<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1999
REGISTRATION NO. 333-78545
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MP3.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3652 33-0840026
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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:
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FREDERICK T. MUTO, ESQ. GARY J. SINGER, ESQ.
CHRISTOPHER J. KEARNS, ESQ. KAREN K. DREYFUS, ESQ.
BLAKE T. BILSTAD, ESQ. CHRISTOPHER A. WHYTOCK, ESQ.
COOLEY GODWARD LLP O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1100 610 NEWPORT CENTER DRIVE, 17TH FLOOR
SAN DIEGO, CA 92121-2128 NEWPORT BEACH, CA 92660-6429
(619) 550-6000 (949) 760-9600
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Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<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 MAY 24, 1999
Shares
[MP3.COM LOGO]
Common Stock
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Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $ and
$ per share. We have applied to have the shares approved for listing on
the Nasdaq National Market under the symbol "MPPP."
At the request of MP3.com, the underwriters have reserved up to shares
of common stock offered hereby for sale at the initial public offering price to
artists and customers of MP3.com, consultants, business associates and certain
other persons. See "Underwriting."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares. See "Underwriting."
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
STARTING ON PAGE 5.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MP3.COM
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS CHARLES SCHWAB & CO.
Prospectus dated , 1999.
<PAGE> 3
DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
The following text appears in the center of the page against a blue background:
There's a new order in the world of music. A community where any artist can
play to an audience of millions. Its official name is MP3.com.
INSIDE TWO-PAGE GATEFOLD SPREAD
Image depicting three pages of MP3.com website: "Home" page, "Featured Artist"
page and "Music" page. Text accompanying the website images reads as follows in
a large headline:
MP3.com. Where the world comes for music.
The following text appears as subheads and smaller copy blocks that relate to
the accompanying webpage images:
- Over 5,000,000 visitors per month.
- Over 21,000,000 songs downloaded.
- A database of over 2,500,000 music lovers.
- Home to over 11,000 artists, with hundreds added weekly. Top acts of
tomorrow as well as current major artists.
- The most unique collection of music on the planet. With 270 genres of
music and more than 56,000 songs.
- A new venue for any and all artists. Anyone can download, listen to and
share music for free.
- A vast, interactive music community where music lovers share with one
another.
- Fans communicate directly with artists.
- A new way for artists to be discovered, regardless of the size of their
audience.
- A new forum for artist empowerment and consumer choice.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 2
RISK FACTORS.......................... 5
USE OF PROCEEDS....................... 15
DIVIDEND POLICY....................... 15
CAPITALIZATION........................ 16
DILUTION.............................. 17
SELECTED HISTORICAL FINANCIAL DATA.... 18
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS............... 19
BUSINESS.............................. 25
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PAGE
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MANAGEMENT............................ 39
CERTAIN TRANSACTIONS.................. 45
PRINCIPAL STOCKHOLDERS................ 46
DESCRIPTION OF CAPITAL STOCK.......... 48
SHARES ELIGIBLE FOR FUTURE SALE....... 51
UNDERWRITING.......................... 53
NOTICE TO CANADIAN RESIDENTS.......... 55
LEGAL MATTERS......................... 56
EXPERTS............................... 56
ADDITIONAL INFORMATION................ 56
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
Except as otherwise indicated, all information in this prospectus assumes:
- the underwriters' over-allotment option will not be exercised;
- a three-for-two split in our common stock that will become effective
prior to the effectiveness of this registration statement;
- the conversion of each outstanding share of preferred stock into one and
one-half shares of common stock upon the closing of this offering;
- the exercise of a warrant to purchase 118,557 shares of common stock;
- the issuance of $2.5 million of common stock (valued at the initial
public offering price) concurrent with the closing of this offering in a
private placement pursuant to an agreement with a strategic partner
entered into on May 12, 1999; and
- the filing, upon approval of our stockholders, of our restated
certificate of incorporation.
MP3.com, the MP3.com logo, DAM CD and the DAM CD logo are trademarks of
MP3.com, Inc. All other trade names and trademarks appearing in this prospectus
are the property of their holders.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before buying shares in this offering. You should read the
entire prospectus carefully.
MP3.COM, INC.
MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music catalog. Our
website contains over 56,000 songs from over 11,000 artists, representing one of
the largest collections of digital music available on the Internet. Consumers
can search, sample and download music free of charge.
We receive revenue from online advertising, e-commerce and offline
sponsorships. To date, the majority of our revenues have been from the sale of
advertising space on our website. In addition, we sell CDs online, both
fully-packaged albums created by our MP3.com artists (which we call Digital
Automatic Music or "DAM CDs") and albums we compile featuring the work of
multiple MP3.com artists (which we call "compilation CDs"). We also receive
revenue from advertisers for their sponsorship of CD samplers, which are
distributed free of charge to consumers and contain collections of music from
MP3.com artists.
Our unique business model provides the following advantages for artists and
consumers:
- creates an easy and convenient way for consumers to listen to, download
and purchase music;
- dramatically lowers costs for artists to promote and distribute their
music;
- enables artists to reach a large number of consumers worldwide;
- enables consumers to discover local and lesser-known artists in ways they
cannot through traditional music retailers; and
- facilitates direct communication between fans and artists.
We believe that large numbers of artists and consumers are drawn to MP3.com
because they have historically been underserved by the traditional music
industry. We will continue to introduce new products and services designed to
meet their entertainment, e-commerce, communications and information needs.
MP3.com was incorporated in March 1998. During 1998, our operations
consisted largely of developing the infrastructure necessary to download music
on the Internet. Since the beginning of the year, our growth has been dramatic.
Headcount increased from eight employees on December 31, 1998, to 54 employees
on March 31, 1999, to 75 employees on April 30, 1999. Traffic to our website
increased over 20% from March to April 1999. In April 1999, we added over 80
artists and 600 new songs on average each day. During April 1999, our website
served over 50 million pageviews, 9 million song deliveries and 4.5 million
music searches.
In April 1999, we entered into a three year consulting arrangement with
Atlas/Third Rail Management, Inc., a leading artist management group, to conduct
certain promotional activities such as our sponsorship of the Alanis Morissette
and Tori Amos "5 1/2 weeks" Summer 1999 tour. We have also 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.
In May 1999, we entered into an agreement with Cox Interactive Media, Inc.
Subject to certain conditions, we plan to sell to Cox Interactive Media
4,182,578 shares of Series C preferred stock (which will be converted into
6,273,867 shares of common stock at the closing of this offering) for a total
purchase price of approximately $45 million in June 1999, and to form a joint
venture with Cox Interactive Media to create and operate music-related websites.
Our principal executive offices are located at 10350 Science Center Drive,
Building 14, San Diego, California 92121. Our telephone number is (619)
320-2120. Our website is www.mp3.com. The information found on our website is
not a part of this prospectus.
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THE OFFERING
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<S> <C>
Common stock offered......................... shares
Common stock to be outstanding after the
offering................................... shares
Directed shares.............................. At our request, the underwriters have
reserved up to shares of common
stock offered hereby for sale at the initial
public offering price to artists and
customers of MP3.com, consultants, business
associates and certain other persons. See
"Underwriting."
Use of proceeds.............................. For general corporate purposes, including
working capital and potential acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... MPPP
</TABLE>
Common stock to be outstanding after the offering is based upon the number
of shares outstanding as of May 1, 1999, assuming an initial public offering
price of $ . It excludes 13,050,000 shares of common stock reserved for
issuance under our stock benefit plans, of which, as of May 1, 1999, 2,957,250
shares were subject to outstanding options at a weighted average exercise price
of $0.34 per share. It also excludes 450,000 shares of common stock issued
subsequent to May 1, 1999 upon the exercise of options at an exercise price of
$1.00 per share. See "Capitalization," "Description of Capital Stock" and
"Management -- 1998 Equity Incentive Plan."
SUMMARY FINANCIAL DATA
The following financial information should be read together with the
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
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PERIOD FROM
MARCH 17, 1998 THREE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1998 MARCH 31, 1999
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STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 1,162,438 $ 665,785
Gross profit................................................ 947,480 460,482
Loss from operations........................................ (219,768) (1,478,287)
Net loss.................................................... (357,538) (1,404,996)
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) $ (0.04)
Shares used in pro forma net loss per share
calculations(1)........................................... 36,907,785 38,262,067
</TABLE>
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<CAPTION>
AT MARCH 31, 1999
---------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 9,327,149 $14,245,197
Working capital.................................... 9,146,989
Total assets....................................... 11,245,608
Total stockholders' equity......................... 10,359,317
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(1) For a description of the computation of the net loss per share and the
number of shares used in the per share calculations, see Note 1 of Notes to
Financial Statements.
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(2) The Pro Forma column gives effect, upon the closing of this offering, to (a)
the conversion of 7,150,000 shares of convertible Series A preferred stock
outstanding as of March 31, 1999 into 10,724,996 shares of common stock; (b)
the conversion of 1,100,000 shares of convertible Series A preferred stock
issued during April 1999 into 1,650,000 shares of common stock; (c) the
conversion of 439,103 shares of convertible Series B preferred stock issued
during April 1999 into 658,653 shares of common stock; (d) the exercise of
warrants to purchase 658,653 shares of common stock; and (e) the issuance of
$2.5 million of common stock (assuming an initial public offering price of
$ per share) in a private placement pursuant to an agreement with a
strategic partner entered into on May 12, 1999. See Note 6 of Notes to
Financial Statements.
(3) The As Adjusted column reflects our receipt of the net proceeds from the
offering (assuming an initial public offering price of $ per share),
after deducting estimated underwriting discounts and commissions and
estimated offering expenses. See "Capitalization" and "Use of Proceeds."
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. You should also refer to the other
information set forth in this prospectus, including our financial statements and
the related notes.
RISKS RELATED TO OUR BUSINESS MODEL
WE HAVE A NEW AND UNPROVEN BUSINESS MODEL.
Our model for conducting business and generating revenues is new and
unproven. Our business model depends upon our ability to generate revenue
streams from multiple sources through our website, including:
- website advertising fees from third parties;
- online sales of CDs and music-related merchandise;
- promotional activity fees; and
- leveraging our aggregated artist and consumer information.
It is uncertain whether a music-based website that relies on attracting
people to learn about, listen to and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. We cannot assure you that
this business model will succeed or will be sustainable as our business grows.
In order for our business to be successful, we must not only develop
services that directly generate revenue, but also provide content and services
that attract consumers to our website frequently. We will need to develop new
offerings as consumer preferences change and new competitors emerge. We cannot
assure you that we will be able to provide consumers with an acceptable blend of
products, services, and informational and community offerings that will attract
consumers to our website frequently. We provide many of our products and
services without charge, and we may not be able to generate sufficient revenue
to pay for these products and services. Accordingly, we are not certain that our
business model will be successful or that we can sustain revenue growth or be
profitable.
WE ARE COMPETING IN A NEW MARKET.
The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for our products and
services are subject to a high degree of uncertainty and risk. We are attempting
to capitalize on a talent pool of artists not currently served by the
traditional recording industry. We cannot assure you that consumers will
continue to be interested in listening to or purchasing music from these
artists. If this new market fails to develop, develops more slowly than expected
or becomes saturated with competitors, or our products and services do not
achieve or sustain market acceptance, our business could be harmed.
We believe the future popularity of downloadable digital music will depend,
in part, on the availability of portable devices to store and replay this music.
To the extent that consumer acceptance or distribution of these portable devices
is delayed or these devices are not available at affordable prices, our market,
and thus a portion of our revenues, may not grow at a sufficient pace and our
business could be harmed.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.
MP3.com was incorporated in March 1998. During 1998, our operating
activities consisted largely of developing the infrastructure necessary to
download music on the Internet. Our limited operating history makes it difficult
to evaluate our current business and prospects. Before investing, you should
evaluate the
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risks, expenses and problems frequently encountered by companies such as ours
that are in the early stages of development.
OUR FAILURE TO MANAGE GROWTH COULD HARM US.
We currently are experiencing a period of rapid expansion in our website
traffic, headcount, facilities and infrastructure. For example, the number of
daily visitors to our website increased approximately 60% from December 1998 to
April 1999. Our headcount increased from eight on December 31, 1998 to 75 on
April 30, 1999. We expect further significant expansion will be required to
address potential growth in our artist and consumer bases, the breadth of our
product and service offerings, and other opportunities. This expansion has
placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources. Our failure to manage growth
could harm us.
WE WILL CONTINUE TO RELY ON REVENUE FROM ONLINE ADVERTISING.
Although our business model contemplates multiple sources of revenue, we
anticipate that in the foreseeable future we will depend substantially on
revenue from online advertising. In 1998, revenue from online advertising
accounted for 91% of our net revenues, and in the first quarter of 1999
accounted for 84% of our net revenues.
We currently depend on a small group of customers for our revenue from
online advertising. In the first quarter of 1999, two customers accounted for
approximately 14% and 13%, respectively, of net revenues, and our top ten
customers accounted for approximately 70% of net revenues. If any of these
important customers were to leave us, our business could be harmed. If we do not
increase revenue from online advertising, our business may not grow or survive.
Increasing our revenue from online advertising depends largely on our ability
to:
- conduct successful selling and marketing efforts aimed at advertisers;
- increase the size of our sales force;
- increase the size of the MP3.com audience by increasing both our artist
and consumer bases;
- increase the amount of revenues per advertisement;
- target advertisements to appropriate segments of our audience; and
- measure accurately the size and demographic characteristics of our
audience.
Our failure to achieve these objectives could decrease our revenue from
online advertising and ultimately harm our business.
WE RELY HEAVILY ON ARTISTS.
We rely on artists to provide us with content for our website. Our success
depends on having a website that offers high quality and diverse music choices,
all of which come from outside artists. Our failure to attract and retain
artists who can provide us with content would limit the overall quality and
quantity of the offerings on our website and harm our business. Because our
artist contracts are non-exclusive and can be terminated by the artist at any
time, our retention of artists requires that we offer sufficient benefits, such
as artist services and artist-oriented content, to encourage them to remain
MP3.com artists and continue providing us with content. If we are not able to
maintain our ability to serve and provide valuable tools to artists, artists may
leave our website and remove their content. This could also prevent us from
attracting new artists. The loss of artists and the inability to attract new
artists would impair our ability to generate advertising revenue targeted to the
MP3.com artist community and generate CD revenues.
Although most of our artists are not bound by record contracts, certain
artists, including most internationally-recognized artists, typically sign
multi-year exclusive recording contracts that may prevent them from becoming
MP3.com artists. As a result, our access to internationally-recognized artists
and our ability to distribute this music or place their music on our website is
limited. For this reason, and because of
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the emphasis of our business model on underserved artists, we expect our content
to continue to concentrate principally on lesser-known and local artists.
DEVELOPMENT OF NEW STANDARDS FOR THE ELECTRONIC DELIVERY OF MUSIC MAY THREATEN
OUR BUSINESS.
We currently rely on mp3 technology for both brand identity and as a
delivery method for the digital distribution of music. Mp3 is an open standard
adopted by the Moving Picture Experts Group for the compression of audio files.
We do not own or control mp3 technology. The onset of competing industry
standards for the electronic delivery of music could significantly affect the
way we operate our business as well as the public's perception of MP3.com as a
company. For example, some of the major recording studios have recently
announced a plan to develop a universal standard for the electronic delivery of
music, called the Secured Digital Music Initiative, or SDMI, and have announced
their intention to make this delivery method available by the end of 1999. In
addition, major corporations such as Microsoft Corporation, IBM Corporation,
AT&T Corp. and Sony Corporation have launched efforts to establish proprietary
audio formats that will compete with the mp3 format. Some competitive formats
offer security and rights-tracking features that mp3 technology does not
currently offer. These features are especially popular among certain groups
associated with the traditional music industry, and are being promoted by some
of our competitors. Widespread industry and consumer acceptance of any of these
audio formats could significantly harm our business if we are unable to adapt
and respond to such changing standards.
Although we are not tied exclusively to the use of mp3 technology or to any
other specific standard for the electronic delivery of music, if a proprietary,
or closed, music delivery format receives widespread industry and consumer
acceptance, we may be required to license additional technology and information
from third parties in order to adopt such a format. We cannot assure you that
this third-party technology and information will be available to us on
commercially reasonable terms, if at all. Any failure to obtain any of these
technology and information licenses or to successfully reconfigure our music
library to support these technologies could prevent us from making our music
available in the most widely accepted formats, which could make our offerings
less popular or 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 HARM OUR BUSINESS.
The traditional music industry has not embraced the development of the mp3
format to deliver music, in part because users of mp3 technology can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Although our business model for the digital distribution of
music does not facilitate music piracy and can support multiple audio
compression and delivery technologies, our brand identity is currently linked to
the mp3 technology. As a result, we may face opposition from a number of
different music industry sources including record companies and studios, the
Recording Industry Association of America and certain artists, due to our
current brand identity and its potentially negative associations. In addition,
adverse news or events relating to mp3 technology may lead to confusion in the
public markets regarding our company and its prospects, and may harm our
business.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET AND THE AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS.
The success of our business will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high speed modems, for
providing reliable Internet access and services. Because global commerce on the
Internet and the online exchange of information is new and evolving, we cannot
predict whether the Internet will prove to be a viable commercial marketplace in
the long term.
The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of
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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.
The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased frequency
of use and increased bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on it. In addition, increased users or
bandwidth requirements may harm the performance of the Internet. The Internet
has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and delays in the
future. This might include outages and delays resulting from the "year 2000"
problem. See "-- We face year 2000 risks." These outages and delays could reduce
the level of Internet usage as well as the level of traffic, and could result in
the Internet becoming an inconvenient or uneconomical source of music and
music-related products and services. The infrastructure and complementary
products or services necessary to make the Internet a viable commercial
marketplace for the long term may not be developed successfully or in a timely
manner. Even if these products or services are developed, the Internet may not
become a viable commercial marketplace for the products or services that we
offer.
WE MAY HAVE DIFFICULTY COMPETING FOR OR EXECUTING STRATEGIC ALLIANCES AND
ACQUISITIONS.
Our business strategy includes entering into strategic alliances and may
include acquiring complementary businesses, technologies, content or products.
For example, in May 1999, we entered into an agreement with Cox Interactive
Media, Inc., pursuant to which we plan to sell to Cox Interactive Media
4,182,578 shares of Series C preferred stock for a total purchase price of
approximately $45 million in June 1999, and to form 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 strategic alliance will be successful.
We may be unable to complete suitable strategic alliances and acquisitions on
commercially reasonable terms, if at all. We expect to face competition for
strategic alliance and acquisition candidates and sponsorships. This competition
could impair our ability to successfully pursue these aspects of our business
strategy.
Strategic alliances or acquisitions could disrupt our ongoing business,
distract our management and employees and increase our expenses. If we acquire a
company, we could face difficulties assimilating that company's personnel and
operations. In addition, the key personnel of the acquired company may decide
not to work for us. Acquisitions of additional services or technologies also
involve risks of incompatibility and lack of integration into our existing
operations. If we finance the acquisitions by incurring debt or issuing equity
securities, this could dilute our existing stockholders. Any amortization of
goodwill or other assets, or other charges resulting from the costs of such
acquisitions, could adversely affect our operating results.
FINANCIAL RISKS
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST.
As a result of our limited operating history, we do not have historical
financial data for a significant number of periods upon which to forecast
quarterly revenues and results of operations. We believe that period-to-period
comparisons of our operating results are not meaningful and should not be relied
upon as indicators of future performance. In addition, revenue streams may be
subject to unpredictable seasonal effects due to the combined effect of the
business cycles of the music industry and Internet commerce in general. In one
or more future quarters our results of operations may fall below the
expectations of securities analysts and investors, and the trading price of our
common stock may drop.
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<PAGE> 12
WE EXPECT NET LOSSES IN THE FUTURE.
We expect substantial net losses and negative cash flow for the foreseeable
future. We believe it is critical to our long term success that we continue to
develop MP3.com brand awareness and loyalty through marketing and promotion,
expand our artist and consumer networks, develop our online content and expand
our other services. We expect that our operating expenses will increase
significantly during the next several years, especially in sales and marketing.
With increased expenses, we will need to generate significant additional
revenues to achieve profitability. As a result, we may never achieve or sustain
profitability and, if we do achieve profitability in any period, we may not be
able to sustain or increase profitability on a quarterly or annual basis.
WE MAY NEED TO OBTAIN ADDITIONAL FINANCING.
The proceeds of this offering are expected to be sufficient to meet our
cash requirements for at least the next 12 months. However, we may need to raise
additional funds in order to:
- finance unanticipated working capital requirements;
- develop or enhance existing services or products;
- fund distribution relationships;
- respond to competitive pressures; or
- acquire complementary businesses, technologies, content or products.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take advantage
of unanticipated opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited. If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced, and these securities
may have rights, preferences or privileges senior to those of our stockholders.
RISKS RELATED TO SALES, MARKETING AND COMPETITION
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
We believe that our historical growth and brand recognition have been
largely attributable to word of mouth. We have benefited from frequent and
visible national and local media exposure. The frequency or quality of this
media exposure may not continue. We believe that continuing to strengthen our
brand will be critical to achieve widespread acceptance of our products and
services. Favorable public perception of our brand will depend largely on our
ability to continue providing users with high quality products and services and
the success of our marketing efforts. We plan to increase our marketing
expenditures to create and maintain brand recognition. However, brand promotion
activities may not yield increased revenues and, even if they do, any increased
revenues may not offset the expenses we incur in building our brand.
The growth of our business will also depend in significant part on our
ability to develop a brand identity that transcends a mere association with the
mp3 format. We must pursue a brand development strategy that identifies our
company as a primary source for interesting and diverse high quality music and
artists above and beyond mp3 technology. Although MP3.com is not tied
exclusively to the use of mp3 technology or to any other specific standard for
the electronic delivery of music, failure to achieve such brand recognition
apart from the mp3 format could significantly harm our business.
OUR MARKETING AND SALES EFFORTS RELY HEAVILY ON OUR ABILITY TO COLLECT
INFORMATION.
We plan to use consumer data to expand, refine and target our marketing and
sales efforts. We collect most of our data from users who report information to
us as they conduct transactions on our website. If a large proportion of users
impede our ability to collect data or if they falsify data, our marketing and
sales
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<PAGE> 13
efforts and advertising revenues would be less effective. In addition, laws
relating to privacy and the use of the Internet to collect personal information
could limit our ability to collect data and utilize our database. Because we use
e-mail for direct marketing, any legislative or consumer efforts to regulate
unsolicited bulk e-mails, commonly referred to as "spam," as well as other laws
regulating the use of e-mail could significantly impair our sales and marketing
efforts.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE.
The market for the online promotion and distribution of music and
music-related products is competitive. Barriers to entry on the Internet are
relatively low, and we expect competition to increase significantly in the
future. We face competitive pressures from numerous actual and potential
competitors including:
- Providers of online music content such as GoodNoise Corporation, Launch
Media, Inc. and various private companies.
- Companies offering mp3 or other audio compression formats, such as those
of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft Corporation
and RealNetworks, Inc. Some of these companies also offer customers the
ability to download music from their websites.
- Online destination sites with greater resources than us such as online
music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
like America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos,
Inc. and Yahoo!, Inc.
- Traditional music industry companies, including BMG Entertainment, a unit
of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc.; and
Universal Music Group, a unit of the Seagram Company Ltd. Certain of
these companies have recently entered the online commercial community and
are currently backing the SDMI security format.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, in May 1999, Microsoft Corporation and Sony Corporation announced an
agreement to pursue a number of cooperative activities. Sony has announced that
it will make its music content downloadable from the Internet using Microsoft's
multimedia software. In addition, Universal Music Group and BMG Entertainment
have announced a joint venture to form an online music store.
Many of our existing and potential competitors have longer operating
histories, greater brand name recognition, larger consumer bases and
significantly greater financial, technical and marketing resources than we do.
We cannot assure you that websites maintained by our existing and potential
competitors will not be perceived by consumers, artists, talent management
companies and other music-related vendors or advertisers as being superior to
ours. We also cannot assure you that we will be able to maintain or increase our
website traffic levels, purchase inquiries and number of click-throughs on our
online advertisements or that competitors will not experience greater growth in
these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.
RISKS RELATED TO OPERATIONS
OUR BUSINESS COULD BE HARMED IF WE LOSE MEMBERS OF, OR FAIL TO INTEGRATE, OUR
MANAGEMENT TEAM.
Our future performance will be substantially dependent on the continued
services of our management and our ability to retain and motivate them. The loss
of the services of any of our officers or senior managers could harm our
business. We do not have long-term employment agreements with any of our key
personnel, other than our Chief Executive Officer, and we do not maintain any
"key person" life insurance policies except on our Chief Executive Officer.
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<PAGE> 14
Almost all of our management team joined MP3.com in 1999. Most of these
individuals have not previously worked together and are currently being
integrated as a management team. If our senior managers are unable to work
effectively as a team, our business would be harmed.
WE MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES.
Our future success will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers, web designers and advertising sales personnel, and we may be unable
to successfully attract sufficiently qualified personnel. Substantially all of
our employees have joined us in 1999 and we expect that our rate of hiring will
continue at a very rapid pace. To manage the expected growth of our operations,
we will need to integrate these employees into our business. Our inability to
hire, integrate and retain qualified personnel in sufficient numbers may reduce
the quality of our programs, products and services, and could harm our business.
WE MUST CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE.
In April 1999, an average of approximately 14.6 gigabytes of musical
content was added to our website each week and the visitors to the site
increased by approximately 20% from the previous month. We must continue to add
hardware and enhance software to accommodate the increased content and use of
our website. If we are unable to increase the data storage and processing
capacity of our systems at least as fast as the growth in demand, our website
may become unstable and may fail to operate for unknown periods of time.
Unscheduled downtime could harm our business and also could discourage users of
our website and reduce future revenues.
WE ARE IN THE PROCESS OF IMPLEMENTING A NEW FINANCIAL ACCOUNTING SYSTEM.
In May 1999, we began installing a new financial accounting system. We
anticipate this installation will be completed in stages through the remainder
of 1999. If the accounting system does not work effectively, we may experience
delays or failures in our accounting processes. This could adversely impact the
promptness and accuracy of our transaction processes, and our financial
accounting and reporting.
To manage the expected growth of our operations and personnel, we will need
to improve our operational and financial systems, transaction processing,
procedures and controls. Our current and planned systems, transaction
processing, procedures and controls may not be adequate to support future
operations.
OUR DATA WAREHOUSING AND WEB SERVER SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS,
FAILURE OF THIRD-PARTY SERVICES AND OTHER UNEXPECTED PROBLEMS.
Since our data warehousing, web server and network facilities are all
located in Southern California, an earthquake or other natural disaster could
affect all of our facilities simultaneously. An unexpected event such as a power
or telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at either of our two Internet service providers'
facilities could cause the loss of critical data and prevent us from offering
our services to artists and consumers. Our business interruption insurance may
not adequately compensate us for losses that may occur. In addition, we rely on
third parties to securely store our archived data, house our web server and
network systems, and connect us to the Internet. A failure by any of these third
parties to provide these services satisfactorily could harm our business.
WE WOULD BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL.
If the security measures that we use to protect personal information are
ineffective, we may lose visitors and our business would be harmed. We rely on
security and authentication technology licensed from third parties. With this
technology, we perform real-time credit card authorization and verification. We
cannot predict whether new technological developments could allow these security
measures to be circumvented.
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<PAGE> 15
In addition, our software, databases and servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
may need to spend significant resources to protect against security breaches or
to alleviate problems caused by any breaches. We cannot assure that we can
prevent all security breaches.
WE FACE YEAR 2000 RISKS.
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, our business may be
seriously harmed. In particular, year 2000 problems could temporarily prevent us
from offering our goods and services. See "Management's Discussion and Analysis
of Financial Condition and Operating Results -- Year 2000 Readiness Disclosure."
RISKS RELATED TO GOVERNMENT REGULATION, CONTENT AND INTELLECTUAL PROPERTY
GOVERNMENT REGULATION MAY REQUIRE US TO CHANGE THE WAY WE DO BUSINESS.
Our business is subject to rapidly changing laws and regulations. Although
our operations are currently based in California, the United States government
and the governments of other states and foreign countries have attempted to
regulate activities on the Internet. Evolving areas of law that are relevant to
our business include privacy law, proposed encryption laws, content regulation
and sales and use tax 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 HAVE LIABILITY FOR CONTENT.
We may be liable to third parties for content on our website and on the CDs
we distribute:
- if the music, text, graphics, 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 content we distribute is deemed obscene, indecent or defamatory.
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.
We are a defendant in an action in which the plaintiffs, PlayMedia Systems,
Inc. and others, allege that our posting on our website of Nullsoft, Inc.'s
digital decoder technology known as "Winamp," which allegedly incorporates
plaintiffs' AMP technology, creates liability for copyright infringement. Though
we believe we have meritorious defenses to this action and intend to vigorously
defend against the allegations, an unfavorable resolution of the matter could
harm our business. See "Business -- Legal Proceedings."
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, we cannot assure you that these
measures will be successful or that we will not be found liable for content.
Liability or alleged liability could harm our business by damaging our
reputation, requiring us to incur legal costs in defense, exposing us to awards
of damages and costs and diverting management's attention away from our
business. See "Business -- Intellectual Property."
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<PAGE> 16
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE.
Our intellectual property includes our trademarks and copyrights,
proprietary software, and other proprietary rights. We believe that our
intellectual property is important to our success and our competitive position,
and we try to protect it. However, our efforts may be inadequate. We do not have
a registered trademark for the "MP3.com" name and may not be able to prevent
others from using "mp3" or "MP3.com." Use of the "MP3.com" name by others could
dilute our brand identity and confuse the market. In addition, our ability to
conduct our business may be harmed if others claim we violate their intellectual
property rights. For example, Sightsound.com, Inc. has asserted that many online
music providers, including MP3.com, violate patent rights that it allegedly owns
covering the sale of music over the Internet through digital downloads. If
successful, these claims, or similar claims by others, could seriously harm our
business by forcing us to cease using important intellectual property 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. See
"Business -- Intellectual Property."
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK IS PARTICULARLY SUBJECT TO VOLATILITY BECAUSE OF THE INDUSTRY
WE ARE IN.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of such companies. These broad
market fluctuations could adversely affect the market price of our common stock.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND HOW WE INVEST THESE
PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
The net proceeds of this offering are not allocated for specific uses. Our
management can spend the proceeds from this offering in ways with which the
stockholders may not agree. We cannot predict that the proceeds will be invested
to yield a favorable return.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL %
OF OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of the outstanding MP3.com common stock will, in the aggregate,
beneficially own approximately % of our outstanding common stock. These
stockholders would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying, deterring or preventing a change in
control of MP3.com and may make some transactions more difficult or impossible
to complete without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions:
- authorize the issuance of "blank check" preferred stock, which is
preferred stock that can be created and issued by the Board of Directors
without prior stockholder approval, with rights senior to those of common
stock;
- provide for a staggered Board of Directors, so that no more than two
directors could be replaced each year and it would take three successive
annual meetings to replace all directors;
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<PAGE> 17
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the Board of Directors and for proposing matters that can be
acted upon by stockholders at a meeting.
OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between us and the representatives of the
underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. In addition, an active public
market for our common stock may not develop or be sustained after this offering.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. The dilution will be $ per share in the net tangible
book value of the common stock from the initial public offering price. If
additional shares are sold by the underwriters following exercise of their
over-allotment option, or if outstanding options or warrants to purchase shares
of common stock are exercised, there will be further dilution.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, assuming a public offering price of $ ,
we will have outstanding shares of common stock. All the shares
sold in this offering will be freely tradable. Of the remaining
shares of common stock outstanding after this offering, 29,250,000 shares will
be eligible for sale in the public market beginning 181 days after the date of
this prospectus. The remaining shares will become available at
various times thereafter upon the expiration of one-year holding periods. We
also intend to register up to 12,476,250 additional shares of our common stock
after this offering for sale pursuant to our equity plans.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue," the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks described above and in other parts of this prospectus. These factors
may cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform them to actual results or to
changes in our expectations.
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<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately
$ million (based upon an assumed initial public offering price of $ per
share) after deducting the underwriting discount and commissions and estimated
offering expenses ($ if the over-allotment option is exercised in
full).
We expect to use the net proceeds for general corporate purposes, including
working capital and capital expenditures, such as expansion of sales and
marketing activities and facilities expansion. The amounts we actually expend
for such working capital purposes may vary significantly and will depend on a
number of factors, including the amount of our future revenues and the other
factors described under "Risk Factors." We have not allocated any portion of the
proceeds from this offering for any specific purpose. Accordingly, our
management will retain broad discretion in the allocation of the net proceeds of
this offering. A portion of the net proceeds may also be used in connection with
strategic partnerships or to acquire or invest in complimentary businesses,
technologies, product lines, content or products. We have no current agreements
or commitments with respect to any such acquisitions, and we are not currently
engaged in any negotiations with respect to any such transaction. Pending such
uses, the net proceeds of this offering will be invested in short term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
Certain 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 therefore do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements, general business condition and other factors
that the board of directors may deem relevant.
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<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- On an actual basis;
- On a pro forma basis after giving effect, upon the closing of the
offering, to (a) the conversion of 7,150,000 shares of convertible Series
A preferred stock outstanding as of March 31, 1999 into 10,724,996 shares
of common stock; (b) the conversion of 1,100,000 shares of convertible
Series A preferred stock issued during April 1999 into 1,650,000 shares
of common stock; (c) the conversion of 439,103 shares of convertible
Series B preferred stock issued during April 1999 into 658,653 shares of
common stock; (d) the exercise of warrants to purchase 658,653 shares of
common stock; and (e) the issuance of $2.5 million of common stock
(assuming an initial public offering price of $ per share)in a
private placement pursuant to an agreement with a strategic partner
entered into on May 12, 1999; and
- On a pro forma as adjusted basis, giving effect to our issuance of the
common stock offered hereby at an assumed offering price of $ per share
and the application of the net proceeds as described under "Use of
Proceeds."
This information should be read in conjunction with our financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------- PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ -----------
<S> <C> <C> <C>
Long-term debt, less current portion(1)............. $ -- $ -- $ --
Stockholders' equity:
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; shares issued
outstanding pro forma (unaudited); 200,000,000
shares authorized; and shares
issued and outstanding, pro forma as
adjusted(2).................................... 31,695
Additional paid in capital........................ 16,159,195
Notes receivable from a stockholder............... (260,000) (260,000) (260,000)
Deferred compensation............................. (3,816,189) (3,816,189) (3,816,189)
Accumulated deficit............................... (1,762,534) (1,762,534) (1,762,534)
------------ ------------ -----------
Total stockholders' equity........................ 10,359,317
------------ ------------ -----------
Total capitalization...................... $ 10,359,317 $ $
============ ============ ===========
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements.
(2) Does not include 13,050,000 shares of common stock reserved for issuance
under our employee benefit plans, of which 2,757,750 shares were subject to
outstanding options as of March 31, 1999 at a weighted average exercise
price of $0.20 per share. See "Description of Capital Stock," "1998 Equity
Incentive Plan" and "Employee Stock Purchase Plan."
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<PAGE> 20
DILUTION
As of March 31, 1999, our pro forma net tangible book value, after giving
effect to conversion of our preferred stock, was approximately $10.4 million, or
$ per share of common stock. Pro forma net tangible book value represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to our sale of
common stock offered hereby at an assumed initial public offering price of
$ per share, and our receipt of the estimated net proceeds therefrom, our
pro forma net tangible book value as of March 31, 1999 would have been
approximately $ million, or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering............................................... $
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 45,387,301 % $15,848,321 % $0.35
New investors........................ % %
---------- ----- ----------- ------
Total...................... 100.0% $ $100.0%
========== ===== =========== ======
</TABLE>
The foregoing discussion and tables assume no exercise of stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 2,757,750 shares of common stock, with a
weighted average exercise price of $0.20 per share. No warrants to purchase
common stock were outstanding as of March 31, 1999, but warrants to purchase
118,557 shares of common stock were outstanding as of May 1, 1999. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new investors. See "Management -- 1998 Equity Incentive Plan,"
"Description of Capital Stock" and Notes 4 and 6 to Notes to Financial
Statements.
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<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
In the table below, we provide you with selected historical financial data.
We have prepared this information using financial statements for the period from
March 17, 1998 (inception) to December 31, 1998 and the three-month period ended
March 31, 1999. The financial statements for the period from March 17, 1998
(inception) to December 31, 1998 have been audited by Ernst & Young LLP,
independent auditors. The financial statements for the three-month period ended
March 31, 1999 have not been audited. We have prepared this unaudited
information on substantially the same basis as the audited financial statements
and included all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of the financial position and
results of operations for the period. When you read this selected historical
financial data, it is important that you read along with it the historical
financial statements and related notes as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this Prospectus. Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998 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..................... 550,197 651,683
---------- -----------
Total operating expenses.......................... 1,167,248 1,938,769
---------- -----------
Loss from operations........................................ (219,768) (1,478,287)
Interest income (expense), net.............................. (3,810) 73,291
---------- -----------
Loss before income taxes.................................... (223,578) (1,404,996)
Provision for income taxes.................................. 133,960 --
---------- -----------
Net loss.................................................... $ (357,538) $(1,404,996)
========== ===========
Net loss per share(1):
Basic and diluted......................................... $ (0.01) $ (0.05)
========== ===========
Weighted average shares -- basic and diluted.............. 26,182,785 27,537,067
========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 MARCH 31, 1999
------------ --------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 39,509 $ 9,327,149
Working capital............................................. 132,469 9,146,989
Total assets................................................ 463,355 11,245,608
Total stockholders' equity.................................. 194,706 10,359,317
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the net loss per share and the number of shares used in the
per share calculation.
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
The following discussion should be read in conjunction with our financial
statements and the notes thereto and the other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking information due
to factors discussed under "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music catalog. Our
website contains over 56,000 songs from over 11,000 artists, representing the
one of the largest collections of digital music available on the Internet.
Consumers can search, sample and download this music free of charge. We receive
revenue from the sale of online advertising on our website. We also sell CDs
online, both fully packaged albums created by our MP3.com artists (which we call
Digital Automatic Music or "DAM CDs") and albums we compile featuring the work
of multiple MP3.com artists (which we call "compilation CDs").
We were incorporated on March 17, 1998. During 1998, our operating
activities consisted largely of developing the infrastructure necessary to
download music on the Internet. At December 31, 1998, we had only eight
employees. This increased to 54 employees at March 31, 1999 and to 75 employees
at April 30, 1999. We shipped approximately 850 DAM CDs in the quarter ended
December 31, 1998, and approximately 6,100 DAM CDs in the quarter ended March
31, 1999.
Given our short operating history and our limited operations in 1998, we
believe that comparisons between any period in 1999 and the comparable period in
1998 would not be meaningful; therefore, these comparisons are not discussed
below.
RESULTS OF OPERATIONS
Net Revenues
To date, net revenues have consisted primarily of the sale of online
advertisements on our website, and to a lesser extent, the online sale of CDs
and music-related merchandise. Net revenues were $1,162,000 during 1998 and
$666,000 in the quarter ended March 31, 1999. The level of net revenues in the
first quarter of 1999 reflected increased banner and sponsorship advertisements
on our website.
Revenue from online advertising. To date, online advertising revenue has
consisted primarily of banner and sponsorship advertisements on our website. The
duration of our banner advertising commitments has ranged from one month to one
year. Sponsorship advertising contracts involve more integration with our
website, such as the placement of buttons that provide users with direct links
to the advertiser's website. Advertising revenue was $1,061,000 (91% of net
revenues) during 1998 and $560,000 (84% of net revenues) in the first quarter
1999. The increase in the level of advertising revenue in the first quarter of
1999 was primarily due to the expansion of our customer base, increased
awareness regarding MP3.com and the mp3 technology, and development and
expansion of our music content. As we develop and introduce new online programs,
products and services, we anticipate that revenue from banner advertising and
sponsorship advertising will decrease as a percentage of net revenues.
We recognize revenue on the sale of banner advertisement contracts as the
impression is delivered or displayed. We recognize revenue on the sale of
sponsorship advertisement contracts ratably over the period in which the
advertisement is displayed. In each case, revenue is only recognized if we have
no remaining significant obligations and the collection of the receivable is
probable. Our obligations typically include guarantees of a minimum number of
"impressions," or times that an advertisement appears in pages viewed
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<PAGE> 23
by users of our website. In these circumstances, we recognize revenues at the
lesser of the ratio of impressions delivered over the guaranteed impressions or
the straight-line basis over the term of the agreement. To the extent minimum
guaranteed impressions are not met, we defer recognition of the corresponding
revenues until the remaining guaranteed impressions are delivered.
Revenue from online sales of CDs and other music-related merchandise. We
also derive revenue from the online sale of our compilation and DAM CDs and, to
a lesser extent, other music-related merchandise. Revenue from the online sale
of CDs and music-related merchandise was $101,000 (9% of net revenues) during
1998 and $106,000 (16% of net revenues) in the first quarter of 1999. Revenue
from online sales of CDs and music-related merchandise increased primarily due
to increased musical content available on our website and increased brand
awareness. In the future, if the number of visitors to our website continues to
grow and the quantity and quality of the musical content available continues to
increase, we expect that revenue from the online sale of CDs will constitute an
increasing portion of total net revenues. This revenue is recognized upon
shipment.
On May 12 1999, we entered into a three year agreement with Boutit, Inc.,
which also does business under the name "No Limit Records." Under this
agreement, we obtained certain rights to a number of No Limit master recordings.
Some of the artists represented by No Limit include Master P and Snoop Dogg,
along with other respected platinum-selling artists. No Limit artists also may
participate in our chatrooms, display MP3.com signs at concert performances,
hold concerts with MP3.com artists and cooperate with us on other promotional
activities. We will split with No Limit revenues generated under the agreement
at varying rates depending on the source of revenue. No Limit will also become a
stockholder of MP3.com at the closing of this offering. Pursuant to our
agreement, we will issue $2.5 million of our common stock (valued at the initial
public offering price) in a private placement concurrent with the closing of
this offering. We expect to amortize a $2.5 million charge over the term of the
agreement to reflect this issuance.
Cost of Revenues
Cost of revenues primarily represents certain website operations costs, CD
and merchandise fulfillment operations and artist royalties. Website operations
costs include Internet connectivity charges, networking costs and equipment
depreciation. CD and merchandise fulfillment operations costs primarily consist
of labor related costs, equipment depreciation, CD blanks, merchandise, shipping
and the allocation of certain facilities costs. In the future, cost of net
revenue also may include content acquisition cost.
Cost of revenues was $215,000 (19% of net revenues) during 1998 and
$205,000 (31% of net revenues) in the first quarter of 1999. The level of cost
of revenues increased, as a percentage of net revenue, due primarily to
increased depreciation expense associated with increased investment in website
and fulfillment related equipment, as well as increases in CD and other music
related merchandise sales (which typically have lower associated gross margins).
We anticipate that future gross margins will fluctuate depending on changes in
our revenue mix and the timing of our investments in website and fulfillment
operations.
Sales and Marketing
Sales and marketing expense consists primarily of direct marketing
expenses, promotional activities, salaries and commissions, costs related to
website editorial content and the allocation of certain facilities cost.
Sales and marketing expense was $79,000 (7% of net revenues) during 1998
and $523,000 (79% of net revenues) in the first quarter of 1999. The increase in
sales and marketing expense, both in absolute dollar amounts and as a percentage
of net revenue, was primarily due to new marketing programs and substantial
increases in sales and marketing personnel. We anticipate that overall sales and
marketing expense will increase significantly in the foreseeable future;
however, sales and marketing expense as a percentage of net revenues may
fluctuate depending on the timing of new marketing programs and addition of
sales and marketing personnel.
In April 1999, we entered into an artist promotion consulting agreement
with Atlas/Third Rail Management, Inc., a leading Los Angeles-based creative
talent agency. The contract has a term of three years.
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<PAGE> 24
Under the agreement, Atlas/Third Rail will use its reasonable efforts to
facilitate artist promotions. One such promotion involves our sponsorship of
Alanis Morissette and Tori Amos' "5 1/2 Weeks" summer 1999 tour. In connection
with the promotion agreement, we granted Atlas/Third Rail warrants to purchase
658,653 shares of our common stock exercisable at $0.33 per share. As a result
of the grant, we recorded deferred marketing costs of approximately $1,936,000.
We will account for these warrants in accordance with the fair value provisions
of FAS 123 and will amortize its value to sales and marketing expense as
follows: approximately $323,000 in the second quarter of 1999 (when the 5 1/2
Weeks tour was announced) and approximately $1,613,000 in the third quarter of
1999 (when the 5 1/2 Weeks tour is scheduled to occur). See "Business -- Sales
and Marketing" and Note 6 of Notes to Financial Statements.
In the future, we anticipate that we will enter into arrangements with
additional leading artists and creative talent agencies to secure their
promotional and marketing services and obtain certain rights to their music.
Future expenses may include costs related to promotional events, which will be
expensed to sales and marketing in the period the event is held. Proceeds from
these events, if any, will be credited against promotional expenses incurred.
Depending upon the terms and timing of promotional activities, substantial sales
and marketing expenses may be incurred in any quarterly or annual period.
Product Development
Product development expense consists primarily of compensation for our
product development staff, depreciation of computer equipment used for
development, supplies and the allocation of facilities costs. We expense product
development costs as they are incurred.
Product development expense was $395,000 (34% of net revenues) during 1998
and $305,000 (46% of net revenues) in the first quarter of 1999. The increase in
the level of product development expense, as a percentage of net revenue, was
primarily due to increased payroll and related expenses associated with
increased head count, increased computer equipment depreciation related to
increased capital expenditures, and expensed computer supplies. We anticipate
that overall product development expenses will increase in the foreseeable
future; however, product development expenses as a percentage of net revenues
may fluctuate depending on the level of future net revenues and the timing of
investments in product development and hiring.
General and Administrative
General and administrative expense consists primarily of salaries for
finance, legal and other administrative personnel, fees for outside consultants,
depreciation, an allocation of facilities related costs, insurance, legal and
accounting fees, and other overhead.
General and administrative expense was $143,000 (12% of net revenues)
during 1998 and $459,000 (69% of net revenues) in the first quarter of 1999. The
increase in general and administrative expense, both in absolute dollar amount
and as a percentage of net revenue, was primarily a result of increased finance
and administrative headcount, recruiting and relocation expenses related to
hiring our management team, increased legal and accounting expenses and
increased depreciation expense. We anticipate that overall general and
administrative expense will increase in the foreseeable future; however, general
and administrative expense as a percentage of net revenues may fluctuate
depending on the level of future net revenues and the timing of additional
investments in general and administrative infrastructure.
Amortization of Deferred Compensation
During 1998 and the quarter ended March 31, 1999, we recorded aggregate
deferred compensation of $728,000 and $4,290,000, respectively, in connection
with the grant of certain stock options which were granted at exercise prices
less than the deemed fair value on the grant date. We also expect to record
additional deferred compensation expense in the second quarter of 1999 to
reflect additional option grants at exercise prices less than the deemed fair
value of common stock on the grant date. The deferred compensation is being
amortized over the vesting period of the options, which is generally four years.
Of the
21
<PAGE> 25
total deferred compensation, $550,000 was amortized during 1998 and $652,000 was
amortized in the first quarter of 1999. See Note 4 of Notes to Financial
Statements.
Interest Income (Expense), Net
Net interest expense of $4,000 during 1998 resulted from interest incurred
on a capital lease, partially offset by interest income earned on cash balances.
Net interest income in the first quarter of 1999 of $73,000 was a result of an
increase in cash associated with approximately $10.9 million in net proceeds
from the Series A convertible preferred stock issuance, offset by interest
expense of approximately $8,000 related to a capital lease obligation.
Provision For Income Taxes
Despite the loss before income taxes of $224,000 in 1998, we recorded a
provision for income taxes of $134,000. The tax provision of $134,000 resulted
from the amortization of deferred compensation, described above, which is not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
To date, our operations have been financed from internally generated cash,
the sale of Series A and B convertible preferred stock in 1999 and, to a lesser
extent, capital equipment lease arrangements.
As of March 31, 1999, approximately $9,327,000 in cash and cash equivalents
was available. Additionally, a $3,000,000 line of credit with Imperial Bank with
a sublimit of $1,500,000 for equipment financing was available. Borrowings under
the line of credit accrue interest at the bank's prime rate plus 1% (8.75% as of
March 31, 1999). As of March 31, 1999, there were no amounts outstanding under
the line of credit and no amounts were borrowed during the first quarter of
1999. On April 30, 1999, we borrowed $1,234,000 under the bank's equipment
sublimit facility. This indebtedness requires monthly payments of interest only
through August 1999, at which time the outstanding principal amount will be
converted into a three year fully-amortizing term loan with the bank. See Note 6
of Notes to Financial Statements.
Net cash provided by operating activities during 1998 was approximately
$157,000 and consisted primarily of the following:
- net loss of approximately $358,000;
- amortization of deferred compensation of $550,000;
- an increase in accounts and unbilled receivables of approximately
$289,000; and
- an increase in accounts payable and accrued expenses of approximately
$130,000.
Net cash used in operating activities for first quarter of 1999 was
approximately $438,000. The uses of cash from operating activities consisted
primarily of the following:
- net loss of approximately $1,405,000;
- amortization of deferred compensation of $652,000;
- an increase in accounts receivable of approximately $107,000;
- an increase in prepaid expenses and other current assets of approximately
$243,000;
- an increase in accounts payable and accrued expenses of approximately
$558,000; and
- an increase in deferred revenue of approximately $68,000.
Cash used in investing activities during 1998 and the first quarter of 1999
was approximately $43,000 and $1,184,000, respectively, and consisted primarily
of property and equipment expenditures.
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
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<PAGE> 26
1999 was approximately $10,909,000, and consisted primarily of the proceeds from
the sale of Series A preferred stock.
We have no material financial commitments other than obligations under our
credit facilities and operating leases. We expect to substantially increase
expenditures for applications including:
- computer equipment and furniture and fixtures associated with increased
head count and facility expansion;
- website computer equipment and increased head count for website
maintenance personnel;
- product fulfillment equipment, infrastructure and head count;
- bandwidth and networking equipment and infrastructure;
- increased head count related to sales and marketing efforts;
- equipment and increased headcount related to product development;
- increased promotion and branding efforts; and
- development and acquisition of content.
Capital requirements in any particular period will depend on the timing of
these expenditures.
To the extent our net revenues increase in the future, we anticipate
significant increases in our working capital requirements to finance higher
relative levels of associated accounts receivable, unbilled receivables and
other assets, offset by increases in accounts payable and other liabilities.
However, we do not expect the increases in accounts payable and other
liabilities will offset the increases in accounts receivable, unbilled
receivables and other assets.
In May 1999, we entered into an agreement with Cox Interactive Media, Inc.
We plan to sell to Cox Interactive Media 4,182,578 shares of Series C preferred
stock (which will be converted into 6,273,867 shares of common stock at the
closing of this offering) for a total purchase price of approximately $45
million in June 1999, and to form a joint venture with Cox Interactive Media to
create and operate music-related websites. In connection with the formation of
the joint venture, we are committed to contribute approximately $14 million to
the joint venture over the next year. No payments will be due until we receive
the approximately $45 million purchase price for the stock we issue to Cox
Interactive Media, but capital investments in excess of our initial contribution
are likely to be required as the operation grows.
We believe that our cash and cash equivalent balances, funds available
under our existing line of credit, proceeds from the Cox Interactive Media
investment, net of 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.
We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products, content,
businesses or technologies. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced, our stockholders may experience additional
dilution and such securities may have rights, preferences or privileges senior
to those of our stockholders. There can be no assurance that additional
financing will be available or on terms favorable to us. If adequate funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
products or services or otherwise respond to competitive pressures could be
significantly limited. Our business may be harmed by such limitations.
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<PAGE> 27
INTEREST RATE RISK
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in certain certificates of
deposit. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would not materially effect the fair value of interest sensitive financial
instruments at December 31, 1998 or March 31, 1999.
YEAR 2000 READINESS DISCLOSURE
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely.
Since our business and, consequently, our hardware, telecommunications and
software systems are new, we believe most of these systems are already year 2000
ready and we do not expect internal year 2000 problems to materially affect us.
Nevertheless, because our business relies heavily on the Internet and on
computer and telecommunication systems, including those of our suppliers,
customers and other third parties, the year 2000 problem could seriously harm
us. Therefore, we established a year 2000 readiness team to assess the effect
that the year 2000 problem may have on us and to develop a year 2000 readiness
plan.
Our year 2000 team is evaluating our information technology systems,
including our computers and software applications, and our other technology
systems, such as our security systems and other equipment in which software is
embedded. As the team identifies critical hardware, telecommunications, software
and other technology systems that require modifications, replacements or
upgrades needed for year 2000 readiness, we plan to make the required
modifications, replacements or upgrades. We plan to complete this assessment by
September 1999. We believe our current products and services are year 2000
compliant.
We estimate that the costs of our year 2000 readiness efforts, including
any necessary modifications, upgrading or replacement of computer hardware or
software, will not exceed $100,000.
The team also is assessing how other parties' year 2000 problems could
affect us. Beginning in May 1999, we intend to contact parties who have material
relationships with us, including our Internet service providers, in order to
inquire as to their year 2000 readiness. Based upon the responses to these
inquiries, we will evaluate the extent to which these parties' year 2000
readiness, or lack of readiness, might impact our business.
If we or any third parties with whom we have a material relationship fail
to achieve year 2000 readiness, our business may be seriously harmed. In
particular, year 2000 problems could temporarily prevent us from offering our
goods and services. For example, because we communicate with our users almost
exclusively by computer over the Internet, our operations could be disrupted to
the extent year 2000 problems cause failures or malfunctions of computer or
telecommunications systems used by our artists, customers or Internet service
providers. This, in turn, could result in financial loss and damage to our
reputation. In addition, disputes could arise with our customers and other third
parties over damage caused by the failure of our products or services to be year
2000 compliant, some of which might result in legal liability. The need to
address problems caused by failure to achieve year 2000 readiness also could
divert our management, personnel and financial resources away from our core
business activities, preventing us from pursuing our business plan and
strategies.
Our year 2000 team is currently developing contingency plans to be
implemented if we encounter year 2000 problems. We expect to complete these
plans in September 1999. However, notwithstanding these plans and the other
efforts of our year 2000 team, we cannot assure you that we will be year 2000
ready, or that year 2000 problems will not adversely affect our business,
financial condition and results of operations.
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<PAGE> 28
BUSINESS
OVERVIEW
MP3.com is pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this expanding music catalog. Our
website contains over 56,000 songs from over 11,000 artists, representing one of
the largest collections of digital music available on the Internet. Consumers
can search, sample and download music free of charge.
We receive revenue from online advertising, e-commerce and offline
sponsorships. To date, the majority of our revenues has been from the sale of
advertising space on our website. In addition, we sell CDs online, both
fully-packaged albums created by our MP3.com artists (which we call Digital
Automatic Music or "DAM CDs") and albums we compile featuring the work of
multiple MP3.com artists (which we call "compilation CDs"). We also receive
revenue from advertisers for their sponsorship of CD samplers, which are
distributed free of charge to consumers and contain collections of music from
MP3.com artists.
Our unique business model provides the following advantages for artists and
consumers:
- creates an easy and convenient way for consumers to listen to, download
and purchase music;
- dramatically lowers costs for artists to promote and distribute their
music;
- enables artists to reach a large number of consumers worldwide;
- enables consumers to discover local and lesser-known artists in ways they
cannot through traditional music retailers; and
- facilitates direct communication between fans and artists.
We believe that artists and consumers are drawn to MP3.com because they
have been historically underserved by the traditional music industry. We will
continue to introduce new products and services designed to meet their
entertainment, e-commerce, communications and information needs.
MP3.com was incorporated in March 1998. During 1998, our operations
consisted largely of developing the infrastructure necessary to download music
on the Internet. Since the beginning of the year, our growth has been dramatic.
Headcount increased from eight employees on December 31, 1998, to 54 employees
on March 31, 1999, to 75 employees on April 30, 1999. Traffic to our website
increased over 20% from March to April 1999. In April 1999, we added over 80
artists and 600 new songs on average each day. During April 1999, our website
served over 50 million pageviews, 9 million song deliveries and 4.5 million
music searches.
INDUSTRY BACKGROUND
Recorded Music Industry
Music is one of the most popular forms of entertainment in the world. Music
is also big business. According to the International Federation of the
Phonographic Industry, or RIAA, worldwide sales of recorded music were $38.7
billion in 1998, 34% of which were in the U.S. Over 70 million consumers in the
United States purchased three or more pieces of pre-recorded music in the past
six months according to a 1999 Soundata study.
The music industry has remained relatively unchanged for many years.
Artists are generally required to sign exclusive contracts with record labels,
who in turn develop, distribute and promote their music. In addition, the major
record labels, as well as a few "independent labels," control to a large extent
the type and quantity of recorded music available to consumers.
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<PAGE> 29
This existing system limits artists and consumers in the following ways:
- Few artists can sell enough music to cover the high distribution and
promotion costs. These costs include producing CDs and tapes, inventory
and retail chain management, as well as television, print and radio
promotions and public relations efforts.
- The majority of artists can only reach limited audiences due to finite
shelf space at retailers and limited airtime on radio and television
stations, thus limiting the choices available to consumers.
- In order to protect the record companies' investment, artists must
generally commit to multi-year, multi-album contracts. These contracts
typically give the record company rights to and control of the artist's
music.
- There is very little communication and exchange of information between
artists and consumers. For example, artists do not readily know who is
buying their music or how to contact them, and consumers often do not
have an opportunity to interact directly with their favorite artists.
Because of these limitations, the number of artists served by the existing
music distribution system is small compared to the universe of musicians with
commercial aspirations. According to a recent Gallup poll, over 25% of the U.S.
population over the age of twelve, or 53 million people, are active
music-makers. In addition, according to the National Association of Music
Merchants, approximately 62% of U.S. households contain an amateur musician.
These musicians represent a broad spectrum of artists including hobbyists,
amateurs, semi-professional and professional musicians.
The Internet
The Internet has emerged as a global platform that allows millions of
people to share information, communicate and conduct business. International
Data Corporation estimates that the number of Internet users worldwide will grow
from approximately 97 million users in 1998 to 320 million by the end of 2002.
The Internet has become an attractive medium for advertising and direct
marketing because the Internet allows for the collection of key demographic data
from consumers. Advertisers can better target specific groups based on customer
tastes and buying patterns on the Internet. Moreover, a sharp increase is
expected in online advertising and direct marketing over the Internet. For
example, Jupiter Communications estimates that the dollar volume of online
advertising will increase from $1.9 billion in 1998 to $7.7 billion in 2002 and
that online direct marketing will increase from $190 million in 1998 to $1.3
billion in 2002.
As users have come to realize the convenience of faster Internet
connections, many have upgraded from a 28.8 Kbps modem to a cable, xDSL or ISDN
modem. According to Jupiter Communications, the number of subscribers using
cable, xDSL or ISDN modems is projected to increase from one million in 1998 to
10.5 million in 2002.
Digital Music
In recent years, consumers have increasingly used their computers to play
music. Dataquest estimates that in 1998, 30% of U.S. households had multimedia
PCs with a sound card, speakers and either a CD-ROM or DVD-ROM drive. Consumers
can now play CDs on their computers with the ease and fidelity formerly
associated only with stereo systems.
However, music files can be very large. For example, a three minute song
can occupy more than thirty megabytes of storage. Storing and transferring audio
files can be expensive and slow. To address this problem, compression formats
have been developed. One of the first widely accepted standards for the
compression of music was mp3, adopted by the Moving Picture Experts Group. The
mp3 standard offers at least 10:1 compression and audio integrity at near-CD
quality. Mp3 playback is currently available on most operating environments such
as Microsoft Windows 95, Windows 98, Windows NT and MacOS, most major versions
of UNIX and many other operating environments. Free copies of mp3 playback
software are widely available on the Internet. Forrester Research, Inc.
estimates that there are over 50 million mp3-capable users today.
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Capitalizing on the growing popularity of mp3, Diamond Multimedia Systems,
Inc. introduced the Rio, the first commercially available mp3 portable player,
in November 1998. Over 250,000 units have been sold to date. Several other
manufacturers, including Creative Labs, Thompson Multimedia's RCA division, LG
Electronics and Samsung, have recently released or announced plans to sell
portable mp3 players.
The development of compression formats such as mp3 has made it practical to
transmit music over the Internet. However, until recently there have been few
legitimate sources of downloadable music on the Internet.
THE MP3.COM SOLUTION
We are pioneering a revolutionary approach to the promotion and
distribution of music. Our website has grown into a premier online music
destination. We use the Internet and data compression technologies to enable a
growing number of artists to broadly distribute and promote their music and to
enable consumers to conveniently access this growing music catalog.
Our website contains over 56,000 songs from over 11,000 artists,
representing one of the largest collections of digital music available on the
Internet. Consumers can search, sample and download music free of charge. We
receive revenue from online advertising, e-commerce and offline sponsorships. To
date, the majority of our revenues has been from the sale of advertising space
on our website. In addition, we sell CDs online, both DAM CDs and compilation
CDs. We also receive revenue from advertisers for their sponsorship of CD
samplers, which are distributed free of charge to consumers and contain
collections of music from MP3.com artists.
We provide advantages to both artists and consumers:
Value to Artists
Distribution and Promotional Power. We offer our artists a distribution
model that allows them to upload and promote their music through their own
MP3.com webpage for no charge, control pricing of their music and achieve
superior economics through revenue sharing on sales of their DAM CDs. We believe
this high level of artist control from origination to final distribution is
extremely appealing to artists underserved by the traditional record industry.
Artists can have a fully-packaged CD available for sale to consumers within as
little as 48 hours of registration by using mp3 technology to digitize their
music. There are no set-up or monthly fees. To use our services, artists provide
at least one full length promotional song for consumers to download or "Instant
Play" (stream) free of charge. In addition, we empower artists by allowing them
to post additional songs on our website at their own discretion and to control
the promotion of their music by specifying music genres and geographical
classifications, adding or deleting music selections at any time and selecting
price points for their CDs. Artists can also achieve "point-to-point"
communications, enabling them to interact with and present music, messages and
other content to their fans.
Global and Local Exposure. Artists can use our website to reach a global
and growing base of consumers immediately upon uploading their music.
Little-known and local artists can immediately promote their music to a targeted
local audience while simultaneously reaching a broader worldwide audience. In
addition, subject to legal restrictions, internationally recognized artists can
promote their music to a global audience in a new way through concert
promotions, new song releases and direct contact with their fans. We facilitate
artist discovery by allowing users to browse the site alphabetically, through
geographical classifications from countries to local towns, or by music genre
and style. We also employ our own song ranking system to provide artists and
fans a daily list of the top songs, complete with links to the featured artists'
webpages. Our editorial content and special features, such as "artist of the
day" or "song of the day", offer additional promotional exposure for artists.
Access to Consumer Feedback and Statistics. Artists receive daily, detailed
information about how many people visited their webpage, how many people
listened to their songs, how many people downloaded their songs, and how many
CDs they sold during the day and over the past month. Artists can learn valuable
information about their fan base including geographical information. Our
aggregated data and demographic
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analyses allow us to offer artists sales, marketing and other information that
enables them to define, evaluate and connect with their fan base. Artists can
use this information, such as geographic and listener data, to determine which
of their songs receive the best reception, which genres are best suited for
their songs and how their music compares to other songs in the same genre or
region. This allows them to change their music selections or target promotional
events and marketing to their fans through our site.
Value to Consumers
Extensive Music Selection and Compelling Value. We offer consumers one of
the largest databases of musical content available on the Internet through our
expanding collection of artists. Consumers can listen to real-time or streaming
audio or download thousands of songs by MP3.com artists to their PCs for no
charge and purchase our DAM CDs at prices ranging from $5.99 to $10.00. We offer
consumers a broad selection of music available 24 hours a day from the
convenience of their home, school or office. Our music collection spans
approximately 270 categorized genres, including pop, rock, classical, country,
alternative, children's, easy listening, electronic, hip hop, rap, blues, jazz
and international. In addition, consumers can access songs from artists from all
50 states and approximately 100 foreign countries.
Personalized Music Experience. Consumers who visit our website are able to
find the music that interests them by searching our music collection by genre,
artist, style or location. As a result of our search capabilities, fans can
browse an increasing number of songs and choose to listen to or purchase only
those selections in which they are primarily interested. In addition, our
customers can register profiles by providing their zip code, e-mail address and
their music preferences that allow us to suggest new songs to them based upon
their preferences and prior purchases. We believe that our personalized approach
not only enhances the experience of visiting our website, but also increases the
time a consumer spends on MP3.com and encourages repeat visits.
Communications with Artists and Other Fans. We allow fans to contact
artists directly via e-mail and to communicate with one another through message
boards. In addition, artists can use their webpage to communicate directly with
their fans, advising them of concerts and new releases. Message boards allow
fans with common interests and preferences to be connected. Newcomers to our
website can receive general guidance from more experienced visitors in our
"General mp3 Questions" forum. Some of our other forums focus on music-related
software and hardware technology and industry news.
ACCOMPLISHMENTS TO DATE
We have created a broad-based music community including over 11,000 artists
and 120 independent labels that have posted more than 56,000 songs on MP3.com.
Since we began offering services, we have digitally delivered more than 21
million songs to consumers visiting our site. In April 1999:
- we added over 80 new artists and 600 new songs on average each day;
- our website served over 50 million pageviews, 9 million song deliveries
and 4.5 million music searches;
- we estimate that more than 250,000 consumers on average visited our
website and listened to more than 300,000 songs a day; and
- we sold on average over 175 DAM CDs per day.
We believe that large numbers of artists and consumers are drawn to MP3.com
because they have historically been underserved by the traditional music
industry. We will continue to introduce new products and services designed to
meet their entertainment, e-commerce, communications and information needs.
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STRATEGY
Our corporate mission is to be the leading online music company for artists
and consumers. Key elements of our strategy include:
Diversify Revenue Streams Across Advertising, E-Commerce and Direct
Marketing. Our strategy is to harvest the breadth and uniqueness of our music
community and our services to generate multiple commercially feasible revenue
streams. Our primary focus to date has been on building an advertising-based
model that offers advertisers the opportunity to target specific music fans
regionally and globally through different types of advertisements and
sponsorship options. We also have sold products such as DAM CDs, compilation CDs
and T-shirts from our website and intend to expand our e-commerce initiatives to
offer customized CDs, collectable products and other music-related merchandise.
Our content presentation will continue to focus on genre and geography, which
enables the collection of valuable consumer data. We believe our unique ability
to deliver large, demographically and geographically profiled audiences will be
a valuable asset in developing a variety of direct marketing, data mining and
advertising services.
Create the Largest Global Community of Artists by Providing Valuable and
Unique Services. A key component of our strategy is to continue to expand our
community of MP3.com artists so that we offer the largest group of global
artists online. As part of this effort, we intend to offer new promotional
services such as auto-e-mail notification of new music postings or other
material on MP3.com, regional calendars allowing artists to post online
performance dates and links to ticketing agencies allowing artists to distribute
tickets to their venues using online ticketing. We believe these specialized
services, combined with compelling economics, will allow us to continue to
increase the number of new MP3.com artists, as well as the loyalty among our
current artists. We believe that offering one of the largest global artist
communities is key to increasing the number of consumers on our website and thus
increasing our advertising and e-commerce opportunities.
Create a Unique and Robust Music-Based Experience for the Consumer. Our
strategy focuses on creating an unmatched experience for consumers by offering
one of the largest collections of music available online, a rich browsing
experience with multiple genre and geographical search classifications and a
cost and time efficient way to purchase music. We also plan to expand local,
regional, national and international coverage and increase editorials,
personalized news and advertising and customized CD sales. As bandwidth
availability continues to improve, we expect to deliver live concert series and
an increasing array of interactive multimedia experiences. We believe our
ability to create a personal, engaging experience will be critical in retaining
our customer base and increasing our audience in the future.
Build Brand Awareness. We plan to increase brand awareness through a
combination of online and offline advertising and promotional activities. We
have historically benefited from word-of-mouth and growing public awareness of
the mp3 format. Recently, we have promoted brand awareness through several
innovative and cost effective channels, including advocacy events, strategic
promotional alliances with established popular artists and our free CD sampler
program. We intend to achieve greater offline awareness by 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 40%
of our online artist community. Moreover, approximately 23% of our DAM CD
customers during April 1999 were from foreign countries. We believe our
multi-level geographical indexing capability, global reach and rankings are
significant attractions for our users. We intend to increase our international
presence by expanding local content and merchandising to selected international
regions. In addition, we also plan to offer foreign language content. We intend
to focus these efforts on Europe and Japan, in particular.
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Support New Technology Formats and Standards. We intend to support a
variety of leading audio compression formats. We currently offer music in both
the mp3 and RealAudio formats. To date, we have primarily utilized the mp3
format due to its high audio quality and status as a widely accepted open
standard. However, we believe our music library can be reconfigured to support
multiple compression formats. Our intention is to support standards that achieve
acceptance by the Internet community.
THE MP3.COM WEBSITE
The MP3.com website offers a variety of attractive benefits to artists and
consumers. We enhance our website frequently to address expressed needs of our
artists and consumers, and strive to continue to improve the user experience.
The following table describes some of the features of our website:
<TABLE>
<CAPTION>
FEATURES FOR ARTISTS
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Simple Sign-Up Online sign-up process. Typically less than 48 hours from
Procedure sign-up to sales.
- - Free Artist Webpage Customizable HTML template page that can be modified at any
time. Artists can add music, reviews, pictures, links,
lyrics, stories, biographies and more.
- - DAM CD Production and Artists can create a customized CD, set the price,
Distribution distribute globally and receive 50% of gross sales, with no
set-up or monthly fees.
- - Artist Message Board Forum for artists to share experiences, get advice and make
connections.
- - Dedicated Artist Provides technical support for artists.
Services Group
- - Ongoing Artists can track a variety statistics on visitors to their
Data-Intensive webpage.
Feedback
</TABLE>
<TABLE>
<CAPTION>
FEATURES FOR CONSUMERS
NAME OF FEATURE DESCRIPTION
--------------- -----------
<S> <C>
- - Browsing by Genre Fans can browse 56,000+ songs by 11,000+ artists in 270
genres with spotlighted artists in each genre.
- - Top 40 Lists Daily and weekly listing of the best music as determined by
our own ranking system.
- - Geographical Listing Fans can find artists from around the world or in their home
town.
- - Alphabetical Listing Browse artists from "A 13th Guest" to "Zyklus II".
- - Specially Featured Stories and news about a selected artist each day.
Artists
- - Spotlight Artist of Artist featured in a particular genre each day.
the Day
- - Song of the Day One song from a particular artist each day.
- - Hot New mp3s Highlights new favorites.
- - Popularity Rankings Fans can find the most popular music in each genre or
region.
- - Searching Fans can search by artist name, song title, keywords genre
or style.
- - News Forums News and editorials relating to the online music world.
- - Review Section Interactive song review area.
- - Michael's Minute Leading column on industry trends written by Michael
Robertson, our Chairman and CEO.
- - Hardware and Software Lists and forums on technical information designed to help
fans get the most out of their online music experience. We
also provide links to purchase hardware and software
products.
- - mp3 for Beginners Newcomers to the site can learn about mp3 usage and online
music through instructions and community chat forums.
- - E-Commerce Fans can purchase T-shirts, DAM CDs and compilation CDs.
- - E-Mail Artists Fans can e-mail messages to their favorite artists directly.
- - Song Recommender Visitors can e-mail song and artist recommendations to their
friends.
- - Artists I Like Artists recommend other artists within the MP3.com community
to their fans.
</TABLE>
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PRODUCTS AND SERVICES
The following lists our current and future products and services:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
ADVERTISING NON-ADVERTISING
- -----------------------------------------------------------------------------------------------------------
ONLINE
ONLINE ADVERTISING E-COMMERCE
Website advertising: banners, portals, DAM CDs
buttons Compilation CDs
Website sponsorships Collectible CDs*
E-mail marketing* T-shirts
Books and other music-related merchandise*
Concert streams*
- -----------------------------------------------------------------------------------------------------------
OFFLINE
OFFLINE SPONSORSHIPS
Sponsorship of CD samplers
Concert sponsorships*
- ----------------------------------------------------------
</TABLE>
* = in development
Online Advertising
We currently derive a substantial portion of our revenues from a diverse
portfolio of online advertising services. These services allow our advertisers
to maximize visibility for their products by placing them in specifically
targeted MP3.com categories, such as Artist Sign-Up, specific music genres, or
specific geographic locations. Advertisements may currently be purchased in two
primary ways:
Banners, Portals and Buttons. Banners, portals and buttons are graphic or
HTML elements. Banners are displayed at the top and bottom of each MP3.com
webpage. A banner is the largest graphic advertising product available and can
be displayed on any MP3.com webpage. Banners can also be displayed in specific
areas and typically carry a premium rate for such targeting. Portals are
generally smaller than banners and appear on the right-hand side of webpages in
selected categories. Buttons are generally smaller than both banners and portals
and appear on the left-hand side of webpages in selected categories. Prices of
each of these advertisements are based on target audience and desirability of
location. Pricing of banners, portals and buttons are generally based on a Cost
Per Thousand Impressions, or CPM, basis. "Impressions" are the number of times
an advertisement appears in pages viewed by users of our website.
Website Sponsorships. A sponsorship is an advertising plan that enables
sponsors' products to be associated with a specific MP3.com category, music
genre or geographic region. Premium sponsorships begin on our home page and
continue throughout the selected category. Category sponsorships begin on the
first page of the selected category and appear on all category-related pages.
Listing sponsorships allow advertisers to purchase preferred placement in
product listings. Prices of sponsorships are based on target audience and
desirability of location.
E-Commerce
Digital Automatic Music (DAM) CDs. DAM CDs are fully-packaged albums
created by our MP3.com artists. Prices are determined by the artists and are
between $5.99 and $10.00 per CD. Each CD contains
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multiple songs that are selected by the artists. The music contained on each CD
is in both mp3 and standard audio CD format, which means it can be listened to
on a computer with mp3 player software, a portable mp3 player or a standard CD
player. In addition, DAM CDs can contain multimedia features such as artist-
provided graphics, song lyrics, biographical information as well as an embedded
mp3 player. We produce and package DAM CDs ourselves and mail them to our
customers within one to two days, depending on when the order is placed.
Compilation CDs. Compilation CDs are albums we compile featuring the work
of multiple MP3.com artists. As with DAM CDs, the music contained on each CD is
in both mp3 and standard audio CD format. We produce and package the CDs
ourselves and mail them to our customers within one to two days.
Other Merchandise. We currently sell T-shirts on our website.
Offline Sponsorships
Sponsorship of CD Samplers. CD samplers are distributed free of charge to
consumers and contain paid advertising. Each CD sampler contains a large
selection of the most popular songs from our expanding roster of over 11,000
artists. In the future, the CD sampler may include video entertainment,
multimedia video game samples and interactive contests. The CD sampler allows
advertisers to target specific consumers by selectively placing advertisements,
game samples and video clips within the genres of the CD sampler. Different
versions of the CD sampler can be created to appeal to specific target
audiences. In May 1999, initial versions of the CD sampler were distributed
through our website, other independent websites and as inserts in consumer
magazines.
Future Products in Development
E-Mail Marketing. We intend to leverage our database to offer advertisers
the chance to send e-mail marketing messages to targeted audiences. Advertisers
can choose to market their products to potential customers using various
criteria our database tracks, including preferred artist or music genre,
geographic location, or any of the customized preferences users have entered
into their user profile.
Collectible CDs. We plan to pursue selected opportunities to obtain digital
distribution rights to music collections that we feel will be of interest to our
customers.
Books and Other Merchandise. We plan to offer mp3- and music-related books
and apparel and artist merchandise on our website.
Concert Streams. We plan to broadcast live concert streams on the MP3.com
website featuring headline and regional MP3.com artists. We may charge customers
a fee to view these concert streams on a "pay per view" basis.
Concert Sponsorships. We are organizing a series of concerts and festivals
featuring headliner bands and regional MP3.com bands. These promotional events
will highlight our artists and mp3-related exhibitions and technologies. We
intend to sell sponsorships to these events.
SALES AND MARKETING
We sell advertising and sponsorships through our internal, direct
advertising sales department. On April 30, 1999, our sales force consisted of
seven people located in our San Diego, California office. For our e-commerce
products, we depend on our website to attract consumers and encourage purchases.
We expect to hire additional sales personnel as demand increases.
Since our inception, our management team has focused on marketing and
public relations efforts. We believe much of the public awareness of MP3.com has
been generated by attendance at trade shows, industry forums and other events.
We have benefitted from frequent and high visibility media exposure both
nationally and locally. We have also used a combination of online and offline
advertising to generate awareness of our company and our website. One element of
our marketing efforts has been an Internet advertising banner campaign to
attract new users to our website. Our Internet advertising has been
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supplemented with traditional media advertising such as print, radio and
television. We also have a public relations team that is focused on generating
awareness of MP3.com both within the music industry and among the general
public.
We intend to generate additional brand awareness from specific promotional
activities and new products and services such as:
- Concert Tours. We are organizing a series of concerts and festivals
featuring headliner bands and regional MP3.com bands. These events will
highlight our artists and mp3-related exhibitions and technologies. To
offset the cost of organizing these events, we may sell tickets or charge
admission.
- mp3 Summit: In June 1999, we will hold our second mp3 Summit for industry
participants to showcase new trends for the online delivery of music.
- mp3 Book: Our chairman, Michael Robertson, is producing a book to educate
the general public about the benefits of digital music. The book is
expected to be published in the second half of 1999.
- Affiliate Program. We plan to enter into relationships with other
websites to place links on their sites to our website. This strategy is
intended to drive Internet traffic to MP3.com, generate electronic
commerce revenue, increase the appeal of MP3.com to advertisers and
improve the service we offer to artists by expanding the audience that
hears their music.
We have signed a three year consulting arrangement with Atlas/Third Rail
Management, Inc., a leading artist management group. We expect to leverage our
relationship with Atlas/Third Rail to attract more well-known artists to
MP3.com. Through that relationship, we expect to expose these artists to our
products and services and the benefits of digital music distribution. The first
such promotion involves our sponsorship of Alanis Morissette and Tori Amos'
"5 1/2 Weeks" Summer 1999 tour.
We have also entered into a three year agreement with Boutit, Inc., which
does business under the name "No Limit Records." Under this agreement, we
obtained certain rights to a number of No Limit master recordings. Some of the
artists represented by No Limit include Master P and Snoop Dogg, along with
other respected platinum-selling artists. No Limit artists also may participate
in our chatrooms, display MP3.com signs at concert performances, hold concerts
with MP3.com artists and cooperate with us on other promotional activities. We
will split with No Limit revenues generated under the agreement at varying rates
depending on the source of revenue. No Limit will also become a stockholder of
MP3.com at the closing of this offering.
RELATIONSHIP WITH COX INTERACTIVE MEDIA
In May 1999, we entered into a Series C Preferred Stock Purchase Agreement
with Cox Interactive Media, Inc. Cox Interactive Media is a subsidiary of Cox
Enterprises, Inc., a leading media company whose business includes newspapers,
television, cable television distribution and radio. Cox Interactive Media
operates a network of websites including 25 city sites.
Under the agreement with Cox Interactive Media, subject to certain
conditions, we will sell to Cox Interactive Media 4,182,578 shares of Series C
preferred stock for a total purchase price of approximately $45 million. The
Series C preferred stock will have rights, preferences and privileges similar to
our outstanding Series A preferred stock and Series B preferred stock, and will
be automatically converted into 6,273,867 shares of our common stock upon the
closing of this offering. One condition to the sale of stock is that Cox
Interactive Media and we furnish the Department of Justice and the Federal Trade
Commission with certain information and materials required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and that a
required waiting period has expired or been terminated. Another condition is
that Cox Interactive Media and MP3.com form a joint venture to conduct
cooperative activities. To form the joint venture, Cox Interactive Media and
MP3.com will be initially required to contribute $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, with the first $5,000,000 payable at
the time the joint venture agreement is entered into. No payments will be due
until we receive the approximately $45 million purchase price for the
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stock we issue to Cox Interactive Media, but capital investments in excess of
the $30 million initial contribution are likely to be required as the operation
grows.
Under the joint venture, Cox Interactive Media and MP3.com will jointly
create and operate a number of music-related websites. In addition, we will
license to the joint venture certain of our intellectual property rights. There
will also be advertising and e-commerce revenue sharing arrangements between the
joint venture and MP3.com. The joint venture will be 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.
Upon the issuance of Series C preferred stock to Cox Interactive Media, a
representative of Cox Interactive Media will be added to our Board of Directors.
Under the terms of our agreement, we are obligated to nominate a representative
from Cox Interactive Media to serve as a Class III director, and a Cox
Interactive Media representative will also be nominated to serve for two
additional three-year terms, so long as Cox Interactive Media maintains a
certain minimum share ownership and the joint venture continues.
We expect to complete the sale of Series C preferred stock to Cox
Interactive Media in June 1999, but, we cannot assure you that the transactions
will not be challenged by the Department of Justice or Federal Trade Commission
on antitrust grounds, that the conditions to the transactions will be satisfied,
that the joint venture will be formed, or that our contemplated transactions
with Cox Interactive Media will occur at all. If the joint venture is launched,
we cannot assure you that its business model will be successful, or that the
venture will generate revenues for MP3.com.
TECHNOLOGY INFRASTRUCTURE
Data Mining and Warehousing Activities
We maintain relational databases of all artists, music, e-commerce and
other end-user information. These databases are used to enhance the user
experience at our website and to provide us with valuable information for
marketing and sales activities. Our content databases make content available for
download, CD purchase, website ranking and cataloging, and are updated as
artists and users interact with our website. Our statistics databases maintain
traffic and site analysis information including page views, download counts, and
artist, song and CD rankings. Our customer and commerce databases, which are
firewalled for protection, contain customer information and transaction
histories.
Infrastructure
Our technology infrastructure is based on a diverse and redundant
architecture designed to be scalable, secure and reliable. Our software is a
combination of proprietary applications, third party database software and open
operating systems that support acquisition of content, management of that
content, publication of our website, downloads of music and media files,
production of CDs, registration and tracking of users, and reporting of
information for both internal and external use. We use software from Sun
Microsystems, Inc., Microsoft Corporation, RedHat Software, Inc., VERITAS
Software Corporation, VeriSign, Inc., Real Media, Inc. and The Apache Group. We
run our software on platforms from leading companies such as Intel Corporation,
Sun Microsystems, Inc., Cisco Systems, Inc. and Storage Technology Corporation.
During April 1999, our website served over 50 million page views, 9 million
song deliveries and 4.5 million music searches. We have designed our
infrastructure to allow each component to be independently scaled, usually by
purchasing additional readily-available hardware and software components, to
meet or exceed future capacity requirements.
Data Center & Hosting Facilities
Our network infrastructure and our website, e-commerce and database servers
are hosted in two data centers on two different backbone networks in two
different cities. Our website servers are hosted at AT&T CERFnet in San Diego,
CA and at Exodus Communications in Irvine, CA. Both CERFnet and Exodus
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maintain suitable environmental conditions and redundant power sources and
network connectivity. Our e-commerce and database servers are located at our
corporate headquarters in San Diego, California.
Monitoring of all servers, networks and systems is performed on a
continuous basis. We employ numerous levels of firewall systems to protect our
databases, e-commerce servers, customer information and music archive. Backups
of all databases, data and media files are performed on a daily basis. Data
back-up tapes are archived at a remote location on a weekly basis.
OPERATIONS, FULFILLMENT AND CUSTOMER SUPPORT
Our operations are centered around a just-in-time fulfillment process which
ties together all of the proprietary and third-party software tools in our
system and allows us to avoid carrying inventory. We are currently capable of
producing approximately 1,200 DAM CDs per day, and our system is scalable to
accommodate higher volume. Additionally, we have developed database and
reporting systems that analyze the transaction information occurring in the
fulfillment center and provide flexible output reports for finance and
accounting purposes.
Orders for DAM CDs and other merchandise are received via our website,
queued up in our database and shipped in the order received. Once the order is
accepted, the fulfillment center sends a confirming e-mail to the customer and
the job is transmitted to the production facility. Fulfillment center personnel
assemble, package and ship the order to the customer, generally within one to
two days of the original order. Upon completion of the order, the fulfillment
center sends out an additional e-mail informing the customer of its status and
tracking number when applicable.
We are continually enhancing and refining our fulfillment system to handle
the increasing demand for DAM CDs. As a result of recent improvements, we can
now package CDs in jewel cases with color cover graphics that artists design.
Customer support personnel are also available six days a week during normal
business hours to respond to customer inquiries and requests presented via
e-mail or on our website.
COMPETITION
The market for the online promotion and distribution of music and
music-related products is competitive. Barriers to entry on the Internet are
relatively low, and we expect competition to increase significantly in the
future. We face competitive pressures from numerous actual and potential
competitors including:
- Providers of online music content such as GoodNoise Corporation, Launch
Media, Inc. and various private companies.
- Companies offering mp3 or other audio compression formats, such as those
of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft
Corporation, and RealNetworks, Inc. Some of these companies also offer
customers the ability to download music from their websites.
- Online destination sites with greater resources than us such as online
music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
like America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos,
Inc. and Yahoo!, Inc.
- Traditional music industry companies, including BMG Entertainment, a unit
of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc. and
Universal Music Group, a unit of The Seagram Company Ltd. Certain of
these companies have recently entered the online commercial community and
are currently backing the SDMI security format.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, in May 1999, Microsoft Corporation and Sony Corporation announced an
agreement to pursue a number of cooperative activities. Sony has announced that
it will make its music content downloadable from the Internet using Microsoft's
multimedia software. In addition, Universal Music Group and BMG Entertainment
have announced a joint venture to form an online music store.
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The bases of competition in the online music promotion and distribution
industry include the:
- quantity and variety of digital recorded music content;
- ability of consumers to search and sample music according to their
preferences;
- ease of downloading music;
- fidelity and quality of sound of the music; and
- ability to promote its website, both online and through traditional
marketing, concerts and strategic alliances.
We believe that MP3.com generally competes favorably with respect to these
bases. However, many of our existing and potential competitors have longer
operating histories, greater brand name recognition, larger consumer bases and
significantly greater financial, technical and marketing resources than we do.
We cannot assure you that websites maintained by our existing and potential
competitors will not be perceived by consumers, artists, talent management
companies and other music-related vendors or advertisers as being superior to
ours. We also cannot assure you that we will be able to maintain or increase our
website traffic levels, purchase inquiries and number of click-throughs on our
online advertisements or that competitors will not experience greater growth in
these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.
GOVERNMENT REGULATION
Our business is subject to rapidly changing laws and regulations. Although
our operations are currently based in California, the United States government
and the governments of other states and foreign countries have attempted to
regulate activities on the Internet. The following are some of the evolving
areas of law that are relevant to our business:
- Privacy Law. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit our ability to leverage our databases
to generate revenues.
- Encryption Laws. Certain record industry associations have lobbied the
federal government for laws requiring music transmitted over the Internet
to be digitally encrypted in order to track music rights and prevent
unauthorized use of copyrighted music. If such laws are adopted, we 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 subject to liability if content delivered by us
or placed on our website violates these regulations. See "Risk
Factors -- We may have liability for the content we deliver."
- Sales and Use Tax. We do not currently collect sales, use or other taxes
on the sale of goods and services on our website other than on sales in
California. However, states or foreign jurisdictions may seek to impose
tax collection obligations on companies like us that engage in online
commerce. If they do, these obligations could limit the growth of
electronic commerce in general and limit our ability to profit from the
sale of goods and services over the Internet.
Because of this rapidly evolving and uncertain regulatory environment, we
cannot predict how these laws and regulations might affect our business. In
addition, these uncertainties make it difficult to ensure compliance with the
laws and regulations governing the Internet. These laws and regulations could
harm us by subjecting us to liability or forcing us to change how we do
business.
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INTELLECTUAL PROPERTY
We may be liable to third parties for 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 content we distribute is deemed obscene, indecent or defamatory.
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.
We attempt to minimize these types of liability by requiring
representations and warranties relating to our artists' ownership of and rights
to distribute and submit their content and by taking related measures to review
content on our website 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. If we have good reason to suspect non-compliance with copyright or
trademark laws, we employ a system of verifying compliance through independent
investigation and cross-checking with our in-house musicologists. It is our
belief that the artist is responsible for the material he or she submits.
However, in the future, we could be found liable for content made available on
our website.
Although we have not experienced a material loss due to content-related
liability to date, we cannot assure you that our measures to limit this
liability will continue to be successful or that we will not be held liable for
our content. Liability or alleged liability could harm our business by damaging
our reputation, requiring us to incur legal costs and diverting management's
attention away from our business. Moreover, future claims may not be adequately
covered by our insurance.
Our intellectual property includes our trademarks and copyrights,
proprietary software, and other proprietary rights. We believe that our
intellectual property is important to our success and our competitive position
and we seek to protect it. However, our efforts may be inadequate. Although we
own the domain name "mp3.com" and have applied for federal trademark
registration for "mp3.com," we do not have any registered trademarks in "mp3" or
any variation of the term. Our trademark registration applications could be
denied for various reasons, including if the term "mp3" is found to be a
descriptive term. This could limit our ability to use and to keep others from
using the term "mp3" and further limit our ability to protect the "mp3.com"
domain name. Use of the "mp3.com" name by others could dilute our brand identity
and confuse the market.
In addition, third parties have claimed and may claim in the future that we
violate their intellectual property rights. For example, Sightsound.com, Inc.
has asserted that many online music providers, including MP3.com, violate patent
rights that it allegedly owns covering the sale of music over the Internet
through digital downloads. We do not believe our past or current method of
operations conflicts with any of Sightsound.com's patent rights. However, to the
extent that such patent rights are valid and enforceable and cover our
activities, we may be required to pay damages, obtain a license to
Sightsound.com's patents or use non-infringing methods to accomplish our
activities with regard to digital downloads. It is possible that a license from
Sightsound.com would not be available on commercially acceptable terms, or at
all, or that we would be unable to provide digital downloads in a non-infringing
manner. If successful, Sightsound's claim, or claims by others that we violate
their intellectual property rights, could seriously harm our business by forcing
us to cease using important intellectual property 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. See " -- Legal Proceedings" and
"Risk Factors -- Our intellectual property protection may be inadequate."
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FACILITIES
Our principal administrative, marketing and product development facilities
are located in approximately 14,900 square feet of office space in San Diego,
California. The lease for this space expires in February 2001 and provides for a
single one-year renewal option. We will need to lease additional space within
the near future, and we have and will continue to search for appropriate
locations and facilities.
EMPLOYEES
As of April 30, 1999, we had 75 employees, including 41 in sales and
marketing, 21 in product development, and 13 in general administration. We
consider our relations with our employees to be good. We have never had a work
stoppage, and no employees are represented under collective bargaining
agreements. We believe that our future success will depend in part on our
continued ability to attract, integrate, retain and motivate highly qualified
personnel, and upon the continued service of our senior management and key
technical personnel. Competition for qualified personnel in our industry and
geographical location is intense, and we cannot assure you that we will be
successful in attracting, integrating, retaining and motivating a sufficient
number of qualified personnel to conduct our business in the future.
LEGAL PROCEEDINGS
We have been 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 alleges that MP3.com is liable for
copyright infringement with respect to "AMP" software used for decoding mp3
files distributed over the Internet. Plaintiffs allege that our posting on our
website of Nullsoft, Inc.'s digital decoder technology known as "Winamp," which
allegedly incorporated plaintiffs' AMP technology, creates liability for
copyright infringement. The First Amended Complaint indicates the plaintiffs are
seeking to recover their alleged actual damages, our profits purportedly
obtained as a result of the alleged infringement, and punitive damages, all in
an amount exceeding $10 million according to proof. In a press release, the
plaintiffs have stated that they are seeking in excess of $15 million. While we
have only had a limited period of time to evaluate the plaintiffs' claims, we
believe we have meritorious defenses to this action and intend to vigorously
defend against the allegations.
We are not presently involved in any other legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information about our directors,
executive officers and key employees as of May 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive Officers
Michael L. Robertson.................... 32 Chief Executive Officer and Chairman of the Board
Robin D. Richards....................... 42 President, Chief Operating Officer and Director
Paul L. H. Ouyang....................... 41 Chief Financial Officer and Executive Vice President
Steven G. Sheiner....................... 44 Executive Vice President, Sales and Marketing
Paul S. Alofs........................... 43 President of Strategic Business Units
Ronald D. Dotson........................ 41 Executive Vice President, Technology
Lawrence F. Probst III(1)............... 48 Director
Mark A. Stevens(1)(2)................... 39 Director
Theodore W. Waitt(1)(2)................. 36 Director
Key Employees
Joshua R. Beck.......................... 22 Chief Technical Officer
John R. Diaz............................ 49 Vice President of Industry Relations
Daniel K. O'Neill....................... 37 Vice President of Engineering
William P. Dow.......................... 34 Controller
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Michael L. Robertson founded MP3.com and has served as our Chief Executive
Officer and Chairman of the Board since March 1998. From September 1995 to March
1998, Mr. Robertson operated several websites that focused on merging search
technologies with commerce. From September 1995 to September 1996, Mr. Robertson
was President and Chief Executive Officer of Media Minds Inc., a developer of
digital picture software. From January 1994 to August 1995, Mr. Robertson was
President and Chief Executive Officer of MR Mac Software, a developer of
networking and security tools. Mr. Robertson received his Bachelor of Arts from
the University of California, San Diego.
Robin D. Richards has served as our President, Chief Operating Officer and
as one of our directors since January 1999. From October 1998 to January 1999 he
served as Managing Director of Tickets.com, Inc., an internet ticketing company.
From March 1986 to October 1997 he was a founder and President and Chief
Executive Officer of Lexi International, a teleservices company. Mr. Richards is
a director of Cash Technologies Inc., a publicly-held company that provides
solutions for coin and currency handling, cash management and e-commerce
transactions. Mr. Richards holds a Bachelor of Science from Michigan State
University.
Paul L. H. Ouyang has served as our Chief Financial Officer and Executive
Vice President since February 1999. From September 1998 to February 1999 he
served as Chief Financial Officer and Executive Vice President of Operations of
Tickets.com, Inc., an Internet ticketing company. From April 1998 to August
1998, Mr. Ouyang served as a consultant to UDP Inc., a company involved in
dental practices management. From November 1996 to March 1998, he served as
Chief Financial Officer and Executive Vice President for Cheap Tickets, Inc., a
ticket distribution company. From June 1994 to November 1996, Mr. Ouyang served
as the Managing Director of Corporate Finance at KPMG Peat Marwick LLP From
September 1982 to June 1994, Mr. Ouyang held various positions with J.P. Morgan
& Co., Incorporated ending with Vice President in Corporate Finance. Mr. Ouyang
holds a Bachelor of Arts from Amherst College and a Master in Business
Administration from the Wharton School of the University of Pennsylvania.
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<PAGE> 43
Steven G. Sheiner has served as our Executive Vice President, Sales and
Marketing since February 1999. From October 1997 to January 1999 he served as
Vice President Business Development at Aegis Communications, Inc., a
telecommunications company. From May 1995 to September 1997 he served as a
direct marketing consultant. From June 1987 to April 1995 he served as President
of Sheiner Direct Marketing & Advertising, Inc., a marketing firm. Mr. Sheiner
holds a Bachelor of Arts from Concordia University.
Paul S. Alofs has served as our President of Strategic Business Units since
May 1999. From July 1997 to May 1999 he served as General Manager and Executive
Vice President at the Disney Store, Inc., a wholly-owned subsidiary of the Walt
Disney Company. From October 1995 to June 1997, he served as President and
General Manager of BMG Music Canada, Inc., a music and entertainment company.
From November 1989 to October 1995 he served as President of HMV Canada, a music
retailer. Mr. Alofs holds a Bachelor of Commerce from the University of Windsor
and a Master in Business Administration from York University.
Ronald D. Dotson has served as our Executive Vice President, Technology
since May 1999. From August 1997 to April 1999, Mr. Dotson served as Director of
Engineering for Netscape Communications, Inc., an Internet software company.
From January 1994 to August 1997, he served as Chief Executive Officer for EOS,
a technical employment agency. Mr. Dotson also co-founded and served on the
board of advisors for Digital Style, an Internet software company. Mr. Dotson
received a Bachelor of Science, Master of Science and a Juris Doctor from
Williamette University.
Lawrence F. Probst III has served as one of our directors since April 1999.
Since May 1991, Mr. Probst has served as President and Chief Executive Officer
of Electronic Arts, Inc., a software company. Mr. Probst holds a Bachelor of
Science from the University of Delaware.
Mark A. Stevens has served as one of our directors since January 1999.
Since 1993 Mr. Stevens has been a general partner of Sequoia Capital, a venture
capital firm. Mr. Stevens is a director of Aspect Development, NVidia, Terayon
and several private companies. Mr. Stevens holds a Bachelor of Science, a
Bachelor of Arts, and a Master of Science from the University of Southern
California and a Master in Business Administration from the Harvard Business
School.
Theodore W. Waitt has served as one of our directors since March 1999.
Since February 1993, Mr. Waitt has served as the Chief Executive Officer and
Chairman of the Board of Gateway 2000, Inc., a manufacturer of personal
computers. Mr. Waitt attended the University of Iowa.
Joshua R. Beck has served as our Chief Technical Officer since April 1998.
From September 1996 to May 1998, Mr. Beck was a Senior System and Network
Engineer for Connectnet INS, Inc., a regional Internet service provider in
Southern California. From September 1995 to June 1996, Mr. Beck attended the
California Institute of Technology and from September 1996 to June 1998, Mr.
Beck attended the University of California, San Diego.
John R. Diaz has served as our Vice President of Industry Relations since
March 1999. Prior to joining MP3.com, Mr. Diaz was involved in freelance
television productions including the Bob Dylan 30th Anniversary Tribute, HBO's
Amnesty International, Rock in Rio II, Pink Floyd from Versailles and HBO's
Michael Jackson special from Bucharest. Prior to that, Mr. Diaz created the
concept for the acclaimed PBS series "On Tour" and served as the series'
producer.
Daniel K. O'Neill has served as our Vice President of Engineering since
March 1999. From July 1990 to March 1999, Mr. O'Neill held various technical and
management positions with Cadence Design Systems, Inc., a manufacturer of
semiconductor design automation software, serving most recently as a Senior
Member of the Consulting Staff. Mr. O'Neill holds a Bachelor of Science and a
Master of Science from Santa Clara University.
William P. Dow has served as our Controller since March 1999. From June
1997 to March 1999, Mr. Dow served as Vice President of Finance for Data Tree
Corporation, an information services company. From April 1995 to June 1997, Mr.
Dow served as Controller of GTI Corporation, a supplier of networking and
network-access products. From September 1988 to April 1995, Mr. Dow was employed
by
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PriceWaterhouseCoopers LLP, serving most recently as Audit Manager. Mr. Dow
holds a Bachelor of Science from San Diego State University and is a Certified
Public Accountant.
BOARD COMPOSITION
Upon the closing of this offering, in accordance with the terms of our
Restated Certificate, the terms of office of the Board of Directors will be
divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2000;
- Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2001; and
- Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2002.
Our Class I directors will be Messrs. Robertson and Stevens, our Class II
directors will be Messrs. Probst and Richards, and our Class III director will
be Mr. Waitt. In addition, upon the expected issuance of Series C preferred
stock to Cox Interactive Media, Inc. in June 1999, a representative of Cox
Interactive Media will be added as a Class III director. At each annual meeting
of stockholders after the initial classification, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This classification of the
board of directors may have the effect of delaying or preventing changes in
control or management of our company.
BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee. The audit committee consists of Mark A. Stevens and
Theodore W. Waitt. The audit committee makes recommendations to the board of
directors regarding the selection of independent auditors, reviews the results
and scope of the audit and other services provided by our independent auditors
and reviews and evaluates our audit and control functions.
The compensation committee consists of Lawrence F. Probst III, Mark A.
Stevens and Theodore W. Waitt. The compensation committee makes recommendations
regarding our equity compensation plans and makes decisions concerning salaries
and incentive compensation for our employees and consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, we did not have a compensation committee. Michael L.
Robertson, our Chief Executive Officer, made all decisions concerning executive
compensation during 1998.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. All directors are eligible to participate in our 1998 Equity
Incentive Plan.
In March 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.
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EXECUTIVE COMPENSATION
Except for Michael L. Robertson, all of our executive officers joined the
Company after December 31, 1998. Accordingly, information given below is only
for Mr. Robertson. The following table sets forth summary information concerning
compensation awarded to, earned by, or accrued for services rendered to us in
all capacities during the fiscal year ended December 31, 1998. The compensation
does not include medical, group life insurance or other benefits which are
available generally to all of our salaried employees and certain perquisites and
other personal benefits received which do not exceed the lesser of $50,000 or
10% of his salary and bonus as disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Michael L. Robertson........................................ $81,333
Chief Executive Officer
</TABLE>
EMPLOYMENT AGREEMENTS
On May 13, 1999, we entered into an Employment Agreement with Michael L.
Robertson, our Chief Executive Officer. This agreement has a four year term
commencing on January 20, 1999. It provides for an annual base salary of
$150,000 and for an annual performance bonus of up to $50,000. This agreement
further provides that Mr. Robertson can terminate his employment with us during
the term of the agreement only upon twelve months' notice.
On January 6, 1999 we entered into a letter agreement with Robin D.
Richards, our President and Chief Operating Officer regarding the terms of his
employment. This agreement provides for an annual base salary of $240,000 and
for the grant of an incentive stock option under our 1998 Equity Incentive Plan
to purchase 2,437,500 shares of our common stock. Mr. Richards exercised his
option and was issued 2,437,500 shares of common stock on January 25, 1999.
These shares are subject to vesting over four years, but vesting will accelerate
as follows: (1) all of the unvested shares will vest if we terminate Mr.
Richards other than for "cause" (as defined in his agreement) at any time
following the effective date of this offering, (2) twenty percent of the
unvested shares will vest as of the effective date of this offering and (3) all
of the unvested shares will vest if we enter into certain change-in-control
transactions.
On February 19, 1999 we entered into a letter agreement with Paul L. H.
Ouyang, our Chief Financial Officer and Executive Vice President regarding the
terms of his employment. This agreement provides for an annual base salary of
$150,000 and for the grant of an incentive stock option under our 1998 Equity
Incentive Plan to purchase 480,000 shares of our common stock. The agreement
also provides that we will pay Mr. Ouyang six months severance if we terminate
his employment other than for "cause," as defined in the agreement, and that we
will reimburse Mr. Ouyang for certain expenses related to relocation not to
exceed $3,000 per month for a period of twelve months. Mr. Ouyang exercised his
option and was issued 480,000 shares of common stock on April 12, 1999. These
shares are subject to vesting over four years, but vesting will accelerate as
follows: (1) all of the unvested shares will vest if we terminate Mr. Ouyang
other than for "cause" (as defined in his agreement) or due to death or
disability, (2) twenty percent of the unvested shares will vest as of the
effective date of this offering, (3) all of the unvested shares will vest if we
enter into certain change-in-control transactions, and (4) fifty percent of the
unvested shares shall vest if Mr. Ouyang resigns for "good reason" (as defined
in his agreement).
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. As amended, this
agreement provides for an annual base salary of $200,000. The agreement also
provides for the grant of an incentive stock option under our 1998 Equity
Incentive Plan to purchase 375,000 shares of our common stock. The shares
underlying this option vest over a four year period and are subject to
accelerated vesting as follows: (1) ten percent of the unvested shares will vest
upon the close of this offering, and (2) all of the unvested shares will vest
upon an acquisition.
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On April 27, 1999, we entered into a letter agreement with Paul S. Alofs,
our President of Strategic Business Units regarding the terms of his employment.
This agreement provides for an annual base salary of $200,000 and for the grant
of an incentive stock option under our 1998 Equity Incentive Plan to purchase
495,000 shares of our common stock. The shares underlying this option vest over
a four year period, with twenty percent vesting as of (a) the effective date of
this offering or (b) April 27, 2000, whichever is earlier, and the remainder
vesting monthly over the next four years.
On May 3, 1999, we entered into a letter agreement with Ronald D. Dotson,
our Executive Vice President, Technology, regarding the terms of his employment.
This agreement provides for an annual base salary of $140,000 and the grant of
an incentive stock option under our 1998 Equity Incentive Plan to purchase
75,000 shares of our common stock. The shares underlying this option vest over a
four year period.
1998 EQUITY INCENTIVE PLAN
In December 1998, the board adopted and the stockholders approved our 1998
Equity Incentive Plan. The 1998 Plan was subsequently amended by the Board in
January 1999 and, subject to stockholder approval, in May 1999. A total of
12,750,000 shares of common stock, as amended, has been authorized for issuance
under to the 1998 Plan. Pursuant to the 1998 Plan, shares subject to stock
awards that have expired or otherwise terminated without having been exercised
in full again become available for grant, but exercised shares repurchased by us
pursuant to a right of repurchase will not again become available for grant.
The 1998 Plan permits the grant of options to our directors, officers, key
employees and consultants and certain of our advisors. Options may be either
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees or nonstatutory stock options. In addition, the 1998
Plan permits the grant of stock bonuses and rights to purchase restricted stock.
No person may be granted options covering more than 2,250,000 shares of common
stock in any calendar year.
The 1998 Plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1998 Plan to the
compensation committee. Subject to the limitations set forth in the 1998 Plan,
the administrator has the authority to select the eligible persons to whom award
grants are to be made, to designate the number of shares to be covered by each
award, to determine whether an option is to be an incentive stock option or a
nonstatutory stock option, to establish vesting schedules, to specify the
exercise price of options and the type of consideration to be paid upon exercise
and, subject to certain restrictions, to specify other terms of awards.
The maximum term of options granted under the 1998 Plan is ten years.
Incentive stock options granted under the 1998 Plan generally are
non-transferable. Nonstatutory stock options generally are nontransferable,
although the applicable option agreement may permit certain transfers. Options
generally expire three months after the termination of an optionholder's
service. However, if an optionholder is permanently disabled or dies during his
or her service, such person's options generally may be exercised up to 12 months
following disability or 18 months following death.
The exercise price of options granted under the 1998 Plan is determined by
the administrator in accordance with the guidelines set forth in the 1998 Plan.
The exercise price of an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the date of the grant. The exercise
price of a nonstatutory stock option cannot be less than 85% of the fair market
value of the common stock on the date of grant.
Options granted under the 1998 Plan vest at the rate determined by the
administrator and specified in the option agreement. The terms of any stock
bonuses or restricted stock purchase awards granted under the 1998 Plan will be
determined by the administrator. The purchase price of restricted stock under
any restricted stock purchase agreement will not be less than 85% of the fair
market value of our common stock on the date of grant. Stock bonuses and
restricted stock purchase agreements awarded under the 1998 Plan are generally
nontransferable, although the applicable award agreement may permit certain
transfers.
Upon certain changes in control in our ownership, all outstanding stock
awards under the 1998 Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity does not assume or
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substitute such stock awards, then the vesting and exercisability of outstanding
awards will accelerate prior to the charge in control and such awards will
terminate to the extent not exercised prior to the change in control.
The board may amend or terminate the 1998 Plan at any time. Amendments will
generally be submitted for stockholder approval only to the extent required by
applicable law.
As of May 1, 1999, we had issued and outstanding under the 1998 Plan
options to purchase 2,957,250 shares of common stock. The per share exercise
prices of these options ranged from $0.11 to $0.66.
EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the board adopted and the stockholders approved the 1999
Employee Stock Purchase Plan. A total of 300,000 shares of common stock has been
authorized for issuance under the Purchase Plan. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, eligible employees will be able to
purchase common stock at a discount in periodic offerings. The Purchase Plan
will commence on the effective date of this offering.
Unless otherwise determined by the board, all employees are eligible to
participate in the Purchase Plan so long as they are employed by us (or a
subsidiary designated by the board) for at least 20 hours per week and are
customarily employed by us (or a subsidiary designated by the board) for at
least 5 months per calendar year.
Employees who participate in an offering may have up to 15% of their
earnings for the period of that offering withheld pursuant to the Purchase Plan.
The amount withheld is used at the end of the offering period to purchase shares
of common stock. The price paid for common stock at the end of an offering
period will equal the lower of 85% of the fair market value of the common stock
at the commencement date of that offering period or 85% of the fair market value
of the common stock on the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.
Upon certain changes in control in our ownership, the board has discretion
to provide that each right to purchase common stock will be assumed or an
equivalent right substituted by the successor corporation or the board may
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to such change in control transaction.
The board has the authority to amend or terminate the Purchase Plan;
provided, however, that no such action may adversely affect any outstanding
rights to purchase common stock. Amendments will generally be submitted for
stockholder approval only to the extent required by law.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION ON LIABILITY
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our other employees and agents to the fullest extent permitted by
Delaware law, except with respect to certain proceedings initiated by such
persons. We are also empowered under our Bylaws to enter into indemnification
contracts with our directors and officers and to purchase insurance on behalf of
any person we are required or permitted to indemnify. Pursuant to this
provision, we have entered into indemnification agreements with each of our
directors and officers.
In addition, our Restated Certificate provides our directors will not be
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to us or its stockholders, (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under Section 174 of the Delaware General Corporation Law or (d) for
any transaction from which the director derives an improper personal benefit.
The Restated Certificate will also provide that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
Restated Certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
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CERTAIN TRANSACTIONS
The following is a description of transactions since our inception in March
1998 to which we have been a party, in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of our
capital stock had or will have a direct or indirect material interest, other
than our compensation arrangements with our executive officers which are
described under "Management."
In January 1999, we sold 7,150,000 shares of Series A preferred stock to
various investors at a purchase price of $1.54 per share, of which 6,224,675
were sold to entities affiliated with Sequoia Capital. Mark A. Stevens, one of
our directors, is either a managing member of the general partner or a general
partner of these entities. Upon the closing of 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 market value of the securities, as determined by our board of
directors, on the date of issuance.
One of our directors, Theodore W. Waitt, is Chief Executive Officer and
Chairman of the Board of Gateway 2000, Inc. From time to time we purchase
computer equipment from Gateway. As of April 30, 1999, we had spent
approximately $54,000 on Gateway 2000 computer equipment. We believe these
purchases were on terms no less favorable than those available in arm's-length
transactions with unaffiliated parties.
45
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for (1) each
person who beneficially owns more than five percent of the common stock; (2)
each of our directors; (3) our Chief Executive Officer; and (4) all directors
and executive officers as a group. Unless otherwise indicated, the address for
each person or entity named below is c/o MP3.com, Inc., 10350 Science Center
Drive, Building 14, San Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 46,320,676 shares of common stock outstanding as of May 1,
1999, as adjusted to reflect (1) the conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering and (2) the
exercise of all outstanding warrants to purchase common stock prior to this
offering.
The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of additional shares of our common stock, and up
to shares of common stock will be outstanding after the
completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF SHARES OUTSTANDING
BENEFICIALLY OWNED --------------------
------------------ BEFORE AFTER
NUMBER OFFERING OFFERING
------------------ -------- --------
<S> <C> <C> <C>
NAME AND ADDRESS OF BENEFICIAL OWNER
Michael L. Robertson...................................... 25,637,010 55.35%
Mark A. Stevens(1)........................................ 9,337,011 20.16
Sequoia Capital
3000 Sand Hill Road
Building 4, Suite 208
Menlo Park, CA 94025
Robin D. Richards(2)...................................... 2,437,500 5.26
Theodore W. Waitt......................................... 1,500,000 3.24
Lawrence F. Probst III.................................... 150,000 * *
All directors and officers as a group (9 persons)(3)...... 39,763,708 85.71
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Includes:
- 8,462,134 shares held by Sequoia Capital VIII, which represents 18.27%
and %, respectively, of the total number of shares outstanding
before and after this offering;
- 107,376 shares held by Sequoia International Technology Partners VIII,
which represents less than 1% of the total number of shares outstanding
before and after this offering;
- 560,221 shares held by Sequoia International Technology Partners VIII(Q),
which represents 1.21% and %, respectively, of the total number of
shares outstanding before and after this offering;
- 186,739 shares held by CMS Partners LLC, which represents less than 1% of
the total number of shares outstanding before and after this offering;
and
- 20,541 shares held by Sequoia 1997, which represents less than 1% of the
total number of shares outstanding before and after this offering.
46
<PAGE> 50
Mr. Stevens is a managing member of the general partner, or a partner, of
each of the above-listed investment funds, and shares investment and voting
power over these shares with the other managing members or general partners
of these funds, none of whom are affiliated with us. Mr. Stevens disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(2) Includes 2,056,640 shares subject to repurchase by us as of May 1, 1999.
(3) Includes:
- shares listed in footnotes 1 and 2 above;
- 630,000 shares held by Paul L. H. Ouyang, of which 549,000 are subject to
a right of repurchase by us as of May 1, 1999; and
- 72,187 shares issuable upon exercise of options held by Steven G. Sheiner
exercisable within 60 days of May 1, 1999. Excludes 41,530 shares
issuable upon exercise of options exercisable upon consummation of this
offering.
47
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering and the filing of our
Restated Certificate, our authorized capital stock will consist of 200,000,000
shares of common stock, $0.001 par value per share, and 15,000,000 shares of
preferred stock, $0.001 par value per share. As of May 1, 1999, after giving
effect to the conversion of all outstanding preferred stock into common stock
upon the closing of this offering, there were outstanding 46,202,119 shares of
common stock held of record by 55 stockholders, options to purchase 2,957,250
shares of common stock and a warrant to purchase 118,557 shares of common stock.
In the event we sell 4,182,578 shares of Series C preferred stock as
contemplated by our agreement with Cox Interactive Media, those shares will be
converted into an additional 6,273,867 shares of common stock upon closing of
this offering.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences of outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 13,033,649 shares of common stock. See Notes 4 and
6 of Notes to Financial Statements for a description of the currently
outstanding preferred stock. In the event we sell 4,182,578 shares of Series C
preferred stock as contemplated by our agreement with Cox Interactive Media,
those shares will be converted into an additional 6,273,867 shares of common
stock upon closing of this offering. Following the conversion, our Certificate
of Incorporation will be amended and restated to delete all references to these
shares of preferred stock. Under the Restated Certificate, the board has the
authority, without further action by stockholders, to issue up to 15,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon the preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of the common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and reduce the likelihood that such holders will receive
dividend payments and payments upon liquidation. The issuance could have the
effect of decreasing the market price of the common stock. The issuance of
preferred stock also could have the effect of delaying, deterring or preventing
a change in control of the. We have no present plans to issue any additional
shares of preferred stock.
WARRANTS
In April 1999, in conjunction with a consulting agreement with Atlas/Third
Rail Management, Inc., we issued a ten year warrant to purchase up to 658,653
shares of common stock at an exercise price of $0.33 per share. Atlas/Third Rail
subsequently transferred rights to purchase an aggregate of 540,096 shares of
common stock under this warrant to several of its affiliates. On April 30, 1999,
these affiliates exercised the warrants they held and received 540,096 shares of
common stock. A warrant to purchase the remaining 118,557 shares of common stock
is expected to be exercised prior to the closing of this offering.
48
<PAGE> 52
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Investors Rights Agreement dated April
12, 1999 between us and certain investors, the investors, holding an aggregate
of 12,042,302 shares of our common stock issued or issuable upon conversion of
the Series A and Series B preferred stock and upon exercise of warrants to
purchase common stock, have certain registration rights pertaining to the
securities they hold, at any time after 180 days following the closing of this
offering. Upon the anticipated sale of 4,182,578 shares of Series C preferred
stock to Cox Interactive Media, Cox Interactive Media will have the same
registration rights as to the 6,273,867 shares of common stock issuable upon
conversion of those shares. If we propose to register any of our securities
under the Securities Act for our own account or the account of any of our
stockholders other than these holders of registrable shares, holders of such
registrable shares are entitled, subject to certain limitations and conditions,
to notice of such registration and are, subject to certain conditions and
limitations, entitled to include registrable shares in the offering therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in such registration. In
addition, commencing 180 days after the effective date of the registration
statement of which this prospectus is a part, we may be required to prepare and
file a registration statement under the Securities Act at our expense if
requested to do so by the holders of at least a majority of the registrable
shares, provided the reasonably expected aggregate offering price will equal or
exceed $5,000,000 including underwriting discounts and commissions. We are
required to use our best efforts to effect such registration, subject to certain
conditions and limitations. We are not obligated to effect more than two of such
stockholder-initiated registrations. Further, holders of registrable securities
may require us to file additional registration statements on Form S-3, subject
to certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for us
and adversely affect any future equity or debt offerings.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware Law. In
general, Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sale or other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. The statute could
have the effect of delaying, deferring or preventing a change in our control.
Charter and Bylaw Provisions
Our Restated Certificate provides that the board of directors, as of the
date of this prospectus, will be divided into three classes of directors, with
each class serving a staggered three-year term. The classification system of
electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us and may maintain the
composition of the board of directors, as the classification of the board of
directors generally increases the difficulty of replacing a majority of
directors. Our Restated Certificate provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any consent
in writing. In addition, our bylaws provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors, our
Chief Executive Officer, by the board of directors pursuant to a resolution
adopted by a majority of the total number of authorized directors, or by the
holders of 10% of our outstanding voting stock. Our Restated Certificate also
specifies that the authorized number of directors may be changed only by
resolution of the board of directors and does not permit cumulative voting for
directors, unless required under applicable California law. Under cumulative
voting, a minority stockholder holding a
49
<PAGE> 53
sufficient percentage of a class of shares may be able to ensure the election of
one or more directors; however, it is expected that following the closing of the
offering, cumulative voting will not be available to our stockholders. These and
other provisions contained in our restated certificate and bylaws could delay or
discourage certain types of transactions involving an actual or potential change
in control of us or our management (including transactions in which stockholders
might otherwise receive a premium for their shares over then current prices) and
may limit the ability of stockholders to remove current management or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of our common stock.
NASDAQ NATIONAL MARKET
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "MPPP."
50
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock (including shares issued upon exercise of outstanding options)
in the public market after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through sale of equity securities. As described below, no shares currently
outstanding will be available for sale immediately after this offering due to
certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming no exercise of the underwriters' over-allotment
option, no exercise of outstanding options or warrants and an initial public
offering price of $ . Of these shares, all shares sold in this
offering will be freely tradable without restriction under the Securities Act
unless purchased by "affiliates" of MP3.com as that term is defined in Rule 144
under the Securities Act. All of the remaining shares will be subject
to either (A) lock-up agreements providing that, with certain limited
exceptions, holders thereof will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our common stock or
any securities convertible into or exchangeable or exercisable for such shares
of common stock or publicly disclose an intention to make any such offer, sale,
pledge or disposal for a period of 180 days following the date of the final
prospectus for this offering, or (B) holding period requirements under Rule 144
under the Securities Act. Beginning 181 days after the date of this offering,
29,250,000 of these shares will be eligible for sale in the public market,
subject to certain volume limitations. The majority of the remaining shares
will become eligible for sale, subject to certain volume limitations, on
, 1999.
In general, under Rule 144, as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner, except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (A) 1% of the number of shares of common stock then outstanding
(which will equal approximately shares immediately after
this offering) or (B) the average weekly trading volume of the common stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about MP3.com. Under Rule 144(k), a person who is not deemed to have
been an affiliate of MP3.com at any time during the three months preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner, except an
affiliate), is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Rule 701 under the Securities Act permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of or
consultant to MP3.com who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares. However, all shares issued pursuant to
Rule 701 are subject to lock-up agreements and will only become eligible for
sale at the earlier of the expiration of (A) the 180-day lock-up agreements, or
(B) 90 days after the offering upon obtaining the prior written consent of
Credit Suisse First Boston Corporation.
Immediately after this offering, MP3.com intends to file a registration
statement under the Securities Act covering shares of common stock subject to
options outstanding under the 1998 Plan or reserved for issuance
51
<PAGE> 55
under the 1998 Plan and the Purchase Plan. Based on the number of shares subject
to outstanding options at March 31, 1999 and currently reserved for issuance
under all these plans, that registration statement would cover approximately
12,476,250 shares. That registration statement will automatically become
effective upon filing. Accordingly, shares registered under that registration
statement will, subject to Rule 144 volume limitations applicable to affiliates
of MP3.com, be available for sale in the open market immediately after the
180-day lock-up agreements expire. Also beginning 180 days after the date of
this offering, certain holders of shares of common stock will be entitled to
certain rights with respect to registration of such shares of common stock for
offer and sale to the public. See "Description of Capital Stock -- Registration
Rights."
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<PAGE> 56
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Hambrecht & Quist LLC, BancBoston Robertson Stephens Inc. and Charles Schwab &
Co., Inc. are acting as representatives, the following respective numbers of
shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
BancBoston Robertson Stephens Inc...........................
Charles Schwab & Co., Inc...................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid
by us................... $ $ $ $
Expenses payable by us.... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our officers and directors and certain other stockholders have
agreed not to offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act relating to any additional shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in the case of issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.
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<PAGE> 57
At the request of MP3.com, the underwriters have reserved up to
shares of common stock offered hereby for sale at the initial public offering
price to artists and customers of MP3.com, consultants, business associates and
certain other persons. As a result, the number of shares available for sale to
the general public will be reduced to the extent that such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares of
common stock offered hereby.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "MPPP."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include the following: the information set
forth in this prospectus and otherwise available to the representatives; market
conditions for initial public offerings; the history and the prospects for the
industry in which we will compete; the ability of our management; the prospects
for our future earnings; the present state of our development and our current
financial condition; the general condition of the securities markets at the time
of this offering; and the recent market prices of, and the demand for, publicly
traded common stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the securities to be higher than it would otherwise
be in the absence of such transactions. These transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
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<PAGE> 58
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.
55
<PAGE> 59
LEGAL MATTERS
Cooley Godward LLP, San Diego, California will pass upon the validity of
the shares of common stock offered by this prospectus and certain other legal
matters. As of the date of this prospectus, certain members and associates of
Cooley Godward LLP beneficially own an aggregate of 48,701 shares of Series A
preferred stock (convertible into 73,051 shares of common stock) through an
investment partnership. O'Melveny & Myers LLP, Newport Beach, California will
pass upon certain legal matters for the underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and for the period from March 17, 1998
(inception) through December 31, 1998, as described in their report. We have
included our financial statements in our prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement,
omits certain information, exhibits, schedules and undertakings set forth in the
registration statement. For further information pertaining to us and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document referred to herein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
registration statement may be obtained from such offices upon the payment of the
fees prescribed by the SEC. In addition, registration statements and certain
other filings made with the commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system, including our registration statement
and all exhibits and amendments to our registration statement, are publicly
available through the commission's website at http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. Upon approval of the common stock for
listing on Nasdaq, such reports, proxy and information statements and other
information may also be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
56
<PAGE> 60
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> 61
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MP3.com, Inc.
We have audited the accompanying balance sheet of MP3.com, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity and cash flows for the period from March 17, 1998 (inception) to December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MP3.com, Inc. at December
31, 1998, and the results of its operations and its cash flows for the period
from March 17, 1998 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
April 2, 1999,
except for Note 6, as to which the date is
, 1999.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 6 to the financial
statements.
/s/ ERNST & YOUNG LLP
San Diego, California
May 24, 1999
F-2
<PAGE> 62
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 16,159,195 16,155,620
Notes receivable from stockholder..................... -- (260,000) (260,000)
Deferred compensation................................. (178,070) (3,816,189) (3,816,189)
Accumulated deficit................................... (357,538) (1,762,534) (1,762,534)
--------- ----------- -----------
Total stockholders' equity.................... 194,706 10,359,317 $10,359,317
--------- ----------- ===========
$ 463,355 $11,245,608
========= ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 63
MP3.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17,
1998
(INCEPTION) TO THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $ 1,162,438 $ 665,785
Cost of revenues............................................ 214,958 205,303
----------- -----------
Gross profit................................................ 947,480 460,482
Operating expenses:
Sales and marketing....................................... 79,328 523,278
Product development....................................... 395,213 305,046
General and administrative................................ 142,510 458,762
Amortization of deferred compensation..................... 550,197 651,683
----------- -----------
Total operating expenses.......................... 1,167,248 1,938,769
----------- -----------
Loss from operations........................................ (219,768) (1,478,287)
Interest income (expense), net.............................. (3,810) 73,291
----------- -----------
Loss before income taxes.................................... (223,578) (1,404,996)
Provision for income taxes.................................. 133,960 --
----------- -----------
Net loss.................................................... $ (357,538) $(1,404,996)
=========== ===========
Historical net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.05)
=========== ===========
Weighted average shares -- basic and diluted.............. 26,182,785 27,537,067
=========== ===========
Pro forma net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.04)
=========== ===========
Weighted average shares -- basic and diluted.............. 36,907,785 38,262,067
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 64
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) -- --
Repayment and cancellation
of note receivable from
stockholder (unaudited)... -- -- (723,750) (724) (77,276) 78,000 -- --
Issuance of Series A
preferred stock at $1.54
per share for cash, net of
issuance costs of $93,076
(unaudited)............... 7,150,000 7,150 -- -- 10,910,774 -- -- --
Deferred compensation
related to stock options
and restricted common
shares (unaudited)........ -- -- -- -- 4,289,802 -- (4,289,802) --
Amortization of deferred
compensation
(unaudited)............... -- -- -- -- -- -- 651,683 --
Net loss (unaudited)........ -- -- -- -- -- -- -- (1,404,996)
--------- ------ ---------- ------- ----------- --------- ------------ -----------
Balance at March 31, 1999
(unaudited)............... 7,150,000 $7,150 31,694,999 $31,695 $16,159,195 $(260,000) $ (3,816,189) $(1,762,534)
========= ====== ========== ======= =========== ========= ============ ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock in
exchange for certain
assets and liabilities.... $ --
Exercise of stock options... 2,047
Deferred compensation
related to the grant of
stock options for common
stock..................... --
Amortization of deferred
compensation.............. 550,197
Net loss.................... (357,538)
-----------
Balance at December 31,
1998...................... 194,706
Exercise of stock options in
exchange for notes
receivable from
stockholders
(unaudited)............... --
Repayment and cancellation
of note receivable from
stockholder (unaudited)... --
Issuance of Series A
preferred stock at $1.54
per share for cash, net of
issuance costs of $93,076
(unaudited)............... 10,917,924
Deferred compensation
related to stock options
and restricted common
shares (unaudited)........ --
Amortization of deferred
compensation
(unaudited)............... 651,683
Net loss (unaudited)........ (1,404,996)
-----------
Balance at March 31, 1999
(unaudited)............... $10,359,317
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 65
MP3.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998 THREE MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(357,538) $(1,404,996)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation.............................................. 9,999 33,689
Deferred income taxes..................................... 98,576 --
Amortization of deferred compensation..................... 550,197 651,683
Changes in operating assets and liabilities:
Accounts receivable.................................... (224,284) (107,383)
Unbilled receivables................................... (64,726) 5,821
Prepaid expenses and other current assets.............. -- (242,960)
Accounts payable....................................... 25,291 577,857
Deferred revenue....................................... 15,145 68,440
Accrued expenses....................................... 104,777 (20,114)
--------- -----------
Cash provided by (used in) operating activities............. 157,437 (437,963)
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (29,471) (1,131,685)
Other assets................................................ (13,751) (52,095)
--------- -----------
Cash used in investing activities........................... (43,222) (1,183,780)
FINANCING ACTIVITIES:
Payments of notes payable................................... (73,000) --
Payments under capital lease obligations.................... (18,650) (8,541)
Issuance of common stock.................................... 2,047 --
Net proceeds from issuance of Series A preferred stock...... -- 10,917,924
--------- -----------
Cash (used in) provided by financing activities............. (89,603) 10,909,383
--------- -----------
Increase in cash and cash equivalents....................... 24,612 9,287,640
Cash and cash equivalents at beginning of period............ 14,897 39,509
--------- -----------
Cash and cash equivalents at end of period.................. $ 39,509 $ 9,327,149
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................... $ 2,622 $ 8,217
========= ===========
Taxes paid.................................................. $ 800 $ 58,000
========= ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Property and equipment acquired under capital leases........ $ 33,079 $ --
========= ===========
Common stock issued for notes receivable.................... $ -- $ 338,000
========= ===========
Cancellation of stockholder notes receivable................ $ -- $ 78,000
========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 66
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 AND PERTAINING TO MARCH 31, 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MP3.com, Inc. (the "Company") is developing a revolutionary approach to the
promotion and distribution of music. The Company uses the Internet and data
compression technologies to enable artists to distribute and promote their music
and to enable consumers to conveniently access this music. Consumers can search,
sample and download certain music free of charge.
The Company, formerly ZCo Inc. ("ZCo"), was incorporated in Delaware and
commenced operations on March 17, 1998 (inception). At inception, the Company's
principal founder contributed certain personal assets and liabilities to the
Company. In exchange, the principal founder received 26,178,749 shares of the
Company's common stock. The assets and liabilities assumed by the Company were
recorded at carryover basis. There were no significant revenues and operations
related to the assets and liabilities transferred to the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL DATA
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1999 are unaudited. The unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
results of operations for the interim period ended March 31, 1999 are not
necessarily indicative of the results which may be reported for any other
interim period or for the year ending December 31, 1999.
CONCENTRATION OF CREDIT RISKS
The Company sells its advertising related products and services to
customers primarily in music and consumer products industries. An allowance for
doubtful accounts is maintained based on the expected collectibility of accounts
receivable. The Company maintains a significant portion of its cash and cash
equivalents with one financial institution. The Company has not experienced any
significant losses on its cash and cash equivalents and accounts receivable.
Three customers accounted for 19.0%, 12.2%, and 10.3%, respectively, of net
revenues from March 17, 1998 (inception) to December 31, 1998. 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. The Company
generally invests its excess cash in money market funds and certificates of
deposit with a financial
F-7
<PAGE> 67
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
institution with a strong credit rating. Such investments are made in accordance
with the Company'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
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, unbilled receivables, accounts payable, accrued severance,
accrued expenses, income tax payable and capital lease obligations are carried
at cost, which approximates fair value because of the short-term maturity of
these instruments.
DEPRECIATION AND AMORTIZATION
Property and equipment is stated at historical cost and depreciated using
the straight-line method over the estimated useful lives of 3 to 5 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. The Company assesses
potential impairments to its long-lived assets when there is evidence that
events or changes in circumstances have made recovery of the asset's carrying
value unlikely. Should an impairment exist, the impairment loss would be
measured based on the excess of the carrying value of the asset over the asset's
fair value or discounted estimates of future cash flows. The Company has
identified no such impairment losses. Substantially all of the Company's
long-lived assets are located in the United States.
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner and
sponsorship advertisements. To date, the duration of the Company's banner
advertising commitments has ranged from one month to one year. Sponsorship
advertising contracts involve more integration with the Company's website, such
as the placement of buttons that provide users with direct links to the
advertiser's website. Sponsorship advertisement contracts are recognized ratably
over the period in which the advertisement is displayed. Advertising revenues on
banner advertisement contracts are recognized as the impression is delivered or
displayed. In each case, revenue is recognized only if the Company has no
remaining significant obligations and collection of the resulting receivable is
probable. Company banner advertisement obligations typically include guarantees
of minimum number of "impressions" or times that an advertisement appears in
pages viewed by users of the Company's website. In these circumstances, the
Company recognizes revenues at the lesser of the ratio of impressions delivered
over the guaranteed impressions or the straight-line basis over the term of the
agreement. To the extent minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the remaining guaranteed
impressions are achieved.
Deferred revenue represents payments or billings in excess of revenue
recognized relating to banner and sponsorship advertising contracts. Unbilled
receivables represent revenues recognized in excess of billings related to
banner and sponsorship advertising agreements.
Revenues derived from the sale of CDs and music-related merchandise are
recognized upon shipment.
F-8
<PAGE> 68
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT DEVELOPMENT COSTS
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Website. Product
development costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and complies with
the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Under APB 25, compensation cost is recognized over the vesting
period based on the excess, if any, on the date of grant of the deemed fair
value of the Company's stock over the employee's exercise price. When the
exercise price of the employee stock options is less than the fair value price
of the underlying stock on the grant date, deferred stock compensation is
recognized and amortized to expense in accordance with FASB Interpretation No.
28 over the vesting period of the individual options, generally four years.
Options or stock awards issued to non-employees are valued using the fair value
method and expensed over the period services are provided.
NET LOSS PER SHARE AND PRO FORMA STOCKHOLDERS' EQUITY
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" ("SFAS 128") and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No.
128, basic net income (loss) per share is computed by dividing the net income
(loss) available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of unvested restricted
common shares, incremental common shares issuable upon the exercise of stock
options, and common shares issuable on assumed conversion of Series A preferred
stock, are included in diluted net income (loss) per share to the extent such
shares are dilutive. Common equivalent shares are not included in the
computation of dilutive net loss per share for the period March 17, 1998
(inception) to December 31, 1998 and the three months ended March 31, 1999
because the effect would be anti-dilutive.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public offering
(using the as-if-converted method). If the Company's initial public offering is
consummated, all of the convertible preferred stock outstanding as of the
closing date will automatically be converted into an aggregate of 10,724,996
shares of common stock based on the shares of convertible preferred stock
outstanding at March 31, 1999. Unaudited pro forma stockholders' equity at
December 31, 1998, as adjusted for the conversion of the convertible preferred
stock, is disclosed on the balance sheet.
Pursuant to SAB 98, common shares issued for nominal consideration, if any,
would be included in the per share calculations as if they were outstanding for
all periods presented. No such shares have been issued.
F-9
<PAGE> 69
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets for the computation of basic and diluted net loss
per share as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, THREE
1998 MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, MARCH 31,
1998 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Numerator:
Net loss........................................ $ (357,538) $(1,404,996)
=========== ===========
Denominator:
Weighted average shares outstanding............. 26,199,931 31,285,417
Weighted average unvested common shares subject
to repurchase agreements..................... (17,146) (3,748,350)
----------- -----------
Denominator for basic and diluted calculation..... 26,182,785 27,537,067
=========== ===========
Net loss per share:
Basic and diluted............................... $ (0.01) $ (0.05)
=========== ===========
</TABLE>
Dilutive common stock equivalents include common stock options and
preferred stock as if converted and restricted stock subject to vesting.
Potentially dilutive securities total 17,146 and 15,195,067, for the period
March 17, 1998 (inception) to December 31, 1998 and the three months ended March
31, 1999, respectively, were excluded from historical and pro forma diluted
earnings per share because of their anti-dilutive effect.
COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Net income (loss) and other comprehensive income (loss),
including foreign currency translation adjustments, and unrealized gains and
losses on investments shall be reported, net of their related tax effect, to
arrive at comprehensive income. To date, there have been no differences between
the Company's net loss and its total comprehensive loss for the period from
March 17, 1998 (inception) to December 31, 1998.
SEGMENT INFORMATION
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires public companies to report financial and descriptive information about
their reportable operating segments. The Company identifies its operating
segments based on how management internally evaluates separate financial
information (if available), business activities and management responsibility.
The Company believes it operates in a single business segment and adoption of
this standard did not have a material impact on the Company's financial
statements. Through December 31, 1998, there have been no foreign operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") which provides
guidance on accounting for the costs of computer software developed or
F-10
<PAGE> 70
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company has adopted the
provisions of SOP 98-1 during the three months ended March 31, 1999 with no
material effect.
In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"). This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is effective
for fiscal years beginning after December 15, 1998. The Company has adopted the
provisions of SOP 98-5 during the three months ended March 31, 1999 with no
material effect.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following :
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Computer equipment............................ $53,079 $ 263,254
Software...................................... -- 272,834
Office furniture and equipment................ 9,471 548,736
Leasehold improvements........................ -- 109,411
------- ----------
62,550 1,194,235
Accumulated depreciation...................... (9,999) (43,688)
------- ----------
$52,551 $1,150,547
======= ==========
</TABLE>
3. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under
noncancellable operating and capital leases, expiring at various dates through
February 2001. Cost and accumulated depreciation of equipment under capital
leases at December 31, 1998 is $33,079 and $6,432, respectively. Depreciation of
equipment under capital leases are included in depreciation expense.
Future minimum annual lease payments under noncancellable operating and
capital leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Year ended December 31,
1999.......................................... $243,455 $15,015
2000.......................................... 260,235 --
2001.......................................... 21,915 --
-------- -------
Minimum lease payments.......................... $525,605 15,015
========
Less amounts representing interest.............. (586)
-------
Total present value of future minimum for
capital lease payments and current portion.... $14,429
=======
</TABLE>
Rent expense for the period from March 17, 1998 (inception) to December 31,
1998 totaled $9,560.
F-11
<PAGE> 71
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY
CHANGES IN CAPITALIZATION
In December 1998, the Board of Directors authorized a 19,500-for-1 stock
split of all outstanding common stock. All share and per share information has
been retroactively restated to reflect the stock split.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock with a par
value of $0.001. As of December 31, 1998, there were no preferred stock issued
and outstanding. The Company's Board of Directors can fix or change the features
of preferred stock. See Note 6 "Recent Events".
STOCK OPTIONS
During 1998, the Company adopted the Founders Stock Option Plan (the
"Founders Plan") and the 1998 Equity Incentive Plan (the "Incentive Plan")
(collectively, the "Plans") for the granting of both incentive and non-qualified
stock options. Under the Plans, incentive stock options may be granted to
employees, directors, and officers of the Company and non-qualified stock
options may be granted to consultants, employees, directors, and officers of the
Company. Options granted under the Plans are for periods not to exceed ten
years, and must be issued at prices not less than 100% and 85%, for incentive
and nonqualified stock options, respectively, of the fair value of the stock on
the date of grant, as determined by the Board of Directors. Options granted to
stockholders who own greater than 10% of the outstanding stock are for periods
not to exceed five years and must be issued at prices not less than 110% of the
fair value of the stock on the date of grant, as determined by the Board of
Directors.
The Founders Plan reserved 3,071,250 shares of common stock for granting to
certain founders of the Company. During 1998, all of the shares reserved in the
Founders Plan were granted, and in December 1998 all of the shares were
exercised at $0.001 per share and are subject to certain restriction agreements.
Common shares obtained by an early exercise of unvested options are subject to
repurchase by the Company at the original exercise price and will vest according
to the respective option agreement. As of December 31, 1998, there were 585,000
shares vested and 2,486,250 shares were subject to repurchase by the Company.
The Incentive Plan reserved 9,750,000 shares of common stock, as amended,
for granting to employees and non-employees of the Company. Grants under the
Incentive Plan vest over four years with 25% on the first anniversary and
ratably monthly for the following 36 months. As of December 31, 1998, there were
no grants of Incentive Plan stock options.
The following table summarizes the Company's stock option activity for the
Plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE PRICE
GRANT SHARES PER SHARE
------------- ---------- ----------------
<S> <C> <C> <C>
Balance at March 17, 1998 (inception).............. -- -- --
Shares reserved.................................. 9,821,250 -- --
Shares granted................................... (3,071,250) 3,071,250 $0.001
Shares exercised................................. -- (3,071,250) $0.001
---------- ----------
Balance as of December 31, 1998.................... 6,750,000 -- --
Increase in shares available (unaudited)......... 3,000,000 -- --
Shares granted (unaudited)....................... (5,926,500) 5,926,500 $ 0.16
Shares exercised (unaudited)..................... -- (3,168,750) $ 0.11
---------- ----------
Balance as of March 31, 1999 (unaudited)........... 3,823,500 2,757,750 $ 0.20
========== ==========
</TABLE>
F-12
<PAGE> 72
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average grant date deemed fair value for options granted for
the period from March 17, 1998 (inception) to December 31, 1998 and the three
months ended March 31, 1999 were approximately $0.33 and $0.85, respectively.
The following table summarizes information about stock options outstanding
as of March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.11 1,327,500 9.14 $0.11 -- --
$0.22 571,500 9.53 $0.22 -- --
$0.33 858,750 10.00 $0.33 22,500 $0.33
</TABLE>
STOCK BASED COMPENSATION
The Company has recorded deferred compensation in connection with the
grants of certain stock options and the restriction of certain existing stock
options of $728,267 and $4,289,802, during the period from March 17, 1998
(inception) to December 31, 1998 and the three months ended March 31, 1999,
respectively.
Had compensation expense for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net loss would have
decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 17, 1998
(INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Net loss as reported........................................ $(357,538)
=========
Pro forma net loss under SFAS 123........................... $(357,129)
=========
Pro forma net loss per share, basic and diluted under SFAS
123....................................................... $ (0.01)
=========
Weighted average fair value of options granted.............. $ 0.33
=========
</TABLE>
Pro forma information is required by SFAS 123, and has been determined as
if the Company had accounted for its stock options under the fair value method
of that statement. The fair value of these options was estimated at the date of
grant using the minimum value method with the following weighted average
assumptions: risk free interest rate of 5.5%; an expected option life of five
years; and no annual dividends. The effect of applying SFAS 123 on 1998 pro
forma net loss as stated above is not necessarily representative of the effect
on reported net income (loss) for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years.
5. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", under which the
liability method is used to calculate deferred income taxes. Under this method,
deferred tax assets and liabilities are determined based on the differences
between financial reporting and income tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
F-13
<PAGE> 73
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The provision for income taxes as of December 31, 1998 is as follows:
<TABLE>
<S> <C>
Current:
Federal................................. $ 28,340
State................................... 7,044
--------
Total current................... 35,384
Deferred:
Federal................................. 76,954
State................................... 21,622
--------
Total deferred.................. 98,576
--------
Provision for income taxes................ $133,960
========
</TABLE>
Significant components of the net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax liabilities:
Accrual to cash basis................. $ 96,975
Other, net............................ 1,601
----------
$ 98,576
==========
</TABLE>
6. RECENT EVENTS
In January 1999, the Company issued 7,150,000 shares of Series A
convertible preferred shares at $1.54 per share for proceeds of approximately
$10.9 million. In April 1999, the Company issued 1.1 million shares of Series A
convertible preferred shares at $2.00 per share for proceeds of $2.2 million.
There were no issuance costs in connection with the proceeds of $2.2 million.
Each share of Series A preferred stock is convertible, at the option of the
preferred stockholder, into common stock at the rate of one share of preferred
stock to one and one-half share of common stock.
The holders of the Series A preferred stock are entitled to receive non
cumulative dividends at a rate of 8% of the issuance price per annum per share.
Preferred stock dividends are payable if and when the dividends are declared by
the Board of Directors. The holders of the Series A preferred stock are entitled
to receive liquidation preferences at the rate of $1.54 per share, prior and in
preference to any distribution of assets to common stockholders. Additionally,
holders of the Series A preferred stock have voting rights for each share of
common stock into which the preferred shares convert.
In February 1999, the Company obtained a line of credit with a bank for
$3,000,000 which expires in February 2000. Under the terms of the agreement,
advances bear interest at the bank's floating prime rate plus 1.0% (8.75% at
December 31, 1998 and March 31, 1999). The line of credit has a sub-limit by
which the Company may finance certain equipment purchases not to exceed
$1,500,000. Further, the line of credit agreement provides that any capital
equipment financing outstanding in August 1999 may be converted to a three year
term note. There are no compensating cash balance requirements and borrowings
under the line of credit are collateralized by substantially all of the
Company's assets. Under the line of credit, the Company is required to comply
with certain financial covenants. The Company was in compliance with all such
covenants on March 31, 1999. In April 1999, the Company drew $1,234,000 on the
line of credit.
In April 1999, the Company entered into an artist promotion consulting
agreement for the term of three years. Independent of the promotion agreement,
in April 1999, the Company entered into a Series B Preferred Stock Purchase
Agreement whereby the Company issued 439,103 shares of the Company's Series B
convertible preferred stock at $5.69 per share for total proceeds of
approximately $2.5 million. Holders of the
F-14
<PAGE> 74
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RECENT EVENTS (CONTINUED)
Series B convertible preferred stock have substantially the same rights and
features as the holders of the Series A convertible preferred stockholders.
Additionally, the consultants were issued a warrant for 658,653 shares of common
stock exercisable at $0.33 per common share of which 540,096 shares of common
stock were exercised. The warrants expire upon the earlier of (i) the closing of
an initial public offering of the Company's common stock, (ii) the sale or
merger of the Company which results in a change of control as defined, or (iii)
or the closing for the sale of substantially all of the Company's assets. The
Company recorded deferred advertising of approximately $1,936,000 related to the
warrants which will be amortized during the year ended December 31, 1999.
The Company has been 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 alleges that the Company is liable for
copyright infringement with respect to "AMP" software used for decoding mp3
files distributed over the Internet. Plaintiffs allege that the Company's
posting on its website of Nullsoft, Inc.'s digital decoder technology known as
"Winamp," which allegedly incorporated the plaintiffs' AMP technology, creates
liability for copyright infringement. The First Amended Complaint indicates the
plaintiffs are seeking to recover their alleged actual damages, the Company's
profits purportedly obtained as a result of the alleged infringement, and
punitive damages, all in an amount exceeding $10 million according to proof. In
a press release, the plaintiffs have stated that they are seeking in excess of
$15 million. While the Company has only had a limited period of time to evaluate
the plaintiffs' claims, the Company believes it has meritorious defenses to this
action and intends to vigorously defend against the allegations. No assurances
as to the outcome of this matter can be given. However, an unfavorable
resolution of this matter could have a material adverse effect on the Company's
business, results of operations and financial condition.
In May 1999, the Company adopted an Employee Stock Purchase Plan (the
"ESPP"). Under the ESPP, employees of the Company who elect to participate may
purchase Common Stock at 85% of the lower of the fair market value of the common
stock on the commencement date or the ending date of each offering period. The
ESPP permits an enrolled employee to make contributions by having withheld from
his or her salary an amount between 1% and 15% of compensation to purchase
shares of common stock. The maximum number of shares that may be issued under
the ESPP is 300,000.
In May 1999, the Company entered into a three year agreement with a certain
independent record label company. Under the terms of the agreement, the Company
obtained the exclusive rights to certain master music recordings and arranged
for other promotional events. In connection with the agreement, the Company will
issue in a private placement $2.5 million of the Company's common stock at a
price equal to the price issued to the public under an underwritten initial
public offering. The Company expects to amortize the $2.5 million charge over
the term of the arrangement. In the event the Company does not complete a firm
underwritten public offering within eight months of the date of the agreement,
the independent record label company can terminate the agreement.
In May 1999, the Company's Board of Directors authorized, subject to
stockholder approval, the restatement of the Company's certificate of
incorporation (the "Restated Certificate") to effect a three-for-two stock split
effective [ , 1999]. The Restated Certificate increased the authorized
common stock to 200,000,000 shares and increased the authorized preferred stock
to 15,000,000 shares. The preferred stock is "blank check preferred," which can
be created and issued by the Board of Directors without stockholder approval,
with rights senior to those of common stock. The accompanying financial
statements have been restated to reflect the three-for-two common stock split.
In addition, the Company's Board of Directors, subject to stockholder approval,
increased the number of shares reserved under the 1998 Equity Incentive Plan to
12,750,000.
F-15
<PAGE> 75
MP3.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RECENT EVENTS (CONTINUED)
In May 1999, the Company entered into an agreement, subject to certain
conditions prior to closing, with Cox Interactive Media, Inc. ("Cox") to issue
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)
for a total purchase price of approximately $45 million. In addition, the
Company and Cox will form a joint venture to create and operate music related
websites. The Company and Cox will own 46.5% and 53.5%, respectively, of the
joint venture, and the Company will be committed to 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.
F-16
<PAGE> 76
INSIDE BACK COVER ARTWORK:
Image depicting the MP3.com logo with accompanying text that reads as follows:
Where the world comes for music.
We are also planning to affix to the inside of the back cover of the prospectus
a CD featuring the music of MP3.com artists.
<PAGE> 77
[MP3.COM LOGO]
<PAGE> 78
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> 79
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 in exchange for certain assets
and liabilities having an aggregate net value of $17,452.50. The Registrant
relied on the exemption provided by Section 4(2) under the Securities Act.
(b) On December 31, 1998 the Registrant issued and sold 3,071,250 shares
of its common stock to three founding employees of the Registrant in the
aggregate amount of $2,047.50 pursuant to the employees' exercise of
incentive stock options granted to them under the Registrant's Founders
Stock Option Plan. The Registrant relied on the exemption provided by
Section 4(2) under the Securities Act.
(c) In January 1999 the Registrant issued and sold 3,168,750 shares of
its common stock to two employees of the Registrant in exchange for secured
promissory notes, payable to the Registrant and secured by the stock
issued, in the aggregate amount of $338,000 pursuant to the employees'
exercise of incentive stock options granted to them under the Registrant's
1998 Equity Incentive Plan. The Registrant relied on the exemption provided
by Rule 701 under the Securities Act.
(d) In January 1999 the Registrant repurchased 723,750 shares of its
common stock held by an employee of the Registrant in exchange for the
cancellation of $78,000 of indebtedness owed to the employee by the
Registrant. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.
(e) In January 1999 the Registrant issued and sold 7,150,000 shares of
its Series A preferred stock (convertible into 10,724,996 shares of common
stock) to certain accredited investors for an aggregate purchase price of
$11,011,000. The Registrant relied on the exemption provided by Section
4(2) under the Securities Act and Regulation D promulgated thereunder.
(f) On April 5, 1999 the Registrant issued and sold 1,000,000 shares of
its Series A preferred stock (convertible into 1,500,000 shares of common
stock) to certain accredited investors for an aggregate purchase price of
$2,000,000. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act and Regulation D promulgated thereunder.
(g) On April 12, 1999 the Registrant issued and sold 100,000 shares of
its Series A preferred stock (convertible into 150,000 shares of common
stock) to a certain accredited investor for an aggregate purchase price of
$200,000. The Registrant relied on the exemption provided by Section 4(2)
under the Securities Act and Regulation D promulgated thereunder.
II-2
<PAGE> 80
(h) On April 12, 1999, the Registrant issued and sold 630,000 and
300,000 shares of its common stock for a purchase price of $101,200 and
$100,000 to an employee and consultant, respectively, pursuant to their
exercise of a qualified and nonqualified stock option granted to them under
the Registrant's 1998 Equity Incentive Plan. The Registrant relied on the
exemption provided by Rule 701 under the Securities Act.
(i) On April 19, 1999, the Registrant issued and sold 3,375 shares of
its common stock to employees of the Registrant for an aggregate purchase
price of $1,125 pursuant to such employees' exercise of stock options
granted to them under the Registrant's 1998 Equity Incentive Plan. The
Registrant relied on the exemption provided by Rule 701 under the
Securities Act.
(j) On April 26, 1999, the Registrant issued a warrant to purchase up to
658,653 shares of its common stock to an accredited investor at an exercise
price of $0.33 per share. This warrant expires on April 26, 2002. In April
1999, the investor transferred 540,096 of the warrant shares to certain
affiliates of the investor which were then exercised in full. Upon the
closing of this offering, the warrant, for the remaining 118,557 shares
thereunder, will be automatically terminated unless otherwise exercised.
For the issuance of the warrants and the common stock issued upon exercise
thereto, the Registrant relied on the exemption provided by Section 4(2)
under the Securities Act.
(k) On April 29, 1999, the Registrant issued and sold 439,103 shares of
its Series B preferred stock to certain accredited investors for an
aggregate purchase price of $2,498,496. Upon the closing of this offering,
the shares of Series B preferred stock will automatically convert into
658,653 shares of common stock. The Registrant relied on the exemption
provided by Section 4(2) under the Securities Act and Regulation D
promulgated thereunder.
(l) On April 30, 1999, the Registrant issued and sold 540,096 shares of
its common stock to certain of the Registrant's investors for an aggregate
purchase price of $180,037.50 pursuant to the exercise of warrants held by
such investors. The Registrant relied on the exemption provided by Section
4(2) of the Securities Act.
(m) On May 3, 1999, the Registrant issued and sold 450,000 shares of its
common stock for a purchase price of $1.00 to a consultant pursuant to the
consultant's exercise of a nonqualified stock option granted to the
consultant. The Registrant relied on the exemption provided by Section 4(2)
of the Securities Act.
(n) On May 12, 1999, the Registrant and Boutit, Inc., d/b/a No Limit
Records, entered into a strategic partnership pursuant to a binding
Memorandum of Agreement. Pursuant to this agreement, No Limit is bound to
provide website content to the Registrant and perform promotional and other
activities and the Registrant is required to issue $2.5 million of common
stock at the initial public offering price in a private placement
concurrent with the closing of this offering. The Registrant is relying
upon the exemption provided by Section 4(2) under the Securities Act and
Regulation D promulgated thereunder.
(o) On May 19, 1999, the Registrant and Cox Interactive Media, Inc.
entered into a Series C Preferred Stock Purchase Agreement. Pursuant to and
subject to the satisfaction of the conditions of this agreement, the
Registrant will issue and sell 4,182,578 shares of its Series C preferred
stock (convertible into 6,273,867 shares of common stock) at a purchase
price of $45,004,539 subject to, among other conditions, (1) satisfaction
of federal Hart-Scott-Rodino Act regulations and (2) successful formation
of a joint venture between the parties. The Registrant is relying upon the
exemption provided by Section 4(2) under the Securities Act and Regulation
D promulgated thereunder.
(p) From time to time since its incorporation, the Registrant has issued
stock options to purchase shares of its common stock pursuant to the
Registrant's 1998 Equity Incentive Plan and Founders' Stock Option Plan.
With respect to these grants of options, exemption from registration was
unnecessary in that the transactions did not involve a "sale" of securities
as that term is used in Section 2(3) of the Securities Act.
II-3
<PAGE> 81
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.
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.(1)
5.1 Opinion of Cooley Godward LLP.(1)
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* Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
April 29, 1999.
10.12* Founder Stock Purchase Agreement by and between the Company
and Michael L. Robertson dated as of March 18, 1998.
10.13* Form of Indemnity Agreement between the Company and its
directors and officers.
10.14* Form of Music Submission Agreement.
10.15* Consulting Agreement by and between the Company and
Atlas/Third Rail Management, Inc. dated as of April 19,
1999.
</TABLE>
II-4
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
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.
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.
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.(1)
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
* 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
II-5
<PAGE> 83
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, County of San Diego, State of California, on May 24, 1999.
By: /s/ MICHAEL L. ROBERTSON
------------------------------------
Michael L. Robertson
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 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>
/s/ MICHAEL L. ROBERTSON Chief Executive Officer and Director May 24, 1999
- ------------------------------------------ (Principal Executive Officer)
Michael L. Robertson
* President, Chief Operating Officer May 24, 1999
- ------------------------------------------ and Director
Robin D. Richards
* Chief Financial Officer and Executive Vice May 24, 1999
- ------------------------------------------ President (Principal Financial and
Paul L. H. Ouyang Accounting Officer)
* Director May 24, 1999
- ------------------------------------------
Lawrence F. Probst III
* Director May 24, 1999
- ------------------------------------------
Mark A. Stevens
* Director May 24, 1999
- ------------------------------------------
Theodore W. Waitt
</TABLE>
* By: /s/ MICHAEL L. ROBERTSON
-----------------------------------------
(Michael L. Robertson)
(Attorney-in-fact)
II-7
<PAGE> 85
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. 1 to the Registration Statement (Form S-1 No. 333-78545) and
related Prospectus of MP3.com, Inc. dated May 24, 1999.
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 the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the restatement of the capital accounts described in Note 6 to the
financial statements.
/s/ ERNST & YOUNG LLP
San Diego, California
May 24, 1999
II-8
<PAGE> 86
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> 87
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.(1)
5.1 Opinion of Cooley Godward LLP.(1)
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* Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
April 29, 1999.
10.12* Founder Stock Purchase Agreement by and between the Company
and Michael L. Robertson dated as of March 18, 1998.
10.13* Form of Indemnity Agreement between the Company and its
directors and officers.
10.14* Form of Music Submission Agreement.
10.15* Consulting Agreement by and between the Company and
Atlas/Third Rail Management, Inc. dated as of April 19,
1999.
10.16* Warrant Agreement by and between the Company and Atlas/Third
Rail Management, Inc, dated as of April 30, 1999.
10.17 Promissory Note from Robin D. Richards to the Company dated
as of January 25, 1999.
10.18 Stock Pledge Agreement, as amended, from Robin D. Richards
to the Company dated as of January 25, 1999.
</TABLE>
<PAGE> 88
<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.
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.(1)
24.1* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment will be requested with respect to certain portions of
this exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
* 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
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<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
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<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).
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(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
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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.
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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 (i) at any time after the
Initial Public Offering, Section A.3(a) above shall no longer apply and removal
shall be as provided in Section 141(k) of the DGCL, and (ii) at any time prior
to the Initial Public Offering, removal shall be as provided in Section IV F.2
(d)(ii) above.
4.
(a) Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders (except as stockholders may have such
rights as described below). Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
director for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
DGCL.
(c) At any time or times that the Corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office, where the number of such directors voting to fill,
such vacancy who have been elected by stockholders shall constitute less than a
majority of the directors then in office, then
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.
2. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
Corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of stockholders in accordance
with the Bylaws prior to the closing of the Initial Public Offering, provided
following the closing of the Initial Public Offering no action shall be taken by
the stockholders by written consent.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
VI.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. This Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the CGCL) for breach of duty to the Corporation
and its shareholders through bylaw provisions or through agreements with the
agents, or through shareholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject, at any
time or times the Corporation is subject to Section 2115(b) to the limits on
such excess indemnification set forth in Section 204 of the CGCL.
C. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by
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 3.5
AMENDED AND RESTATED
BYLAWS
OF
MP3.COM, INC.
(A DELAWARE CORPORATION)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I OFFICES.......................................................................1
Section 1. Registered Office.........................................................1
Section 2. Other Offices.............................................................1
ARTICLE II CORPORATE SEAL................................................................1
Section 3. Corporate Seal............................................................1
ARTICLE III STOCKHOLDERS' MEETINGS........................................................1
Section 4. Place Of Meetings.........................................................1
Section 5. Annual Meetings...........................................................1
Section 6. Special Meetings..........................................................4
Section 7. Notice Of Meetings........................................................5
Section 8. Quorum....................................................................5
Section 9. Adjournment And Notice Of Adjourned Meetings..............................5
Section 10. Voting Rights............................................................6
Section 11. Joint Owners Of Stock....................................................6
Section 12. List Of Stockholders.....................................................6
Section 13. Action Without Meeting...................................................6
Section 14. Organization.............................................................7
ARTICLE IV DIRECTORS.....................................................................8
Section 15. Number And Term Of Office................................................8
Section 16. Powers...................................................................8
Section 17. Classes of Directors.....................................................8
Section 18. Vacancies................................................................9
Section 19. Resignation.............................................................10
Section 20. Removal.................................................................10
Section 21. Meetings................................................................10
Section 22. Quorum And Voting.......................................................11
Section 23. Action Without Meeting..................................................12
Section 24. Fees And Compensation...................................................12
Section 25. Committees..............................................................12
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 26. Organization............................................................13
ARTICLE V OFFICERS.....................................................................13
Section 27. Officers Designated.....................................................13
Section 28. Tenure And Duties Of Officers...........................................14
Section 29. Delegation Of Authority.................................................15
Section 30. Resignations............................................................15
Section 31. Removal.................................................................15
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY
THE CORPORATION..............................................................16
Section 32.Execution Of Corporate Instruments.......................................16
Section 33.Voting Of Securities Owned By The Corporation............................16
ARTICLE VII SHARES OF STOCK..............................................................16
Section 34. Form And Execution Of Certificates......................................16
Section 35. Lost Certificates.......................................................17
Section 36. Transfers...............................................................17
Section 37. Fixing Record Dates.....................................................17
Section 38. Registered Stockholders.................................................18
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION........................................19
Section 39. Execution Of Other Securities...........................................19
ARTICLE IX DIVIDENDS....................................................................19
Section 40. Declaration Of Dividends................................................19
Section 41. Dividend Reserve........................................................19
ARTICLE X FISCAL YEAR..................................................................20
Section 42. Fiscal Year.............................................................20
ARTICLE XI INDEMNIFICATION..............................................................20
Section 43. Indemnification Of Directors, Officers, Employees And Other Agents......20
ARTICLE XII NOTICES......................................................................23
Section 44. Notices.................................................................23
ARTICLE XIII AMENDMENTS.................................................................24
</TABLE>
ii.
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 45. Amendments..............................................................24
ARTICLE XIV LOANS TO OFFICERS..........................................................25
Section 46. Loans To Officers.......................................................25
</TABLE>
iii.
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
MP3.COM, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation, for the
purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors. Nominations of persons for election
to the Board of Directors of the corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders:
(i) pursuant to the corporation's notice of meeting of stockholders; (ii) by or
at the
1.
<PAGE> 6
direction of the Board of Directors; or (iii) by any stockholder of the
corporation who was a stockholder of record at the time of giving of notice
provided for in the following paragraph, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in Section 5.
(b) At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (iii) of Section 5(a) of these Bylaws, (i) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (ii) such other business must be a proper matter for
stockholder action under the Delaware General Corporation Law ("DGCL"), (iii) if
the stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the corporation with a Solicitation Notice (as
defined in this Section 5(b)), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares required
under applicable law to carry any such proposal, or, in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the one hundred twentieth
(120th) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the giving of
a stockholder's notice as described above. Such stockholder's notice shall set
forth: (A) as to each person whom the stockholder proposed to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder
2.
<PAGE> 7
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the corporation's books, and of such beneficial owner, (ii) the
class and number of shares of the corporation which are owned beneficially and
of record by such stockholder and such beneficial owner, and (iii) whether
either such stockholder or beneficial owner intends to deliver a proxy statement
and form of proxy to holders of, in the case of the proposal, at least the
percentage of the corporation's voting shares required under applicable law to
carry the proposal or, in the case of a nomination or nominations, a sufficient
number of holders of the corporation's voting shares to elect such nominee or
nominees (an affirmative statement of such intent, a "Solicitation Notice").
(c) Notwithstanding anything in the second sentence of Section 5(b) of
these Bylaws to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the corporation at least one
hundred (100) days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 5 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this Section 5, in
order to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(f) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
3.
<PAGE> 8
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), or (iv) the holders of 10% or more of the corporation's
voting stock.
At any time or times that the corporation is subject to Section 2115(b) of the
California General Corporation Law ("CGCL"), stockholders holding five percent
(5%) or more of the outstanding shares shall have the right to call a special
meeting of stockholders only as set forth in Section 18(c) herein.
(b) If a special meeting is properly called by any person or persons
other than the Board of Directors, the request shall be in writing, specifying
the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the Chairman of the Board of Directors, the Chief
Executive Officer, or the Secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
Board of Directors shall determine the time and place of such special meeting,
which shall be held not less than thirty-five (35) nor more than one hundred
twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within one hundred (100) days after the receipt of the request, the
person or persons properly requesting the meeting may set the time and place of
the meeting and give the notice. Nothing contained in this paragraph (b) shall
be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
(c) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
corporation who is a stockholder of record at the time of giving notice provided
for in these Bylaws who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 6(c). In the event
the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no
4.
<PAGE> 9
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by statute, the Certificate of Incorporation or these Bylaws,
in all matters other than the election of directors, the affirmative vote of the
majority of shares present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders.
Except as otherwise provided by statute, the Certificate of Incorporation or
these Bylaws, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Where a separate vote by a class or classes
or series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes cast
by the holders of shares of such class or classes or series shall be the act of
such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the
5.
<PAGE> 10
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the DGCL, Section 217(b). If the instrument filed with the
Secretary shows that any such tenancy is held in unequal interests, a majority
or even-split for the purpose of subsection (c) shall be a majority or
even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of Incorporation, any
action required by statute to be taken at any annual or special meeting of the
stockholders, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action
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so taken, shall be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the DGCL if such action had been voted on by stockholders at a meeting
thereof, then the certificate filed under such section shall state, in lieu of
any statement required by such section concerning any vote of stockholders, that
written consent has been given in accordance with Section 228 of the DGCL.
(d) Notwithstanding the foregoing, no such action by written consent
may be taken following 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 of the corporation
(the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary
directed to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to
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questions or comments by participants and regulation of the opening and closing
of the polls for balloting on matters which are to be voted on by ballot. Unless
and to the extent determined by the Board of Directors or the chairman of the
meeting, meetings of stockholders shall not be required to be held in accordance
with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors
of the corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. CLASSES OF DIRECTORS.
(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, 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 17(a) shall become
effective and apply 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 17(a) of these
Bylaws shall not apply and all directors 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
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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.
SECTION 18. VACANCIES.
(a) Unless otherwise provided in the Certificate of Incorporation, any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes and any newly created directorships
resulting from any increase in the number of directors shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, be filled only by the affirmative
vote of a majority of the directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
director for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified. A vacancy in the Board of
Directors shall be deemed to exist under this Section 18 in the case of the
death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
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, the directors then in
office where the number of
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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
(1) 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
(2) 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.
SECTION 19. RESIGNATION. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
SECTION 20. REMOVAL.
(a) 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) Following any date on which the corporation is no longer subject
to Section 2115(b) of the CGCL and subject to any limitations imposed by law,
Section 20(a) above shall no longer apply and removal shall be as provided in
Section 141(k) of the DGCL.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and
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such meeting shall be held for the purpose of electing officers and transacting
such other business as may lawfully come before it.
(b) REGULAR MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, regular meetings of the Board of Directors may be held at any
time or date and at any place within or without the State of Delaware which has
been designated by the Board of Directors and publicized among all directors. No
formal notice shall be required for regular meetings of the Board of Directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of
any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any meeting
of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; provided, however, at any meeting whether
a
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quorum be present or otherwise, a majority of the directors present may adjourn
from time to time until the time fixed for the next regular meeting of the Board
of Directors, without notice other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or
repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to time,
appoint such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall any such committee have the powers denied to the Executive
Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors shall
serve a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to any requirements of any
outstanding series of preferred Stock and
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the provisions of subsections (a) or (b) of this Bylaw, may at any time increase
or decrease the number of members of a committee or terminate the existence of a
committee. The membership of a committee member shall terminate on the date of
his death or voluntary resignation from the committee or from the Board of
Directors. The Board of Directors may at any time for any reason remove any
individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon written notice to the members of such committee of the time and
place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. A majority of the authorized number of
members of any such committee shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present shall be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President (if a director), or if the President is absent, the
most senior Vice President (if a director), or, in the absence of any such
person, a chairman of the meeting chosen by a majority of the directors present,
shall preside over the meeting. The Secretary, or in his absence, any Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief
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Executive Officer, the President, one or more Vice Presidents, the Secretary,
the Chief Financial Officer, the Treasurer and the Controller, all of whom shall
be elected at the annual organizational meeting of the Board of Directors. The
Board of Directors may also appoint one or more Assistant Secretaries, Assistant
Treasurers, Assistant Controllers and such other officers and agents with such
powers and duties as it shall deem necessary. The Board of Directors may assign
such additional titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of the corporation at
any one time unless specifically prohibited therefrom by law. The salaries and
other compensation of the officers of the corporation shall be fixed by or in
the manner designated by the Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all meetings
of the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. Unless
some other officer has been elected Chief Executive Officer of the corporation,
the President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of
the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
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these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep or cause to be kept the books of account of the corporation in a
thorough and proper manner and shall render statements of the financial affairs
of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order of
the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller to assume and perform the duties
of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
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ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may,
in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares
of stock of the corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the Chairman of the Board of Directors, or the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face or
back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests
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the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Within a reasonable time after the issuance or transfer of uncertificated stock,
the corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to this section or otherwise required by law or with respect to this
section a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall be
made only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the DGCL.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall, subject to applicable law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to
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vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date. If no record date has been
fixed by the Board of Directors within ten (10) days of the date on which such a
request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation
and applicable law, if any, may be declared by the Board of Directors pursuant
to law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation and applicable law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
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ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS.
(a) DIRECTORS AND OFFICERS. The corporation shall indemnify its
directors and officers to the fullest extent not prohibited by the DGCL or any
other applicable law; provided, however, that the corporation may modify the
extent of such indemnification by individual contracts with its directors and
officers; and, provided, further, that the corporation shall not be required to
indemnify any director or officer in connection with any proceeding (or part
thereof) initiated by such person unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board of
Directors of the corporation, (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the DGCL or any other applicable law or (iv) such
indemnification is required to be made under subsection (d).
(b) EMPLOYEES AND OTHER AGENTS. The corporation shall have power to
indemnify its employees and other agents as set forth in the DGCL or any other
applicable law. The Board of Directors shall have the power to delegate the
determination of whether indemnification shall be given to any such person to
such officers or other persons as the Board of Directors shall determine.
(c) EXPENSES. The corporation shall advance to any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or officer, of
the corporation, or is or was serving at the request of the corporation as a
director or executive officer of another corporation, partnership, joint
venture, trust or other enterprise, prior to the final disposition of the
proceeding, promptly following request therefor, all expenses incurred by any
director or officer in connection with such proceeding upon receipt of an
undertaking by or on behalf of such person to repay said amounts if it should be
determined ultimately that such person is not entitled to be indemnified under
this Section 43 or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Section 43, no advance shall be made by the corporation to
an officer of the corporation (except by reason of the fact that such officer is
or was a director of the corporation in which event this paragraph shall not
apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the
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Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and officers
under this Bylaw shall be deemed to be contractual rights and be effective to
the same extent and as if provided for in a contract between the corporation and
the director or officer. Any right to indemnification or advances granted by
this Section 43 to a director or officer shall be enforceable by or on behalf of
the person holding such right in any court of competent jurisdiction if (i) the
claim for indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor.
The claimant in such enforcement action, if successful in whole or in part,
shall be entitled to be paid also the expense of prosecuting his claim. In
connection with any claim for indemnification, the corporation shall be entitled
to raise as a defense to any such action that the claimant has not met the
standards of conduct that make it permissible under the DGCL or any other
applicable law for the corporation to indemnify the claimant for the amount
claimed. In connection with any claim by an officer of the corporation (except
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such executive officer is or was a
director of the corporation) for advances, the corporation shall be entitled to
raise a defense as to any such action clear and convincing evidence that such
person acted in bad faith or in a manner that such person did not believe to be
in or not opposed to the best interests of the corporation, or with respect to
any criminal action or proceeding that such person acted without reasonable
cause to believe that his conduct was lawful. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the DGCL or
any other applicable law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct. In any suit brought by a director or
officer to enforce a right to indemnification or to an advancement of expenses
hereunder, the burden of proving that the director or officer is not entitled to
be indemnified, or to such advancement of expenses, under this Section 43 or
otherwise shall be on the corporation.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any applicable statute, provision of the Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or
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agents respecting indemnification and advances, to the fullest extent not
prohibited by the Delaware General Corporation Law, or by any other applicable
law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the DGCL or any
other applicable law, the corporation, upon approval by the Board of Directors,
may purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this Section 43.
(h) AMENDMENTS. Any repeal or modification of this Section 43 shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and officer to the full
extent not prohibited by any applicable portion of this Section 43 that shall
not have been invalidated, or by any other applicable law. If this Section 43
shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
officer to the full extent under any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Section 43 with respect to the resulting or surviving
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corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "director," "officer," "employee," or "agent"
of the corporation shall include, without limitation, situations where such
person is serving at the request of the corporation as, respectively, a
director, officer, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Section 43.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
delivery service, facsimile, telex or telegram, except that such notice other
than one which is delivered personally shall be sent to such address as such
director shall have filed in writing with the Secretary, or, in the absence of
such filing, to the last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
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(e) METHODS OF NOTICE. It shall not be necessary that the same method
of giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within
which any stockholder may exercise any option or right, or enjoy any privilege
or benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be affected or extended in any manner by the
failure of such stockholder or such director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action or
meeting which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the corporation is
such as to require the filing of a certificate under any provision of the DGCL,
the certificate shall state, if such is the fact and if notice is required, that
notice was given to all persons entitled to receive notice except such persons
with whom communication is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the DGCL, the certificate need not state that notice was not given
to persons to whom notice was not required to be given pursuant to this
paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least
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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.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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EXHIBIT 10.3
MP3.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON MAY 13, 1999
ADJUSTED FOR TWO-FOR-THREE SPLIT _______, 1999
APPROVED BY THE STOCKHOLDERS ON _______, 1999
1. PURPOSE.
(a) The purpose of this Employee Stock Purchase Plan (the "Plan")
is to provide a means by which employees of MP3.com, Inc., a Delaware
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the
services of its employees, to secure and retain the services of new employees,
and to provide incentives for such persons to exert maximum efforts for the
success of the Company.
(d) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an "employee
stock purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of
the Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of
the Company shall be eligible to participate in the Plan.
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(iii) To construe and interpret the Plan and rights
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company and its Affiliates and to carry out the intent that the Plan be
treated as an "employee stock purchase plan" within the meaning of Section 423
of the Code.
(c) The Board may delegate administration of the Plan to a
Committee composed of one (1) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
(d) Any interpretation of the Plan by the Board of any decision
made by it under the Plan shall be final and binding on all persons.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to
adjustments upon changes in stock, the stock that may be sold pursuant to rights
granted under the Plan shall not exceed in the aggregate three hundred thousand
(300,000) shares of the Company's common stock (the "Common Stock"). If any
right granted under the Plan shall for any reason terminate without having been
exercised, the Common Stock not purchased under such right shall again become
available for the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(a) The Board or the Committee may from time to time grant or
provide for the grant of rights to purchase Common Stock of the Company under
the Plan to eligible employees (an "Offering") on a date or dates (the "Offering
Date(s)") selected by the Board or the Committee. Each Offering shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all employees granted rights to purchase stock under
the Plan shall have the same rights and privileges. The terms and conditions of
an Offering shall be incorporated by reference into the Plan and treated as part
of the Plan. The provisions of
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separate Offerings need not be identical, but each Offering shall include
(through incorporation of the provisions of this Plan by reference in the
document comprising the Offering or otherwise) the period during which the
Offering shall be effective, which period shall not exceed twenty-seven (27)
months beginning with the Offering Date, and the substance of the provisions
contained in paragraphs 5 through 8, inclusive.
(b) If an employee has more than one (1) right outstanding under
the Plan, unless he or she otherwise indicates in agreements or notices
delivered hereunder, a right with a lower exercise price (or an earlier-granted
right if two (2) rights have identical exercise prices), will be exercised to
the fullest possible extent before a right with a higher exercise price (or a
later-granted right if two (2) rights have identical exercise prices) will be
exercised.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as
the Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no employee of the
Company or any Affiliate shall be eligible to be granted rights under the Plan
unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that each person who,
during the course of an Offering, first becomes an eligible employee of the
Company or designated Affiliate will, on a date or dates specified in the
Offering which coincides with the day on which such person becomes an eligible
employee or occurs thereafter, receive a right under that Offering, which right
shall thereafter be deemed to be a part of that Offering. Such right shall have
the same characteristics as any rights originally granted under that Offering,
as described herein, except that:
(i) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right;
(ii) the period of the Offering with respect to such right
shall begin on its Offering Date and end coincident with the end of such
Offering; and
(iii) the Board or the Committee may provide that if such
person first becomes an eligible employee within a specified period of time
before the end of the Offering, he or she will not receive any right under that
Offering.
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(c) No employee shall be eligible for the grant of any rights
under the Plan if, immediately after any such rights are granted, such employee
owns stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or of any Affiliate. For
purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of any employee, and stock which
such employee may purchase under all outstanding rights and options shall be
treated as stock owned by such employee.
(d) An eligible employee may be granted rights under the Plan
only if such rights, together with any other rights granted under "employee
stock purchase plans" of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan; provided, however, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding fifteen percent (15%) of
such employee's Earnings (as defined in subparagraph 7(a)) during the period
which begins on the Offering Date (or such later date as the Board or the
Committee determines for a particular Offering) and ends on the date stated in
the Offering, which date shall be no later than the end of the Offering. The
Board or the Committee shall establish one (1) or more dates during an Offering
(the "Purchase Date(s)") on which rights granted under the Plan shall be
exercised and purchases of Common Stock carried out in accordance with such
Offering.
(b) In connection with each Offering made under the Plan, the
Board or the Committee may specify a maximum number of shares that may be
purchased by any employee as well as a maximum aggregate number of shares that
may be purchased by all eligible employees pursuant to such Offering. In
addition, in connection with each Offering that contains more than one (1)
Purchase Date, the Board or the Committee may specify a maximum aggregate number
of shares which may be purchased by all eligible employees on any given Purchase
Date under the Offering. If the aggregate purchase of shares upon exercise of
rights granted under the Offering would exceed any such maximum aggregate
number, the Board or the Committee shall make a pro rata allocation of the
shares available in as nearly a uniform manner as shall be practicable and as it
shall deem to be equitable.
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(c) The purchase price of stock acquired pursuant to rights
granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the
fair market value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the
fair market value of the stock on the Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan
pursuant to an Offering by delivering an enrollment agreement to the Company
within the time specified in the Offering, in such form as the Company provides.
Each such agreement shall authorize payroll deductions of up to the maximum
percentage specified by the Board or the Committee of such employee's Earnings
during the Offering. "Earnings" is defined as an employee's regular salary or
wages (including amounts thereof elected to be deferred by the employee, that
would otherwise have been paid, under any arrangement established by the Company
that is intended to comply with Section 125, Section 401(k), Section 402(e)(3),
Section 402(h) or section 403(b) of the Code, and also including any deferrals
under a non-qualified deferred compensation plan or arrangement established by
the Company), and also, if determined by the Board or the Committee and set
forth in the terms of the Offering, may include any or all of the following: (i)
overtime pay, (ii) commissions, (iii) bonuses, incentive pay, profit sharing and
other remuneration paid directly to the employee, and/or (iv) other items of
remuneration not specifically excluded pursuant to the Plan. Earnings shall not
include the cost of employee benefits paid for by the Company or an Affiliate,
education or tuition reimbursements, imputed income arising under any group
insurance or benefit program, traveling expenses, business and moving expense
reimbursements, income received in connection with stock options, contributions
made by the Company or an Affiliate under any employee benefit plan, and similar
items of compensation, as determined by the Board or the Committee.
Notwithstanding the foregoing, the Board or Committee may modify the definition
of "Earnings" with respect to one or more Offerings as the Board or Committee
determines appropriate. The payroll deductions made for each participant shall
be credited to an account for such participant under the Plan and shall be
deposited with the general funds of the Company. A participant may reduce
(including to zero) or increase such payroll deductions, and an eligible
employee may begin such payroll deductions, after the beginning of any Offering
only as provided for in the Offering. A participant may make additional payments
into his or her account only if specifically provided for in the Offering and
only if the participant has not had the maximum amount withheld during the
Offering.
(b) At any time during an Offering, a participant may terminate
his or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall
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<PAGE> 6
distribute to such participant all of his or her accumulated payroll deductions
(reduced to the extent, if any, such deductions have been used to acquire stock
for the participant) under the Offering, without interest, and such
participant's interest in that Offering shall be automatically terminated. A
participant's withdrawal from an Offering will have no effect upon such
participant's eligibility to participate in any other Offerings under the Plan
but such participant will be required to deliver a new enrollment agreement in
order to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's employment
with the Company and any designated Affiliate, for any reason, and the Company
shall distribute to such terminated employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire stock for the terminated employee), under the Offering, without
interest.
(d) Rights granted under the Plan shall not be transferable by a
participant other than by will or the laws of descent and distribution, or by a
beneficiary designation as provided in paragraph 14, and during a participant's
lifetime, shall be exercisable only by such participant.
8. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant
Offering, each participant's accumulated payroll deductions and other additional
payments specifically provided for in the Offering (without any increase for
interest) will be applied to the purchase of whole shares of stock of the
Company, up to the maximum number of shares permitted pursuant to the terms of
the Plan and the applicable Offering, at the purchase price specified in the
Offering. No fractional shares shall be issued upon the exercise of rights
granted under the Plan. The amount, if any, of accumulated payroll deductions
remaining in each participant's account after the purchase of shares which is
less than the amount required to purchase one share of Common Stock on the final
Purchase Date of an Offering shall be held in each such participant's account
for the purchase of shares under the next Offering under the Plan, unless such
participant withdraws from such next Offering, as provided in subparagraph 7(b),
or is no longer eligible to be granted rights under the Plan, as provided in
paragraph 5, in which case such amount shall be distributed to the participant
after such final Purchase Date, without interest. The amount, if any, of
accumulated payroll deductions remaining in any participant's account after the
purchase of shares which is equal to the amount required to purchase one or more
whole shares of Common Stock on the final Purchase Date of an Offering shall be
distributed in full to the participant after such Purchase Date, without
interest.
(b) No rights granted under the Plan may be exercised to any
extent unless the shares to be issued upon such exercise under the Plan
(including rights granted thereunder) are covered by an effective registration
statement pursuant to the Securities Act of 1933, as amended (the "Securities
Act") and the Plan is in material compliance with all applicable state, foreign
and other securities and other laws applicable to the Plan. If on a Purchase
Date in any Offering
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hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such rights.
(b) The Company shall seek to obtain from each federal, state,
foreign or other regulatory commission or agency having jurisdiction over the
Plan such authority as may be required to issue and sell shares of stock upon
exercise of the rights granted under the Plan. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such rights
unless and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company (or
its transfer agent).
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and
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<PAGE> 8
the class(es) and number of shares and price per share of stock subject to
outstanding rights. Such adjustments shall be made by the Board or the
Committee, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by the
Company.")
(b) In the event of: (1) a dissolution or liquidation of the
Company; (2) a lease, sale, or other disposition of all or substantially all of
the assets of the Company; (3) a merger or consolidation in which the Company is
not the surviving corporation; (4) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's Common Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise; (5) the
acquisition by any person, entity or group within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any comparable successor provisions (excluding any employee benefit
plan, or related trust, sponsored or maintained by the Company or any Affiliate
of the Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of securities
of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors; or (6) the individuals who,
as of the date of the adoption of this Plan, are members of the Board (the
"Incumbent Board"; (if the election, or nomination for election by the Company's
stockholders, of a new director was approved by a vote of at least fifty percent
(50%) of the members of the Board then comprising the Incumbent Board, such new
director shall upon his or her election be considered a member of the Incumbent
Board) cease for any reason to constitute at least fifty percent (50%) of the
Board; then the Board in its sole discretion may take any action or arrange for
the taking of any action among the following: (i) any surviving or acquiring
corporation may assume outstanding rights or substitute similar rights for those
under the Plan, (ii) such rights may continue in full force and effect, or (iii)
all participants' accumulated payroll deductions may be used to purchase Common
Stock immediately prior to or within a reasonable period of time following the
transaction described above and the participants' rights under the ongoing
Offering terminated.
13. AMENDMENT OF THE PLAN OR OFFERINGS.
(a) The Board at any time, and from time to time, may amend the
Plan or the terms of one or more Offerings. However, except as provided in
paragraph 12 relating to adjustments upon changes in stock, no amendment shall
be effective unless approved by the stockholders of the Company within twelve
(12) months before or after the adoption of the amendment, where the amendment
will:
(i) Increase the number of shares reserved for rights
under the Plan;
(ii) Modify the provisions as to eligibility for
participation in the Plan or an Offering (to the extent such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to
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<PAGE> 9
comply with the requirements of Rule 16b-3 promulgated under the Exchange Act,
or any comparable successor rule ("Rule 16b-3"); or
(iii) Modify the Plan or an Offering in any other way if
such modification requires stockholder approval in order for the Plan to obtain
employee stock purchase plan treatment under Section 423 of the Code or to
comply with the requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan or an Offering in
any respect the Board deems necessary or advisable to provide eligible employees
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to employee stock
purchase plans and/or to bring the Plan and/or rights granted under an Offering
into compliance therewith.
(b) The Board may, in its sole discretion, submit any amendment
to the Plan or an Offering for stockholder approval.
(c) Rights and obligations under any rights granted before
amendment of the Plan or Offering shall not be impaired by any amendment of the
Plan, except with the consent of the person to whom such rights were granted, or
except as necessary to comply with any laws or governmental regulations, or
except as necessary to ensure that the Plan and/or rights granted under an
Offering comply with the requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if applicable, from the participant's
account under the Plan in the event of such participant's death subsequent to
the end of an Offering but prior to delivery to the participant of such shares
and cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under the
Plan in the event of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice in the form prescribed by the Company.
In the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living (or if an entity, is otherwise
in existence) at the time of such participant's death, the Company shall deliver
such shares and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its sole discretion, may deliver such
shares and/or cash to the spouse or to any one (1) or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may determine.
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15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion, may suspend or terminate the
Plan at any time. The Plan shall automatically terminate if all the shares
subject to the Plan pursuant to subparagraph 3(a) are issued. No rights may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the
Plan is in effect shall not be impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under an Offering comply with the requirements of Section
423 of the Code.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the same day on which the Company's
registration statement under the Securities Act with respect to the initial
public offering of shares of the Company's Common Stock becomes effective (the
"Effective Date"), but no rights granted under the Plan shall be exercised
unless and until the Plan had been approved by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board or the Committee, which date may be prior to the Effective Date.
17. CHOICE OF LAW.
All questions concerning the construction, validity and interpretation
of this Plan shall be governed by the law of the State of California, without
regard to such state's conflict of laws rules.
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MP3.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED BY THE BOARD OF DIRECTORS ON MAY __, 1999
1. GRANT; OFFERING DATE.
(a) The Board of Directors (the "Board") of MP3.com, Inc. (the
"Company"), pursuant to the Company's Employee Stock Purchase Plan (the "Plan"),
hereby authorizes the grant of rights to purchase shares of the common stock of
the Company ("Common Stock") to all Eligible Employees (an "Offering"). The
first Offering shall begin on the effective date of the initial public offering
of the Company's Common Stock and end on July 31, 2001 (the "Initial Offering").
Thereafter, an Offering shall begin on August 1, 2001 and on each August 1 every
second year thereafter, and each such offering shall end on the day prior to the
second anniversary of its Offering Date. The first day of an Offering is that
Offering's "Offering Date."
(b) Notwithstanding the foregoing: (i) if any Offering Date falls on a
day that is not a Trading Day (as defined herein), then such Offering Date shall
instead fall on the next subsequent Trading Day and (ii) if any Purchase Date
falls on a day that is not a Trading Day, then such Purchase Date shall instead
fall on the immediately preceding Trading Day. "Trading Day" shall mean any day
the exchange(s) or market(s) on which the Common Stock is listed, whether it be
any established stock exchange, The Nasdaq National Market, The Nasdaq SmallCap
Market or otherwise, is open for trading.
(c) Notwithstanding anything to the contrary, in the event that the Fair
Market Value (as defined herein) of a share of Common Stock on any Purchase Date
during an Offering is less than the Fair Market Value of a share of Common Stock
on the Offering Date of such Offering, then following the purchase of Common
Stock on such Purchase Date: (i) the Offering shall terminate and (ii) all
participants in the just-terminated Offering shall automatically be enrolled in
the Offering that shall commence on the next Trading Day following the Purchase
Date. Except as provided in paragraph 4, "Fair Market Value" shall mean the
closing sales price for the Common Stock (or the closing bid price, if no sales
were reported) as quoted on any established stock exchange or traded on the
Nasdaq National Market or the Nasdaq SmallCap Market and as reported in The Wall
Street Journal or such other source as the Board deems reliable.
(d) Prior to the commencement of any Offering, the Board (or the
Committee described in subparagraph 2(c) of the Plan, if any) may change any or
all terms of such Offering and any subsequent Offerings. The granting of rights
pursuant to each Offering hereunder shall occur on each respective Offering Date
unless, prior to such date (a) the Board (or the Committee) determines that such
Offering shall not occur, or (b) no shares remain available for issuance under
the Plan in connection with the Offering.
(e) Notwithstanding any other provisions of an Offering, if the terms of
an Offering as previously established by the Board would, as a result of a
change to applicable accounting standards, as a result of obtaining shareholder
approval during such Offering for shares of Common Stock that would be issued
under such Offering (but for the provisions of this Section
<PAGE> 12
1(e)), or otherwise, generate a charge to earnings, such Offering shall
terminate effective as of the earlier of (1) the day prior to the date such
change of accounting standards would otherwise first apply to the Offering or
(2) the day prior to the date upon which the maximum aggregate number of shares
of Common Stock available to be purchased by all Eligible Employees under such
Offering (excluding any additional shares of Common Stock made available for
issuance under the Plan by approval of the shareholders of the Company during
the Offering) exceeds the aggregate number of whole shares purchasable by all
Eligible Employees based upon the aggregate of such Employees' payroll
deductions accumulated pursuant to such Offering (the "Offering Termination
Date"), and such Offering Termination Date shall be the final Purchase Date of
such Offering. A subsequent Offering shall commence on such date and on such
terms as shall be provided by the Board of Directors of the Company.
2. ELIGIBLE EMPLOYEES.
(a) All employees of the Company and each of its Affiliates (as defined
in the Plan) incorporated in the United States, shall be granted rights to
purchase Common Stock under each Offering on the Offering Date of such Offering,
provided that each such employee otherwise meets the employment requirements of
subparagraph 5(a) of the Plan (an "Eligible Employee") and that each Eligible
Employee may only contribute to one Offering at any given point in time.
Notwithstanding the foregoing, the following employees shall not be Eligible
Employees or be granted rights under an Offering: (i) part-time or seasonal
employees whose customary employment is less than twenty (20) hours per week or
five (5) months per calendar year and (ii) 5% stockholders (including ownership
through unexercised and/or unvested stock options) described in subparagraph
5(c) of the Plan.
(b) Notwithstanding the foregoing, each person who first becomes an
Eligible Employee during any Offering and at least six (6) months prior to the
final Purchase Date (as defined in paragraph 6 hereof) of the Offering will, on
the next February 1 or August 1 during that Offering following the date that
person first becomes an Eligible Employee, receive a right under such Offering,
which right shall thereafter be deemed to be a part of the Offering. Such right
shall have the same characteristics as any rights originally granted under the
Offering except that:
(1) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right; and
(2) the Offering for such right shall begin on its Offering Date
and end coincident with the end of the ongoing Offering.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such employee's Earnings paid during the period of such Offering beginning after
such Eligible Employee first commences participation; provided, however, that no
employee may purchase Common Stock on a particular Purchase Date that would
result in more than fifteen percent (15%) of such employee's Earnings in the
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period from the Offering Date to such Purchase Date having been applied to
purchase shares under all ongoing Offerings under the Plan and all other plans
of the Company intended to qualify as "employee stock purchase plans" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). For
this Offering, "Earnings" means the base salary paid to an employee (including
all amounts elected to be deferred by the employee, that would otherwise have
been paid, under any cash or deferred arrangement established by the Company),
overtime pay, commissions, and bonuses, but excluding other remuneration paid
directly to the employee, profit sharing, the cost of employee benefits paid for
by the Company, education or tuition reimbursements, imputed income arising
under any Company group insurance or benefit program, traveling expenses,
business and moving expense reimbursements, income received in connection with
stock options, contributions made by the Company under any employee benefit
plan, and similar items of compensation.
(b) Notwithstanding the foregoing, the maximum number of shares of
Common Stock an Eligible Employee may purchase on any Purchase Date in an
Offering shall be such number of shares as has a Fair Market Value (determined
as of the Offering Date for such Offering) equal to (x) $25,000 multiplied by
the number of calendar years in which the right under such Offering has been
outstanding at any time, minus (y) the Fair Market Value of any other shares of
Common Stock (determined as of the relevant Offering Date with respect to such
shares) which, for purposes of the limitation of Section 423(b)(8) of the Code,
are attributed to any of such calendar years in which the right is outstanding.
The amount in clause (y) of the previous sentence shall be determined in
accordance with regulations applicable under Section 423(b)(8) of the Code based
on (i) the number of shares previously purchased with respect to such calendar
years pursuant to such Offering or any other Offering under the Plan, or
pursuant to any other Company plans intended to qualify as "employee stock
purchase plans" under Section 423 of the Code, and (ii) the number of shares
subject to other rights outstanding on the Offering Date for such Offering
pursuant to the Plan or any other such Company plan.
(c) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of: (i) eighty-five percent (85%) of the Fair Market Value of the Common
Stock on the Offering Date or (ii) or eighty-five percent (85%) of the Fair
Market Value of the Common Stock on the Purchase Date, in each case rounded up
to the nearest whole cent per share. For the Initial Offering, the Fair Market
Value of the Common Stock at the time when the Offering commences shall be the
price per share at which shares of Common Stock are first sold to the public in
the Company's initial public offering as specified in the final prospectus with
respect to that public offering.
5. PARTICIPATION.
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(a) An Eligible Employee may elect to participate in an Offering only at
the beginning of the Offering, or such later date specified in subparagraph
2(b). An Eligible Employee shall become a participant in an Offering by
delivering an enrollment form authorizing payroll deductions. Such deductions
must be either a fixed dollar amount per pay period, up to a maximum dollar
amount which is less than or equal to fifteen percent (15%) of Earnings, or in
whole percentages of Earnings, with a minimum percentage of one percent (1%) and
a maximum percentage of fifteen percent (15%). A participant may not make
additional payments into his or her account. The agreement shall be made on such
enrollment form as the Company provides, and must be delivered to the Company
prior to the date participation is to be effective, unless a later time for
filing the enrollment form is set by the Company for all Eligible Employees with
respect to a given Offering. For the Initial Offering, the time for filing an
enrollment form and commencing participation for individuals who are Eligible
Employees on the Offering Date for the Initial Offering shall be determined by
the Company and communicated to such Eligible Employees.
(b) A participant may decrease his or her participation level during the
course of a six (6) month purchase interval one (1) time, and only by delivering
notice to the Company at least ten (10) days in advance of the Purchase Date in
such form as the Company prescribes; provided that a participant may (i) reduce
his or her deductions to zero percent (0%) upon ten (10) days' prior notice, or
within such shorter period as determined by the Board and communicated to the
participants, by delivering a notice in such form as the Company provides, (ii)
may increase or decrease his or her participation level at any time to become
effective on the day following the next subsequent Purchase Date, or (iii) may
withdraw from an Offering and receive his or her accumulated payroll deductions
from the Offering (reduced to the extent, if any, such deductions have been used
to acquire Common Stock for the participant on any prior Purchase Dates) without
interest, at any time prior to the end of the Offering, excluding only each ten
(10) day period immediately preceding a Purchase Date, by delivering a
withdrawal notice to the Company in such form as the Company provides. A
participant who has withdrawn from an Offering shall not again participate in
such Offering, but may participate in subsequent Offerings under the Plan in
accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as each January 31 and July 31. The first Purchase Date
under the Initial Offering shall be January 31, 2000. Notwithstanding the
foregoing, if any Purchase Date falls on a day that is not a Trading Day, then
such Purchase Date shall instead fall on the immediately preceding Trading Day.
7. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall
be given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering, shall be deemed effectively given
upon receipt or, in the case of notices and
4
<PAGE> 15
agreements delivered by the Company, five (5) days after deposit in the United
States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders as required for the Plan to obtain treatment as a
tax-qualified employee stock purchase plan under Section 423 of the Code and to
comply with the requirements of an available exemption from potential liability
under Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") set forth in Rule 16b-3 promulgated under the Exchange Act.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
5
<PAGE> 16
MP3.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
ENROLLMENT/CHANGE FORM
Action Complete Sections:
SECTION 1: [ ] New Enrollment 2, 3, 6, 7
ACTIONS [ ] Withdrawal 2, 5, 7
[ ] Election Change 2, 4, 7
[ ] Beneficiary Change (optional) 2, 6, 7
================================================================================
SECTION 2:
EMPLOYEE Name _______________________________________________________
DATA Last First MI
Home Address________________________________________________
Street
____________________________________________________________
City State Zip Code
Social Security #: ____________--____________--____________
================================================================================
SECTION 3:
NEW Effective: Payroll Deduction Amount: _____%
ENROLLMENT of Earnings (whole percentage,
[ ] _______________, _____ maximum 15%), OR
[ ] Initial Offering Dollar Amount: $_____ (maximum
15% of Earnings)
================================================================================
SECTION 4:
ELECTION Effective with the pay Payroll Deduction Amount: _____%
CHANGE period beginning of Earnings (whole percentage,
_______________, _____: maximum 15%), OR
Dollar Amount: $_____ (max. 15%
of Earnings)
================================================================================
SECTION 5:
WITHDRAWAL Effective with the pay period beginning ____________________,
I withdraw from the ESPP.
NOTE: Your election to withdraw from the ongoing Offering
cannot be changed, and you may not resume
participation in the ESPP prior to the commencement
of the next Offering. In connection with your
withdrawal, your payroll deductions will be refunded
to you as soon as practicable, without interest.
NOTE: If your employment terminates for any reason, you
will automatically be withdrawn from the ESPP, and
any payroll deductions collected and not previously
used to purchase stock will automatically be refunded
to you as soon as practicable.
================================================================================
SECTION 6: Beneficiary Relationship of Beneficiary
BENEFICIARY
DESIGNATION
(Optional) ____________________________ ____________________________
================================================================================
SECTION 7:
AUTHORIZATION
I hereby authorize MP3.com, Inc. to enroll me in the ESPP, to make regular
payroll deductions in the amount indicated above, and to purchase shares for me.
If I have elected to withdraw from the ESPP, I authorize MP3.com, Inc. to
distribute my accumulated deductions to me. Any authorization for payroll
deductions will continue until canceled or changed by me in accordance with the
terms of the ESPP. Deductions will cease upon the termination of my status as an
Employee, termination of the ESPP or upon my election to withdraw from the ESPP.
I agree to be bound by the terms and provisions of the ESPP, as described in the
official text of the ESPP, and any applicable offering document.
Date: ___________________ Signature:___________________________________
<PAGE> 17
SUMMARY OF TERMS OF
MP3.COM
EMPLOYEE STOCK PURCHASE PLAN
1. EFFECTIVE DATE: Effective date of the Company's initial
public offering ("IPO").
2. EMPLOYEES ELIGIBLE: All employees except that part-time
employees whose customary employment is
for less than 20 hours per week or 5
months per calendar year will be
excluded. Any 5% shareholders (including
options as if exercised) also will be
excluded.
3. METHOD OF PARTICIPATION: Eligible employees may elect to have up
to 15% of their "Earnings" withheld from
their pay and applied under the Plan to
purchase Company common stock.
"Earnings" for this purpose shall mean
regular salary, overtime, commissions
and bonuses.
4. OFFERING PERIODS: The initial Plan Offering will commence
on the effective date of the Company's
IPO and continue through July 31, 2001.
Subsequent Offerings will be 24 months
in length, with the first such Offering
to begin on August 1, 2001. An Offering
will automatically restart if the fair
market value on the Purchase Date is
lower than the fair market value of the
first day of the Offering.
5. PURCHASES: Purchases will take place on designated
Purchase Dates during an Offering, using
funds accumulated during the Purchase
Period ending on such Purchase Date. The
first Purchase Date will be January 31,
2000 and subsequent Purchase Dates will
be on each July 31 and January 31
thereafter.
6. PURCHASE PRICE: Lower of (1) 85% of fair market value on
the first day of the Offering Period or
(2) 85% of fair market value on the
relevant Purchase Date. For the Initial
Offering, the fair market value on the
first day of the Offering Period shall
be the price per share at which shares
of Common Stock are first sold to the
public in the Company's initial public
offering as specified in the final
prospectus with respect to that public
offering.
<PAGE> 18
7. PARTICIPATION OF Employees who become eligible after
SUBSEQUENTLY ELIGIBLE commencement of an Offering may
EMPLOYEES: participate beginning as of the day
after a Purchase Date (i.e., the next
February 1 or August 1).
8. NUMBER OF SHARES 300,000 shares (post split).
AVAILABLE UNDER PLAN:
9. INDIVIDUAL LIMITS: An employee's right to purchase shares
may not accrue at a rate exceeding
$25,000 per calendar year in value
(determined as of the beginning of the
Offering Period).
10. VESTING RESTRICTIONS: None.
11. EMPLOYMENT TERMINATION: Accumulated payroll deductions will be
returned to a terminated employee
without interest, to the extent not
previously applied to purchases.
2
<PAGE> 1
Exhibit 10.7
MP3.COM, INC.
10350 Science Center Drive, Bldg 14
San Diego, CA. 92121
May 19,1999
Steven G. Sheiner
c/o MP3.com, Inc.
10350 Science Center Drive, Building 14
San Diego, CA. 92121
RE: REVISED EMPLOYMENT TERMS
Dear Steve:
This letter sets forth the terms and conditions of your employment with MP3.com,
Inc., a Delaware corporation (the "Company"), effective as of the first day of
the pay period immediately following the date hereof (the "Effective Date"), as
mutually agreed between you and the Company. The amended and restated terms of
your employment are set forth below.
You shall continue to serve as Executive Vice President, Advertising & Marketing
and shall be responsible for such duties as are normally associated with such
position or as otherwise determined by the President of the Company. You will
report to Robin Richards, the President of the Company, and work at our facility
located in San Diego. Of course, the Company may change your position, duties,
and work location from time to time as it deems necessary.
As of the Effective Date, your compensation shall be increased to $16,666.67 per
month, less payroll deductions and all required withholdings. You are paid
semi-monthly and you are eligible for standard benefits, such as medical
insurance, sick leave, vacations and holidays, according to standard Company
policy as may be adopted by the Company from time to time. Details about these
benefits will be provided in an Employee Handbook and in Summary Plan
Descriptions, which will be prepared by the Company and made available for your
review in due course. The Company may modify your compensation and benefits from
time to time as it deems necessary.
The Company's Board of Directors has granted you two separate Incentive Stock
Options. The specific terms and conditions of your Incentive Stock Options are
set forth in the Incentive Stock Option Agreements previously executed between
you and the Company.
As a Company employee, you are expected to abide by Company rules and
regulations, and acknowledge in writing that you have read the Company's
Employee Handbook (once it has been made available to you). As a condition of
employment, you are required to sign
<PAGE> 2
Steven Sheiner
May 19, 1999
Page 2
and comply with a Proprietary Information and Inventions Agreement, a copy of
which is attached hereto as Exhibit A, which, among other things, prohibits
unauthorized use or disclosure of Company proprietary information.
Normal working hours are from 8:30 a.m. to 5:30 p.m., Monday through Friday. As
an exempt salaried employee, you are expected to work additional hours as
required by the nature of your work assignments.
You may terminate your employment with the Company at any time and for any
reason whatsoever simply by notifying the Company in writing no later than two
weeks prior to the date of such termination. Likewise, the Company may terminate
your employment at any time and for any reason whatsoever, with or without cause
or advance notice. This at-will employment relationship cannot be changed except
in a writing signed by a Company officer.
As of the Effective Date, the terms in this letter supersede any other
agreements or promises made to you by anyone, whether oral or written, including
without limitation the letter agreement regarding employment dated as of January
29, 1999, and comprise the final, complete and exclusive agreement between you
and the Company. As required by law, your employment with the Company is subject
to satisfactory proof of your right to work in the United States.
<PAGE> 3
Steven Sheiner
May 19, 1999
Page 2
Please sign and date this letter, and return it to me as soon as possible if the
foregoing accurately sets forth the terms of your employment with the Company.
Sincerely,
MP3.COM, INC.
By: /s/ ROBIN RICHARDS
- ------------------------------------
Robin Richards
President
ACCEPTED BY:
/s/ STEVEN G. SHEINER
- ------------------------------------
Steven G. Sheiner
19 May 1999
- ------------------------------------
Date
<PAGE> 4
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 1
Exhibit 10.17
PROMISSORY NOTE
$260,000
January 25, 1999
FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to
pay to the order of MP3.COM, INC., a Delaware corporation (the "Company"), at
P.O. Box 910091, San Diego, California 92191-0091, or at such other place as the
holder hereof may designate in writing, in lawful money of the United States of
America and in immediately available funds, the principal sum of Two Hundred
Sixty Thousand Dollars ($260,000) together with interest accrued from the date
hereof on the unpaid principal at the rate of 4.64% per annum, or the maximum
rate permissible by law (which under the laws of the State of California shall
be deemed to be the laws relating to permissible rates of interest on commercial
loans), whichever is less, as follows:
PRINCIPAL REPAYMENT. The outstanding principal amount
hereunder shall be due and payable in full on January 11, 2003.
INTEREST PAYMENTS. Interest shall be payable annually in
arrears and shall be calculated on the basis of a 360-day year for the
actual number of days elapsed;
provided, however, that in the event that the undersigned's employment by or
association with the Company is terminated for any reason prior to payment in
full of this Note, this Note shall be accelerated and all remaining unpaid
principal and interest shall become due and payable immediately after such
termination.
If the undersigned fails to pay any of the principal and accrued
interest when due, the Company, at its sole option, shall have the right to
accelerate this Note, in which event the entire principal balance and all
accrued interest shall become immediately due and payable, and immediately
collectible by the Company pursuant to applicable law.
This Note may be prepaid at any time without penalty. All money paid
toward the satisfaction of this Note shall be applied first to the payment of
interest as required hereunder and then to the retirement of the principal.
The full amount of this Note is secured by a pledge of shares of Common
Stock of the Company, and is subject to all of the terms and provisions of the
Early Exercise Stock Purchase Agreement and the Pledge Agreement, each of even
date herewith between the undersigned and the Company.
The undersigned hereby represents and agrees that the amounts due under
this Note are not consumer debt, and are not incurred primarily for personal,
family or household purposes, but are for business and commercial purposes only.
1.
<PAGE> 2
The undersigned hereby waives presentment, protest and notice of
protest, demand for payment, notice of dishonor and all other notices or demands
in connection with the delivery, acceptance, performance, default or endorsement
of this Note.
The holder hereof shall be entitled to recover, and the undersigned
agrees to pay when incurred, all costs and expenses of collection of this Note,
including without limitation, reasonable attorneys' fees.
This Note shall be governed by, and construed, enforced and interpreted
in accordance with, the laws of the State of California, excluding conflict of
laws principles that would cause the application of laws of any other
jurisdiction.
/s/ ROBIN RICHARDS
------------------
ROBIN RICHARDS
2.
<PAGE> 1
Exhibit 10.18
STOCK PLEDGE AGREEMENT
1. As collateral security for the payment of that certain $260,000
promissory note issued this date to MP3.COM, INC. ("Pledgee") by the undersigned
(hereinafter called "indebtedness"), the undersigned hereby assigns, transfers
to and pledges with the Pledgee the securities listed on Schedule 1 hereto which
were this day delivered to be deposited with Pledgee, together with any stock
rights, rights to subscribe, dividends paid in cash or other property in
connection with the complete or partial liquidation of Pledgee, stock dividends,
dividends paid in stock, new securities or other property except cash dividends
other than liquidating dividends to which the undersigned is or may hereafter
become entitled to receive on account of such property, and in the event that
the undersigned receives any such, the undersigned will immediately deliver it
to Pledgee to be held by Pledgee hereunder in the same manner as the property
originally pledged hereunder. All property assigned, transferred to and pledged
with Pledgee under this paragraph is hereinafter called "collateral."
2. At any time, without notice, and at the expense of the undersigned,
Pledgee in its name or in the name of its nominee or of the undersigned may, but
shall not be obligated to: (a) collect by legal proceedings or otherwise all
dividends (except cash dividends other than liquidating dividends), interest,
principal payments and other sums now or hereafter payable upon or on account of
said collateral; (b) enter into any extension, reorganization, deposit, merger,
or consolidation agreement, or any agreement in any way relating to or affecting
the collateral, and in connection therewith may deposit or surrender control of
such collateral thereunder, accept other property in exchange for such
collateral and do and perform such acts and things as it may deem proper, and
any money or property received in exchange for such collateral shall be applied
to the indebtedness or thereafter held by it pursuant to the provisions hereof;
(c) insure, process and preserve the collateral; (d) cause the collateral to be
transferred to its name or to the name of its nominee; (e) exercise as to such
collateral all the rights, powers, and remedies of an owner, except that so long
as the indebtedness is not in default the undersigned shall retain all voting
rights as to the collateral.
3. The undersigned agrees to pay prior to delinquency all taxes,
charges, liens and assessments against the collateral, and upon the failure of
the undersigned to do so Pledgee at its option may pay any of them and shall be
the sole judge of the legality or validity thereof and the amount necessary to
discharge the same.
4. All advances, charges, costs and expenses, including reasonable
attorneys' fees, incurred or paid by Pledgee in exercising any right, power or
remedy conferred by this agreement, or in the enforcement thereof, shall become
a part of the indebtedness secured hereunder and shall be paid to Pledgee by the
undersigned immediately and without demand.
5. At the option of Pledgee and without necessity of demand or notice,
all or any part of the indebtedness of the undersigned shall immediately become
due and payable irrespective of any agreed maturity, upon the happening of any
of the following events: (a) failure to keep or perform any of the terms or
provisions of this agreement; (b) default in the payment of principal or
interest when due; (c) the levy of any attachment, execution or other
1.
<PAGE> 2
process against the collateral; or (d) the insolvency, commission of an act of
bankruptcy, general assignment for the benefit of creditors, filing of any
petition in bankruptcy or for relief under the provisions of Title 11, United
States Code, Bankruptcy, of, by, or against the undersigned.
6. In the event of the nonpayment of any indebtedness when due, whether
by acceleration or otherwise, or upon the happening of any of the events
specified in the last preceding paragraph, Pledgee may then, or at any time
thereafter, at its election, apply, set off, collect or sell in one or more
sales, or take such steps as may be necessary to liquidate and reduce to cash in
the hands of Pledgee in whole or in part, with or without any previous demands
or demand of performance or notice or advertisement, the whole or any part of
the collateral in such order as Pledgee may elect, and any such sale may be made
either at public or private sale at its place of business or elsewhere, or at
any broker's board or securities exchange, either for cash or upon credit or for
future delivery; provided, however, that if such disposition is at private sale,
then the purchase price of the collateral shall be equal to the public market
price then in effect, or, if at the time of sale no public market for the
collateral exists, then, in recognition of the fact that the sale of the
collateral would have to be registered under the Securities Act of 1933 and that
the expenses of such registration are commercially unreasonable for the type and
amount of collateral pledged hereunder, Pledgee and the undersigned hereby agree
that such private sale shall be at a purchase price mutually agreed to by
Pledgee and the undersigned or, if the parties cannot agree upon a purchase
price, then at a purchase price established by a majority of three independent
appraisers knowledgeable of the value of such collateral, one named by the
undersigned within 10 days after written request by the Pledgee to do so, one
named by Pledgee within such 10 day period, and the third named by the two
appraisers so selected, with the appraisal to be rendered by such body within 30
days of the appointment of the third appraiser. The cost of such appraisal,
including all appraiser's fees, shall be charged against the proceeds of sale as
an expense of such sale. Pledgee may be the purchaser of any or all collateral
so sold and hold the same thereafter in its own right free from any claim of the
undersigned or right of redemption. Demands of performance, notices of sale,
advertisements and presence of property at sale are hereby waived, and Pledgee
is hereby authorized to sell hereunder any evidence of debt pledged to it. Any
sale hereunder may be conducted by any officer or agent of Pledgee.
7. The proceeds of the sale of any of the collateral and all sums
received or collected by Pledgee from or on account of such collateral shall be
applied by Pledgee to the payment of expenses incurred or paid by Pledgee in
connection with any sale, transfer or delivery of the collateral, to the payment
of any other costs, charges, attorneys' fees or expenses mentioned herein, and
to the payment of the indebtedness or any part hereof, all in such order and
manner as Pledgee in its discretion may determine. Pledgee shall pay any balance
to the undersigned.
8. Pledgee shall be under no duty or obligation whatsoever to make or
give any presentments, demands for performance, notices of non-performance,
protests, notices of protest or notices of dishonor in connection with any
obligations or evidences of indebtedness held by Pledgee as collateral, or in
connection with any obligations or evidences of indebtedness which constitute in
whole or in part the indebtedness secured hereunder.
2.
<PAGE> 3
9. Pledgee may at any time deliver the collateral or any part thereof
to the undersigned and the receipt of the undersigned shall be a complete and
full acquittance for the collateral so delivered, and Pledgee shall thereafter
be discharged from any liability or responsibility therefor.
10. Upon the transfer of all or any part of the indebtedness Pledgee
may transfer all or any part of the collateral and shall be fully discharged
thereafter from all liability and responsibility with respect to such collateral
so transferred, and the transferee shall be vested with all the rights and
powers of Pledgee hereunder with respect to such collateral so transferred; but
with respect to any collateral not so transferred Pledgee shall retain all
rights and powers hereby given.
11. Until all indebtedness shall have been paid in full the power of
sale and all other rights, powers and remedies granted to Pledgee hereunder
shall continue to exist and may be exercised by Pledgee at any time and from
time to time irrespective of the fact that the indebtedness or any part thereof
may have become barred by any statute of limitations, or that the personal
liability of the undersigned may have ceased.
12. The rights, powers and remedies given to Pledgee by this agreement
shall be in addition to all rights, powers and remedies given to Pledgee by
virtue of any statute or rule of law. Pledgee may exercise its Pledgee's lien or
right of setoff with respect to the indebtedness in the same manner as if the
indebtedness were unsecured. Any forbearance or failure or delay by Pledgee in
exercising any right, power or remedy hereunder shall not be deemed to be a
waiver of such right, power or remedy, and any single or partial exercise of any
right, power or remedy hereunder shall not preclude the further exercise
thereof; and every right, power and remedy of Pledgee shall continue in full
force and effect until such right, power or remedy is specifically waived by an
instrument in writing executed by Pledgee.
3.
<PAGE> 4
Dated: January 25, 1999
Amended: May 13, 1999
PLEDGOR:
/s/ ROBIN RICHARDS
- -------------------------
ROBIN RICHARDS
PLEDGEE:
MP3.COM, INC.
By: /s/ PAUL OUYANG
---------------------
Name: Paul Ouyang
-------------------
Title: CFO & EVP
------------------
ATTACHMENT:
Schedule 1
4.
<PAGE> 5
SCHEDULE 1
TO
STOCK PLEDGE AGREEMENT
Common Stock Certificate No. 7 representing 1,625,000 shares of the Common Stock
of MP3.com, Inc., of which no more than 125,000 shares shall be deemed as
collateral hereunder.
<PAGE> 1
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
EXHIBIT 10.19
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 [***] 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 [***]
<PAGE> 2
4. No Limit licenses exclusively to MP3 the right during the Term to [***].
Without limiting the generality of the immediately-preceding sentence, MP3 may
[***]. No Limit and MP3 shall mutually agree upon [***]. MP3 shall solicit
orders for [***] 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 right to engage in [***] is sometimes referred to
herein as [***].
5. No Limit hereby licenses exclusively to MP3 the right during the Term
throughout the Territory to [***]. No Limit acknowledges and agrees that MP3
shall be entitled to [***] at no additional cost to MP3 provided that [***]. MP3
shall determine, in its sole discretion, the [***] and shall remit to No Limit
on a regular accounting schedule [***] of MP3's gross receipts [***].
Notwithstanding anything to the contrary contained in the immediately-preceding
sentence, if MP3's [***] gross receipts [***]. The right to [***] is sometimes
referred to herein as [***].
2
*CONFIDENTIAL TREATMENT REQUESTED
<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 [***], 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 [***] 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 [***].
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 [***]. MP3 shall not be obligated to make any
[***]
3
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 4
9. [***] After the expiration of the [***] with respect to any [***],
MP3 shall continue to have non-exclusive 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 [***]. Nothing contained in
this paragraph 9 shall require No Limit to record any additional master
recordings for the sole purpose of [***]. Each [***] shall apply in [***].
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 [***], 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 REQUESTED
<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 [***].
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
*CONFIDENTIAL TREATMENT REQUESTED
<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 [***]. 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 [***]. 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 [***] 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 [***] 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 [***] 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 [***] to be provided to MP3 at [***] price
therefor.
6
*CONFIDENTIAL TREATMENT REQUESTED
<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 [***] organize and effect [***] 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 [***] during each month of the Term. In addition MP3
will consider in good faith and discuss other activities suggested by No Limit
that [***]. Nothing contained herein shall require MP3 to act in a manner
inconsistent with [***] 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
7
*CONFIDENTIAL TREATMENT REQUESTED
<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: /s/ ROBIN RICHARDS By: /S/ [ILLEGIBLE]
--------------------------------- ---------------------------------
Its: Its:
--------------------------------- ---------------------------------
11
<PAGE> 12
SCHEDULE A
<TABLE>
<S> <C> <C>
Category of Merchandise Name of Merchandiser Expiration Date of Agreement
</TABLE>
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 [***]
between the Company and the Purchaser and (ii) the expiration or
* CONFIDENTIAL TREATMENT REQUEST(ED)
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 [***], 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.
* CONFIDENTIAL TREATMENT REQUEST(ED)
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 [***], 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
* CONFIDENTIAL TREATMENT REQUEST(ED)
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,
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<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).
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<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.
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(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.
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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
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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.
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(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
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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
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(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.
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(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
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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
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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)
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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 [***]
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 104
LIMITED LIABILITY COMPANY AGREEMENT
OF
[***]
A DELAWARE LIMITED LIABILITY COMPANY
* CONFIDENTIAL TREATMENT REQUEST(ED)
<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>
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<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>
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<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>
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<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 [***]................................................................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>
* CONFIDENTIAL TREATMENT REQUEST(ED)
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<PAGE> 109
LIMITED LIABILITY COMPANY AGREEMENT OF
[***]
A DELAWARE LIMITED LIABILITY COMPANY
THIS LIMITED LIABILITY COMPANY AGREEMENT of [***]., 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 [***] and provide functionalities as determined by the Management
Committee (as defined below), and will present [***]
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
* CONFIDENTIAL TREATMENT REQUEST(ED)
<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 [***] and provides functionalities as
determined by the Management Committee and which presents [***].
"Agreement" shall mean this Limited Liability Company Agreement of
[***], 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.
" [***] Page" shall mean a co-branded webpage hosted on MP3 servers
featuring [***], 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.
* CONFIDENTIAL TREATMENT REQUEST(ED)
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<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
[***], 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 [***], 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
* CONFIDENTIAL TREATMENT REQUEST(ED)
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<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
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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.
" [***] Page" shall mean a webpage hosted on MP3 servers featuring [***]
and conforming to the specifications of Section 13.1.2 hereof.
"Majority Vote" shall have the meaning given such term in Section 8.4.
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"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.
"[***] Page" shall mean a webpage on the MP3 Website featuring [***] 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;
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(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
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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.
"[***] Affiliate" shall mean any [***] which enters into an affiliation
agreement or arrangement with the Company for purposes of [***].
"[***] Affiliates Pages" shall mean one or more webpages hosted on MP3
servers featuring [***] 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
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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.
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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 [***]. Concurrently with the
execution of this Agreement, MP3 has licensed [***] 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 "[***]" 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.
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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 [***] and provide
functionalities as determined by the Management Committee and will present
[***].
4.1.2 To license to, and enter into [***], as contemplated under
the Initial Business Plan, and to [***].
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
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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).
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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
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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
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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
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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 [***]. 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 [***] 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
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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
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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.
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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) [***] In accordance with Section 13.5.1, the Company shall
distribute to [***] share of certain [***] 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
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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.
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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 [***] 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.
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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 [***]. 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
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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.
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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 [***] 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 [***] 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
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(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
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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
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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
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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;
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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.
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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
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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.
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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
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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
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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);
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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
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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,
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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
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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
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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,
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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.
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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 [***]. 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
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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 [***].
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.
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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
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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 [***] 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
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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 [***]. The initial integration of [***] 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 [***] 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 [***] and the [***]. 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 [***] 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 [***]. 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
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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
[***] (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
[***]. Each Affiliate Website shall contain promotional links to the MP3 Website
and appropriate links to the [***] Pages. MP3 shall provide, at no cost to the
Company or [***] Affiliates, [***], including graphical links to appropriate
[***] Pages, to be used on the Affiliate Websites (such as, for example, the
[***] 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 [***].
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 [***] 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 [***] Affiliates Pages, the [***] Pages,
the [***] 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 [***] 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)
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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 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 [***] 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 [***] Pages
to download, at no cost, any software typically required for end users to
utilize the services proposed to be offered by the [***] 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 [***] and MP3 shall provide back-end and
fulfillment support for orders of such [***] may include material such as [***],
but any other material for [***] shall be as reasonably agreed to by MP3 and the
Company. Such [***] 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)
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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 [***] to the Company an exclusive, worldwide, royalty-free license to use
the [***] (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 [***] shall mean the trademark and/or service mark
[***] MP3 acknowledges that the Company may register and use the [***] domain
name in its own name; however, the Company acknowledges MP3's ownership of the
[***] and acknowledges that the Company's use of the [***] will not create in
it, nor will it represent it has, any right, title or interest in or to the
[***] other than the license granted herein. The Company will not challenge the
validity of or attempt to register the [***] 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 [***] without the prior
written consent of MP3, which consent shall not be unreasonably withheld. The
Company may offer products and/or services using the [***] 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 [***] therefrom and to refrain from marketing, selling, delivering
and/or supporting any product or service which uses or reflects the [***]. 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 [***] 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 [***] and the
[***] 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 [***]
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
* CONFIDENTIAL TREATMENT REQUEST(ED)
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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 [***]
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 [***] 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
* CONFIDENTIAL TREATMENT REQUEST(ED)
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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 [***]
13.4.1 The Company shall receive [***] (which shall include,
without limitation, sales of [***]and similar goods and services and [***] that
results from [***] (which shall include for purposes of this Section 13.4.1 the
[***] Pages and the [***] Affiliates Pages). The Company may share a portion of
[***] with its [***] Affiliates, under such terms as may be determined by the
Management Committee.
13.4.2 MP3 shall receive [***] (which shall include, without
limitation, sales of [***] and similar goods and services and [***] 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 [***] Pages and
the [***] Affiliates Pages) and links to the Affiliate Websites, either directly
or through the [***] Pages or [***] 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 [***] shall be subject to review by
the Company and MP3 every two years in order to determine whether such [***] in
light of other generally prevalent industry standards and practices with regard
to [***]. If the parties mutually agree that [***] 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, [***] of the type described in Section
* CONFIDENTIAL TREATMENT REQUEST(ED)
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13.4 or [***] of the type described in Section 13.1.2, MP3 or the Company, as
the case may be, shall prepare a quarterly statement providing sufficient detail
regarding the source of such [***] 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 [***]; Other [***] Affiliates
13.6.1 Cox shall cause the [***] to become [***], of such
affiliation). As a group, the [***] that become [***] Affiliates shall have
"most favored nation" status, relative to other [***] Affiliates and that are
similarly situated to the [***], for their respective affiliation arrangements
with the Company. The initial allocation of [***] on the Affiliate Websites of
the [***] that become [***] Affiliates shall be set at [***].
13.6.2 Cox shall use commercially reasonable efforts to solicit
[***] to become [***] Affiliates.
13.6.3 The affiliation agreements between the Company and its
[***] Affiliates shall generally be exclusive [***]. If [***] acquires a [***]
in which the Company already has an exclusive affiliation agreement with another
[***] Affiliate [***], the [***] shall be permitted to become the Company's
exclusive [***] upon the expiration or earlier termination of the affiliation
agreement of such other [***] Affiliate and the Company shall not renew any
affiliation agreement of a [***] Affiliate [***] following the acquisition by
[***] as such [***] Affiliate.
* CONFIDENTIAL TREATMENT REQUEST(ED)
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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
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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):
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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:
[***]
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.
* CONFIDENTIAL TREATMENT REQUEST(ED)
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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
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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.
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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:
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EXHIBIT A
[***]
<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>
* CONFIDENTIAL TREATMENT REQUEST(ED)
Exhibit-A
<PAGE> 1
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
EXHIBIT 10.22
[MP3.COM LETTERHEAD]
SPONSORSHIP AGREEMENT
This Sponsorship Agreement ("Agreement") is made and entered into on February
17, 1999 ("Effective Date"), by and between Tickets.com, Inc., a Delaware
corporation, located at 4061 Glencoe Ave., Marina del Rey, CA 90292 ("Tickets")
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, Tickets shall be
MP3.com's [***] and MP3.com shall include a Tickets Portal on the "Music" page
and the "Pop," "Rock" and "Alternative" genre pages on the Website. A "Portal"
is defined as a web graphic with the dimensions not to exceed 125 X 125 pixels
and 20Kb in size. The content of the Portal shall be supplied by Tickets and
shall conform with reasonable technical and content specifications supplied by
MP3.com.
2. Impressions. MP3.com agrees to deliver a guaranteed minimum of [***]
Impressions per month for the term of this Agreement. An "Impression" is defined
as the display of the Tickets Portal to a user on one of the above referenced
pages.
3. Sponsor Fees. Tickets 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. 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. Term and Termination. This Agreement shall commence on the Effective Date and
shall remain in full force and effect until one (1) year subsequent to the
Effective Date, provided however, that Tickets may terminate this Agreement for
any reason upon thirty (30) days' notice to MP3.com at any time prior to the
expiration of sixty (60) days subsequent to the Effective Date. Furthermore, for
a thirty (30) day period, beginning thirty (30) days prior to the first
anniversary of this Agreement, Tickets shall have the right to renew the
Agreement for another year [***]. Any payments which have accrued prior to the
date of termination shall remain due and payable. Sections 6, 7, and 8 shall
survive termination of this Agreement.
5. Measurement. Upon request, Tickets shall have access to pertinent statistics
related to Impressions covering the period of this contract. Tickets agrees to
accept MP3.com's
* CONFIDENTIAL TREATMENT REQUEST(ED)
<PAGE> 2
measurement of Impressions (the "Count") according to MP3.com's logs and other
tracking devices and/or software MP3.com may use, provided however, that Tickets
shall have the right to audit MP3.com's records in this regard. If Tickets
reasonably disputes the Count pursuant to this Agreement, then Tickets shall
have the right to select the independent auditor of its choice to conduct an
audit of MP3.com's records (the "Audit"). The Audit will be conducted in such a
way so as not to interfere to any material extent with MP3.com's operations. If,
for any applicable period, the independent auditor determines that MP3.com
overstated the Count by more than five percent (5%), then MP3.com shall pay the
cost of the Audit and shall refund Tickets the difference between the amount
originally paid and the amount which should have been paid, or MP3.com shall
credit the appropriate amount of Impressions to Tickets' account.
6. Representations and Warranties. Each party is solely responsible for any
legal liability arising out of or relating to the content of its site and any
material to which users can link through the sites. Each party represents and
warrants that its sites will not: (i) infringe upon 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. Each party agrees to defend, indemnify and hold harmless
the other and its shareholders, 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 or license of either party's goods or services; or (c)
any other act, omission or representation by either party. Either party may
participate in the defense of itself at its option and expense.
7. 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.
8. 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 Tickets without MP3.com's written consent,
which shall be promptly granted or denied and not unreasonably withheld, except
that Tickets may assign this Agreement without MP3.com's consent if another
entity acquires substantially all the assets of Tickets. The parties to this
Agreement are independent contractors, and no agency, partnership, joint
venture or employee-employer relationship is created by this Agreement. MP3.com
intend to, and does, bind its successors and assigns to the terms of this
Agreement.
<PAGE> 3
/s/ GREG FLORES /s/ ADAM EPSTEIN
- ------------------------- -----------------------------------
Representative of MP3.com Representative of Tickets.com. Inc.
Greg Flores - VP Sales Adam Epstein - V.P. & Counsel
- ------------------------- -----------------------------------
Printed Name & Position Printed Name & Position
2/17/99 2-17-99
- ------------------------- -----------------------------------
Date Date
<PAGE> 4
Steve:
Per our conversation yesterday, this will confirm, on behalf of Tickets.com,
Inc., that the term of the February 17, 1999 agreement (the "Agreement") by and
between Tickets.com, Inc. and MP3.com, Inc. is for one (1) year as stated in
Paragraph 4 thereof (subject to the exceptions stated therein). Though Paragraph
3 of the Agreement only specifies revenue owing MP3.com, Inc. through the first
six (6) months of the Term, it is Tickets.com, Inc.'s understanding that for
each of the months subsequent thereto MP3.com, Inc. will be compensated in the
amount of ([***]) per month.
/s/ ADAM EPSTEIN
- ----------------
Adam Epstein
Senior V.P. Business Development & Counsel
Tickets.com, Inc.
4061 Glencoe Avenue
Marina Del Rey, CA 90292
Phone: (310) 578-4221
Fax: (310) 578-4201
E-mail: [email protected]
* Confidential Treatment Requested
<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 [***].
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 [***] 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.,
[***] under this contract [***], [***].
/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 [***] must be [***], and [***].
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
[***]
-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-
