initiating Member within forty-five (45) calendar days after its receipt of
the Buy/Sell Notice, the Responding Member shall be deemed to have accepted the
Initiating Member's offer to purchase the Responding Member's Units and
Membership Interest.
10.7.4 Default by Responding Member.
(a) If the Responding Member accepts the Initiating
Member's offer to sell to the Responding Member all of the Initiating Member's
Units and Membership Interest, and the Responding Member defaults in its
obligation to purchase the Initiating Member's Units and Membership Interest on
the date specified in Section 10.7.6(a) for the closing of the purchase and sale
of the Initiating Member's Units and Membership Interest, then the Initiating
Member may elect either:
(1) to purchase all, but not less than all, of the
Units and Membership Interest of the Responding Member for a price per Unit
equal to 95% of the Unit Price and otherwise on the terms and subject to the
conditions set forth in this Section 10.7; or
(2) to cause the Company to be liquidated and
dissolved in accordance with Article 11.
(b) The two options that may be elected by the Initiating
Member pursuant to Section 10.7.4(a) are exclusive of each other but are not
exclusive of any other right or remedy that may be available to the Initiating
Member at law or equity as a result of the Responding Member's default.
(c) The Initiating Member may make an election pursuant to
Section 10.7.4(a) by delivering written notice of its election to the Responding
Member, with a copy to each Other Member, at any time after the date specified
in Section 10.7.6(a) for the closing of the purchase and sale of the Initiating
Member's Units and Membership Interest and prior to such time, if any, as the
Responding Member stands ready, willing, and able to purchase the Initiating
Member's Units and Membership Interest in accordance with this Section 10.7.
10.7.5 Purchase and Sale of Other Member's Units and Membership
Interests
(a) If the Responding Member accepts the Initiating
Member's offer to sell to the Responding Member all of the Initiating Member's
Units and Membership Interest,
-36-
<PAGE> 145
the Responding Member may elect to purchase all, but not less than all, of the
Units and Membership Interest of each of the Other Members for a price per Unit
equal to the Unit Price and otherwise on the terms and subject to the conditions
set forth in this Section 10.7. The Responding Member shall make an election to
purchase the Units and Membership Interests of the Other Members pursuant to
this Section 10.7.5 by delivering written notice of its election to each Other
Member, with a copy to the Initiating Member, concurrently with its delivery to
each Other Member of a copy of the Acceptance Notice pursuant to Section 10.7.3.
(b) If the Responding Member accepts or is deemed
to accept the Initiating Member's offer to purchase all of the Responding
Member's Units and Membership Interest, the Initiating Member may elect to
purchase all, but not less than all, of the Units and Membership Interest of
each of the Other Members for a price per Unit equal to the Unit Price and
otherwise on the terms and subject to the conditions set forth in this Section
10.7. The Initiating Member shall make an election to purchase the Units and
Membership Interests of the Other Members pursuant to this Section 10.7.5 by
delivering written notice of its election to each Other Member, with a copy to
the Responding Member, within twenty (20) Business Days after receipt by the
Initiating Member of the Acceptance Notice.
(c) If the Initiating Member elects pursuant to
Section 10.7.4(a)(1) to purchase all of the Responding Member's Units and
Membership Interest, the Initiating Member may elect to purchase all, but not
less than all, of the Units and Membership Interest of each of the Other Members
for a price per Unit equal to the Unit Price and otherwise on the terms and
subject to the conditions set forth in this Section 10.7. The Initiating Member
shall make an election to purchase the Units and Membership Interests of the
Other Members pursuant to this Section 10.7.5(c) by delivering written notice of
its election to each Other Member, with a copy to the Responding Member,
concurrently with its delivery to the Responding Member and each Other Member of
a copy of its election pursuant to Section 10.7.4(a)(1).
10.7.6 General Terms Applicable to Purchase and Sale of
Membership Interests.
(a) The closing of the purchase and sale of a
Member's Units and Membership Interest in accordance with this Section 10.7
shall occur not later than (1) if no governmental consents or approvals are
required in connection with the sale of each selling Member's Units and
Membership Interest, no later than ninety (90) calendar days after the
Responding Member's receipt of the Buy/Sell Notice pursuant to Section
10.7.2(a), or the Responding Member's receipt of the Initiating Partner's
election pursuant to Section 10.7.4(a)(1), whichever is applicable, or (2) in
all other cases, the later of thirty (30) calendar days after the receipt of all
governmental consents and approvals required in connection with the sale of all
selling Members' Units and Membership Interest or the date specified in clause
(1).
(b) The closing of the purchase and sale of a
Member's Units and Membership Interest in accordance with this Section 10.7
shall take place at the principal office of the Company or at any other location
agreed to by Cox and MP3.
(c) Prior to the closing of any purchase and sale
of a Member's Units and Membership Interest pursuant to this Section 10.7, the
purchasing Member shall use commercially reasonable efforts to obtain such
financing as may be necessary in order to enable
-37-
<PAGE> 146
the purchasing Member to pay the entire purchase price in cash at the closing;
provided, however, that if such purchasing Member has not been able to obtain
such financing, the purchasing Member may pay at least 20% of the purchase price
for the Units and Membership Interest in cash and the balance of such purchase
price may be paid in the form of a promissory note, with a term not to exceed
one year, bearing interest at a rate equal to the Prime Rate plus two percent,
secured by the Units and Membership Interest and the other assets of such
purchasing Member, and subject to prepayment by such purchasing Member at any
time without penalty. At the closing of any purchase and sale of a Member's
Units and Membership Interest pursuant to this Section 10.7, the purchasing
Member shall pay or cause to be paid to the selling Member, by cash or other
immediately available funds (or by a promissory note to the extent permitted by
the preceding sentence), the purchase price for the Units and Membership
Interest being purchased and the selling Member shall deliver to the purchasing
Member (or its permitted assignee) good title, free and clear of any liens
(other than those created by this Agreement and those securing financing
obtained by the purchasing Member), to the Units and Membership Interest being
sold.
(d) Each Member and the Company shall bear its own
costs relating to any purchase and sale of a Member's Units and Membership
Interest pursuant to this Section 10.7, including attorneys' fees and filing
fees.
10.7.7 Restructuring of Transactions. The Members will undertake
to structure any purchase and sale of Units and Membership Interests pursuant to
this Section 10.7 in a manner that minimizes negative tax consequences to the
Members and the Company to the extent doing so would not materially adversely
affect any Member.
10.8 Termination of a Member. If, in the event of the Termination of a
Member (hereinafter a "Terminating Member"), the Terminating Member's trustee in
bankruptcy or successor-in-interest shall have only the rights of an assignee of
the right to receive Company distributions applicable to the Membership Interest
of such Terminating Member. In the event of the Termination of a Member, the
non-Terminating Members shall have the option to purchase the Membership
Interest owned by such Terminating Members pro rata based on the relative
Percentage Interests of such non-Terminating Members by serving written notice
upon such Terminating Member's administrator, conservator, liquidator or other
successor-in-interest within thirty (30) calendar days after the giving of
written notice to such Members that such Terminating Member is to be dissolved
or liquidated. If one or more of the non-Terminating Members do not elect to
purchase their pro rata portion of such Membership Interest, and gives written
notice of this decision to the other non-Terminating Members, the other
non-Terminating Member(s) may elect to purchase pro rata the remainder of the
Membership Interest of the Terminating Member. The price to be paid for such
Membership Interest shall be equal to the total Capital Contributions made by
the Terminating Member as of the date of dissolution or liquidation less any
distributions received by the Terminating Member as of the date of dissolution
or liquidation. The Sale of such Membership Interest to the Non-Terminating
Members shall be made within ninety (90) calendar days after the Non-Terminating
Members serve written notice of their intent to purchase the Terminating
Member's Interest, subject to extension for a maximum of one hundred twenty
(120) additional calendar days to the extent required to obtain all applicable
governmental, regulatory and other third party consents and approvals. The
purchase price shall be paid by an initial cash payment equal to 25% of the
total
-38-
<PAGE> 147
purchase price, and the remaining 75% shall be paid by the delivery of a
promissory note providing for five equal annual payments of principal, with
accrued interest at the Prime Rate, which promissory note may be prepaid at any
time without penalty.
10.9 Termination of Article 10 Provisions. Notwithstanding any other
provision of this Agreement, the provisions of this Article 10 shall be
terminated and be of no further force and effect from and after the date of the
consummation by the Company of an initial public offering of its Capital Stock.
ARTICLE 11
DISSOLUTION AND TERMINATION
11.1 Dissolution. Notwithstanding anything to the contrary contained in
this Agreement, the Company shall be dissolved upon the occurrence of any of the
following events:
11.1.1 Upon the requisite vote of the Management Committee
required pursuant to Section 8.5.1;
11.1.2 The entry of a decree of dissolution pursuant to Section
18-802 of the Delaware Act (a "Withdrawal Event"); or
11.1.3 May ___, 2049.
Except as expressly permitted in this Agreement, a Member shall not voluntarily
resign or take any other voluntary action that directly causes a Withdrawal
Event.
11.2 Effect of Commencement of Dissolution Proceedings. After the
commencement of dissolution, the Company shall cease to carry on its business,
except insofar as may be necessary to complete the winding up of its affairs,
but its separate existence shall continue until a certificate of cancellation
has been filed with the Delaware Secretary of State pursuant to Section 11.5 or
until a decree dissolving the Company has been entered by a court of competent
jurisdiction.
11.3 Winding Up, Liquidation, and Distribution of Assets.
11.3.1 Upon dissolution of the Company, the Management Committee,
or a Person selected by Supermajority Vote of the Management Committee to act as
a liquidating trustee (the "Liquidating Trustee"), shall wind up the affairs of
the Company pursuant to the following provisions. For any Fiscal Year of the
Company in which an event occurs resulting in the dissolution or liquidation of
the Company, and for each Fiscal Year thereafter, each item of income, gain,
loss or deduction which comprises the Company's Net Profit and Net Loss for any
such Fiscal Year shall be credited or charged to the Capital Accounts of the
Members (which Capital Accounts shall first be adjusted to take into account all
distributions made during the Fiscal Year) in accordance with Article 6. The
Management Committee or the Liquidating Trustee, as applicable, shall, as soon
as practicable, determine which assets, if any, will be distributed in kind to
the Members pursuant to Section 11.4. Thereafter, the Members or the Liquidating
Trustee, as applicable, shall Sell or otherwise liquidate the assets of the
Company,
-39-
<PAGE> 148
other than those that will be distributed in kind to Members, after which the
assets of the Company, or the proceeds therefrom, shall be distributed or used
as follows and in the following order of priority:
11.3.1.1 first, for the payment of the debts and
liabilities of the Company, and the expenses of liquidation;
11.3.1.2 second, to the setting up of any Reserves that
the Members or the Liquidating Trustee may deem reasonably necessary
(considering, among other things, the previous experiences of the Liquidating
Trustee with respect to the adequacy of Reserves) for any unforeseen or unfixed
or contingent liabilities or obligations of the Company; and
11.3.1.3 finally, any remaining assets will be distributed
to the Members in accordance with their positive Capital Account balances in
accordance with Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2).
11.3.2 Upon completion of the winding up, liquidation and
distribution of the assets, the Company shall be deemed terminated.
11.3.3 The Management Committee shall comply with any applicable
requirements of applicable law pertaining to the winding up of the affairs of
the Company and the final distribution of its assets.
11.4 Distributions In Kind on Liquidation. If the Management Committee
or the Liquidating Trustee, as applicable, shall, in its good faith judgment,
determine a sale or other disposition of part or all of the Company's assets
would cause undue loss to the Members, the Management Committee or the
Liquidating Trustee may distribute part or all of such remaining assets to the
Members in accordance with Section 11.3.1. If the Management Committee elects,
or the Liquidating Trustee elects to distribute any remaining assets in
liquidation of the Company pursuant to this Section 11.4, such assets shall be
distributed among the Members in accordance with Section 11.3.1 as if an amount
of cash equal to the fair market value of the assets (determined by the
Management Committee or the Liquidating Trustee, as applicable, as of the record
date for such distribution, but net of any liabilities to which the assets are
subject or that will be transferred to the recipient Members) were distributed
on the date of distribution. If a distribution is made both in cash and in kind,
such distribution shall be made so that, to the fullest extent practicable, the
percentage of the cash and assets distributed to each Member pursuant to this
Section 11.4 is identical. Distributions in kind of assets shall be deemed to be
made pro rata among the Members if made in proportion to the dollar amounts to
which each Member is entitled hereunder in such distribution. To the extent that
the Company holds Intellectual Property that would be of ongoing use to the
Members after the liquidation of the Company, the Management Committee shall
determine, by a Supermajority Vote, the terms upon which such Intellectual
Property shall be equitably distributed on a joint basis or jointly licensed to
the Members; provided, however, that any and all databases, customer lists,
customer registration information, data compilations and collections and
technical data developed or maintained by the Company shall be replicated and
each of Cox and MP3 shall obtain and have full unrestricted ownership rights to
a complete copy of such replicated information.
-40-
<PAGE> 149
11.5 Certificate of Cancellation. When all debts, liabilities and
obligations have been paid and discharged or adequate provisions have been made
therefor and all of the remaining property and assets have been distributed to
the Members, a certificate of cancellation shall be executed in duplicate and
verified by the Management Committee then in office or the Liquidating Trustee,
which certificate shall set forth the information required by the Delaware Act.
Duplicate originals of the certificate of cancellation shall be delivered to the
Delaware Secretary of State.
11.6 Effect of Filing Certificate of Cancellation. Upon the issuance of
the certificate of cancellation, the existence of the Company shall cease. The
Management Committee or the Liquidating Trustee shall have authority to
distribute any Company property discovered after dissolution, convey real estate
and take such other action as may be necessary on behalf of and in the name of
the Company.
11.7 Return of Contribution Nonrecourse to Other Members. Except as
provided by law or as expressly provided in this Agreement, upon dissolution,
each Member shall look solely to the assets of the Company for the return of its
Capital Contributions. If the Company property remaining after the payment or
discharge of the debts and liabilities of the Company is insufficient to return
the cash contribution of one or more Members, no Member shall have any recourse
against any other Member.
11.8 Withdrawal or Reduction of Members' Contributions to Capital. A
Member shall not receive out of the Company's property any part of its Capital
Contribution until all liabilities of the Company, except liabilities to Members
on account of their Capital Contributions, have been paid or provided for or
there remains property of the Company sufficient to pay them.
ARTICLE 12
CERTAIN ADDITIONAL COVENANTS AND
REPRESENTATIONS OF THE MEMBERS
12.1 Noncompetition.
12.1.1 Each of Cox and MP3 agree that, during the term of this
Agreement, neither Cox nor MP3 will, directly or through any Affiliates, without
the prior consent of the other, engage in, continue in or carry on any business
principally involved in, nor become or act as a stockholder, partner, joint
venturer or investor (other than as a holder of not more than five percent (5%)
of any class of securities of any corporation or other entity which securities
have been publicly registered under Section 12 of the Exchange Act) in, or
otherwise operate or manage, any Person that directly competes with the Company
in the business of creating, developing, marketing and licensing templated
websites for over-the-air commercial broadcast radio stations featuring
digitally embedded music differentiated by format. Nothing in this Section 12.1
shall be deemed to limit in any way the ability of Cox and its Affiliates to
own, operate, manage and provide content for its own local city websites.
12.1.2 During the term of this Agreement, the Company will not
directly or indirectly engage in any Competitive Activities. The term
"Competitive Activities" as used in
-41-
<PAGE> 150
this Section 12.1.2 shall mean: (i) engaging in, continuing in or carrying on
any business principally involved in, or that utilizes any technology for the
principal purpose of, enabling artists to upload or provide in any manner
digitally encoded music of any type and in any format (including, but not
limited to, MP3 Files) for subsequent distribution of such music to end users;
and (ii) engaging in any practice the purpose of which is to evade the
restriction in the preceding clause. The parties hereto agree that the Company
may engage in Competitive Activities and, upon a Majority Vote of the Management
Committee, change its name if MP3 is no longer reasonably considered one of the
top music upload companies in the world by its industry peers; provided that MP3
shall have first received a written notice from the Company specifying in
reasonable detail the basis for the determination that MP3 is no longer such a
top music site and MP3 shall have failed to cure such deficiency within six (6)
months after such notice. The parties hereto agree that this covenant not to
compete shall extend internationally throughout the world. The term "Competitive
Activities" shall not include the ownership of five percent or less of any class
of the securities of an Entity that is publicly registered under Section 12 of
the Exchange Act. The parties agree that MP3 may sell, assign or otherwise
transfer this covenant not to compete, in whole or in part, to any person,
corporation, firm or entity that purchases all or part of the Capital Stock or
all or substantially all of the assets of MP3. In addition, the Company shall
not solicit to employ (other than by way of generalized employment advertising
undertaken by the Company in the ordinary course of business) any employee of
Cox or MP3, without the prior consent of such party, at any time during the term
of this Agreement.
12.1.3 In addition to the other provisions of Section 12.1, and
not in limitation thereof, MP3 shall not, during the term of this Agreement,
directly or through any Affiliates (other than the Company) initiate
negotiations with over-the-air commercial broadcast radio stations for the
principal purposes of providing MP3's content to such radio stations or seeking
to acquire content from such radio stations for MP3.
12.1.4 In the event a court of competent jurisdiction determines
that the provisions of Section 12.1 are excessively broad as to duration,
geographical scope or activity, it is expressly agreed that this Section 12.1
shall be construed so that the remaining provisions shall not be affected, but
shall remain in full force and effect, and any such overbroad provisions shall
be deemed, without further action on the part of any person, to be modified,
amended and/or limited, but only to the extent necessary to render the same
valid and enforceable in such jurisdiction.
12.2 Confidentiality
12.2.1 Each Member agrees that except as may be required to be
disclosed pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the Securities Act of 1933, as amended (the "Securities
Act"), such Member will not, during the term of this Agreement or thereafter,
disclose, directly or indirectly, to any Person (other than to its Affiliates,
Subsidiaries, employees and/or agents in connection with such Member's
performance of its obligations hereunder) or copy, reproduce or use, any Company
Confidential Information or any other information belonging to the Company and
treated as confidential by the Company, known, learned or acquired by such
Member during the term of this Agreement except information already within the
knowledge of such Member or independently developed by such Member as evidenced
by written documentation pre-dating any such disclosure.
-42-
<PAGE> 151
12.2.2 Each Member agrees to take any and all actions reasonably
deemed necessary or appropriate by it to insure the continued confidentiality
and protection of the confidential information that it has agreed to keep
confidential pursuant to this Section 12.2. In the event that any Member is
requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
process) to disclose any of the confidential information that it has agreed to
keep confidential hereunder, it will provide the Company and each other Member
with prompt notice of such request so that the Company and/or any other Member
may seek an appropriate protective order or waive its compliance with the
provisions of this Section 12.2. In the event that such protective order or
other remedy is not obtained, or the Company or the other Members waive
compliance with the provisions of this Section 12.2, such Member agrees that it
will furnish only that portion of any confidential information that is legally
required and will exercise its reasonable efforts to obtain reliable assurance
that confidential treatment will be accorded to that portion of any confidential
information being disclosed.
12.3 Transactions Between a Member or Manager and the Company Generally.
Notwithstanding the fact that it may constitute a conflict of interest, the
Members may, and may cause their Affiliates to, engage in transactions with the
Company so long as such transactions are not prohibited by this Agreement and,
to the extent required hereunder, have been approved by a Supermajority Vote of
the Management Committee. In the event such a transaction has been approved by a
Supermajority Vote of the Management Committee, a Member or any Affiliate of a
Member shall have the same rights and obligations when transacting business with
the Company as any Person who is not a Member or an Affiliate of a Member.
12.4 Publicity. During the term of this Agreement, no Member shall, nor
shall any Member permit its respective controlled Affiliates or Subsidiaries,
directors, officers, employees, agents, advisors or Members to, issue any press
release or otherwise make any public statement or announcement concerning the
operations of the Company's business that has not been approved by a
Supermajority Vote of the Management Committee; provided, however, that no
Member shall be prevented at any time by this Section 12.4 from furnishing any
required information to any Governmental Agency or from complying with its legal
obligations under the Exchange Act, the Securities Act or any other applicable
laws; provided, further, however, that, notwithstanding any other provision of
this Agreement, MP3 shall consult with Cox concerning the disclosure of any
information (including the terms of this Agreement) relating to the Company or
its business or operations in the context of any registration statement or
periodic report filed by MP3 with the Securities and Exchange Commission and, to
the extent requested by Cox, MP3 will use reasonable efforts to obtain
confidential treatment for the relevant portions of this Agreement or any other
Company-related disclosure that is proposed to be made in such registration
statement or periodic report.
12.5 Independent Activities. Each Member and its Affiliates may engage
in whatever activities they choose without having or incurring any obligation to
offer any profit from or interest in such activities to the Company or any
Member, and neither this Agreement (except to the extent expressly provided in
Section 12.1) nor any activity undertaken pursuant hereto shall prevent any
Member or its Affiliates from engaging in such activities, or require any Member
or its Affiliates to permit the Company, any Member or its Affiliates to
participate in any such activities, and as a material part of the consideration
for the execution of this Agreement by each
-43-
<PAGE> 152
Member, each Member hereby waives, relinquishes and renounces any such right or
claim of participation.
12.6 Representations and Warranties of the Members. Each Member
represents and warrants to the other Members that, as of the date of its
admission to the Company:
12.6.1 All action required to be taken by such Member as a
condition to the issuance and Sale of the Membership Interests in the Company
being acquired by the Member has been taken.
12.6.2 This Agreement has been duly authorized, executed and
delivered by such Member and, upon due execution and delivery of the Agreement
by the other Members, will constitute the valid and legally binding obligation
of such Member.
12.6.3 The execution and delivery of the Agreement by such Member
and the performance of its duties and obligations hereunder do not result in a
breach of any of the terms, conditions or provisions of, or constitute a default
under such Member's certificate of incorporation, bylaws or similar
organizational instruments or, any indenture, mortgage, deed of trust, credit
agreement, note or other evidence of indebtedness, or any lease or other
agreement or understanding, or any license, permit, franchise or certificate, to
which such Member is a party or by which it is bound or to which its properties
are subject, or require any authorization or approval under or pursuant to any
of the foregoing, or violate any statute, regulation, law, order, writ,
injunction, judgment or decree to which such Member is subject.
12.7 Indemnification.
12.7.1 Each Member shall indemnify and hold harmless the Company,
each other Member, and their respective directors, officers and employees from
and against any and all losses, claims, damages, expenses or liabilities
(including without limitation reasonable attorneys fees) arising from (a) any
breach by such indemnifying Member of any of its representations or warranties
set forth herein, (b) any breach by such indemnifying Member of any of its
covenants or obligations set forth herein, or (c) any claim that the use by the
Company or the Radio Affiliates of any of the tools, technologies, or other
Intellectual Property rights to be furnished or made available by such
indemnifying Member pursuant to this Agreement infringes, violates or interferes
with the rights of any other Person.
12.7.2 The indemnifying Member hereunder shall have full control
of the defense of litigation relating to a claim for indemnity hereunder and may
settle, compromise or adjust the same; provided, that an indemnifying Member may
not consent to any entry of judgment or enter into any such settlement,
compromise or adjustment which does not include as an unconditional term thereof
the giving by the plaintiff or claimant to the indemnitees of a release of all
liability in respect of the claim, liability or litigation; and provided
further, however, that an indemnitee, upon relieving the indemnifying Member in
writing of the obligations imposed hereunder for defense and indemnification,
shall have the right, if it so elects, to conduct such litigation at its own
expense by its own counsel.
12.7.3 The above obligations for defense and indemnification
shall be imposed only if (i) the indemnitee sends to the indemnifying Member
timely written notice of first
-44-
<PAGE> 153
service of process upon the indemnitee and a timely written request to defend
the litigation (such notice and request shall be deemed timely if given within a
reasonable length of time after receipt of service by the indemnitee and a
reasonable length of time prior to the date by which first response to such
process is legally required, considering all the circumstances); (ii) while such
litigation is pending, the indemnitee, upon request, shall furnish to the
indemnifying Member all relevant facts and documentary material in the former's
possession or under its control, and shall make its employees or other persons
under its control with knowledge of relevant facts reasonably available to the
indemnifying Member for consultation and as witnesses at their customary places
of business; and (iii) the indemnitee does not enter into any settlement
relating to any claim for which it requests indemnification hereunder without
the prior approval of the indemnifying Member.
ARTICLE 13
CERTAIN MATTERS RELATING TO THE OPERATION OF THE COMPANY'S BUSINESS
13.1 Integration of MP3 Website and the Affiliate Websites. The initial
integration of the Affiliate Websites with the MP3 Website is illustrated by the
sample screen shots included as part of the Initial Business Plan (on page 6
thereof) attached hereto as Exhibit B, and each of Cox, MP3 and the Company
shall use its commercially reasonable efforts to achieve the overall integration
of the Affiliate Websites with the MP3 Website as contemplated in Exhibit B. In
addition to the foregoing, and not in limitation thereof, each of Cox, MP3 and
the Company agree to each of the following:
13.1.1 MP3 shall produce for the Company, at no cost to the
Company, the [***] and the [***]. MP3 shall use commercially reasonable efforts
to enable users to link to the [***] and the [***] within two (2) clicks of the
[***] homepage. MP3 shall provide graphical links on the MP3 Website homepage to
an appropriate [***]. Each [***] shall feature: (i) one graphical link to an
appropriate [***] and (ii) one graphical link to an appropriate [***]. Subject
to the foregoing provisions of this Section 13.1.1, the size and placement of
the links shall be mutually agreed upon by the Company and MP3, with the
understanding that the final result must be consistent with the then current
overall design strategy and implementation of the MP3 Website.
13.1.2 Subject to the terms of this Section 13.1.2, both the
[***] Pages and the [***] Affiliates Pages shall be owned, produced, hosted and
maintained by MP3 and all traffic on such pages shall be counted as traffic for
MP3 for purposes of audience reach technologies used by standard Internet
audience reporting agencies (e.g., Media Metrix) (all such audience reach
measurement, "Audience Reach"). All advertising inventory on the [***] Pages
and on the [***] Affiliates Pages shall be allocated to the Company, except that
[***] of the sponsorship inventory on the [***] Pages shall be allocated to
MP3. All revenue (net of reasonable advertising sales commissions and agency
fees) generated by the Company's sale of advertising inventory on the [***]
Pages and the [***] Affiliates Pages shall be [***] the Company and MP3. All
user data generated by the [***] Pages and [***] Affiliates Pages shall be
available to both MP3 and the Company. Each [***] Affiliates Page and each [***]
Page shall feature graphical links to
* CONFIDENTIAL TREATMENT REQUEST(ED)
-45-
<PAGE> 154
appropriate [***], with the size and placement of such links to be
mutually agreed upon by the Company and MP3.
13.1.3 The Affiliate Websites shall be produced and hosted by the
Company and all traffic on such pages shall be counted as traffic for the
Company for purposes of Audience Reach. The Affiliate Websites shall feature a
"Powered by MP3.com" brand, which shall be prominently displayed at the top of
the Affiliate Website homepage and all other pages at least equal in size to the
Radio Affiliate's logo or name (provided that any typeface for the words
"Powered by" shall be approximately 75% of the size of the typeface size used on
such page for the Radio Affiliate's logo or name. Each Affiliate Website shall
contain promotional links to the MP3 Website and appropriate links to the Band
Pages. MP3 shall provide, at no cost to the Company or Radio Affiliates,
genre-focused content, including graphical links to appropriate Band Pages, to
be used on the Affiliate Websites (such as, for example, the "Free Music Area"
section of the example Affiliate Website shown on page 5 of the Initial Business
Plan). Initially, each page shall include at least two banner and two
sponsorship availabilities. The size, placement and frequency of the brand and
these promotional links shall be mutually agreed upon by the Company and MP3,
with the understanding that the final result must be consistent with the then
current overall design strategy and implementation for the Affiliate Websites.
The bottom of each page of an Affiliate Website may also be branded with any
brand developed by the Company for purposes of branding its network of Affiliate
Websites.
13.1.4 Subject to the terms of this Section 13.1.4, each [***]
Page shall be owned, produced, hosted and maintained by MP3 and all traffic on
such pages shall be counted as traffic for MP3 for purposes of Audience Reach.
Each [***] Page shall feature branding for the appropriate Affiliate Website
from which end user traffic is linked. All advertising inventory on each [***]
Page shall be available to the Company and all revenue generated by the sale of
advertising inventory shall [***]. All user data generated by the [***] Pages
shall be available to both MP3 and the Company. MP3 shall provide monthly
reports to the Company regarding click through rates and page view information
for traffic to the [***] Pages that originates from the Affiliate Websites.
13.1.5 The Company may share a portion of its advertising
inventory on the Affiliate Website with Radio Affiliates, under such terms as
may be determined by the Management Committee. For any advertising sold by the
Company, the Company shall be responsible for the account management, billing
and collections from the client. The Company shall control and set pricing for
all sales of such advertising inventory. The Company will coordinate advertising
placements in order to avoid conflicts between advertising displayed on the
pages of the Affiliate Websites, the Radio Affiliates Pages, the Local Genre
Pages, the Band Pages and the MP3 Website.
13.1.6 The Company and MP3 shall reasonably cooperate to develop
other mutually agreeable programs and opportunities to co-market and
cross-promote the network of the Affiliate Websites and the MP3 Website. The
Company shall use commercially reasonable efforts to promote the MP3.com brand
as one of the purposes of this Agreement.
* CONFIDENTIAL TREATMENT REQUEST(ED)
-46-
<PAGE> 155
13.2 Additional Services and Licenses to be Provided by MP3
13.2.1 MP3 shall provide the Company, at no cost to the Company,
with content elements appropriate for each radio format for use by Affiliate
Websites and with such tools, technical support and consultative services as may
be reasonably requested by the Company to enable the Company to create its own
content elements for the Affiliate Websites using MP3 File functionalities (such
as, for example, the [***] section of the example Affiliate Website shown on
page 5 of the Initial Business Plan). MP3 shall provide the Band Pages, at no
cost to the Company, with all necessary facilities, servers, connectivity,
software and related equipment, tools and technology required to permit the
playback or downloading of MP3 Files. The resources to be provided by MP3 in
this regard shall include tools and technology that will enable end users of the
Band Pages to download, at no cost, any software typically required for end
users to utilize the services proposed to be offered by the Band Pages;
provided, however, that if special third party commercial software is required
for any specific special or premium service participation, then the end users
may be required to pay standard fees, if any, for such software and/or
participation. Notwithstanding the foregoing, the parties specifically agree
that the Company will not provide the playback, downloading or uploading of MP3
Files on its own servers.
13.2.2 For the term of this Agreement, MP3 also shall make
available to the Company, at a cost not to exceed MP3's direct incremental costs
therefor, facilities, servers, connectivity, software and related equipment, and
tools and technology currently available to MP3 (with MP3 to use its
commercially reasonable efforts to develop additional [***] functionality to be
made available on substantially similar terms to the Company), which is required
to enable end users of the Affiliate Websites to link to [***]. Such [***] may
originate from a website hosted on MP3's servers. In addition, for the term of
this Agreement, MP3 shall make available to the Company, at a cost not to exceed
MP3's direct incremental costs therefor, such facilities, servers, connectivity,
software and related equipment, tools, technology and associated Intellectual
Property rights or licenses as may be necessary to enable end users of the
Affiliate Websites to create unique "Digital Audio Music" ("DAM") CDs (or
similar successor technology) of material directly related to the broadcast
business of the Radio Affiliates (all such DAM CDs, "Affiliate DAM CDs"), and
MP3 shall provide back-end and fulfillment support for orders of such Affiliate
DAM CDs. Affiliate DAM CDs may include material such as catalogs of top hits
featured in the broadcasts of the Radio Affiliates, but any other material for
Affiliate DAM CDs shall be as reasonably agreed to by MP3 and the Company. Such
Affiliate DAM CD functionality may be provided by a link from the Affiliate
Website to a website on MP3's servers or to the MP3 Website.
13.2.3 MP3 hereby grants the Company a non-exclusive,
royalty-free license, which license shall expire concurrently with the
termination of this Agreement, at a cost not to exceed MP3's direct incremental
costs therefor, to any software it has developed to date in connection with the
development of website architecture and tools that will permit the Affiliate
Websites to feature e-mail and listserve functionalities similar to those
available on the MP3 Website. MP3 shall reasonably consult with the Company in
connection with the development
* CONFIDENTIAL TREATMENT REQUEST(ED)
-47-
<PAGE> 156
of such website architecture and tools that will permit the Affiliate Websites
to feature e-mail and listserve functionalities similar to those available on
the MP3 Website.
13.2.4 Intellectual Property.
(a) Subject to the terms of this Agreement, MP3 hereby
grants (or shall cause Michael L. Robertson, its Chief Executive Officer, to
grant) to the Company an exclusive, worldwide, royalty-free license to use the
MP3RADIO Mark (as defined below) as its trade name, its second-level domain
name, and as a trademark and/or service mark solely in connection with the
activities described in Section 4.1. The "MP3RADIO Mark" shall mean the
trademark and/or service mark MP3RADIO.COM. MP3 acknowledges that the Company
may register and use the MP3Radio.com domain name in its own name; however, the
Company acknowledges MP3's ownership of the MP3RADIO Mark and acknowledges that
the Company's use of the MP3RADIO Mark will not create in it, nor will it
represent it has, any right, title or interest in or to the MP3RADIO Mark other
than the license granted herein. The Company will not challenge the validity of
or attempt to register the MP3RADIO Mark or its interest therein as a licensee,
nor will it adopt any confusingly similar names, brands or marks or create any
combination marks that incorporate the MP3RADIO Mark without the prior written
consent of MP3, which consent shall not be unreasonably withheld. The Company
may offer products and/or services using the MP3RADIO Mark that are made or
provided at standards of quality reasonably comparable to those associated with
MP3's own goods and services offered under the MP3.COM mark. If at any time such
products or services shall, in the reasonable judgment of MP3, fail to conform
to the required standards of quality, MP3 shall so notify the Company. Upon
receipt of such notification, the Company shall immediately initiate steps to
bring any quality substandard product or service up to the level reasonably
required by MP3 and shall effect such conformance or cure within 60 days or such
longer period of time as may be agreed to in writing by the parties. In the
event that conformance or a cure is not effected within such 60 day period and
such failure constitutes a material breach of this Agreement, then the license
granted under this Section 13.2.4 (a) shall be terminated upon written notice
from MP3 of termination, and the Company agrees to change its trade name to
remove the MP3RADIO Mark therefrom and to refrain from marketing, selling,
delivering and/or supporting any product or service which uses or reflects the
MP3RADIO Mark. If, however, the Company disagrees with MP3's judgment that the
Company has failed to conform with the required standards of quality and the
Company institutes legal proceedings to challenge such determination by MP3, the
license shall remain in effect until there is a final, non-appealable
determination by a court of competent jurisdiction as to whether or not the
Company has, in fact, conformed with the required standards of quality. Within
30 days of the effective date of such termination, the Company shall assign all
rights in and to the MP3Radio.com domain name to MP3 and take all required
action with InterNIC or its successor to effect such assignment. In the event of
such termination, MP3.com shall reasonably cooperate in allowing limited use of
the MP3RADIO Mark and the MP3Radio.com domain name by the Company during an
interim transition period. Unless terminated in accordance with this Section
13.2.4(a), the license to the MP3RADIO Mark granted herein shall be perpetual
and survive termination or expiration of this Agreement and the sale or transfer
of all or substantially all of the Company's business.
(b) Subject to the terms and conditions of this Agreement,
MP3 grants to the Company a non-exclusive worldwide royalty-free limited license
to use the MP3
-48-
<PAGE> 157
Trademarks (as defined below) solely in connection with the activities described
in Section 4.1 of this Agreement. "MP3 Trademarks" shall mean the following
trademarks and/or service marks and any associated logos or designs: (i)
"D.A.M." (ii) "DIGITAL AUTOMATIC MUSIC" (iii) "POWERED BY MP3" (iv) "MP3.COM"
and (v) any other marks identified in writing by MP3. The Company may offer
products and/or services using the MP3 Trademarks that are made or provided at
standards of quality reasonably comparable to those associated with MP3's own
goods and services offered under the MP3.COM mark. If at any time such products
or services shall, in the reasonable judgment of MP3, fail to conform to the
required standards of quality, MP3 shall so notify the Company. Upon receipt of
such notification, the Company shall immediately initiate steps to bring any
quality substandard product or service up to the level reasonably required by
MP3 and shall effect such conformance or cure within 60 days or such longer
period of time as may be agreed to in writing by the parties. In the event that
conformance or a cure is not effected within such 60 day period and such failure
constitutes a material breach of this Agreement, then the license granted under
this Section 13.2.4 (b) shall be terminated upon written notice from MP3 of
termination. If, however, the Company disagrees with MP3's judgment that the
Company has failed to conform with the required standards of quality and the
Company institutes legal proceedings to challenge such determination by MP3, the
license shall remain in effect until there is a final, non-appealable
determination by a court of competent jurisdiction as to whether or not the
Company has, in fact, conformed with the required standards of quality. The
Company shall place a 7 or (tm) (as appropriate) with the MP3 Trademarks as
requested by MP3. The Company acknowledges that the Company's use of the MP3
Trademarks will not create in it, nor will it represent it has, any right, title
or interest in or to the MP3 Trademarks other than the license granted by MP3
above. The Company will not challenge the validity of or attempt to register any
of the MP3 Trademarks or its interest therein as a licensee, nor will it adopt
any confusingly similar names, brands or marks or create any combination marks
with the MP3 Trademarks. The Company acknowledges MP3's ownership of the MP3
Trademarks and agrees that all goodwill arising as a result of the use of the
MP3 Trademarks shall inure to the benefit of MP3. The Company shall be permitted
to grant limited sublicenses to use of the MP3 Trademarks only to Radio Station
Affiliates, and solely in connection with the activities described in Section
4.1 of this Agreement and subject to terms that shall be no less protective of
MP3 than the terms provided for in this Section 13.4.2(b).
13.3 User Data.
MP3 shall reasonably consult with the Company in connection with the
development of website architecture and tools for the collection and analysis of
registration information and other end user data, traffic patterns and user
feedback related to the Affiliate Websites (all such architecture and tools,
"Database Marketing Functionality"). The Company shall develop policies
regarding the confidential treatment of such data, consistent with industry
standards on privacy and data use. MP3 hereby grants the Company a
non-exclusive, royalty-free license, which license shall expire concurrently
with the termination of this Agreement, at a cost not to exceed MP3's direct
incremental costs therefor, to any software it now has that will enable the
Company to implement Database Marketing Functionality. All end user data
collected by the Company or its Radio Affiliates shall be owned and may be used
by such parties, subject to such privacy and data use policies as the Company
may implement, for the purposes of improving the services made available to end
users of the Affiliate Websites, for
-49-
<PAGE> 158
targeting advertising, for communications to end users, in the aggregate for
reporting information about the services of the Company and its Affiliates
Websites and for any other purpose commonly available to the owners of such
data. Both the Company and MP3 agree, in connection with end user data, to use
commercially reasonable efforts to abide by the privacy policies of the other
party as such polices are amended from time to time.
13.4 E-Commerce Transactions Revenue.
13.4.1 The Company shall receive [***] of the gross revenues
actually received and collected by MP3 from MP3.com e-commerce transactions
(which shall include, without limitation, sales of DAM CDs, concert tickets,
music-oriented merchandise and paraphernalia and similar goods and services and
other commercial transactions in which an end user purchases goods or services
online through the MP3 Website, either directly from MP3 or from a third party
with whom MP3 has a revenue or fee sharing relationship or other similar
contractual relationship) that results from end user traffic during a session
that originates from the Affiliate Websites and links directly to the MP3
Website (which shall include for purposes of this Section 13.4.1 the Local Genre
Pages and the Radio Affiliates Pages). The Company may share a portion of such
percentage of revenues with its Radio Affiliates, under such terms as may be
determined by the Management Committee.
13.4.2 MP3 shall receive [***] of the gross revenues actually
received and collected by the Company from Company e-commerce transactions
(which shall include, without limitation, sales of DAM CDs, concert tickets,
music-oriented merchandise and paraphernalia and similar goods and services and
other commercial transactions in which an end user purchases goods or services
online through an Affiliate Website, either directly from the Company or from a
third party with whom the Company has a revenue or fee sharing relationship or
other similar contractual relationship) that results from end user traffic
during a session that originates from the MP3 Website (which shall not include
for purposes of this Section 13.4.2 the Local Genre Pages and the Radio
Affiliates Pages) and links to the Affiliate Websites, either directly or
through the Local Genre Pages or Radio Affiliates Pages.
13.4.3 The revenue sharing arrangements specified herein shall
not apply to any transaction involving a product where the gross revenues
actually received and collected by such party with respect to such product is
less than the direct cost to the seller.
13.4.4 These arrangements for the sharing of revenues from
MP3.com transactions and Company transactions shall be subject to review by the
Company and MP3 every two years in order to determine whether such
revenue-sharing arrangements remain equitable in light of other generally
prevalent industry standards and practices with regard to revenue-sharing for
comparable e-commerce transactions. If the parties mutually agree that such
revenue-sharing arrangements should be modified, the parties shall negotiate in
good faith to agree upon appropriate modifications.
13.5 Payments; Audits.
13.5.1 At the end of each quarter in which MP3 or the Company,
respectively, actually receives payments of e-commerce transactions of the type
described in Section 13.4 or advertising revenue of the type described in
Section 13.4 or advertising revenue of the type described in Section 13.1.2,
MP3 or the Company, as the
* CONFIDENTIAL TREATMENT REQUEST(ED)
-50-
<PAGE> 159
case may be, shall prepare a quarterly statement providing sufficient detail
regarding the source of such e-commerce transaction or advertising revenue and
will deliver such statement along with the required payment described therein to
the Company or MP3, respectively, no less than thirty (30) calendar days
following such date.
13.5.2 MP3 and the Company shall each have the right, upon
reasonable written notice to the other party, to inspect, or have its agent
inspect, subject to such confidentiality requirements as may reasonably be
imposed by the other party, such other party's books and records and all other
documents and material in the possession of or under its control with respect to
all amounts described in this Agreement at the place or places where such
records are normally retained by MP3 or the Company, respectively. MP3 or the
Company or their agents shall have free and full access thereto during normal
business hours for such purposes and shall be permitted to be able to make
copies thereof and extracts therefrom. In the event that an inspection reveals a
discrepancy in the amount of any payments owed MP3 or the Company from what was
actually paid, the Company or MP3 shall promptly pay such discrepancy. In the
event that such discrepancy is in excess of five percent (5%) of the payments
due for the period audited, the Company or MP3, as appropriate, shall reimburse
the other party for the reasonable costs of performing the audit.
13.6 Cox Radio Stations; Other Radio Affiliates
13.6.1 Cox shall cause the commercial radio broadcast stations
(collectively, the "Cox Radio Stations") owned and operated by Cox Radio Inc.
("CRI") to become Radio Affiliates of the Company (subject to CRI's reasonable
determination as to suitability, based on radio station format, of such
affiliation). As a group, the Cox Radio Stations that become Radio Affiliates
shall have "most favored nation" status, relative to other commercial radio
broadcast station groups that become Radio Affiliates and that are similarly
situated to the Cox Radio Stations (in terms of market size, audience and/or
advertising revenues), for their respective affiliation arrangements with the
Company. The initial allocation of advertising inventory and revenue from
e-commerce transactions on the Affiliate Websites of the Cox Radio Stations that
become Radio Affiliates shall be set at [***].
13.6.2 Cox shall use commercially reasonable efforts to solicit
commercial radio broadcast stations (other than Cox Radio Stations) to become
Radio Affiliates.
13.6.3 The affiliation agreements between the Company and its
Radio Affiliates shall generally be exclusive by format in each radio market. If
CRI acquires a Cox Radio Station in a particular market in which the Company
already has an exclusive affiliation agreement with another Radio Affiliate in
the same format, the Cox Radio Station shall be permitted to become the
Company's exclusive Radio Affiliate for such format within that radio market
upon the expiration or earlier termination of the affiliation agreement of such
other Radio Affiliate and the Company shall not renew any affiliation agreement
of a Radio Affiliate in a particular market following the acquisition by CRI of
a Cox Radio Station in such market having the same format as such Radio
Affiliate.
* CONFIDENTIAL TREATMENT REQUEST(ED)
-51-
<PAGE> 160
ARTICLE 14
Miscellaneous Provisions
14.1 Incorporation; Public Offering.
14.1.1 The Management Committee, upon approval by a Supermajority
Vote, may in connection with a proposed initial public offering by the Company,
cause the incorporation of the Company or all of the Company's assets into a
corporate form pursuant to a Reorganization. As used herein, a "Reorganization"
shall include each of the following transactions:
(a) The contribution and/or sale, exchange, lease,
transfer, disposition or conveyance to any Person(s) formed by the Company or
its Affiliates for the purpose of effecting the Reorganization of all or
substantially all of the Company's (and, if appropriate, its Subsidiaries')
assets and liabilities;
(b) The merger or consolidation of the Company with or
into any Person(s) formed by the Company or its Affiliates for the purpose of
effecting the Reorganization;
(c) The contribution, transfer, disposition or conveyance
to any Person(s) formed by the Company or its Affiliates for the purpose of
effecting the Reorganization of all of the Interests in the Company; or
(d) Any other transaction or series of transactions
involving the Company that has the effect of any of the transactions described
in (a), (b) or (c) above, or which otherwise causes or results in the
incorporation of the Company or the Company's (and, if appropriate, its
Subsidiaries') assets.
Any Person that succeeds to the assets of the Company (and/or its Subsidiaries,
if appropriate) is hereinafter referred to as the "Successor".
14.1.2 Upon any Reorganization, if determined by the Management
Committee (subject to approval by a Supermajority Vote) to be appropriate under
the circumstances, the Company shall be liquidated, and the consideration
received as part of the Reorganization shall be distributed to the Members in
accordance with the provisions of Article 11.
14.1.3 Following the approval of a Reorganization pursuant to
this Section 14.1, the Members shall, subject to the other provisions of this
Section 14.1, execute all instruments and documents that may be required to best
effectuate such Reorganization, consistent with the terms and conditions of this
Agreement, while continuing in full force and effect the terms, provisions and
conditions of this Agreement, to the fullest extent consistent with such
Reorganization, as determined by the Management Committee (subject to approval
by a Supermajority Vote).
14.1.4 Following the approval of a Reorganization pursuant to
this Section 14.1, the Management Committee shall cause a registration for a
public offering or sale of Capital
-52-
<PAGE> 161
Stock of the Company (or the Successor, as the case may be) to be effected in
accordance with the terms and conditions of this Agreement and such additional
terms and conditions, consistent therewith, as may be determined by the
Management Committee (subject to approval by a Supermajority Vote). At the
request of the Management Committee, the Members shall execute all documents as
may be determined by the Management Committee to be reasonably necessary in
connection with any such public offering.
14.1.5 Notwithstanding anything to the contrary continued herein,
in the event of any registration for public offering or sale of Capital Stock of
the Company or the Successor, effective upon the consummation of such public
offering, this Agreement and any instruments or documents executed in connection
with a Reorganization (including all documents and instruments entered into
pursuant to Section 14.1.3 above) shall be amended or modified (i) to modify or
eliminate all special consent or voting rights or other powers or voting rights
given to Members or Representatives, (ii) to change the provisions relating to
expiration of the term of the Company (or the Successor); (iii) to modify or
eliminate any other provisions, in each case to the extent that any such
modifications are approved by the Management Committee, by a Supermajority Vote,
and determined to be beneficial to the proposed public offering in the judgment
of the managing underwriter (as chosen for participation in the public offering
by the Management Committee, by a Supermajority Vote); and (iv) to eliminate
Article 10 of this Agreement. In the event of such approval by the Management
Committee and such determination by the underwriter, each Member shall be bound
by such approval and determination, and the Management Committee shall be
authorized to execute, on behalf of such Members, the appropriate amendments or
modifications to such agreements, documents and instruments.
14.1.6 Notwithstanding anything contained in this Section 14.1 to
the contrary, it is understood and agreed that in connection with a registration
for a public offering or sale of Capital Stock of the Company or the Successor
that (i) the Capital Stock received by each Member in respect of its Units shall
be the same Capital Stock being offered to the public; (ii) any limitations
imposed on shares of Capital Stock pursuant to a "lock-up" or similar agreement
required by the managing underwriter shall be on terms customary in initial
public offerings or secondary public offerings; and (iii) a Member shall have
the right to participate, pro rata relative to its Percentage Interests, in any
registration rights that the Management Committee may determine, by a
Supermajority Vote, to provide for in connection with the Reorganization.
14.2 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly signed
or made as of the date delivered if delivered personally or by overnight
courier, when confirmed by telephone if delivered by facsimile, or three (3)
Business Days after being mailed by registered or certified mail (postage
prepaid, return receipt requested), to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice,
except that notices of changes of address shall be effective upon receipt):
-53-
<PAGE> 162
if to Cox:
Cox Enterprises, Inc.
1400 Lake Hearn Drive
Atlanta, GA 30319
Attention: Mr. William L. Killen, Jr.
with a copy to:
Dow, Lohnes & Albertson, PLLC
1200 New Hampshire Avenue, NW
Washington, D.C. 20036
Attention: Edward J. O'Connell, Esq.
if to MP3:
MP3.com, Inc.
10350 Science Center Drive
Building 14
San Diego, California 92121
Attention: President
with a copy to:
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, California 92121
Attention: Frederick T. Muto, Esq.
if to the Company:
MP3Radio.com L.L.C.
c/o Cox Interactive Media, Inc.
1400 Lake Hearn Drive
Atlanta, Georgia 30319
Attention:
14.3 Application of Delaware Law. This Agreement, and the application or
interpretation hereof, shall be governed exclusively by its terms and by the
laws of the State of Delaware, and specifically the Delaware Act.
14.4 Waiver of Action for Partition. Except as otherwise expressly
provided in this Agreement, the Members hereby specifically renounce, waive and
forfeit all rights, whether arising under contract or statute or by operation of
law, to seek, bring or maintain any action in any court of law or equity for
partition of the Company, or any interest that is considered to be Company
property, regardless of the manner in which title to any such property may be
held.
-54-
<PAGE> 163
14.5 Amendments. This Agreement may be amended, and any provisions
hereof may be waived, only by the prior written consent of each of Cox and MP3;
provided, however, that once either Cox or MP3 holds a Percentage Interest of
less than 15%, this Agreement may be amended by a Supermajority Vote of the
Management Committee.
14.6 Execution of Additional Instruments; Power of Attorney.
14.6.1 Each Member agrees to execute, with acknowledgment or
affidavit, if required, any and all documents and writings that may be expedient
in connection with the continuance of the Company and the achievement of its
purposes, specifically including (i) all amendments of this Agreement adopted
pursuant to this Agreement, (ii) any certificates and other documents as the
Manager reasonably deems necessary or appropriate to qualify the Company to do
business as a limited liability company in all jurisdictions in which the
Company conducts or plans to conduct business or owns or plans to own property
and (iii) all such agreements, certificates, tax statements, tax returns and
other documents as may be required of the Company or its Members by the laws of
the United States of America and the State of Delaware, or any other State in
which the Company conducts or plans to conduct business or owns or plans to own
property, or any political subdivision or agency thereof.
14.6.2 Compliance with Laws. At all times during the term of this
Agreement, the Company shall obtain and maintain all permits, licenses and
approvals as may be required by applicable law in order to engage in its
business as described herein, and shall otherwise engage in business in such a
manner so as to comply with all federal, state and local laws that may be
applicable to the Company or its business.
14.6.3 Headings. The headings in this Agreement are for
convenience only and are in no way intended to describe, interpret, define or
limit the scope, extent or intent of this Agreement or any of its provisions.
14.6.4 Waivers. The failure of any party to seek redress for
violation of or to insist upon the strict performance of any covenant or
condition of this Agreement shall not prevent a subsequent act, that would have
originally constituted a violation, from having the effect of an original
violation.
14.6.5 Rights and Remedies Cumulative. The rights and remedies
provided by this Agreement are cumulative and the use of any one right or remedy
by any party shall not preclude or waive the right to use any or all other
remedies. Said rights and remedies are given in addition to any other rights the
parties may have by law, statute, ordinance or otherwise.
14.7 Severability. If any provision of this Agreement or portion
thereof, or the application of such provision or portion thereof to any person
or circumstance, shall be held invalid, the remainder of this Agreement, or the
application of such provision or portion thereof to Persons or circumstances
other than those to which it is held invalid, shall not be affected thereby.
14.8 Successors, and Assigns. Each and all of the covenants, terms,
provisions, and agreements contained in this Agreement shall be binding upon and
inure to the benefit of the parties hereto and, to the extent permitted by this
Agreement, their respective successors and
-55-
<PAGE> 164
assigns. Neither party may assign this Agreement (by operation of law or
otherwise) to any Person (other than an Affiliate) without the prior written
consent of the other party except in connection with a sale of all or
substantially all of such first party's business.
14.9 Creditors. None of the provisions of this Agreement shall be for
the benefit of or enforceable by any creditors of the Company.
14.10 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same instrument.
14.11 Private Placement. These Units have been issued in reliance on an
exemption from the registration requirements of the Securities Act.
14.12 Integration. This Agreement constitutes the entire agreement among
the parties hereto pertaining to the subject matter hereof and supersedes all
prior agreements and understandings pertaining thereto.
-56-
<PAGE> 165
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
COX INTERACTIVE MEDIA, INC.
By:________________________________________
Name:
Title:
MP3 COM, INC.
By:_________________________________________
Name:
Title:
-57-
<PAGE> 166
EXHIBIT A
MP3Radio.com L.L.C.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
INITIAL MEMBER
INITIAL CAPITAL INITIAL PERCENTAGE
MEMBER CONTRIBUTION COMMITMENT UNITS INTEREST
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cox Interactive Media, Inc. $16,050,000 535 53.5%
1400 Lake Hearn Drive, N.E.
Atlanta, Georgia 30319
- --------------------------------------------------------------------------------------------
MP3Com, Inc. $13,950,000 465 46.5%
10350 Science Center Drive
Building 14
San Diego, California 92121
- --------------------------------------------------------------------------------------------
TOTAL $30,000,000 1,000 100.0%
- --------------------------------------------------------------------------------------------
</TABLE>
Exhibit-A
<PAGE> 167
Exhibit B
Business Plan
<PAGE> 168
MP3 RADIO.COM
BUSINESS PLAN
- CONFIDENTIAL - MAY 14, 1999
<PAGE> 169
MP3 RADIO.COM FORMAT SITES
EXTEND MP3.COM TO RADIO
[Graphic showing
mp3.com's formats]
[***] Rock Stations
[***] Country Stations
[***] Contemporary Stations
[***] Jazz Stations
[***] Urban Stations
[***] CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 170
SITE DESIGN & CONTENT
# Sites will be templated rather than customized
# Highly formatted . . . No local HTML
# Sites will be templated by genre
# Editorially oriented to the music format
# Sites will promote Internet music culture as opposed to radio music culture
# Licensed use of certain MP3.com technology
3
<PAGE> 171
SITE DESIGN & CONTENT (CONT'D)
# Branding of sites will include "powered by MP3.com"
# [***]
# Community tools
# [***]
# [***]
# URL: www.krld.mp3radio.com
# "MP3 Radio.com" name licensed to Joint Venture
4
[***] Confidential Treatment Request(ed)
<PAGE> 172
MP3 TRAFFIC TO MP3 RADIO.COM
[Graphic showing how traffic flows among the venture's web pages and the
distribution of revenues among the partners.]
<PAGE> 173
EXAMPLE OF SITE DESIGN
[Graphic showing design of two web pages in the joint venture's website]
<PAGE> 174
ADVERTISING & ECOMMERCE ON
MP3 RADIO.COM
# Each page will include at least [***] banner and [***]
sponsorship advertising opportunities
# [***] of ad inventory will be controlled by MP3 Radio.com
# Initially, [***] of inventory will be allocated to the affiliated radio
station
# MP3 Radio.com will receive [***] of the gross revenue to
MP3.com on transactions from MP3 Radio.com's traffic
(MP3.com will receive [***] of the gross revenue to MP3
Radio.com on transactions from MP3.com's traffic)
# Other third-party eCommerce opportunities to be
negotiated
[***] CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 175
TRAFFIC FROM MP3 RADIO.COM
TO MP3.COM "BAND PAGES"
# Traffic in the [***] will be counted as traffic and reach for MP3.com by
standard reporting agencies, e.g., Media Metrix
- I.e, MP3.com will serve these co-branded pages
# [***] of ad inventory will be controlled by MP3 Radio.com
- Initially, [***] of inventory will be allocated to the affiliated radio
station
# MP3 Radio.com will receive [***] of the gross revenue to MP3.com on
transactions from MP3 Radio.com's traffic (MP3.com will receive [***] of the
gross revenue to MP3 Radio.com on transactions from MP3.com's traffic)
[***] CONFIDENTIAL TREATMENT REQUEST(ED)
8
<PAGE> 176
PITCH TO RADIO STATIONS
# Use "free music" to connect with listeners
# Get data on your listener
- E-mail "acquisition & retention"
# Free first rate website
- Station branding
- [***]
# Initial [***] split of ad avails on local traffic
# Initial [***] split of eCommerce on station's traffic
# Coop marketing $ in market
# Unlimited promotional opportunities
[***] Confidential Treatment Request(ed)
9
<PAGE> 177
ROLE OF RADIO STATIONS
# Provide pre-determined level of on-air promotion to MP3 Radio.com site
# If desired, sell its initial [***] allocation of ad inventory
# If desired, radio station staff provides local content
[***] CONFIDENTIAL TREATMENT REQUEST(ED)
10
<PAGE> 1
EXHIBIT 10.23
* Confidential Treatment Requested Under
17 C.F.R. Section 200.80(b)4),
200.83 and 230.406
[MP3 LETTERHEAD]
SPONSORSHIP AGREEMENT
This Sponsorship Agreement ("Agreement") is made and entered into February 18,
1999 ("Effective Date"), by and between Xing Technology, Inc., located at 2925
McMillan, Suite 202, San Luis Obispo, CA 93401 USA ("Xing") and MP3.com, Inc.,
having an address at P.O. Box 910091, San Diego, CA 92191-0091 ("MP3.com").
MP3.com owns and operates the website located at www.mp3.com (the "Website").
1. Form of Sponsorship. During the term of this Agreement MP3.com shall
include the Xing Technology product Audiocatalyst (or other single Xing
product of Xing's choosing) on "The Best" pages for "Encoders", "CD
Rippers" and when a new product is available the "Players" and "All In One"
sections for both Windows and Macintosh users.
2. [***]. The product featuring a screenshot, promotional paragraph and rating
shall appear at the beginning of the "The Best" products listed. In the
event that [***] then [***]. In the event that [***], the product shall
remain on the pages and the terms of this contract shall still remain in
full force.
3. Sponsor Fees. Xing Technology agrees to pay MP3.com, during the term of
this Agreement, as follows: (i) [***] payable on the Effective Date; (ii)
[***] payable on or before one month subsequent to the Effective Date;
(iii) [***] payable on or before two months subsequent to the Effective
Date; (iv) [***] payable on or before three months subsequent to the
Effective Date; (v) [***] payable on or before four months subsequent to
the Effective Date; (vi) [***] payable on or before five months subsequent
to the Effective Date; (vii) [***] payable on or before six months
subsequent to the Effective Date; (viii) [***] payable on or before seven
months subsequent to the Effective Date; (ix) [***] payable on or before
eight months subsequent to the Effective Date; (x) [***] payable on or
before nine months subsequent to the Effective Date; (xi) [***] payable
on or before ten months subsequent to the Effective Date; [***] payable
on or before eleven months subsequent to the Effective Date. Any late
payments under this Agreement will be assessed a service fee of one and
one-half percent (1.5%) per month, to the extent allowed by law.
4. Impressions. MP3.com agrees to deliver a guaranteed minimum of [***]
Impressions during the first thirty (30) days. Thereafter, the number of
impressions delivered will increase at the rate of [***] impressions per
month for the term of this Agreement. The Impressions shall be delivered at
the rate of [***] per 1,000 impressions. An "Impression" is defined as the
display of the Xing banner to a user on the MP3.com site.
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 2
5. Impression Fees. Xing Technology agrees to pay MP3.com, during the term of
this Agreement, as follows: (i) [***] payable on the Effective Date; (ii)
[***] payable on or before one month subsequent to the Effective Date;
(iii) [***] payable on or before two months subsequent to the Effective
Date; (iv) [***] payable on or before three months subsequent to the
Effective Date; (v) [***] payable on or before four months subsequent to
the Effective Date; (vi) [***] payable on or before five months subsequent
to the Effective Date; (vii) [***] payable on or before six months
subsequent to the Effective Date; (viii) [***] payable on or before seven
months subsequent to the Effective Date; (ix) [***] payable on or before
eight months subsequent to the Effective Date; (x) [***] payable on or
before nine months subsequent to the Effective Date; (xi) [***] payable on
or before ten months subsequent to the Effective Date; [***] payable on or
before eleven months subsequent to the Effective Date; Any late payments
under this Agreement will be assessed a service fee of one and one-half
percent (1.5%) per month, to the extent allowed by law. If MP3.com fails to
deliver the required number of Impressions in any given period, Xing has
the option of either receiving additional Impressions in a subsequent
period to make good for the Impressions not delivered or to pay for only
those Impressions delivered.
6. Term and Termination. This Agreement shall commence on the Effective Date
and shall remain in full force and effect until 12 months subsequent to the
Effective Date.
7. Measurement. Upon request Xing shall have access to pertinent statistics
related to Impressions covering the period of this contract. Xing agrees to
accept MP3.com's measurement of Impressions according to MP3.com's logs and
other tracking devices and/or software MP3.com may use.
8. Representations and Warranties. Xing is solely responsible for any legal
liability arising out of or relating to the content of the software or
banner and any material to which users can link through the software or
banner. Xing represents and warrants that the software or banner will not:
(i) infringe of any third party's copyright, patent, trademark, trade
secret or other proprietary rights or rights of publicity or privacy; (ii)
violate any law, statute, ordinance or regulation, including without
limitation any laws regarding unfair competition, antidiscrimination or
false advertising; (iii) be pornographic or obscene; (iv) be defamatory or
trade libelous; or (v) contain viruses other harmful programming routines.
Xing agrees to defend, indemnify and hold harmless MP3.com and its
directors, officers, agents and employees for any and all losses, costs,
liabilities or expenses (including without limitation reasonable attorneys'
and expert witnesses' fees) incurred or arising from: (a) any breach of the
foregoing representations or warranties; (b) any claim arising from the
sale of license of Ticket's goods or services; or (c) any other act,
omission or representation by Xing. MP3.com may participate in the defense
at its option and expense.
9. No Consequential Damages. Except for claims arising under section 6, in no
event will either party be liable for any special, indirect, incidental or
consequential damages.
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 3
10. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without reference to
conflict of law principles thereof. Any claim arising out of or related to
this Agreement must be brought exclusively in the state or federal courts
located in San Diego County, California, and each party hereby consent to
the jurisdiction thereof. In any action to enforce this Agreement the
prevailing party will be entitled to costs and attorneys' fees. This
Agreement constitutes the entire agreement between the parties with respect
to the subject matter hereof and supersedes all prior discussions,
documents, agreements and prior course of dealing, and shall not be
effective until signed by both parties. This Agreement may not be assigned
by Xing without MP3.com's written consent, which shall be promptly granted
or denied and not unreasonably withheld. The parties to this Agreement are
independent contractors, and no agency, partnership, joint venture or
employee-employer relationship is created by this Agreement.
11. Page Targeting. In the event that MP3.com implements the ability to target
as to specific pages on the site such as Software, Hardware, Encoders
etc., then Xing shall have the opportunity to [***] under this contract on
those pages [***]. The monthly impression fees [***] however the number of
impressions are to be [***] to be determined at that time. The [***] will
not exceed [***]. If Xing chooses to not [***], Xing's impressions will be
randomly distributed on the remaining unsold pages at the current rate of
[***] per thousand impressions.
/s/ GREG FLORES /s/ DEAN KAPLAN
- -------------------------- --------------------------
Representative of MP3.com Representative of Xing
GREG FLORES - VP-Sales DEAN KAPLAN, CFO
- -------------------------- --------------------------
Printed Name & Position Printed Name & Position
2-18-99 2-18-99
- -------------------------- --------------------------
Date Date
* Confidential Treatment Requested.
<PAGE> 1
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
EXHIBIT 10.24
ADVERTISING INSERTION ORDER
This advertising insertion order ("IO") is made and entered into as of
the 19th day of May, 1999 (the "EFFECTIVE DATE") by and between BILL GROSS'
IDEALAB!, a California corporation with a place of business at 130 West Union
Street, Pasadena, CA 91103 ("BUYER") and MP3, INC., a Delaware corporation with
a place of business at 10350 Science Center Drive, Building 14, San Diego, CA
92121 ("SELLER").
The parties agree as follows:
1. DEFINITIONS
1.1 "ABOVE THE FOLD" means, with respect to a Banner Advertisement, that
such Banner Advertisement is immediately visible to an end user, without any
scrolling or navigation on a 640 by 480 pixel page.
1.2 "BANNER ADVERTISEMENT" means any image displayed on a Web Page that
is intended to serve as an advertisement for a product, service or otherwise.
1.3 "HOME PAGE" means the top level Web Page of a Web Site that is
viewed in response to a Web-based search, or the selection of a button or other
hyperlink. Unless otherwise agreed by the parties, "HOME PAGE OF SELLER" shall
mean the page returned by the entry of the basic URL or root address
http://www.mp3.com, or any mirror Web Page, i.e. a Web Page that is identical in
content to the Web Page at such address and that is made available by Seller in
parallel with the Home Page to increase speed of access by visitors.
1.4 "IMPRESSION" is generated when a visitor's browser software requests
and receives a Web Page that contains a Banner Advertisement placed under this
Agreement.
1.5 "WEB PAGE" means a single file displayed through Web browser
software and made available for viewing, by means of a download to local cache
memory, over the Internet through a common protocol.
1.6 "WEB SITE" means any number of associated Web Pages.
2. ADVERTISING BANNERS
2.1 DELIVERY AND ACCEPTANCE OF IMAGES. From time to time, Buyer shall
deliver Banner Advertisements to Seller, in a form and manner to be reasonably
specified by Seller. Buyer will have sole discretion to determine the content of
such Banner Advertisements; provided, however, that Seller may, in its sole
discretion, accept or reject any Banner Advertisement delivered hereunder;
provided further, that Seller must promptly offer Buyer a reasonably detailed
explanation of the reasons for each such rejection.
-1-
<PAGE> 2
2.2 PLACEMENT. Seller shall display the Advertising Banners delivered by
Buyer under this Agreement on Seller's Web Site. Placement and positioning of
such Advertising Banners shall be determined by Seller in its sole discretion;
provided, however, that:
2.2.1 No less than [***] of the aggregate number of Impressions
required to be generated hereunder must be generated from Banner Advertisements
placed (a) [***], and (b) [***].
2.2.2 All other Impressions required to be generated hereunder
must be generated from Banner Advertisements placed on Web Pages that are on the
same Web Site as Seller's Home Page.
2.3 IMPRESSIONS. During the term of this Agreement, Seller shall use
all reasonable efforts to place Advertising Banners as described in Section 2.2
in a manner calculated to generate no less than the number of Impressions
necessary to accrue (based on the rate indicated in Section 3.1) the fees to be
paid for each period in accordance with EXHIBIT A. In the event that, as of the
last day of the applicable monthly period for which Impressions are to be
generated (as set forth in EXHIBIT A), Seller has generated less than the
aggregate number of Impressions necessary to accrue (based on the rate indicated
in Section 3.1) 85% of the aggregate fees payable for each such period in
accordance with EXHIBIT A, Seller shall be deemed in material breach of this
Agreement and Buyer may terminate this Agreement pursuant to Section 6.2 below.
After June 15, 2001, Seller shall cure any shortfall between the aggregate
number of Impressions generated and the number of Impressions for which fees
have been paid in accordance with EXHIBIT A (based on the rate indicated in
Section 3.1) by continuing to place Banner Advertisements as set forth in
Section 2.2 during the remainder of the term. If Seller is unable to cure such
shortfall by the end of the term, Seller shall refund to Buyer the fees paid for
any unplaced Impressions (based on the rate indicated in Section 3.1).
2.4 LICENSE. For the term of this Agreement, Buyer hereby grants Seller
a non-exclusive, royalty-free, worldwide license to use the Banner
Advertisements in accordance with this IO on or in conjunction with Seller's
Website. Title to and ownership of all intellectual property rights of all
Banner Advertisements shall remain with Buyer or its third party licensors.
3. PAYMENT BY BUYER
3.1 PAYMENTS FOR IMPRESSIONS. Buyer shall pay to Seller an amount equal
to [***] for each 1,000 Impressions generated under Section 2.3. Buyer will not
be obligated to pay fees for Impressions in excess of the number of Impressions
necessary to accrue (based on the rate indicated in this Section 3.1) the
aggregate fees payable in accordance with EXHIBIT A, except to the extent the
parties agree in advance in writing that Seller may place Banner Advertisements
for additional Impressions.
3.2 REPORTS. After the end of each calendar month during the term of
this IO, Seller shall make available to Buyer the reports described in EXHIBIT
B.
3.3 PAYMENT TERMS. Buyer shall pay Seller the amounts set forth in
EXHIBIT A no later than the fifth (5th) business day following the date on which
each such amount is due and payable in
-2-
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 3
accordance with EXHIBIT A. Late payments will accrue interest at the lesser of
1% per month, or the maximum permitted by applicable law, whichever is less.
3.4 AUDITS. During the term of the IO and for eighteen (18) months
thereafter, Seller shall keep complete records relating to the payments
hereunder and the Impressions generated by the Banner Advertisements placed
hereunder. Upon reasonable notice to Seller, Buyer or an agent of Buyer may
audit or inspect, at Buyer's expense and during Seller's normal business hours,
Seller's records in order to verify the amounts due under this Agreement. Seller
shall make prompt adjustment to compensate for any errors or omissions disclosed
by such examination or audit. If the audit reveals an overpayment by Buyer,
Seller shall pay Buyer the amount of overpayment.
4. WARRANTIES; INDEMNIFICATION.
4.1 BUYER. Buyer shall be solely responsible for any legal liability
arising out of or relating to the Banner Advertisements and any material that
resides on an idealab! site to which users can initially link through the Banner
Advertisements. Buyer represents, warrants and covenants to Seller that it has
the power and authority to enter into this IO. EXCEPT AS SET FORTH ABOVE, BUYER
MAKES NO WARRANTIES TO SELLER, EITHER EXPRESS OR IMPLIED, AND HEREBY DISCLAIMS
ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
4.2 SELLER. Seller represents, warrants and covenants to Buyer that (1)
it has the power and authority to enter into this IO, (2) it has the right to
make available the Banner Advertisements required to be placed under Section
2.2. above, and (3) to Seller's knowledge as of the Effective Date, Seller will
generate, at a minimum, the Impressions required to be generated under Section
2.2. of this Agreement. EXCEPT AS SET FORTH ABOVE, SELLER MAKES NO WARRANTIES TO
BUYER, EITHER EXPRESS OR IMPLIED, AND HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE
PLACEMENT OF BANNER ADVERTISEMENTS. SELLER PROVIDES SELLER'S WEBSITE AND ALL
SERVICES PERFORMED HEREUNDER "AS IS" AND WITHOUT ANY WARRANTY OF ANY KIND.
SELLER DOES NOT GUARANTEE CONTINUOUS OR UNINTERRUPTED DISPLAY OR DISTRIBUTION OF
ANY BANNER ADVERTISEMENT.
4.3 INDEMNITY. Each party ("INDEMNITOR") agrees to, at its option,
defend or settle, any Claim (as defined below) against the other party
("INDEMNITEE") or its directors, officers and employees, and to pay any costs,
losses, liabilities, expenses, third party damages or settlements (including
without limitation reasonable attorneys' fees) to the extent arising out of any
such Claim. A "CLAIM" means any demand, lawsuit, or action, alleging that the
Indemnified Materials (as defined below): (a) infringe on any third party's
copyright, trademark, trade secret or right of publicity or privacy; (b) violate
any law, statute, ordinance or regulation, including without limitation the laws
and regulations governing export control; (c) are defamatory or trade libelous;
(d) are obscene; (e) violate any laws regarding unfair competition,
anti-discrimination or false advertising, or (f) contain viruses, Trojan horses,
worms, time bombs, cancelbots or other similar harmful or deleterious
programming routines; provided that the Indemnitee provides Indemnitor
-3-
<PAGE> 4
with (i) prompt written notice of such Claim, (ii) control over the defense and
settlement of such Claim and (iii) proper and full information and assistance to
settle and/or defend any such Claim. THE FOREGOING PROVISIONS OF THIS SECTION
4.3 STATE THE ENTIRE LIABILITY AND OBLIGATIONS OF EACH PARTY, AND THE EXCLUSIVE
REMEDY OF EACH PARTY, WITH RESPECT TO ANY ACTUAL OR ALLEGED INFRINGEMENT OF ANY
INTELLECTUAL PROPERTY RIGHT. The Indemnitee may participate in the defense at
its expense. "INDEMNIFIED MATERIALS" means, in the case that Buyer is
Indemnitor, the Banner Advertisements, and in the case that Seller is
Indemnitor, means the MP3 Web Site).
5. CONFIDENTIALITY.
5.1 RESTRICTIONS ON DISCLOSURE AND USE. From time to time during the
term of this IO, Buyer and Seller (each, a "RECEIVING PARTY") may be exposed to
information concerning the other party's (the "DISCLOSING PARTY") business,
technology, or products which is confidential and proprietary to the Disclosing
Party and is not generally known to the public, including without limitation the
information contained in the reports required under Section 3.2 (collectively,
the "CONFIDENTIAL INFORMATION"). During and for 5 years after the term of this
IO, neither Receiving Party shall use any Confidential Information belonging to
the Disclosing Party except in accordance with the provisions and for the
purposes of this IO, and will not disclose any Confidential Information to any
third party (other than the Disclosing Party's employees or agents) without the
prior written consent of the Disclosing Party.
5.2 EXCEPTIONS. The provisions of this Section 5 will not apply to
Confidential Information to the extent that: (1) such information was generally
known or otherwise in the public domain prior to disclosure hereunder, or
becomes so known subsequent to such disclosure through no fault of the Receiving
Party; (2) such information was received by the Receiving Party without
restriction from a third party not under an obligation to the Disclosing Party
not to disclose it and otherwise not in violation of the Disclosing Party's
rights; or (3) is required to be disclosed by law.
5.3 EFFECT OF TERMINATION. Upon termination of this IO, the Receiving
Party promptly shall return, or at the Disclosing Party's option, destroy, any
copies of Confidential Information in its possession or control.
6. TERM AND TERMINATION.
6.1 TERM. This IO is effective as of the Effective Date and expires on
September 15, 2001, unless earlier terminated earlier in accordance with this
Section 6.
6.2 TERMINATION. Either party may terminate this IO effective upon
written notice to the other if the other party violates any provision,
representation or warranty contained herein in any material respect or defaults
or fails to perform any of its obligations or agreements hereunder in any
material respect, which violation, default or failure is not cured within 30
days after notice thereof from the non-defaulting party stating its intention to
terminate this IO by reason thereof.
6.3 SURVIVAL. The parties' rights and obligations with respect to the
following Sections shall survive any termination of this IO: 1, 4, 5, 6.3, 7 and
8.
-4-
<PAGE> 5
7. LIMITATION OF LIABILITY.
7.1 IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING BUT NOT LIMITED TO SUCH DAMAGES
ARISING FROM BREACH OF CONTRACT OR WARRANTY OR FROM NEGLIGENCE OR STRICT
LIABILITY), OR FOR INTERRUPTED COMMUNICATIONS, LOSS OR USE, LOST BUSINESS, LOST
DATA OR LOST PROFITS, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. This
does not, however, limit the damages that either party may be required to pay as
a result of any breach of its obligations regarding Confidential Information.
7.2 IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY
THIRD PARTY FOR AN AMOUNT THAT, IN THE AGGREGATE, EXCEEDS THE GROSS AMOUNTS PAID
OR PAYABLE BY BUYER TO SELLER UNDER THIS IO AT THE TIME THAT THE ACTION GIVING
RISE TO A CLAIM FOR DAMAGES AROSE. This does not, however, limit the damages
that either party may be required to pay as a result of any breach of its
obligations regarding Confidential Information.
8. GENERAL PROVISIONS.
8.1 INDEPENDENT CONTRACTORS. Seller and Buyer shall perform their
respective obligations hereunder as independent contractors and shall be solely
responsible for their own financial obligations. Nothing contained herein will
be construed to imply a joint venture or principal and agent relationship
between the parties, and neither party shall have any right, power or authority
to create any obligation, express or implied, on behalf of the other in
connection with the performance hereunder.
8.2 ENTIRE AGREEMENT. This IO and the exhibits hereto constitute the
entire agreement between the parties, may only be amended in writing signed by
both parties, and supersede all prior agreements and understandings with respect
to the matters covered by this IO.
8.3 ASSIGNMENT. Neither Buyer nor Seller may assign this IO or any
rights hereunder without the prior written consent of the other party; provided,
however, that either Buyer or Seller may freely assign this IO in connection
with a merger, acquisition or other change of control to any party that agrees
in writing to be bound by the terms and conditions hereof. Subject to this
restriction, this IO shall benefit and bind the successors and assigns of the
parties. Any assignment in violation of this Section will be void.
8.4 WAIVER. The waiver of one breach or default hereunder shall not
constitute the waiver of any subsequent breach or default. All waivers must be
in writing.
8.5 NOTICES. All notices permitted or required under this IO must be in
writing and must be delivered in person, mailed by first class mail, postage
prepaid, (registered or certified), or sent by telecopy with a confirming copy
sent by mail, to the party to receive the notice at the address set forth at the
beginning of this IO or such other address as either party may specify in
writing. All such notices will be effective upon receipt.
-5-
<PAGE> 6
8.6 EXECUTION IN COUNTERPARTS AND BY FACSIMILE. This IO may be executed
in counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute but one and the same instrument. This IO may be
executed and delivered by facsimile and the parties agree that such facsimile
execution and delivery shall have the same force and effect as delivery of an
original document with original signatures, and that each party may use such
facsimile signatures as evidence of the execution and delivery of this IO by all
parties to the same extent that an original signature could be used.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
"SELLER": "BUYER":
MP3.COM, INC. BILL GROSS' IDEALAB!
By: /s/ PAUL L. H. OUYANG By: /s/ MARCIA GOODSTEIN
------------------------------ ----------------------------------
Paul L. H. Ouyang Marcia Goodstein
Chief Financial Officer & EVP Chief Operating Officer
-7-
<PAGE> 8
EXHIBIT A
IMPRESSIONS AND PAYMENT SCHEDULE
(Based on a CPM of [***] per 1,000 Impressions)
For Impressions Generated During: Date Payment Due: Amount Due:
- --------------------------------- ----------------- -----------
[***] [***] [***]
-8-
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 9
EXHIBIT B
REPORTS
DESCRIBE STANDARD DAILY IMPRESSION AND CLICKTHROUGH REPORTS ON A BANNER BY
BANNER BASIS
[to come]
-9-
<PAGE> 1
EXHIBIT 10.25
ADVERTISING, PROMOTION AND MARKETING AGREEMENT
THIS ADVERTISING, PROMOTION AND MARKETING AGREEMENT ("Agreement") is
made and entered into as of July 10, 1999 ("Effective Date"), by and between
MP3.COM, INC., a Delaware corporation ("MP3.com"), having an address at 10350
Science Center Dr., Building #14, San Diego, CA 92121, and GROUPE ARNAULT, a
French corporation ("Buyer"). MP3.com and Buyer may be referred to individually
as a "Party" and collectively as the "Parties." MP3.com owns and operates the
website located at www.mp3.com (the "Website").
1. PURPOSE OF THIS AGREEMENT. This Agreement sets forth the terms
and conditions under which (i) an affiliate of Buyer will purchase $150 million
of advertising, promotion and marketing services to be provided by MP3.com for
use primarily with brands associated with Buyer's affiliate LVMH Moet Hennessy
Louis Vuitton ("LVMH"); and (ii) Buyer shall have the exclusive right, for a
period of ninety (90) days following the effective date of the IPO, to negotiate
the terms of a joint venture between Buyer (or another entity affiliated with
Buyer) and MP3.com covering the territories of Europe and Asia. Concurrently
with the execution of this Agreement, an affiliate of Buyer will enter into an
IPO Equity Offer Agreement whereby MP3.com will offer such affiliate an
opportunity to purchase registered shares of common stock of MP3.com directly
from MP3.com in connection with MP3.com's initial public offering (the "IPO").
2. ADVERTISING, PROMOTION AND MARKETING COMMITMENT. Buyer agrees to
purchase from MP3.com various global advertising, promotional and marketing
items and services, in the amounts and in the manner set forth in this Section
2. Such items and services shall include, but not be limited to, banner ads,
portals, graphical buttons, e-mail marketing sponsorships, event and tour
sponsorships, CD sampler sponsorships, webcast sponsorships, co-branded media
programs, artist acquisition programs, artist and consumer education programs,
other sponsorships and on- and off-line promotions and related services
(collectively, "Media"). Subject to the payment conditions in Section 2.3
herein, Buyer further agrees that it shall purchase, on a prepaid basis for each
quarter during the term of this Agreement, no less than the full dollar amount
of Media as set forth on Exhibit A attached hereto. Should Buyer not fully use
any amount of Media that it has paid for in any given quarterly period (except
as provided in Section 9 herein), all of Buyer's rights to such Media shall
terminate, all payment obligations of Buyer shall remain in effect and any
advance payments for such quarter shall remain the sole property of MP3.com with
no further obligations whatsoever with respect to the Media scheduled for such
quarter.
2.1 INITIAL QUARTER. The initial quarterly period under this
Agreement shall commence on October 1, 1999 and end on December 31, 1999.
2.2 QUARTERLY MEDIA ALLOCATION; DEFAULT ALLOCATION. No later
than two weeks prior to the beginning of each quarter, Buyer and MP3.com shall
meet to discuss the manner in which the Media to be purchased during such
quarter shall be allocated. MP3.com and Buyer shall use their best efforts to
mutually agree upon the specific allocation of such Media, and shall set forth
such allocation in a written document signed by both parties no later than the
first day of each quarter. Notwithstanding the foregoing, in the event MP3.com
and
1.
<PAGE> 2
Buyer are unable to mutually agree upon the specific allocation of any quarter's
Media, such quarter's Media shall be allocated in the same manner as in the
prior quarter unless a particular type of Media is not available in such
quarter, in which event the amount attributable to that particular Media shall
be allocated proportionately among the other categories in the prior quarter.
MP3.com and Buyer agree to negotiate in good faith with respect to the type,
quantity, frequency, placement and price of the Media to be purchased during
each quarter. Notwithstanding anything in this Agreement to the contrary, Buyer
shall be required to pay, for any particular form of Media to be delivered in
any quarter, a rate equal to the average price paid to MP3.com by its three
largest purchasers (or, if there are less than three purchasers during the
period, such lesser number of purchasers) for similar types of such Media in the
immediately preceding quarter, provided, that in no event shall such rate exceed
MP3.com's standard published pricing rate for such type of Media. If there were
no purchasers of a particular type of Media in the immediately preceding
quarter, Buyer and MP3.com shall negotiate in good faith to determine the
appropriate rate for such type of Media.
2.3 PAYMENT. Buyer shall prepay to MP3.com in immediately
available, non-refundable U.S. funds $45 million no later than July 13, 1999.
MP3.com may terminate all arrangements pursuant to this Agreement and the IPO
Equity Offer Agreement between MP3.com and Arkaro S.A. of even date herewith
(the "IPO Equity Offer Agreement") if it has not received such $45 million by
July 15, 1999, in which event no party shall have any obligation under this
Agreement or the IPO Equity Offer Agreement. Beginning with the first quarter of
2001 and for the remainder of this Agreement, on the first day of the first
month for each quarter Buyer shall pay MP3.com scheduled payments in the exact
amount listed on Exhibit A attached hereto by draw-downs against the letter of
credit contemplated by Section 2.5. Buyer shall make all such prepayments
referred to herein to MP3.com in the form of (i) a wire transfer to MP3's
account at Imperial Bank, 701 "B" Street, Suite 600, San Diego, CA 92101,
Routing# 122201444, Account# 0038-051-008, or any other account previously
approved in writing by MP3.com, (ii) actual delivery of a cashier's check to
MP3.com, or (iii) as otherwise agreed to in writing by MP3.com.
2.4 LATE PAYMENTS; TAXES. Any late payments under this
Agreement will be assessed a service fee of one and one-half percent (1.5%) per
month, to the extent allowed by law. All fees owed by Buyer to MP3.com are
exclusive of, and Buyer shall pay, all sales, use, excise and other taxes which
may be levied upon either party in connection with this Agreement, except for
taxes based on MP3.com's net income.
2.5 LETTER OF CREDIT. No later than July 16, 1999, in order
to secure Buyer's remaining payment obligations following receipt of the payment
contemplated by Section 2.3(i), Buyer shall cause to be delivered to MP3.com an
irrevocable letter of credit in the face amount of $105 million issued by a
financial institution acceptable to MP3.com in its sole discretion and naming
MP3.com as beneficiary thereunder. Such letter of credit shall be in form and
substance satisfactory to MP3.com in its reasonable discretion and shall provide
for the drawing of funds upon receipt of a certificate from an officer of
MP3.com.
3. LVMH AS PRINCIPAL ADVERTISER. Buyer agrees that the Media
purchased under this Agreement is expected and intended to be primarily for use
with brands affiliated with LVMH. Buyer may request that Media purchased be used
for brands of a similar quality of other
2.
<PAGE> 3
entities in which Buyer affiliates have investments, subject to MP3.com's
approval of any other such brands which approval shall not be unreasonably
withheld.
4. DELIVERY OF ADVERTISER CONTENT. Buyer will deliver to MP3.com
such materials, logos and designs as may be reasonably requested by MP3.com in
connection with the performance of MP3.com's obligations under this Agreement.
Any materials so delivered are hereinafter referred to as "Advertiser Content."
In the event that any Advertiser Content as delivered does not conform to the
technical specifications supplied by MP3.com, or any Advertiser Content does not
arrive when specified by MP3.com in order to meet the agreed-upon start date for
delivery of the related Media under this Agreement, then MP3.com may, in its
discretion: (a) refuse such Advertiser Content and, if available, substitute any
prior Advertiser Content in MP3.com's possession or (b) delay delivery of the
related Media until Buyer shall have delivered a corrected copy of such
Advertiser Content. At all times, MP3.com will use its best efforts to emulate
and display Advertiser Content with a similar quality of presentation and an
overall look-and-feel of the LVMH brands (or other mutually agreed-upon
providers' brands) to which the Advertiser Content relates.
5. LICENSE.
5.1 ADVERTISER CONTENT LICENSE. MP3.com's obligations to
deliver Media under this Agreement is conditioned upon LVMH (or any other
mutually agreed-upon provider of Advertiser Content) granting to MP3.com a
non-exclusive, royalty-free, worldwide license to use, reproduce, distribute,
create derivative works of, publicly perform, publicly display and digitally
perform the Advertiser Content on or in conjunction with the Website and the
Media delivered hereunder. Title to and ownership of all intellectual property
rights of the Advertiser Content shall remain with LVMH (or such other mutually
agreed-upon provider of Advertiser Content) or its third party licensors.
MP3.com hereby confirms that the foregoing license shall be used solely in
connection with the production and delivery of Media under this Agreement.
5.2 TRADEMARKS. None of the Parties hereto may use any other
party's trademarks, service marks, trade names, logos, or other commercial or
product designations (collectively, "Marks") for any purpose whatsoever without
the prior written consent of the other Party. Notwithstanding the foregoing,
MP3.com's obligation to deliver Media under this Agreement is conditioned upon
LVMH (or such other mutually agreed-upon provider of Advertiser Content)
granting to MP3.com a non-exclusive, nontransferable, royalty-free, worldwide
license to use LVMH's (or such other mutually agreed upon provider of Advertiser
Content's) Marks on the Website for the purposes of marketing, promotion, and
content directories or indexes, and in electronic or printed advertising,
publicity, press releases, newsletters and mailings about the Website or
MP3.com. Such use of LVMH's marks shall be subject to the prior approval of
LVMH, which approval shall not be unreasonably withheld.
6. REPORTS. Within sixty (60) days of the end of each quarter,
MP3.com will provide Buyer standard MP3.com reports summarizing the quantity,
frequency, placement and distribution of the Media delivered during the
preceding quarter. Buyer acknowledges and agrees that any statistics or other
information provided to Buyer pursuant to this Section 5 shall be deemed
"Confidential Information" of MP3.com. Buyer agrees to hold such Confidential
3.
<PAGE> 4
Information in strict confidence and not to disclose such Confidential
Information to any third parties.
7. RECORDS AND AUDITS. MP3.com shall keep complete and accurate
records pertaining to the pricing and sale or other disposition of the Media in
sufficient detail to permit Buyer to confirm the accuracy of all purchases made
hereunder. Buyer shall have the right to cause an independent, certified public
accountant reasonably acceptable to MP3.com to audit such records to confirm the
determination of pricing hereunder for the preceding year. Such audits may be
exercised during normal business hours upon at least 30 working days' prior
written notice to MP3.com. Audits may be conducted no more than once in any
calendar quarter. Buyer shall bear the full cost of any such audits.
8. REPRESENTATIONS AND WARRANTIES.
8.1 ADVERTISER MATERIAL. Buyer shall be solely responsible
for any legal liability arising out of or relating to the composition of the
Advertiser Content and any material to which users can link through the
Advertiser Content (collectively, the "Advertiser Material"). Buyer represents
and warrants that the Advertiser Material does not and will not: (a) infringe on
any third party's copyright, patent, trademark, trade secret or other
proprietary rights or right of publicity or privacy; (b) violate any law,
statute, ordinance or regulation, including without limitation the laws and
regulations governing export control, unfair competition, antidiscrimination or
false advertising; (c) be defamatory or trade libelous; (d) be defamatory,
harmful to minors, obscene or child pornographic; (e) be materially false,
misleading or inaccurate or cannot be promptly fulfilled, or (f) contain
viruses, trojan horses, worms, time bombs, cancelbots or other similar harmful
or deleterious programming routines. Buyer agrees to defend, indemnify and hold
harmless MP3.com and its directors, officers, agents and employees for any and
all losses, costs, liabilities or expenses (including without limitation
reasonable attorneys' and expert witnesses' fees) incurred or arising from: (a)
any breach of the foregoing representations or warranties; (b) any claim arising
from the sale of license of Buyer's or LVMH's (or such other mutually
agreed-upon provider's) goods or services; or (c) any other act, omission or
representation by Buyer. MP3.com may participate in the defense at its option
and expense.
8.2 USE OF ADVERTISER CONTENT. MP3.com represents and
warrants that it shall not place Advertiser Content with other content that: (a)
infringes on any third party's copyright, patent, trademark, trade secret or
other proprietary rights or right of publicity or privacy; (b) violates any law,
statute, ordinance or regulation, including without limitation the laws and
regulations governing export control, unfair competition, antidiscrimination or
false advertising; (c) is defamatory or trade libelous; (d) is defamatory,
harmful to minors, obscene or child pornographic; (e) is materially false,
misleading or inaccurate or cannot be promptly fulfilled, or (f) contains
viruses, trojan horses, worms, time bombs, cancelbots or other similar harmful
or deleterious programming routines. MP3.com agrees to defend, indemnify and
hold harmless Buyer and its directors, officers, agents and employees for any
and all losses, costs, liabilities or expenses (including without limitation
reasonable attorneys' and expert witnesses' fees) incurred or arising from any
breach of the foregoing representations or warranties.
4.
<PAGE> 5
8.3 DUE AUTHORIZATION. Each Party has all necessary
corporate power and authority under all applicable provisions of law to execute
and deliver this Agreement and to carry out its provisions. All corporate action
on each Party's part required for the lawful execution and delivery of this
Agreement and any related agreements has been effectively taken. Upon its
execution and delivery, this Agreement will be a valid and binding obligation of
each Party, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights and (b) general
principles of equity that restrict the availability of equitable remedies.
9. DISCLAIMER OF WARRANTIES; LIMITED REMEDY. Except as set forth in
Section 8.2, MP3.com provides the Website and all services performed hereunder
"AS IS" and without any warranty of any kind. EXCEPT AS SET FORTH IN SECTION
8.2, MP3.COM MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES OF ANY KIND,
EITHER EXPRESS OR IMPLIED WITH RESPECT TO THE MEDIA PROVIDED, THE ADVERTISER
CONTENT OR THE FUNCTIONALITY, PERFORMANCE OR RESULTS OF USE THEREOF, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE OR OTHER WARRANTIES ARISING BY USAGE OF TRADE, COURSE OF DEALING OR
COURSE OF PERFORMANCE. MP3.com does not guarantee continuous or uninterrupted
display or distribution of any Advertiser Content. In the event of interruption
of display or distribution of the Advertiser Content, MP3.com's sole obligation
shall be to restore service as soon as commercially practicable. If MP3.com does
not deliver a specific Media that it had previously agreed to deliver within a
given quarter, Buyer's sole remedy shall be to receive a refund of an amount
equal to the dollar amount allocated for that specific Media in such quarter;
provided, however, that if such failure to deliver specific Media is due to an
interruption in service on the Website, in lieu of such a refund, MP3.com agrees
to deliver the specific Media as soon as practicable in the following quarter.
10. CONSEQUENTIAL DAMAGES DISCLAIMER. IN NO EVENT SHALL MP3.COM BE
LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING
BUT NOT LIMITED TO SUCH DAMAGES ARISING FROM BREACH OF CONTRACT OR WARRANTY OR
FROM NEGLIGENCE OR STRICT LIABILITY), OR FOR INTERRUPTED COMMUNICATIONS, LOSS OF
USE, LOST BUSINESS, LOST DATA OR LOST PROFITS, INCOME OR GOODWILL, THE REJECTION
OR REMOVAL OF ANY Advertiser Content, OR ANY DELAY IN DISPLAYING OR THE FAILURE
TO DISPLAY ANY LVMH CONTENT, ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT.
11. LIMITATION OF LIABILITY. NOTWITHSTANDING ANY OTHER PROVISIONS OF
THIS AGREEMENT, MP3.COM'S AGGREGATE LIABILITY TO BUYER AND/OR ANY THIRD PARTY
UNDER ANY CLAIMS RELATING TO OR ARISING OUT OF THIS AGREEMENT SHALL NOT EXCEED
AN AMOUNT GREATER THAN THE AMOUNTS RECEIVED UNDER THIS AGREEMENT DURING THE
TWELVE (12) MONTH PERIOD IMMEDIATELY PRECEDING SUCH CLAIM.
12. TERM AND TERMINATION.
5.
<PAGE> 6
12.1 TERM OF AGREEMENT. The term of this Agreement shall
commence on the Effective Date and shall remain in full force and effect until
June 30, 2002.
12.2 TERMINATION FOR DEFAULT. Buyer or MP3.com may terminate
this Agreement:
(a) Except as set forth in Section 9, immediately
upon written notice if the other Party breaches a material term or condition of
the Agreement and does not cure such breach (or commence a cure in a manner
reasonably satisfactory to the non-breaching party) within ninety (90) days (or
ten (10) days in the event of nonpayment of money) after written notice of such
breach; or
(b) Immediately upon written notice if the other
ceases to do business, or otherwise terminates its business operations, except
as a result of a permitted assignment; or
(c) Immediately upon written notice if the other
shall fail to promptly secure or renew any license, registration, permit,
authorization or approval for the conduct of its business in the manner
contemplated by this Agreement or if any such license, registration, permit,
authorization or approval is revoked or suspended.
12.3 RIGHTS AND OBLIGATIONS UPON TERMINATION. In the event
this Agreement expires or is terminate: (a) each Party shall cooperate with the
others in order to effect an orderly termination of the relationship created by
this Agreement, including each Party's prompt return of any Confidential
Information. Termination of this Agreement shall not limit any Party from
pursuing other remedies available to it, including injunctive relief. The
parties' rights and obligation under Sections 8, 9, 10, 11 and 12, and the
provisions regarding "Confidential Information" under Section 6, shall survive
termination or expiration of this Agreement.
13. EXCLUSIVE RIGHT OF FIRST NEGOTIATION FOR JOINT VENTURE
AGREEMENT. Buyer shall have the exclusive right to negotiate the terms of a
joint venture between Buyer (or such other entity affiliated with Buyer) and
MP3.com covering the territories of Europe and Asia (the "Joint Venture
Agreement"). Buyer and MP3.com shall negotiate in good faith for a period of
ninety (90) days following the effective date of MP3.com's IPO to enter into the
definitive Joint Venture Agreement on mutually-acceptable terms and to establish
the joint venture. If Buyer and MP3.com do not enter into a definitive Joint
Venture Agreement within ninety (90) days of the effective date of the IPO, such
right shall terminate and each party shall have no further obligations of any
kind or nature to each other with respect to the joint venture. The Parties
hereto agree that the failure to enter into a joint venture, for any reason or
no reason at all, shall not constitute a breach of this Agreement. Buyer further
agrees that it would have entered into this Agreement and made the specific
commitments in Section 2 herein irrespective of whether or not the joint venture
was established.
14. GENERAL PROVISIONS.
14.1 ENTIRE AGREEMENT. This Agreement, together with any
Exhibits attached hereto, represents the entire agreement between the Parties
with respect to the subject matter hereof and thereof and shall supersede all
prior agreements and communications of the Parties, oral or written.
6.
<PAGE> 7
14.2 AMENDMENT AND WAIVER. No amendment to, or waiver of, any
provision of this Agreement shall be effective unless in writing and signed by
all Parties hereto. The waiver by any party of any breach or default shall not
constitute a waiver of any different or subsequent breach or default.
14.3 GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California without
giving effect to principles of conflicts of laws. Buyer agrees to submit to
jurisdiction in California and further agrees that any cause of action arising
under this Agreement must be brought exclusively in a court in San Diego County,
California.
14.4 SUCCESSORS AND ASSIGNS. No Party shall assign its rights
or obligations under this Agreement without the prior written consent of the
other Party, which shall not unreasonably be withheld or delayed.
Notwithstanding the foregoing, each Party may assign this Agreement to an entity
who acquires substantially all of the stock or assets of a Party to this
Agreement; provided that consent will be required in the event that the
non-assigning Party reasonably determines that the assignee will not have
sufficient capital or assets to perform its obligations hereunder, or that the
assignee is a direct competitor of the non-assigning party. All terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective permitted transferees, successors and
assigns.
14.5 FORCE MAJEURE. No Party shall be liable for failure to
perform or delay in performing any obligation (other than the payment of money)
under this Agreement if such failure or delay is due to fire, flood, earthquake,
strike, war (declared or undeclared), embargo, blockade, legal prohibition,
governmental action, riot, insurrection, damage, destruction or any other
similar cause beyond the control of such party.
14.6 NOTICES. All notices, requests and other communications
called for by this agreement shall be deemed to have been given immediately if
made by telecopy or electronic mail (confirmed by concurrent written notice sent
via overnight courier for delivery by the next business day), if to MP3.com at
10350 Science Center Dr., #14, San Diego, CA 92121, attention President (e-mail:
[email protected]), with a copy to its Director of Legal Affairs (e-mail:
[email protected]), and if to Buyer at the physical and electronic mail addresses
set forth on the signature page of this Agreement, or to such other addresses as
each Party shall specify to the other Party. Notice by any other means shall be
deemed made when actually received by the Party to which notice is provided.
14.7 SEVERABILITY. If any provision of this Agreement is held
to be invalid, illegal or unenforceable for any reason, such invalidity,
illegality or unenforceability shall not effect 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.
14.8 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which taken together shall constitute a single
instrument. Execution and delivery of this Agreement may be evidenced by
facsimile transmission.
7.
<PAGE> 8
14.9 AUTHORITY. Each of the Parties represents and warrants
that the negotiation and entry of this Agreement will not violate, conflict
with, interfere with, result in a breach of, or constitute a default under any
other agreement to which they are a party.
14.10 ATTORNEYS FEES. The prevailing party in any action to
enforce this Agreement shall be entitled to reimbursement of its expenses,
including reasonable attorneys' fees.
8.
<PAGE> 9
The Parties have caused this Agreement to be duly executed as of the Effective
Date.
<TABLE>
<S> <C>
MP3.COM, INC. GROUPE ARNAULT
By:__________________________________________ By:____________________________________________
Name: Robin Richards Name: Jean-Bernard Tellio
Title: President and Chief Operating Officer Title: Vice President Investments and
Information Technology
Date: July 10, 1999 Date: July 10, 1999
Address: 10350 Science Center Drive Address: 30 Ave. Hoche
Building #14 Paris 75008
San Diego, CA 92121 France
e-mail: [email protected] e-mail: [email protected]
</TABLE>
9.
<PAGE> 10
EXHIBIT A
MEDIA PURCHASE SCHEDULE
<TABLE>
<CAPTION>
QUARTERLY PAYMENT SCHEDULE: PURCHASE AMOUNT:
- --------------------------- ----------------
<S> <C>
1999 Q4 $ 5,000,000*
2000 Q1 $ 6,500,000*
Q2 $ 8,500,000*
Q3 $11,000,000*
Q4 $14,000,000*
2001 Q1 $15,000,000
Q2 $17,000,000
Q3 $18,500,000
Q4 $19,500,000
2002 Q1 $17,500,000
Q2 $17,500,000
-------------------
TOTAL: $150,000,000
</TABLE>
* -- Amounts to be prepaid no later than July 13, 1999.
<PAGE> 1
EXHIBIT 10.26
IPO EQUITY OFFER AGREEMENT
THIS IPO EQUITY OFFER AGREEMENT ("Agreement") is made and entered into
as of July 10, 1999 ("Effective Date"), by and between MP3.COM, INC., a Delaware
corporation ("MP3.com"), located at 10350 Science Center Dr., Building #14, San
Diego, CA 92121, and ARKARO S.A., a Belgian corporation ("Arkaro") (and a
subsidiary of Groupe Arnault, a French corporation ("GA")). MP3.com and Arkaro
may be referred to individually as a "Party" and collectively as the "Parties."
WHEREAS, MP3.com desires to offer Arkaro an opportunity to purchase,
directly from MP3.com, shares of common stock to be registered under the
Securities Act of 1933, as amended (the "Act"), in connection with MP3.com's
initial public offering (the "IPO"); and
WHEREAS, any purchase of such shares shall be conditioned upon the
delivery to and acceptance by Arkaro of a final prospectus in accordance with
the Act.
NOW, THEREFORE, in consideration of the foregoing recitals and due and
valid consideration hereby acknowledged, the Parties hereto agree as follows:
1. IPO EQUITY OFFER. Subject to receipt of any necessary approvals
from the National Association of Securities Dealers, Inc., which both parties
shall use their reasonable best efforts to obtain, MP3.com shall offer Arkaro
the opportunity (the "IPO Offer") to purchase directly from MP3.com
simultaneously with MP3.com's IPO a number of shares of common stock equal to
five percent (5%) of the number of shares of outstanding capital stock of
MP3.com as of the effective date of the IPO (excluding any stock options,
warrants or similar securities) but giving effect to (i) the closing of the IPO
and (ii) the exercise by Arkaro of the IPO Offer (the "IPO Offer Shares"). In
the event that Arkaro exercises its IPO Offer, Arkaro shall purchase the IPO
Offer Shares directly from MP3.com at the price per share offered to the public
in the IPO. MP3.com shall provide written notice to Arkaro at least three
business days prior to the anticipated effective date of the IPO. Arkaro shall
be required to provide written notice to MP3.com no later than two business days
following its receipt of such notice of Arkaro's intention to exercise its IPO
Offer, provided, however, that any purchase of the IPO Offer Shares by Arkaro
shall be conditioned upon the delivery to and acceptance by Arkaro of a final
prospectus in accordance with the Act. Arkaro's IPO Offer may only be exercised
for the full amount of the IPO Offer Shares. The closing of Arkaro's purchase of
the IPO Offer Shares from MP3.com (the "Closing") shall occur simultaneously
with the closing of the sale of the underwritten shares of common stock in the
IPO, which is expected to occur three business days following the date on which
the Registration Statement on Form S-1 registering the IPO Offer Shares is
declared effective by the United States Securities and Exchange Commission (the
"SEC"). Payment by Arkaro for the IPO Offer Shares in the Closing shall be made
by wire transfer to MP3.com's account at Imperial Bank, 701 "B" Street, Suite
600, San Diego, CA 92101, Routing# 122201444, Account# 0038-051-008, in exchange
for a certificate representing the IPO Offer Shares. Such IPO Offer Shares shall
be registered under the Act and shall bear no legends other than a stop-transfer
legend pursuant to Section 2.4. The IPO Offer shall terminate as provided in the
second sentence of Section 2.3 of the Advertising Agreement (as defined below)
or if, as of the date of pricing of the IPO, GA is in default under that certain
Advertising, Promotion and Marketing Agreement entered into by GA and MP3.com as
of even date herewith
1.
<PAGE> 2
(the "Advertising Agreement"), including without limitation any default under
Section 2.3 or Section 2.5 of the Advertising Agreement.
2. EQUITY PROVISIONS.
2.1 STANDSTILL PROVISION. Arkaro hereby covenants and agrees
that from and after the Effective Date, except as contemplated in Section 1 of
this Agreement or in the Advertising Agreement, Arkaro shall not, and shall not
permit its affiliates (including parents, subsidiaries or other related
entities), in any manner, singly or as part of a partnership, limited
partnership, syndicate or other "Group" (within the meaning of Section 13(d)(3)
of the Securities Exchange Act of 1934), directly or indirectly, to:
(a) make, effect, initiate, cause or participate in
(i) any acquisition of beneficial ownership of any securities of MP3.com or any
securities of any subsidiary or other affiliate of MP3.com, (ii) any acquisition
of any assets of MP3.com or any assets of any subsidiary or other affiliate of
MP3.com, (iii) any tender offer, exchange offer, merger, business combination,
recapitalization, restructuring, liquidation, dissolution or extraordinary
transaction involving MP3.com or any subsidiary or other affiliate of MP3.com,
or involving any securities or assets of MP3.com or any securities or assets of
any subsidiary or other affiliate of MP3.com, or (iv) any "solicitation" of
"proxies" (as those terms are used in the proxy rules of the SEC) or consents
with respect to any securities of MP3.com;
(b) form, join or participate in a "group" (as
defined in the Securities Exchange Act of 1934 and the rules promulgated
thereunder) with respect to the beneficial ownership of any securities of
MP3.com;
(c) act, alone or in concert with others, to seek to
control or influence the management, board of directors or policies of MP3.com;
(d) take any action that might require MP3.com to
make a public announcement regarding any of the types of matters set forth in
clause "(a)" of this sentence;
(e) agree or offer to take, or encourage or propose
(publicly or otherwise) the taking of, any action referred to in clause "(a)",
"(b)", "(c)" or "(d)" of this sentence;
(f) assist, induce or encourage any other Person to
take any action of the type referred to in clause "(a)", "(b)", "(c)", "(d)" or
"(e)" of this sentence;
(g) enter into any discussions, negotiations,
arrangement or agreement with any other Person relating to any of the foregoing;
or
(h) request or propose publicly or in writing that
MP3.com or any of MP3.com's representatives amend, waive or consider the
amendment or waiver of any provision set forth in this Section 2.1.
2.
<PAGE> 3
For the purposes of this Section 2.1, the term "Person" shall be
broadly interpreted to include any individual and any corporation, partnership
entity, group, tribunal or governmental authority.
2.2 AGREEMENT NOT TO SELL. Arkaro agrees that, during the
period beginning on the Effective Date and ending on the first anniversary of
the effective date of MP3.com's IPO, Arkaro shall not, without the prior written
consent of MP3.com, directly or indirectly sell, contract to sell (including,
without limitation, any short sale), grant any option to purchase or otherwise
transfer or dispose of any securities of MP3.com held by it at any time during
such period. Notwithstanding the foregoing, commencing on the six (6) month
anniversary of the IPO, the foregoing restrictions shall lapse with respect to
10% of the IPO Offer Shares in each subsequent calendar month; provided,
however, that Arkaro will not sell, transfer or dispose of more than 20% of the
IPO Offer Shares in any month prior to the first anniversary of the effective
date of MP3.com's IPO.
2.3 TRANSFERS TO AFFILIATES. Notwithstanding the foregoing
Section 2.2, Arkaro may transfer the IPO Offer Shares to GA or any subsidiary of
GA, subject to such transferee's consent to be bound by this Agreement to the
same extent that Arkaro would be subject to this Agreement.
2.4 STOP TRANSFER PROVISIONS. In order to enforce the
provisions of this Section 2, MP3.com may impose stop-transfer instructions with
respect to the securities held by Arkaro that are subject to the foregoing
restrictions. When stop-transfer restrictions lapse with respect to any IPO
Offer Shares, MP3.com shall, upon request of GA, reissue certificates
representing such IPO Offer Shares without stop-transfer restrictions.
3. DUE AUTHORIZATION. Each Party has all necessary corporate power
and authority under all applicable provisions of law to execute and deliver this
Agreement and to carry out its provisions. All corporate action on each Party's
part required for the lawful execution and delivery of this Agreement and any
related agreements has been effectively taken. Upon its execution and delivery,
this Agreement will be a valid and binding obligation of each Party, enforceable
in accordance with its terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights and (b) general principles of equity
that restrict the availability of equitable remedies.
4. GENERAL PROVISIONS.
4.1 ENTIRE AGREEMENT. This Agreement, together with any
Exhibits attached hereto, represents the entire agreement between the Parties
with respect to the subject matter hereof and thereof and shall supersede all
prior agreements and communications of the Parties, oral or written.
4.2 AMENDMENT AND WAIVER. No amendment to, or waiver of, any
provision of this Agreement shall be effective unless in writing and signed by
all Parties hereto. The waiver by any party of any breach or default shall not
constitute a waiver of any different or subsequent breach or default.
3.
<PAGE> 4
4.3 GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California without
giving effect to principles of conflicts of laws. Arkaro agrees to submit to
jurisdiction in California and further agrees that any cause of action arising
under this Agreement must be brought exclusively in a court in San Diego County,
California.
4.4 SUCCESSORS AND ASSIGNS. No Party shall assign its rights
or obligations under this Agreement without the prior written consent of the
other Party, which shall not unreasonably be withheld or delayed.
Notwithstanding the foregoing, each Party may assign this Agreement to an entity
who acquires substantially all of the stock or assets of a Party to this
Agreement; provided that consent will be required in the event that the
non-assigning Party reasonably determines that the assignee will not have
sufficient capital or assets to perform its obligations hereunder, or that the
assignee is a direct competitor of the non-assigning party. In addition, Arkaro
may assign its rights under Section 1 to GA or any wholly-owned subsidiary of
GA, subject to such assignee's consent to be bound by this Agreement to the same
extent that Arkaro would be subject to this Agreement. All terms and provisions
of this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted transferees, successors and assigns.
4.5 FORCE MAJEURE. No Party shall be liable for failure to
perform or delay in performing any obligation (other than the payment of money)
under this Agreement if such failure or delay is due to fire, flood, earthquake,
strike, war (declared or undeclared), embargo, blockade, legal prohibition,
governmental action, riot, insurrection, damage, destruction or any other
similar cause beyond the control of such party.
4.6 NOTICES. All notices, requests and other communications
called for by this agreement shall be deemed to have been given immediately if
made by telecopy or electronic mail (confirmed by concurrent written notice sent
via overnight courier for delivery by the next business day), if to MP3.com at
10350 Science Center Dr., #14, San Diego, CA 92121, attention President (e-mail:
[email protected]), with a copy to its Director of Legal Affairs (e-mail:
[email protected]), and if to Arkaro at the physical and electronic mail addresses
set forth on the signature page of this Agreement, or to such other addresses as
each Party shall specify to the other Party. Notice by any other means shall be
deemed made when actually received by the Party to which notice is provided.
4.7 SEVERABILITY. If any provision of this Agreement is held
to be invalid, illegal or unenforceable for any reason, such invalidity,
illegality or unenforceability shall not effect 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.
4.8 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which taken together shall constitute a single
instrument. Execution and delivery of this Agreement may be evidenced by
facsimile transmission.
4.9 AUTHORITY. Each of the Parties represents and warrants
that the negotiation and entry of this Agreement will not violate, conflict
with, interfere with, result in a breach of, or constitute a default under any
other agreement to which they are a party.
4.
<PAGE> 5
4.10 ATTORNEYS FEES. The prevailing party in any action to
enforce this Agreement shall be entitled to reimbursement of its expenses,
including reasonable attorneys' fees.
5.
<PAGE> 6
The Parties have caused this Agreement to be duly executed as of the Effective
Date.
<TABLE>
<S> <C>
MP3.COM, INC. ARKARO S.A.
By:__________________________________________ By:___________________________________________
Name: Robin Richards Name: Jean-Bernard Tellio
Title: President and Chief Operating Officer Title: Vice President Investments and
Information Technology
Date: July 10, 1999 Date: July 10, 1999
Address: 10350 Science Center Drive Address: 30 Ave. Hoche
Building #14 Paris 75008
San Diego, CA 92121 France
e-mail: [email protected] e-mail: [email protected]
</TABLE>
6.
