<PAGE>
As filed with the Securities and Exchange Commission on February 19, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MUSICMAKER.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 5961 54-1811721
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
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1831 Wiehle Avenue
Suite 128
Reston, Virginia 20190
(703) 904-4110
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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Robert P. Bernardi
Co-Chief Executive Officer
musicmaker.com, Inc.
1831 Wiehle Avenue
Suite 128
Reston, Virginia 20190
(703) 904-4110
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
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Copies to:
John L. Sullivan, III Andrew J. Sherman
Andrea S. Kaufman David J. Kaufman
Erik J. Lichter Alan J. Schaeffer
Venable, Baetjer and Howard, LLP Katten Muchin & Zavis
2010 Corporate Ridge 1025 Thomas Jefferson St., N.W.
Suite 400 Suite 700
McLean, VA 22102 Washington, DC 20007
(703) 760-1600 (202) 625-3790
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement is effective.
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, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum
Title of Each Class of Aggregate Amount of
Securities to be Offering Registration
Registered Price(2) Fee
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<S> <C> <C>
Common Stock, par value $0.01 per share $30,000,000 $8,340
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</TABLE>
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(1) Includes shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion: dated February 19, 1999.
PROSPECTUS
musicmaker.com, Inc.
[logo]
shares of common stock
$ per share initial public offering price
This is our initial public offering. Prior to this initial public offering,
there has been no public market for our common stock. We expect our initial
public offering price to be between $ and $ per share. We have filed an
application for our common stock to be quoted on the Nasdaq National Market
under the symbol "MMKR."
Offering Information
<TABLE>
<CAPTION>
Per share Total
<S> <C> <C>
Initial public offering price...................................
Underwriting discounts/commissions..............................
Estimated offering expenses.....................................
Net offering proceeds to musicmaker.com, Inc....................
</TABLE>
We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase a maximum of additional shares to
cover over-allotments. Because the underwriters may chose not to exercise
their over-allotment option, the calculations in the table above do not
account for such exercise.
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Investing in our common stock involves certain risks.
See "Risk Factors" section beginning on page 5 of this prospectus.
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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.
Ferris, Baker Watts Fahnestock & Co. Inc.
Incorporated
<PAGE>
MUSICMAKER(TM), MUSIC CONNECTION(TM), MUSICMAGIC(TM) and CD KIT(TM) are
trademarks of musicmaker.com, Inc. Musicmaker.com, Inc. has applied for
federal trademark registration for each of the marks above. All other
trademarks or service marks appearing in this prospectus are the property of
their respective holders.
[Picture of musicmaker.com website and custom CDs and descriptive language to
be filed by amendment.]
<PAGE>
Prospectus Summary
You should read this summary together with the more detailed information and
financial statements and related notes thereto appearing elsewhere in this
prospectus, including the information under "Risk Factors." Unless otherwise
indicated, all information reflects: a one-for-3.85 reverse stock split
effected on , 1999; the automatic conversion of all outstanding shares of
preferred stock and all outstanding convertible notes into shares of our common
stock; and the automatic conversion of all outstanding preferred stock warrants
into common stock warrants upon completion of this offering.
Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio, Inc. format.
We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
. Creedence Clearwater . The Beach Boys . Ziggy Marley
Revival
. Miles Davis . Johnny Cash
. Jerry Lee Lewis
. John Coltrane . Dionne Warwick
. Little Richard
. The Yardbirds with . Muddy Waters
. Frank Zappa Eric Clapton
. The Blues Brothers
. Taylor Dayne . Blondie
. The Kinks
. The Ramones . Kansas
. The Band
We believe that the multimedia features available through the interactive
environment of the Internet make it an ideal medium for promoting, marketing
and selling our custom CDs and digitally downloaded music.
Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs and digital
downloads:
. Growth in sales of CD singles.
. Growth of the Internet as a viable retail medium.
. Increasing affluence of the over 30 generation.
. Continued prominence of classic rock albums.
. Record label desire to diversify distribution methods while protecting
intellectual property rights.
1
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We sell our custom CDs through our website as well as the websites of other
prominent music retailers, including Platinum Entertainment, Inc., Trans World
Entertainment Corporation and N2K Inc. (musicboulevard.com). Additionally, we
have a marketing alliance with The Columbia House Company, a leading record and
video club, jointly owned by Sony Music Entertainment, Inc. and Time Warner
Inc. This alliance currently allows us to exclusively market our custom CDs to
Columbia House's 15 million members, including those without Internet access,
through Columbia House's websites and direct marketing campaigns.
Musicmaker.com has recently entered into a similar marketing alliance with
Audio Book Club, Inc., a direct marketer of audio books through the Internet
and club member catalogs, and intends to seek additional alliances with music
and non-music retailers.
Our management team has significant experience in both the music and
technology industries. Our officers and directors include the former Chairman
and Chief Executive Officer of PolyGram Records, Inc. and President of Mercury
Records Corporation, the former President of Warner Music Media and RCA Direct
Marketing, Inc./BMG Direct Marketing, Inc., as well as the co-founder of
PictureTel Corporation.
We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:
. Offer a new way to buy licensed, customized music.
. Offer most extensive selection of music for custom compilation and
digital downloading.
. Increase website traffic through industry alliances and multiple
hyperlinks.
. Create strong brand awareness.
. Establish genre-specific user communities.
. Capitalize on cross-selling opportunities.
. Leverage technologies for additional formats.
. Expand international presence.
Musicmaker.com, Inc. is a Delaware corporation incorporated on April 23,
1996. Our principal executive office is located at 1831 Wiehle Avenue, Suite
128, Reston, Virginia 20190, and our telephone number is (703) 904-4110. Our
World Wide Web site is www.musicmaker.com. The information on our website is
not incorporated by reference into this prospectus.
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The Offering
<TABLE>
<S> <C>
Common stock offered by
musicmaker.com...............
Common stock outstanding after
this offering(1).............
Use of proceeds............... . Pay advances to record labels in connection
with acquiring additional music content.
. Expand advertising, marketing and
promotional efforts with existing and future
strategic marketing partners.
. Maintain and upgrade technological systems.
. Fund working capital and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol................ "MMKR"
</TABLE>
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(1) Does not include:
. shares of common stock underlying outstanding warrants issued to Ferris,
Baker Watts, Incorporated and Fahnestock & Co. Inc., as representatives of
the underwriters, or 595,855 shares of common stock underlying outstanding
common stock warrants, or 247,039 additional shares reserved for issuance
pursuant to our stock option plan.
Includes:
. 532,182 shares of common stock underlying stock options outstanding as of
the date of this prospectus pursuant to our stock option plan and 728,725
shares of common stock underlying warrants issued upon conversion of the
outstanding preferred warrants. See "Management--Stock Option Plan."
3
<PAGE>
Summary Financial Data
The following table summarizes our financial data. You should read this
information together with our consolidated financial statements and notes
thereto appearing elsewhere in this prospectus.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Period from
April 23, 1996
(inception) to Year ended December 31,
December 31, ------------------------
1996 1997 1998
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<S> <C> <C> <C>
Net sales............................ $ 8,355 $ 13,432 $ 74,028
Cost of sales........................ 2,590 2,955 46,821
--------- ----------- -----------
Gross profit......................... 5,765 10,477 27,207
Total operating expenses............. 370,410 2,060,677 4,699,789
--------- ----------- -----------
Loss from operations................. (364,645) (2,050,200) (4,672,582)
Net interest (expense) income........ (2,667) (33,957) 17,815
--------- ----------- -----------
Net loss............................. $(367,312) $(2,084,157) $(4,654,767)
========= =========== ===========
Pro forma basic and diluted net loss
per share (1)(2): $ (1.73)
===========
Pro forma weighted average shares
outstanding (1)(2): 2,863,521
===========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
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Pro Forma
Actual Pro Forma (1) As Adjusted (3)
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<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........... $ 972,954 $2,286,579 $
Working capital .................... (287,767) 1,025,858
Total assets........................ 3,233,963 4,435,193
Debt, long-term portion............. 726,786 214,286
Convertible preferred stock......... 3,434,700 --
Total stockholders' (deficit) equity
................................... (2,312,668) 2,835,762
</TABLE>
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(1) Pro forma to give effect to:
. A one-for-3.85 reverse stock split to be effected, on , 1999.
. The automatic conversion, upon the completion of the offering, of all
outstanding shares of preferred stock into 819,199 shares of common
stock.
. The automatic conversion of all outstanding convertible notes into
415,584 shares of common stock ($512,500 of convertible notes
outstanding at December 31, 1998 and $1,487,500 of convertible notes
issued in January 1999).
. The write-off of all capitalized loan fees related to the convertible
notes ($112,395 capitalized at December 31, 1998 and $173,875
capitalized in January 1999).
(2) Computed on the basis described in Note 9 of the notes to the consolidated
financial statements.
(3) Adjusted to give effect to reflect the sale of shares of common stock
offered hereby at an assumed initial public offering price of $ per
share (the midpoint of the range) and the application of the net proceeds
of this offering. See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks, in addition to the other
information contained in this prospectus, before making any investment
decision. The risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties, not presently known to us,
or currently considered immaterial by our management, may also materially
affect our future business, financial condition and results of operations. As
a result of any of the risks we encounter, our business, financial condition
and results of operations could be materially adversely affected. In addition,
any such adverse effect could cause the trading price of our common stock to
decline and you may correspondingly lose all or some portion of your
investment in us.
We have a limited operating history, have incurred losses and may continue to
realize losses. We also have an accumulated deficit that may continue to
increase.
We began commercial operations in November 1997. Accordingly, we have a
limited operating history and we face all of the risks and uncertainties
encountered by early stage companies in new, unproven and rapidly evolving
markets. Among other things, our business will require:
. Expanding the content available in our online music library.
. Increasing awareness of the musicmaker.com brand.
. Increasing our customer base.
. Attracting and retaining talented management, technical, marketing and
sales personnel.
If we are unable to achieve any of these goals, or other requirements for
the successful growth of an early stage Internet commerce company, our
business, financial condition and results of operations may be materially
adversely affected.
We have had net losses in each period since we began operations. We
anticipate that such losses may continue for the foreseeable future as our
operating expenses continue to increase. We reported a net loss of $4,654,767
and $2,084,157 for the years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998, we had an accumulated deficit of $7,106,236. There
can be no assurance that we will ever achieve profitable operations or
generate significant revenue with our current products and strategy. See
"Summary Financial Data," the consolidated financial statements appearing
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We do not have a license agreement with any major record label and currently
rely solely on independent record labels for our music content.
In order to build our music library, we must negotiate and enter into
license agreements with record labels. We rely upon our license agreements
with over 85 record labels, all of which are typically smaller, independent
labels. In order to achieve significant commercial success, we believe we need
to enter into a license agreement with at least one of the five major record
labels. Together, the five major record labels below accounted for
approximately 80% of the music sold in 1997:
. BMG Entertainment
. EMI
. Universal Music Group
. Sony Music Entertainment
. Warner Music
We may not be able to negotiate additional agreements and obtain additional
licenses on favorable terms, if at all. Our inability to secure licenses for
additional song titles or to obtain commercially popular music titles in a
5
<PAGE>
timely fashion may have a material adverse effect upon our business, financial
condition and results of operations.
In addition, we may encounter difficulty in making the minimum payments
required under our existing and any future license agreements with record
labels. Our failure to make such minimum payments could have material adverse
effects on our relationships with record labels, including, but not limited
to, cancellation of our license agreements. Any difficulties in obtaining, or
maintaining rights to music content could materially affect our business,
financial condition and results of operations. See "Business--Music Content."
We need to develop the musicmaker.com brand.
Our future success and growth significantly depend upon our promotion and
favorable consumer perception of the musicmaker.com brand. Increased
recognition and awareness of the musicmaker.com brand will largely depend upon
our advertising and promotional efforts, our strategic marketing alliances,
and our continued provision of a high quality product and high level of
customer service. There can be no assurance that these efforts will result in
increased brand recognition or if such increased brand recognition is
obtained, that we will experience a corresponding increase in the sale of our
custom CDs. See "Business--musicmaker.com Strategy."
Our business depends on continued growth of online commerce.
Purchasing products and services over the Internet is a new and emerging
market. Our future revenues and profits are substantially dependent upon
widespread consumer acceptance and use of the Internet and other online
services as a medium for commerce. Rapid growth of the use of the Internet and
other online services is a recent phenomenon. This growth may not continue. A
sufficiently broad base of consumers may not adopt, or continue to use, the
Internet as a medium of commerce. Demand for and market acceptance of recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there are few proven products and services. For us to
grow, consumers who have historically used traditional means of commerce will
instead need to purchase products and services online, and as a result the
custom CD market may not be viable without the growth of Internet commerce.
We depend upon maintenance and continued improvement of the Internet's
infrastructure.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a
reliable network backbone with the necessary speed, data capacity and
security, and the timely development of complementary products, such as high-
speed modems, to provide reliable Internet access and services.
The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure and could face such outages
and delays in the future. Outages and delays are likely to affect the level of
Internet usage, the level of traffic on our website and the number of
purchases on our website. In addition, the Internet could lose its viability
as a mode of commerce due to delays in the development or adoption of new
standards to handle increased levels of activity or due to increased
government regulation. The adoption of such new standards or government
regulation may also require us to incur substantial compliance costs.
Our business model is novel and unproven.
Musicmaker.com is based on a novel and unproven business model. It is
impossible to predict the degree to which consumers will use the
musicmaker.com service and the level of consumer acceptance for our custom
CDs. It is also difficult to anticipate the level of acceptance of our
distribution model by additional record labels, specifically major record
labels. We will be successful only if consumers and record labels respond
favorably to our business model and our custom CDs and digitally downloaded
music.
6
<PAGE>
Factors influencing consumers' acceptance of our custom CDs and digitally
downloaded music include:
. Our ability to consistently provide high quality custom CDs and
digitally downloaded music at competitive prices.
. Our maintenance of a user-friendly ordering process and a high level of
customer service.
. Consumers' desire to conduct online commerce, specifically their demand
for custom CDs.
Factors influencing record labels' acceptance of our business model include:
. The belief that sales of custom CDs and digitally downloaded music will
enable record labels to gain market exposure for artists and titles in
their back catalogs and generate incremental revenue without disrupting
existing distribution channels or retail pricing structures.
. The belief that musicmaker.com will be able to assist in the protection
of record label's intellectual property rights.
Should we encounter difficulty with any of the factors above, or other
factors associated with consumer or record label acceptance of our business
model, it is possible that we will not achieve profitability. See "Business--
musicmaker.com Strategy."
The online music industry is extremely competitive.
The market for online commerce is extremely competitive and we believe such
competition will continue to grow and intensify. Our most visible custom
compilation competitors currently include Custom Revolutions, Inc., CDuctive,
and amplified.com. Although our primary focus is on sales of custom, rather
than pre-recorded music CDs, we may ultimately compete with existing online
websites that provide sales of pre-recorded music on the Internet. Such online
competitors may include N2K, CDnow, Inc., Amazon.com, Inc., barnesandnoble.com
inc., Columbia House and BMG Music Service. We do not believe that any of
these competitors currently offer customized music compilations to their
customers. However, CDnow purchased SuperSonic Boom, a custom compilation
provider, in June 1998.
We also face significant competition in the growing market to provide
digitally downloaded music, specifically for music files in MP3 format.
Digitally downloaded music can currently be found on the websites of existing
online music retailers, artists and record labels as well as catalogs of songs
provided by internet portals such as Lycos. We expect the competition to
provide MP3 files to intensify with further entry by additional record labels,
artists and portals, including those with greater resources and music content
than musicmaker.com. Recently, the five major record labels announced that
they have joined with IBM to conduct a market trial of a digital distribution
system, providing over 1,000 albums to cable subscribers in the San Diego
area. We expect additional market trials and alliances by technology and music
industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. See "Risk
Factors--Our industry may encounter changes in music distribution methods."
Our ability to effectively compete in the online music industry will depend
upon, among other things:
. Our ability to expand the list of song titles available from our online
music library.
. Our continued promotion of the musicmaker.com website and brand.
. Our maintenance and improvement of the technical systems upon which our
operations rely.
. Our ability to attract and retain experienced management, technical,
marketing and sales personnel.
. Our ability to provide a high quality, easy to use mechanism by which
users can customize and purchase music at a reasonable price.
Our failure in connection with any of the factors above, would materially
adversely affect our ability to compete.
7
<PAGE>
In addition to competition encountered on the Internet, we face competition
from traditional music retail chains and megastores, mass merchandisers,
consumer electronics stores, music clubs, and a number of small custom
compilation start-up companies. We could also face competition from record
companies, multimedia companies and entertainment companies that seek to offer
recorded music either directly to the public or through strategic ventures and
partnerships.
Many of our current and potential competitors in the Internet commerce and
music businesses have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and
larger existing customer bases than musicmaker.com. For example, should record
labels decide to compete with us by offering their own custom CDs over the
Internet or by making their music available for digital downloads, we would be
at a significant disadvantage from a music library selection standpoint. We
expect that such competitors may be able to respond more quickly to new or
emerging technological change, competitive pressures and changes in customer
demand. As a result of their advantages, our competitors may be able to limit
or curtail our ability to successfully compete in the industry. The
competitive pressures that we encounter in the industry could materially
adversely affect our business, financial condition and operating results. See
"Business--Competition."
We are significantly dependent upon certain existing and future marketing
alliances.
We believe that future marketing of our custom CDs is heavily dependant upon
existing strategic marketing alliances. We anticipate that our ability to
distribute print advertisements, promote the musicmaker.com brand name and
ultimately sell custom CDs would be materially adversely affected by
contractual difficulties associated with, or the termination of, our existing
marketing alliances.
We especially rely upon our current marketing alliance with Columbia House.
Columbia House may terminate our alliance upon not less than thirty days
notice if Mr. Puthukarai ceases to be musicmaker.com's President and Chief
Operating Officer and Columbia House deems his replacement incompatible with
their interest, or Columbia House determines after the first six
musicmaker.com promotional mailings to its members that its financial returns
do not justify continuing the relationship. Columbia House may choose to enter
into non-exclusive marketing agreements with our competitors if they offer a
significant repertoire of music unavailable through musicmaker.com. Our
alliance with N2K is subject to renegotiation as a result of its proposed
merger with CDNow, which acquired a custom compilation provider in June 1998.
Our future success and development of the musicmaker.com brand name is also
heavily dependant upon our ability to enter into additional marketing
alliances and hyperlink arrangements with music and entertainment companies,
Internet service providers, and Internet search engines. There is no assurance
that we will be able to develop future strategic alliances on terms favorable
to us, if at all. Our inability to enter into such alliances in the future
could materially adversely affect the promotion of our musicmaker.com brand
and our custom CDs. See "Business--Marketing."
Growth of musicmaker.com may challenge our business operations.
Since beginning commercial operations in November 1997, we have rapidly
expanded our operations. While we anticipate continued expansion of our
operations for the foreseeable future, such growth may place considerable
strain on our existing resources and technology, as well as our management,
technical, marketing and sales personnel. In order to adequately manage our
growth, it will be necessary to continue to implement our strategy and to
assess and upgrade the systems and resources which support our operations. If
we are unable to manage our growth effectively, our business, financial
condition and results of operations may be materially adversely affected. See
"Business--musicmaker.com Strategy."
We may encounter security risks associated with business on the Internet.
We are potentially vulnerable to computer break-ins, "hackers," credit
fraud, viruses and other similar disruptive problems caused by our customers
or unauthorized third parties. These disruptions could result in interruption,
delay or possible cessation of service to our customers. Unauthorized activity
on our network or website could also result in potential misappropriation of
proprietary information or customer data. Such misappropriation could cause us
to incur significant litigation expense to assert our proprietary rights or
defend possible claims of misuse of, or failure to secure, consumers' personal
information.
8
<PAGE>
Consumers currently use their credit cards to make online purchases. We rely
on licensed encryption and authentication technology to secure transmission of
confidential information, including credit card numbers. It is possible that
advances in computer capabilities and technology could result in a compromise
or breach of the technology we use to protect customer transaction data. Such
security concerns of our business, and the online industry generally may deter
customers and potential customers from using the Internet as a means of
commerce. Security breaches could also expose us to potential liability to
customers, record labels and others and could inhibit the growth of the
Internet as a merchandising medium.
Our industry may encounter changes in music distribution methods.
New digital distribution channels for music could radically alter the
established order of artists, publishers, distributors, retailers and media
companies that use current music distribution methods. Early adopters are
currently performing market trials with high quality, open format MP3
downloaded music files--some posted legally by artists or record labels on
their own websites, others posted illegally on sites that have pirated
intellectual property owned by the major and independent labels. A portable
device, the Rio, that plays MP3 downloaded music files recently became
available to consumers.
In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which uses IBM software, will allow
approximately 1,000 cable subscribers in San Diego to download music from a
library of 1,000 album titles and several hundred song titles provided by the
major record labels. The market trial is viewed by many as the first step
taken by the major record companies to consider the sale of digital music
online.
A task force of recording companies, software programmers and consumer
electronics makers, called the Secure Digital Music Initiative, is attempting
to develop standards by which songs available in digital format can be
disseminated without infringing upon copyright or other intellectual property
rights. We have made a business decision to provide licensed music content
over the Internet by licensing content from labels in a traditional manner to
ensure compliance with existing copyright laws. The acceptance and integration
of any of these new methods of music distribution, without sufficient
protection of intellectual property or industry uniformity, could materially
adversely affect our business, financial condition and results of operations.
Increased availability of high bandwidth capacity could further alter existing
distribution methods.
We may not be able to keep up with technological advancements.
The market for providing custom CDs and digitally downloaded music on the
Internet, and for Internet commerce generally, is characterized by rapid
change, evolving industry standards and the frequent introduction of new
technological products and services. The introduction of new technology,
products, services or standards may prove to be too difficult, costly or
simply impossible to integrate into our existing systems. Such innovations
could render our existing or any future products and services obsolete. Our
ability to remain competitive will also depend heavily upon our ability to
maintain and upgrade our technology products and services. Any difficulty
keeping pace with technological advancements could hurt growth of our
business, retention of our customers and may materially adversely affect our
business, financial condition and results of operations.
Risk of our system failure.
Our business heavily depends upon our ability to maintain our computer and
telecommunications equipment in effective working order. The scalability
features of our storage and fabrication systems have not been tested in actual
operations and may not be able to handle a large increase in customer demand
or a significant increase in our online music library. The strain associated
with increased demands upon our systems may result in reduced quality of our
customer service and products or potential system failure. Any interruption,
damage to, or failure of our systems could have a material adverse effect on
our business, financial condition and results of operations.
Substantially all of our computer and telecommunications operations are
located at our facility in Reston, Virginia. We currently do not maintain a
redundant website or co-hosting arrangement nor do we have an off-site back-up
of our music library. In the event of a catastrophic loss at our Reston
facility resulting in damage to, or destruction of, our computer and
telecommunications systems, we would have a material interruption in our
business operations.
9
<PAGE>
We depend upon intellectual property rights and risk having such rights
infringed.
We consider our trademarks, trade secrets and similar intellectual property
to be a valuable part of our business. To protect such intellectual property
rights, we rely upon copyright, trademark, patent and trade secret laws, as
well as confidentiality agreements with our employees and consultants. There
can be no assurance that our use of such contracts and the application of
existing law will provide sufficient protection from misappropriation or
infringement of our intellectual property rights. It is possible that others
will develop and patent technologies that are similar or superior to that of
musicmaker.com. It is also possible that third parties will obtain and use our
content or technology without authorization.
Musicmaker.com's year 2000 risks.
The year 2000 issue is the result of computer programs written using year
identifiers consisting of two digits, rather than four. Use of two digits to
identify years may cause certain systems to recognize a date using "00" as the
year 1900, rather than the year 2000. The year 2000 issue could result in
system failures, or miscalculations causing disruption to the operations of
many businesses. We have not verified that the companies doing business with
us are year 2000 compliant. Significant uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance. Any year
2000 compliance problem of musicmaker.com, our current and any future
strategic marketing partners, our vendors or our users could have a material
adverse effect on our business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 System Costs."
We may be exposed to liability for content retrieved from our website.
Our exposure to liability from providing content on the Internet is
currently uncertain. Due to third party use of information and musical content
downloaded from our website, we may be subject to claims for defamation,
negligence, copyright, trademark or patent infringement or other theories
based on the nature and content of such materials. Our exposure to such
liability, particularly for claims not covered by insurance, or in excess of
any insurance coverage, could have a material adverse effect on our business,
financial condition and results of operations.
We depend upon the services of key personnel.
Our future success depends heavily upon the continued service and industry
relationships of our key senior management personnel, including, but not
limited to:
. Robert P. Bernardi, our Chairman of the Board of Directors and Co-Chief
Executive Officer.
. Devarajan S. Puthukarai, our President, Co-Chief Executive Officer and
Chief Operating Officer.
. Irwin H. Steinberg, our Vice Chairman of the Board of Directors and a
consultant to musicmaker.com.
Any departure by key senior management personnel may have a material adverse
effect upon our business, financial condition and results of operations. See
"Risk Factors--We are significantly dependent upon certain existing marketing
alliances," "Business--Marketing" and "Management."
We depend upon hiring and retaining qualified employees.
Our current and future operations significantly depend upon our ability to
attract, retain and motivate highly qualified, managerial, technical,
marketing and sales personnel. Competition for such personnel is intense,
particularly in the Northern Virginia employment market. There can be no
assurance that we will be able to retain our existing employees or attract,
retain and motivate highly qualified personnel in the future. Such personnel
difficulties could impair growth of our business, promotion of our
musicmaker.com brand and products, and materially adversely affect our
business, financial condition and results of operations.
10
<PAGE>
Regulation of Internet domain names is uncertain.
We currently hold the Internet domain name "musicmaker.com." Domain names
generally are regulated by Internet regulatory bodies. The regulation of
domain names in the United States and in foreign countries is subject to
change. Regulatory bodies could establish additional top level domains,
appoint additional domain name registrars or modify the requirements for
holding domain names. As a result, we may not acquire or maintain the
musicmaker.com domain name in all of the countries in which we conduct or
expect to conduct business. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that infringe or otherwise decrease the value of our trademarks
and other proprietary rights.
Our industry may be subject to increased government regulation.
As commerce conducted on the Internet continues to evolve, federal, state or
foreign agencies may adopt regulations or impose new taxes intended to cover
our business operations. Such efforts may seek to regulate areas including
user privacy, pricing, content and consumer protection standards for our
products and services. Compliance with such regulations could hinder our
growth or prove to be prohibitively expensive. It is also possible that the
introduction of such regulations could expose companies involved in Internet
commerce, or the provision of content over the Internet, to significant
liability. If enacted, such government regulation could materially adversely
affect the viability of Internet commerce, generally, as well as our business,
financial condition and results of operations.
Certain existing investors own a large percentage of musicmaker.com's voting
securities.
Following the completion of this offering, our executive officers, directors
and their affiliated entities together will beneficially own approximately
of our outstanding shares of common stock ( if the underwriters'
overallotment option is exercised in full). As a result, these stockholders
will exercise significant control over all matters requiring stockholder
consent. Matters typically submitted to our stockholders for a vote include
the election of our directors, mergers or consolidations, and any sale of all,
or substantially all of our assets. The concentrated holdings of the
stockholders noted above may result in delay or deterrence of possible changes
in our control, which may reduce the market price of our common stock. See
"Principal Stockholders."
We may encounter risks associated with international expansion.
We intend to expand our business into international markets. In the event
that we conduct any such expansion, we will encounter many of the risks
associated with international business expansion, generally. Such risks
include, but are not limited to, language barriers, changes in currency
exchange rates, political and economic instability, difficulties with
regulatory compliance and difficulties with enforcing contracts and other
legal obligations. See "Business--musicmaker.com Strategy."
Shares eligible for future sale.
We will have shares of common stock outstanding after this offering. The
common stock sold in this offering will be freely tradable except for any
shares purchased by "affiliates" as that term is defined in Rule 144,
promulgated under the Securities Act of 1933, as amended. Our common stock
sold prior to the offering and certain other securities sold prior to the
offering, including securities automatically converting into common stock upon
completion of this offering are "restricted securities" as that term is
defined in Rule 144. In addition the following securities are outstanding and,
upon exercise of certain purchase rights and issuance of common stock therefor
unless registered, may only be sold pursuant to Rule 144 or an exemption from
registration.
. Under our stock option plan, options to purchase 532,182 shares of common
stock are issued and outstanding and upon exercise, the underlying common
stock may be freely traded subject to certain limitations imposed by Rule
701 of the Securities Act. An additional 247,039 shares of common stock are
reserved for issuance under our stock option plan.
11
<PAGE>
. 595,855 common stock warrants outstanding, 728,725 common stock warrants to
be issued upon conversion of the outstanding preferred warrants and
common stock warrants to be issued to the representatives in connection
with this offering. The holders of the warrants may sell shares of common
stock acquired upon exercise no earlier than six months from the date of
issuance, pursuant to, and as limited by, Rule 144.
Stockholders holding approximately or % of our outstanding common stock
have agreed not to offer, pledge, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any
musicmaker.com securities currently held without prior written consent of
Ferris, Baker Watts, Incorporated for a period of 180 days. Further sales of
common stock under Rule 144 or otherwise, and the introduction of such shares
into the public market could materially adversely affect the market price of
our common stock. See "Shares Eligible for Future Sale."
Our management will have broad discretion in applying the net proceeds of this
offering.
Assuming an initial offering price of $ and after deducting underwriting
discounts and commissions and other expenses of the offering, we will receive
net proceeds of $ . We have not yet determined the specific dollar amount of
net proceeds to be allocated to any of the possible uses indicated in "Use of
Proceeds." Accordingly, our management will have broad discretion in applying
the net proceeds of the offering. See "Use of Proceeds."
Investors purchasing common stock in this offering will experience immediate
and substantial dilution.
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after this offering. Accordingly, if you purchase common
stock in this offering, you will incur immediate dilution of approximately
$ , or % in the pro forma net tangible book value per share of common
stock from the price you pay for the common stock. To the extent that
outstanding options and warrants are exercised or additional securities are
issued, there will be further dilution to the investors in this offering. See
"Dilution" and "Shares Eligible for Future Sale."
Tax uncertainties of our business.
It is possible that the current tax moratorium limiting the ability of state
and local governments to impose taxes on Internet based transactions could
fail to be renewed prior to October 2001. Failure to renew this legislation
would allow states to impose new taxes on Internet based commerce. Should
states impose a requirement that online vendors collect taxes for all products
shipped to each state, collection of such sales tax could create additional
administrative burdens on our operations and slow the growth of Internet
commerce. The imposition of such taxes could materially adversely affect our
ability to become profitable in the future.
There has not been a public market for our common stock and its market price
is likely to fluctuate.
Prior to this offering there has been no public market for our common stock.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "MMKR." There can be no assurance, however, that an active trading
market will develop, or, if developed, that such a market will be maintained.
The market price of our common stock is likely to be volatile. As a result,
you may not be able to resell your shares at or above the initial public
offering price and could lose all or some portion of your investment. This
volatility may result from factors including:
. Variations in our quarterly operating results.
. Increase or decrease in orders placed for our products.
. Changes in estimates prepared by analysts for musicmaker.com or online
commerce generally.
. Any announcement of technological innovations.
. The introduction of new competitors or changes in customer preferences.
. The general condition of companies engaged in Internet commerce.
. Other events or factors affecting the market for our common stock and
the stock market generally.
12
<PAGE>
The stock market and Internet stocks specifically have experienced
significant price and volume fluctuations that have affected the market price
of common stock for many companies engaged in industries similar to
musicmaker.com. The factors above could materially adversely affect the market
price of our common stock.
We may have fluctuations in our quarterly results.
We expect to experience significant fluctuations in our future quarterly
operating results caused by a variety of factors, many of which are outside of
our control. Factors affecting our quarterly results may include:
. Any announcement, or introduction of new or enhanced websites, products,
services and strategic alliances by us, our alliance partners or our
competitors.
. Any changes to our current product offering, increases or decreases in
our song library or that of our competitors.
. Seasonality of music purchases.
. Level of customer satisfaction, including our ability to retain existing
customers and attract new customers.
. Price competition or changes in our current licensing arrangements.
. Increases or decreases in the use of the Internet, generally, and
consumer acceptance of the Internet for retail commerce purposes.
. Our ability to upgrade or respond to technological advances in a timely
and cost effective manner with minimal disruption to our operations.
. Technical difficulties, system downtime or Internet disruptions.
. General economic conditions and conditions specific to Internet commerce
and the music industry.
As a result of these and other factors, period-to-period comparisons of our
results of operations may not be meaningful and should not be relied upon as
an indication of our future performance. As a result of any of the factors
above, our operating results could be below expectations of investors and
market analysts, and the market price of our common stock could be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Anti-takeover effects of our Charter and Bylaws.
Our Charter and Bylaws contain provisions that could discourage potential
acquisition proposals and might delay or prevent a change in control of
musicmaker.com. These provisions could make musicmaker.com less attractive to
potential acquirers. These provisions could also result in our stockholders
being denied a premium for, or receiving less for, their shares than they
otherwise might have been able to obtain in a takeover attempt. See
"Description of Securities."
Our stockholders may have difficulty in recovering monetary damages from
directors.
Our Charter contains a provision which eliminates personal liability of our
directors for monetary damages to be paid to us and our stockholders for
breach of certain fiduciary duties. As a result of this provision, our
stockholders may be unable to recover monetary damages against our directors
for their actions that constitute a breach of certain fiduciary duties,
negligence or gross negligence. Inclusion of this provision in our Charter may
also reduce the likelihood of derivative litigation against our directors and
may discourage lawsuits against our directors for breach of their duty of care
even though such claims might have been successful and benefited stockholders.
See "Description of Securities."
13
<PAGE>
We may require additional capital or financing in the future.
We anticipate that the proceeds of this offering, cash on hand, cash
equivalents and commercial credit facilities will be adequate to meet our
working capital needs for at least the next 12 months. Beyond that period, we
may need to raise additional funds. We cannot be certain that we will be able
to obtain such funds on favorable terms, if at all. If we decide to raise such
funds by issuing additional equity securities, purchasers in this offering may
experience additional dilution. Issuance of additional equity securities may
also involve granting preferences or privileges ranking senior to those
purchasers in this offering. If we cannot obtain sufficient funds, we may not
be able to grow our operations, take advantage of future business
opportunities or respond to technological developments or competitive
pressures. See "Dilution," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
We do not intend to pay dividends.
We have never paid dividends on our common stock. We do not intend to pay
dividends and purchasers should not expect to receive dividends on our common
stock for the foreseeable future. See "Dividend Policy" and "Description of
Securities."
Warning regarding our use of forward-looking statements.
This prospectus contains forward-looking statements. Such statements relate
to possible future events, our future performance and our future operations.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "anticipates," "believes," "expects,"
"plans," "future," "intends," and other similar expressions. These forward-
looking statements are only our predictions. Our actual results could and
likely will differ materially from these forward-looking statements for many
reasons, including the risks described below and appearing elsewhere in this
prospectus.
14
<PAGE>
USE OF PROCEEDS
Assuming an initial offering price of and after deducting underwriting
discounts and commissions and other expenses of this offering, we will receive
net proceeds of from the sale of shares of our common stock in this
offering. We intend to use the net proceeds of this offering to pay advances
in connection with acquiring additional music content from record labels. We
also anticipate using net proceeds to expand our advertising, marketing and
promotional efforts with our existing and future strategic marketing partners.
Net proceeds may be used to support promotional inserts in direct mailings to
Columbia House and Audio Book Club members, website advertising and seasonal
product promotions. We intend to use net proceeds to maintain, back-up, and
upgrade the technological systems which support our operations. Although we do
not have any current plans to acquire any businesses, we may use a portion of
the net proceeds of the offering for such purposes. We have not yet determined
the amount of net proceeds to specifically allocate to each of the foregoing
purposes. As a result, management will have significant discretion in the
application of such proceeds. Allocation of net proceeds is further subject to
future events including general economic conditions, changes in
musicmaker.com's strategy and response to competitive pressures and consumer
preferences associated with the music industry and Internet commerce. Pending
use, we will invest the net proceeds of this offering in bank certificates of
deposit and other fully insured investment grade interest bearing securities.
See "Business--musicmaker.com Strategy" and "Risk Factors--Our management will
have broad discretion in applying the net proceeds of this offering."
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998:
. On an actual basis.
. On a pro forma basis to reflect:
. A one-for-3.85 reverse stock split to be effected on ,
1999.
. The automatic conversion, upon the completion of the offering,
of all outstanding shares of preferred stock into 819,199 shares
of common stock.
. The automatic conversion of all outstanding convertible notes
into 415,584 shares of common stock ($512,500 of convertible
notes outstanding at December 31, 1998 and $1,487,500 of
convertible notes issued in January 1999) and the issuance of
252,104 shares of common stock after December 31, 1998.
. On a pro forma as adjusted basis, to reflect the receipt by
musicmaker.com of the estimated net proceeds from the offering.
The information below assumes an initial public offering price of $ as
reduced for underwriting discounts, commissions and expenses incurred in
connection with the offering.
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
<S> <C> <C> <C>
Current portion of long-term obligation.. $ 42,857 $ 42,857
=========== =========== ====
Convertible notes and long-term
obligation.............................. $ 726,786 $ 214,286
Series A preferred stock................. 1,750,000 --
Series B preferred stock................. 1,684,700 --
Stockholders' (deficit) equity:
Common stock, $0.01 par value;
5,194,805 shares authorized; 2,707,954
shares issued and outstanding on an
actual basis; 3,942,737 shares issued
and outstanding on a pro forma basis
and shares issued and outstanding
on a pro forma as adjusted basis...... 27,080 39,427
Additional paid-in capital............. 4,766,488 10,188,841
Accumulated deficit.................... (7,106,236) (7,392,506)
----------- ----------- ----
Total stockholders' (deficit) equity .... (2,312,668) 2,835,762
----------- ----------- ----
Total capitalization..................... $ 1,848,818 $ 3,050,048
=========== =========== ====
</TABLE>
16
<PAGE>
DILUTION
The difference between the initial public offering price per share of common
stock and the as adjusted pro forma net tangible book value per share of
common stock after this offering constitutes the dilution to investors
purchasing common stock in this offering. Net tangible book value per share is
determined by dividing musicmaker.com's net tangible book value (total assets
less total liabilities) by the number of outstanding shares of common stock.
At December 31, 1998, our net tangible book value was $ or $ per share
of common stock. After giving effect to the sale of the common stock offered
hereby, assuming an initial public offering price of $ and after deducting
the estimated underwriting discounts, commissions and offering expenses, our
net tangible book value as of December 31, 1998, would have been $ or $
per share. This represents an immediate increase in net tangible book value of
$ per share to the existing holders of common stock and an immediate
dilution to investors purchasing in this offering of $ per share. The
following table illustrates the per share dilution to investors purchasing in
this offering:
<TABLE>
<S> <C>
Assumed initial public offering price per share..........................
Net tangible book value before offering................................
Pro forma increase attributable to new investors.......................
Net tangible book value after offering.................................
Pro forma dilution to investors purchasing in offering...................
</TABLE>
The following table summarizes as of December 31, 1998, on the pro forma
basis described above, the number of shares of capital stock purchased from
musicmaker.com, the total consideration paid to musicmaker.com and the average
price per share paid by existing stockholders and by investors purchasing
shares of common stock in this offering at an assumed initial public offering
price of $ , before deducting the estimated underwriting discount and
commissions and 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... % $ % $
New investors........... $
-------- -------- ---------- --------- ----
Total................. 100% $ 100%
======== ======== ========== ========= ====
</TABLE>
The table above excludes the following:
. 595,855 common stock warrants issued and outstanding, 728,725 common
stock warrants to be issued upon conversion of the oustanding preferred
stock warrants, and common stock warrants to be issued to the
representatives in connection with this offering; and
. 532,182 options issued as of January 31, 1999 under our stock option
plan.
To the extent that any of these options or warrants are exercised, there
would be further dilution to investors purchasing in the offering. See
"Capitalization," "Management--Stock Option Plan" and Notes 5 and 9 of the
notes to the consolidated financial statements.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends in the foreseeable future. The
payment of cash dividends, if any, in the future will be at the sole
discretion of the Board of Directors.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
consolidated financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the period from April 23, 1996 (inception) to December
31, 1996 and the years ended December 31, 1997 and 1998, and the consolidated
balance sheet data at December 31, 1997 and 1998 are derived from the
consolidated financial statements of musicmaker.com that have been audited by
our independent auditors, and are included elsewhere in this prospectus.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
Period from
April 23, 1996
(inception) to
December 31, 1996 1997 1998
----------------- ----------- -----------
<S> <C> <C> <C>
Net sales......................... $ 8,355 $ 13,432 $ 74,028
Cost of sales..................... 2,590 2,955 46,821
--------- ----------- -----------
Gross profit...................... 5,765 10,477 27,207
Operating expenses:
Sales and marketing............. -- 7,780 929,661
Operating and development....... 64,029 692,041 1,435,690
General and administrative...... 306,381 1,360,856 2,334,438
--------- ----------- -----------
Total operating expenses.......... 370,410 2,060,677 4,699,789
--------- ----------- -----------
Loss from operations.............. (364,645) (2,050,200) (4,672,582)
Net interest (expense) income..... (2,667) (33,957) 17,815
--------- ----------- -----------
Net loss.......................... $(367,312) $(2,084,157) $(4,654,767)
========= =========== ===========
Basic and diluted net loss per
share(2)......................... $ (0.44) $ (1.20) $ (2.13)
========= =========== ===========
Weighted average shares
outstanding(2)................... 830,076 1,734,328 2,186,488
========= =========== ===========
Pro forma basic and diluted net
loss per share(1)(2): $ (1.73)
===========
Pro forma weighted average shares
outstanding(1)(2): 2,863,521
===========
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(3)
---------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 972,954 $2,286,579 $
Working capital........................ (287,767) 1,025,858
Total assets........................... 3,233,963 4,435,193
Debt, long-term portion................ 726,786 214,286
Convertible preferred stock............ 3,434,700 --
Total stockholders' (deficit) equity... (2,312,668) 2,835,762
</TABLE>
- --------
(1) Pro forma to give effect to:
. A one-for-3.85 reverse stock split to be effected on , 1999.
. The automatic conversion, upon the completion of the offering, of all
shares of outstanding preferred stock into 819,199 shares of common
stock.
. The automatic conversion of all outstanding convertible notes into
415,584 shares of common stock ($512,500 of convertible notes
outstanding at December 31, 1998 and $1,487,500 of convertible notes
issued in January 1999).
. The write-off of all capitalized loan fees related to the convertible
notes ($112,395 capitalized at December 31, 1998 and $173,875
capitalized in January 1999).
(2) Computed on the basis described in Note 9 of the notes to the consolidated
financial statements.
(3) Adjusted to give effect to reflect the sale of shares of common stock
offered hereby at an assumed initial public offering price of $ per
share and the application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of musicmaker.com should be read in conjunction with the consolidated financial
statements and the related notes thereto and other financial information
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Musicmaker.com's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
factors set forth under "Risk Factors" and appearing elsewhere in this
prospectus.
Overview
Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio format.
We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
<TABLE>
<S> <C>
</TABLE>
. Creedence Clearwater Revival . The Beach Boys . Ziggy Marley
. Jerry Lee Lewis . Miles Davis . Johnny Cash
. Little Richard . John Coltrane . Dionne Warwick
. Frank Zappa . The Yardbirds with . Muddy Waters
Eric Clapton
. Taylor Dayne . Blondie . The Blues Brothers
. The Ramones . Kansas . The Kinks
. The Band
Musicmaker.com was incorporated in April 1996 ("Inception"). On July 31,
1996, musicmaker.com acquired the technology to produce its custom CDs. See
"Certain Transactions." During the remainder of 1996 and through the year ended
December 31, 1997, musicmaker.com's operating activities consisted of
recruiting personnel, developing the technological infrastructure necessary to
create custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. Musicmaker.com
launched its website in October 1997 and shipped its first custom CD in
November 1997. In 1998, musicmaker.com established several strategic alliances
with leading online and offline music marketers. See "Business--Marketing."
Since commercial operations primarily began in the fourth quarter of 1997,
musicmaker.com has sold over 5,000 custom CDs. Through July 1998, all of
musicmaker.com's net sales had been derived from the sale of custom CDs through
its own website and print promotions. In August 1998, musicmaker.com began
selling its custom CDs through a marketing alliance with N2K. In October 1998,
musicmaker.com began selling its custom CDs through marketing alliances with
Platinum and Columbia House. See "Business--Marketing."
Net sales are primarily derived from custom CDs offered over the Internet and
through advertising campaigns and individual songs downloaded directly from
musicmaker.com's website. Net sales are net of sales
19
<PAGE>
discounts, and include shipping and handling charges. Customer accounts are
settled by directly charging a customer's credit card. Net sales are
recognized upon shipment of the CD from musicmaker.com's production site in
Reston, Virginia. For digitally downloaded songs, net sales are recognized
upon execution of the order.
Cost of sales principally consist of content costs, production and shipping
costs, and credit card receipt processing costs. Content costs will include
royalty payments based on actual sales. Production costs include jewel cases,
CD trays and CD inserts. Musicmaker.com expects that its cost of sales will
increase significantly as it enters into additional licensing agreements to
further expand and develop its music library.
Sales and marketing expenses consist primarily of advertising and
promotional expenditures, including payroll and related expenses.
Musicmaker.com expenses all advertising costs as incurred. Musicmaker.com
expects sales and marketing expenses to increase significantly as it endeavors
to increase its customer base, drive traffic to its website and enhance brand
name awareness.
Operating and development expenses are expensed as incurred and consist
primarily of initial royalty payments and content development costs. To
establish its music library, musicmaker.com made advance royalty payments
pursuant to licensing agreements with certain record labels. These payments
have been classified as operating and development expenses due to management's
belief that minimal net sales will be generated during the one year period
following the payment of these advances. Musicmaker.com is required to make
additional annual advance payments for up to two years. Should these initial
arrangements generate significant revenues, future advances will be classified
as cost of sales. With respect to future licensing arrangements,
musicmaker.com intends to pay royalties based on actual sales which would be
included in cost of sales. Musicmaker.com expects that in the future,
operating and development costs will consist primarily of payroll and related
expenses for website and system development as well as expenses associated
with website hosting and Internet operations. Musicmaker.com's operating and
development expenses have increased significantly since Inception, and are
expected to continue to increase with our growth.
General and administrative expenses consist primarily of legal and
professional fees, payroll costs and related expenses for officers and
administrative personnel, as well as other expenses associated with corporate
functions.
Musicmaker.com has an extremely limited operating history upon which to base
an evaluation of its business and prospects. Musicmaker.com has yet to achieve
significant net sales and its ability to generate significant net sales in the
future is uncertain. Further, in view of the rapidly evolving nature of
musicmaker.com's business and its very limited operating history,
musicmaker.com has little experience forecasting net sales. Therefore,
musicmaker.com believes that period-to-period comparisons of our financial
results are not necessarily meaningful and you should not rely upon them as an
indication of future performance.
To date, musicmaker.com has incurred substantial costs to create, introduce
and enhance its services, to acquire content, to build brand awareness and to
grow its business. As a result, musicmaker.com has incurred operating losses
since Inception. In addition, musicmaker.com expects significantly increased
operating expenses in connection with an increase in the size of its staff,
expansion of its marketing efforts, and an increase in its research and
development efforts to assist in musicmaker.com's planned growth. To the
extent that increases in operating expenses precede or are not followed by
increased net sales, musicmaker.com's business, financial condition and
results of operations will be materially adversely affected. See "Risk
Factors--We have a limited operating history, have incurred losses and may
continue to realize losses. We also have an accumulated deficit that may
continue to increase."
Musicmaker.com's business and prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early years, particularly companies in new and rapidly evolving markets such
as electronic commerce. See "Risk Factors--We depend on continued growth of
online commerce" and "We depend on maintenance and continued improvement of
the Internet's infrastructure." In addition, musicmaker.com's net sales depend
substantially upon the level of activity on its website and the success of its
Columbia House print promotions. Although musicmaker.com has experienced
growth in its operations, there can be no assurance that musicmaker.com's net
sales will continue at its current level or rate of growth.
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Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 were $74,028
compared to $13,432 for the year ended December 31, 1997. The generation of
net sales resulted from development of our customer base, expansion of our
music library and the formation of strategic alliances with Columbia House,
N2K and Platinum which provided Internet traffic and access to additional
customer bases.
Cost of Sales. Cost of sales for the year ended December 31, 1998 were
$46,821 compared to $2,955 for the year ended December 31, 1997. For the
period ended December 31, 1998 content costs accounted for $10,258 or 22% of
cost of sales and production costs accounted for $32,086 or 69% of cost of
sales. Postage and mailing and credit card costs accounted for $2,383 and
$2,095, respectively for the year ended December 31, 1998, or a combined 9% of
cost of sales. Cost of sales for the year ended December 31, 1997 consisted
entirely of production costs of $2,955.
Operating and Development Expenses. Operating and development expenses were
$1,435,690 for the year ended December 31, 1998 compared to $692,041 for the
year ended December 31, 1997. This increase was primarily attributable to
expenses associated with obtaining content as well as enhancing the features
and functionality of our website and related systems.
Sales and Marketing Expenses. Sales and marketing expenses were $929,661
for the year ended December 31, 1998 compared to $7,780 in the year ended
December 31, 1997. Sales and marketing expense for the year ended December 31,
1998 consisted primarily of print advertising, expenditures incurred in the
development of our strategic alliances and increases in sales and marketing
personnel.
General and Administrative Expenses. General and administrative expenses
were $2,334,438 for the year ended December 31, 1998 from $1,360,856 for the
year ended December 31, 1997. This increase was primarily due to increases in
the number of personnel and corporate facility expenses necessary to support
the growth of our business and operations.
Interest Expense/Income. Interest income for the year ended December 31,
1998 was $17,815 compared to interest expense of $33,957 for the year ended
December 31, 1997. The 1997 interest expense was attributable to convertible
notes which were converted to common stock in June 1997. Musicmaker.com did
not have any interest expense associated with debt during the year ended
December 31, 1998.
Year Ended December 31, 1997 Compared to Inception Period from April 23, 1996
to December 31, 1996
Net Sales. Net sales were $13,432 for the year ended December 31, 1997
compared to $8,355 for the period from Inception through December 31, 1996
(the "Inception Period"). Net sales in the Inception Period consisted of
certain product sales from musicmaker.com's subsidiary which was dissolved in
early 1999. The increase in net sales was principally due to growth in
musicmaker.com's customer base and expansion of its music library.
Cost of Sales. Cost of sales were $2,955 for the year ended December 31,
1997 compared to $2,590 for the Inception Period.
Operating and Development Expenses. Operating and development expenses were
$692,041 for the year ended December 31, 1997 compared to $64,029 for the
Inception Period. This increase was primarily attributable to costs incurred
to obtain content and to enhance the features and functionality of
musicmaker.com's website and related systems.
Sales and Marketing Expenses. Sales and marketing expenses were $7,780 for
the year ended December 31, 1997. There were no sales and marketing expenses
for the Inception Period.
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General and Administrative Expenses. General and administrative expenses
were $1,360,856 for the year ended December 31, 1997 compared to $306,381 for
the Inception Period. This increase was primarily due to increases in the
number of personnel and corporate facility expenses necessary to support the
growth of musicmaker.com's business and operations.
Liquidity and Capital Resources
Net cash used in operating activities totaled $3,519,777 for the year ended
December 31, 1998 as compared net cash used in operating activities of
$1,101,275 for the year ended December 31, 1997. Net cash used in operating
activities for the year ended December 31, 1998 was primarily attributable to
the net loss of $4,654,767 offset by accrued compensation to related parties
of $30,665, an increase in accounts payable and accrued expenses of $297,250,
and an increase in long-term obligations of $257,143. Net cash used in
operating activities for the year ended December 31, 1997 was primarily
attributable to the net loss of $2,084,157, offset by an increase to accrued
compensation payable to related parties of $543,634, the issuance of stock and
warrants for services for $150,500, and an increase in accounts payable and
accrued expenses of $207,776.
Cash used in investing activities was $217,961 and $299,755 for the years
ended December 31, 1998 and 1997, respectively. The increase from the year
ended December 31, 1997 to December 31, 1998 included the purchase of computer
equipment and software for $177,954, the purchase of leasehold improvements of
$36,823 and furniture and other office equipment of $3,184.
Net cash provided by financing activities was $3,308,710 and $2,390,940 for
the year ended December 31, 1998 and December 31, 1997, respectively. Net cash
provided by financing activities, for the year ended December 31, 1998 was
through the issuance of outstanding preferred stock for $1,568,033 and the
issuance of common stock for $1,344,302. The net cash provided by financing
activities for this period also included the net proceeds from the issuance of
convertible notes of $396,375. Net cash provided by financing activities, for
the year ended December 31, 1997, was primarily through the issuance of
outstanding preferred stock for $1,700,000, issuance of common stock for
$440,940 and proceeds from the issuance of convertible notes of $250,000.
On January 8, 1999, musicmaker.com signed a lease line agreement which
provides leasing for computer and related equipment as well as CD fabrication
equipment up to $200,000 between the signing of the agreement and June 8,
1999. Any equipment leased under this agreement will have a 24 month lease
term, and at the end of the lease term musicmaker.com will either be obligated
to buy the equipment at 10% of the original equipment cost or extend the lease
term for an additional 24 months. Borrowings under this lease line agreement
require payments due in advance with a monthly rental factor of .0498 for
months one through 24. The actual monthly rental will be determined by
multiplying the cost of the equipment by the applicable monthly rental factor,
plus any monthly maintenance charges. We will provide the lessor with a first
security interest in the equipment leased under this agreement for the
duration of the term of the lease. Musicmaker.com also signed the first lease
under this agreement which will have a monthly rental payment of $8,261. As
part of the lease line agreement, musicmaker.com issued a warrant to purchase
6,234 shares of its common stock at $4.81 per share which expires on January
8, 2009.
On February 12, 1999, musicmaker.com signed a commitment letter with a
financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. Borrowings
under this line of credit bear interest at Imperial Bank's prime rate of
interest plus 2%. The line of credit is secured by a blanket security interest
on all of our assets including general intangibles excluding previously leased
equipment. The line also has certain financial covenants, including minimum
net worth and liquidity ratios. At February 15, 1999, we did not have any
outstanding balances under this line of credit. Interest on any balance
outstanding is payable monthly with principal and all accrued interest due six
months from the date of the loan. In the event that equipment and software
purchases under the line are termed out, equal payments of principal and
interest will be due monthly for 24 months, starting on the first month
following the initial six month maturity. If the term of the credit facility
is extended, Imperial Bank will have the right to purchase warrants equal to
4% of the commitment amount.
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Musicmaker.com anticipates that it will have negative cash flows for the
foreseeable future. It is estimated that musicmaker.com will need to provide
for items such as computer storage, production equipment, distribution
equipment, hardware and software for computer systems, and furniture and
fixtures. Musicmaker.com expects to fund its purchase of such capital
equipment with its working capital, which will include the proceeds from this
offering.
As of December 31, 1998, musicmaker.com had approximately $973,000 in cash
and cash equivalents. Musicmaker.com believes that the net proceeds from its
prior financings, this offering, and cash flows from operations, will be
adequate to satisfy its operations, working capital and capital expenditure
requirements for at least the next 12 months, although musicmaker.com may seek
to raise additional capital during that period. There can be no assurance that
such financing will be available on acceptable terms, if at all, or that such
financing will not dilute shares held by musicmaker.com's stockholders. See
"Risk Factors--We may require additional capital or financing in the future."
Year 2000 System Costs
Computer systems, software packages and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."
Musicmaker.com may realize exposure and risk if the systems it relies upon
to conduct day-to-day operations are not year 2000 compliant. The potential
areas of exposure include electronic data exchange systems operated by third
parties with whom musicmaker.com transacts business, certain products
purchased from third parties and computers, software, telephone systems and
other equipment used internally. To minimize the potential adverse effects of
the year 2000 problem, musicmaker.com established an internal project team
comprised of all functional disciplines. This project team has begun a three-
phase process of identifying internal systems (both information and non-
information technology systems) that are not year 2000 compliant, determining
their significance in the effective operation of musicmaker.com, and
developing plans to resolve the issues where necessary. Musicmaker.com has
been communicating with its suppliers and others with whom it does business to
coordinate year 2000 readiness. The responses received by musicmaker.com to
date indicate that steps are currently being taken to address this concern.
However, if such third parties are not able to make all systems year 2000
compliant, there could be a material adverse impact on musicmaker.com.
After initial review of musicmaker.com's principal transaction processing
software through which nearly all of musicmaker.com's business is transacted,
management has determined musicmaker.com to be year 2000 compliant and, as
such, does not anticipate any material adverse operational issues to arise.
Musicmaker.com plans to complete the year 2000 compliance assessment by the
end of the first quarter 1999 and implement corrective solutions before the
end of the third quarter 1999. Based on current estimates, management expects
that musicmaker.com's future costs in connection with its year 2000 compliance
project will not exceed $10,000; however, future anticipated costs are
difficult to estimate with any certainty and may differ materially from those
currently projected based on the results of phase one of musicmaker.com's year
2000 project. The anticipated costs associated with musicmaker.com's year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become year 2000 compliant
or costs to implement musicmaker.com's future contingency plans.
Musicmaker.com has not yet developed a contingency plan in the event that any
non-compliant critical systems are not remedied by January 1, 2000, nor has it
formulated a timetable to create such contingency plan. Upon completion of our
review, if systems material to musicmaker.com's operations have not been made
year 2000 compliant in a timely manner, the year 2000 issue could have a
material adverse effect on musicmaker.com's business, financial condition and
results of operations.
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BUSINESS
Overview
Musicmaker.com is a leading e-commerce provider of customized music CD
compilations over the Internet. Our customers can search our extensive online
music library and sample and select songs to make their own customized
compilation CDs. Our music library currently contains over 150,000 licensed
song titles. Our custom CDs can be further personalized by including selected
graphics or consumer provided text. Our custom CDs have sound quality
equivalent to pre-recorded CDs available at retail stores and are sold at
competitive prices. We manufacture and ship our custom CDs from our state-of-
the-art production facility generally within 24 hours of order. Our proprietary
technology (patent application allowed) can digitally store approximately five
million songs, provides advanced search/retrieval capabilities and automates
the high speed production of our custom CDs. Customers can also download music
from our music library using either Secure-MP3, a copyright-protected format,
or a Liquid Audio, format.
We currently have music content agreements with over 85 independent record
labels and seek to sign content agreements with additional record labels. We
believe that our proprietary customization process provides substantial
benefits by allowing the customer to purchase only those songs that he chooses
and by providing the record label with an additional source of revenue for
songs in its back catalog. Musicmaker.com has amassed a library of music in
multiple genres including significant catalogs of jazz, blues and classical
music. Artists in our music library include:
. Creedence Clearwater Revival
. The Beach Boys . Ziggy Marley
. Miles Davis . Johnny Cash
. Jerry Lee Lewis
. John Coltrane . Dionne Warwick
. Little Richard
. The Yardbirds with Eric Clapton
. Muddy Waters
. Frank Zappa
. Blondie . The Blues
. Taylor Dayne Brothers
. Kansas . The Kinks
. The Ramones
. The Band
Industry Background
Historically, the music industry has benefited from advances in technology,
such as the introduction of the CD in 1983. During the last ten years much of
the industry's growth resulted from consumers replacing existing record or tape
music collections with CDs. According to the Record Industry Association of
America, nine of the top ten selling albums were produced before 1982 and
include such established artists as The Eagles, Pink Floyd, Billy Joel,
Fleetwood Mac, Led Zeppelin, The Beatles, Boston and AC/DC.
According to the Record Industry Association of America, domestic music sales
grew from $6.2 billion in 1988 to $13.7 billion in 1998. Of the $13.7 billion
in total sales, full length CDs continue to account for the greatest dollar and
unit volume, such sales increased by approximately 13% from 1997 to 1998.
Musicmaker.com believes that substantial growth opportunities exist for sales
of music over the Internet. According to Jupiter Communications, LLC, total
online sales of pre-recorded music are projected to increase from $37.0 million
in 1997 to $1.4 billion in 2002. Musicmaker.com believes that while the
Internet provides an additional, price competitive distribution channel for
pre-recorded music, the potential exists to use the Internet as a value-added
method of distribution. Internet based retailers have certain other advantages
over traditional retail channels. Musicmaker.com estimates that music retail
stores generally stock between 10,000 and 39,000 of the available 200,000 CDs
and tend to carry a greater percentage of hit releases, often at the expense of
differing music genres and back titles from the libraries of record labels.
Additionally, online retailers are open 24 hours and Internet users and their
purchases can be tracked to provide demographic information for use in direct
marketing or other targeted programs.
We believe that the demographic profile of consumers of recorded music has
aged along with the general population. According to the Record Industry
Association of America, domestic purchases of recorded music by
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those age 30 and over have increased from approximately 32% of the U.S. sales
in 1988 to approximately 48% of sales, or approximately $5.9 billion, in 1997.
We believe that the Internet represents an attractive retail and promotion
medium for customers in this age group as they are less "hits-driven" than
younger age groups, typically can afford to buy more titles at one time, often
own PCs and generally have credit cards, which are usually used to make
electronic payments. Despite the fact that those age 30 and over represent the
largest segment of the United States population and have the highest level of
disposable income, this group currently spends the smallest percentage of its
disposable income on music purchases. We attribute this phenomenon to the
allocation of most retail shelf space and promotional budgets to new releases,
which are typically targeted at younger audiences. We believe that a
significant opportunity exists in remarketing older titles to the 30 and over
age group. We believe that this group will be attracted to the flexibility of
our custom CDs.
One of the latest technological innovations in the music industry has
centered on digital distribution, the downloading of compressed music files
over the Internet to a PC. Such music files can be stored to a PC or on a CD
using a read/write CD-ROM drive. Recently, MP3, a non-streaming compression
technology, has proliferated over the Internet, allowing users to freely
distribute songs, without making royalty payments to the music label or to the
artist holding the rights to such music. Certain factors, including bandwidth
constraints, a limited selection of music, difficulties with industry
acceptance, the required purchase of a specialized MP3 player and the lack of
portability associated with downloaded music, have limited the growth of MP3
to date. Nevertheless, MP3's ability to freely copy and transfer music and the
potential subsequent loss of revenue is of substantial concern to the music
industry.
In February 1999, the five major record companies announced that they would
conduct a market trial to test selling music as digital information
transmitted over the Internet. The test, which utilizes IBM software, will
allow approximately 1,000 cable subscribers in San Diego to download music
from a library of 1,000 album titles and several hundred song titles provided
by the major record labels. The market trial is viewed by many as the first
step taken by the major record companies to consider the sale of digital music
online.
Musicmaker.com believes that the following trends provide an environment
favorable to industry and consumer acceptance of our custom CDs:
. Growth in sales of CD singles.
. Growth of the Internet as a viable retail medium.
. Increasing affluence of the over 30 generation.
. Continued prominence of classic rock albums.
. Record label desire to diversify distribution methods while protecting
intellectual property rights.
MUSICMAKER.COM STRATEGY
We seek to be the leading provider of custom CDs and digitally downloaded
music on the Internet. The core elements of our strategy include:
Offer a new way to buy licensed, customized music. Through our proprietary
technology, we offer consumers a new method for customizing, digitally
downloading and purchasing music over the Internet. Unlike many online
retailers, we do not use the Internet simply to distribute products that can
be purchased elsewhere. Rather, our website and proprietary production
technology provide the ability to create a novel product--the
custom CD--that could not previously be mass marketed. We have implemented new
technology for digital downloading to help protect the intellectual property
rights of record labels.
Offer most extensive selection of music for custom CD compilation and
digital downloading. We intend to offer consumers the most extensive
collection of music available for use in custom CDs and digital downloading.
We have entered into exclusive and non-exclusive license agreements with more
than 85 music labels and currently have a music library of more than 150,000
songs. We intend to significantly expand our existing music catalog through
the development of content relationships with additional record labels,
including major labels.
Increase website traffic through industry alliances and multiple
hyperlinks. We seek to establish strategic alliances with global music and
media companies to attract additional users to the musicmaker.com website. We
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are currently the exclusive provider or a featured retailer of custom CDs for
Columbia House, N2K, Platinum, Audio Book Club and Trans World. We intend to
continue to expand the number and depth of our marketing alliances and
affiliate programs to drive traffic and increase the number of third party
hyperlinks to musicmaker.com.
Create strong brand awareness. We currently promote our brands through
online and traditional media, special event driven promotions and artist-
specific offerings. We intend to enhance brand awareness of our website by
advertising and co-marketing as well as through strategic relationships
whereby other websites designate musicmaker.com as their online music retailer
for custom CDs.
Establish genre-specific user communities. By collecting information about
our customers, we are able to target demographic user groups, thereby
providing advertisers and sponsors with access to highly defined audiences.
This segmentation will enable advertisers and sponsors to customize their
messages through banner advertisements, event and program sponsorships and
music recording promotions. We intend to provide our advertisers and sponsors
with quantitative feedback on the effectiveness of their programs.
Capitalize on cross-selling opportunities. We intend to generate additional
revenue by drawing users to our website and providing hyperlinks to music
related merchandise sites offering posters, clothing and books. We intend to
generate cross-selling opportunities by establishing hyperlinks between artist
and fan club websites, placing posts in music related news groups and securing
reviews and event notices in appropriate online directories.
Leverage technologies for additional formats. We intend to provide
additional products to consumers which may include custom music on mini-disc,
custom music videos on DVD, audio books on CD and software on CD-ROM. By
leveraging our existing technology to a variety of formats, we believe that we
will effectively increase the content and marketability of our products.
Expand international presence. We intend to capitalize on the global nature
of music and the Internet by building an international user base. We intend to
create local language versions of, and culture specific music content for,
musicmaker.com. We also intend to expand our international presence through
localized websites in countries with a demand for international music.
Music Content
We have licensed music from record labels to expand and diversify our online
music library. We have focused primarily on independent record labels, which
represent approximately 20% of the $40 billion recorded music industry, and
have entered into content licenses with over 85 independent record labels.
Our music collection currently contains more than 150,000 tracks licensed
from independent record labels including:
<TABLE>
<S> <C>
</TABLE>
. The All Blacks B.V. . Nimbus Communications International
(Roadrunner) Limited
. Platinum Entertainment, Inc.
. Alligator Records
. Prestige Records, Ltd.
. Brunswick Record Corp.
. Reachout International Records,
. Cakewalk LLC (32 Records Inc. (ROIR)
Jazz) . Rounder Records Corp.
. Del-Fi Records
. Storyville Records
. Fantasy Records, Inc.
. Sun Entertainment Corporation
. HNH International Limited
(Naxos) . Surrey House Music
. Koch International L.P.
. VelVel Records LLC
. Lightyear Entertainment, L.P.
. Viceroy Entertainment Group
. Minnesota Mining and
Manufacturing Company (3M)
Our music library contains significant catalogs of blues, jazz, classical,
rock (including heavy metal and punk), country, rhythm and blues, pop, gospel
and oldies. Set forth below is a sampling of the artists contained in our
music library, organized by music genre, for which we have licensed at least
ten songs.
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Sample Artists by Music Genre
Blues .Marcia Ball Jazz . Louis Armstrong
.Elvin Bishop . Chet Baker
.Blues Brothers and Friends . Count Basie
.Roy Buchanan . Dave Brubeck
.Otis Clay . John Coltrane
.Albert Collins . Miles Davis
.Buddy Guy . Bill Evans
.John Lee Hooker . Stan Getz
.Lightnin' Hopkins . Dizzy Gillespie
.Elmore James . Billie Holiday
.Albert King . Charles Mingus
.Brownie Mc Ghee . Thelonious Monk
.Roomful of Blues . Charlie Parker
.Memphis Slim . Cole Porter
.Muddy Waters . Art Tatum
.Junior Wells
.Johnny Winter
Rock .Atlanta Rhythm Section Country .Bellamy Brothers
.The Band .Johnny Cash
.Big Star .Roy Clark
.Savoy Brown .Patsy Cline
.Creedence Clearwater Revival .The Gatlin Brothers
.The Guess Who .Crystal Gayle
.Kansas .Merle Haggard
.The Kinks .Ronnie McDowell
.Alvin Lee .Roger Miller
.Alan Parsons .Juice Newton
.Paul Rodgers .Billy Joe Royal
.The Troggs .Conway Twitty
.Bill Wyman
.The Yardbirds with Eric Clapton
.Frank Zappa
Metal . Annihilator Soul/R & B . Barbara Acklin
. Biohazard . Booker T. & The MG's
. Crimson Glory . Cameo
. Deicide . Gene Chandler
. King Diamond . The Chi-lites
. Life of Agony . George Clinton
. Machine Head . Dramatics
. Motorhead . The Gap Band
. Obituary . Isaac Hayes
. Sepultura . Etta James
. Type O Negative . The Persuasions
. Jackie Wilson
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Sample Artists by Music Genre (Continued)
Rock 'n . Jerry Lee Lewis Pop .The Beach Boys
Roll . Carl Lee Perkins .Peter Cetera
. Ritchie Valens .Roger Daltrey
.Taylor Dayne
.The Foundations
.KC & The Sunshine Band
.The Vogues
.Dionne Warwick
Reggae .Black Uhuru Alternative .Circle Jerks
.Dennis Brown .The Fleshtones
.Culture .In The Nursery
.Marcia Griffiths .The Legendary Pink Dots
.The Heptones .Marine Girls
.Gregory Isaacs .The Moon Seven Times
.The Paragons .Plastic Noise Experience
.Lee "Scratch" Perry .Television
.Yellowman
Folk . The Burns Sisters Bluegrass .Bela Fleck
. Ramblin' Jack Elliott .The Bluegrass Album Band
. John Fahey .J.D. Crowe & The New
. David Grisman South
. Peter Keane .The Freight Hoppers
. Leo Kottke .John Hartford
. John McCutcheon .The Johnson Mountain Boys
. Tom Paxton .The Nashville Bluegrass
. Tony Rice Band
. Dave Van Ronk .Doc Watson
. Cheryl Wheeler
Punk .The Buzzcocks Easy Listening
.Ronnie Aldrich
.The Dickies .Arthur Ferrante
.The Dictators .Nick Ingman Orchestra
.UK Subs .Intimate Broadway
.Peter Nero
. The Royal Philharmonic
Orchestra
. Pat Valentino
Techno
. Chosen Few
. Fear Factory
. Front Line Assembly
. Intermix
. Technohead
We intend to significantly expand and diversify our existing music catalog
through the development of content relationships with additional record labels.
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Downloading of Music on the Internet
Customers can also download songs from our music library directly to their
PCs. As of January 1999, approximately five million MP3 players have been
downloaded by consumers, indicating that MP3 is rapidly becoming a favorable
method of obtaining music files over the internet. Music files in an MP3
format can be downloaded in approximately 10 minutes using a 56K modem. To
date, MP3 music files may be easily copied and transferred.
We provide Liquid Audio and Secure-MP3, two secure downloading formats to
protect the copyrights of the record label and the recording artist. We
license Liquid Audio, a downloading format that prevents the transference of
downloaded music to other PCs. In addition, we have developed a new, secure
MP3 format called Secure-MP3. Secure-MP3 incorporates a watermarking
technology licensed from Aris Technologies. Our system embeds a permanent
watermark into each MP3 music file downloaded from our library, allowing the
music file to be tracked by us or by industry copyright protection agencies.
During a Secure-MP3 or Liquid Audio download, an on-screen display notifies
the consumers that they are receiving a copyrighted file and provides the name
of the licensing record label. Both the Secure-MP3 and Liquid Audio formats
require downloading a software player to decrypt and play downloaded music
files.
Marketing
Our marketing strategy is designed to build brand awareness, attract repeat
users and direct traffic to our website through hyperlinks with strategic
partner websites. We use a combination of advertising and promotion, both
traditional and online, to accomplish these objectives.
Marketing Alliances
To promote our custom CDs and establish musicmaker.com as the premier brand
for custom CDs, we have entered into marketing alliances with major music
marketing companies including Columbia House, N2K, Platinum and Trans World.
We have recently entered into a marketing alliance with Audio Book Club and
intend to seek additional alliances with music and non-music retailers. These
strategic alliances are intended to drive traffic to our website, increase the
number of websites where our custom CDs can be purchased, and co-promote our
products through direct mail campaigns. Through marketing alliances,
musicmaker.com seeks to be the exclusive custom CD provider featured on a
partner's website or in other promotional materials or activities. We believe
that such alliances provide access to a targeted customer base, such as
customers who purchase music or music related merchandise online.
The Columbia House Company Alliance. We are currently the exclusive
marketer and featured retailer of custom CDs for Columbia House, a leading
record and video club, jointly owned by Sony Music Entertainment, Inc. and
Time Warner Inc. We provide our custom CD compilation services to Columbia
House's 15 million club members through website and direct mail promotions.
Columbia House displays and promotes musicmaker.com's custom CDs on
ColumbiaHouse.com, its club website and TotalE.com, its non-club website that
offers music, videos, DVDs, computer software and other related merchandise to
the general public. Columbia House also provides a hyperlink directly to a co-
branded musicmaker.com and Columbia House website.
We will also market our custom CDs through a series of print promotion
campaigns in conjunction with the Columbia House's direct mail program.
Through these direct promotion campaigns, we can market our products to all of
Columbia House's members, including those without Internet access.
Musicmaker.com can include promotional inserts in at least six Columbia House
direct mailings per year. The inserts will promote both the co-branded and
musicmaker.com websites and allow club members to purchase custom CDs using a
mail-in form.
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Our marketing alliance with Columbia House expires in September 2001. Under
this alliance, we may not sell custom CDs through any other music club without
prior consent of Columbia House. Additionally, we have exclusive rights to
offer our custom CDs to Columbia House's members unless and until one of our
competitors offers a significant repertoire of music content unavailable
through musicmaker.com. Columbia House and musicmaker.com share the profits
net of certain expenses from custom CD sales originating from Columbia House
members and from users referred from their websites. The allocation of net
profits is calculated based upon the terms of the musicmaker.com license
agreement covering each of the selected song titles.
If during the term of the Columbia House alliance, Sony or Warner
exclusively allow Columbia House club members to create custom CDs using music
from their libraries, Columbia House is required to use musicmaker.com as its
custom CD provider. Columbia House may terminate our alliance upon not less
than thirty days notice if Mr. Puthukarai ceases to be musicmaker.com's
President and Chief Operating Officer and Columbia House deems his replacement
incompatible with their interest, or Columbia House determines after the first
six musicmaker.com promotional mailings to its members that its financial
returns do not justify continuing the relationship. We anticipate mailing our
first promotional insert to Columbia House members in the second quarter of
1999. Columbia House received 129,870 warrants for common stock exercisable at
$4.62 per share prior to September 1, 2001 as part of this marketing alliance.
Platinum Entertainment, Inc. Alliance. We are the exclusive marketer of
custom CDs and digitally downloaded music for Platinum, the largest
independent music label in the United States with artists such as Peter
Cetera, Roger Daltry, Crystal Gayle and Dionne Warwick. Platinum displays and
promotes our custom CDs on their PlatinumCD.com website which has a direct
hyperlink to musicmaker.com. Musicmaker.com also has exclusive license rights
to Platinum's entire music catalog of approximately 13,000 songs.
We have a marketing alliance and license agreement with Platinum that
expires in September 2003. We currently have exclusive rights to Platinum's
music content and to offer custom CDs on Platinum's website. After the first
two years of our alliance, however, Platinum may elect to provide its library
on a non-exclusive basis to other custom compilation providers. Net profits
from the sale of custom CDs under the alliance are allocated based upon the
song titles selected, from which website customer orders originate and the
exclusivity of the alliance. Under this alliance, we may not use music content
licensed from Platinum for sale of custom CDs through an automated kiosk.
Under our marketing and music content alliance with Platinum we intend to
offer approximately 13,000 songs and 1,300 albums in MP3 format beginning in
the second quarter of 1999.
Audio Book Club, Inc. Alliance. We have an exclusive marketing alliance
with Audio Book Club, a provider of direct to consumer marketing of audio
books with over 1.3 million audio users and buyers. Under this arrangement,
musicmaker.com will be the exclusive provider of custom CDs through the
AudioBookClub.com and BooksAloud.com websites and through print promotions in
direct mailings to members.
Our marketing alliance with Audio Book Club expires in January 2002, with
three-year renewals to be negotiated with terms no less favorable than the
current arrangement. Under this alliance, musicmaker.com will promote its
custom CDs:
. On Audio Book Club's websites.
. By participating in at least six direct mailings to club members per year.
. By sponsoring annual Valentine's Day and Christmas promotions.
Net profits of sales to Audio Book Club members will be allocated based upon
the license arrangements covering the songs selected. Audio Book Club may
terminate the marketing alliance upon 30 days' notice after the first six
months of the relationship.
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Trans World Entertainment Corporation Alliance. We have a non-exclusive
marketing alliance with Trans World, one of the largest music retailers in the
United States operating approximately 520 specialty retail music and video
stores including approximately 320 mall locations under the names Record Town,
Saturday Matinee, and F.Y.E., and approximately 200 freestanding stores under
the names Coconuts Music and Movies, Planet Music, Strawberries and Waxie
Maxie's. Under this alliance, musicmaker.com and Trans World will establish a
co-branded, co-promoted marketing campaign to sell our custom CDs over the
Internet through Trans World's TWEC.com website.
Our marketing alliance with Trans World is for a one-year term, renewable
from year to year, and begins upon activation of the link between
musicmaker.com and TWEC.com. This alliance requires musicmaker.com to accept
any music content owned or licensed and offered by Trans World for inclusion
in custom CDs. Musicmaker.com and Trans World will divide the gross revenues
received from orders under the alliance based upon the license arrangement
covering the content included on custom CDs.
N2K Inc. Alliance. Musicmaker.com markets its custom CDs with N2K, a major
Internet retailer of music CDs. Musicmaker.com and N2K establish co-branded
websites through which N2K customers can purchase our custom CDs from select
genres and artist or occasion--specific music libraries. In 1998, the first
two joint promotions, featuring Miles Davis and Christmas music compilations,
were launched.
Musicmaker.com has agreed to offer N2K the right of first negotiation,
except with respect to Columbia House, for any genre, artist or occasion-
specific promotions. Musicmaker.com and N2K allocate proceeds from the sale of
promotional custom CDs based upon the website from which the order originates
and the shipping option chosen by the customer. The terms of our relationship
with N2K are subject to continued renewal and renegotiation as a result of a
merger between N2K and CDnow.
Affiliate Program
We intend to position our website as part of an interconnected online music
network through our affiliate program. This program will allow customers who
visit affiliate websites to hyperlink to musicmaker.com through banner ads and
other prominent displays. Musicmaker.com will allocate a portion of revenue
from sales of custom CDs to the referring affiliate.
Merchandising and Consumer Programs
Insider's Club. Our Insider's Club membership program awards members a free
song(s) on custom CDs after a specified number of purchases. This club allows
us to collect user demographics, foster repeat purchases, and attempt to
capture a greater portion of a member's purchases of custom CDs and digitally
downloaded music. Consumers joining the Insider's Club submit personal and
credit profiles to eliminate time and effort required for the collection of
billing and shipping information.
Special Promotional Sales. We intend to produce and license custom CDs to
marketers for use as promotional items. We will have specialized sales
personnel who will target large companies for custom-made, promotional CD
products.
Targeted Consumer Marketing. We collect information on website visitors and
customers such as point of origin, advertisement banner clicks, destination
after leaving the musicmaker.com website, genres searched, previous purchases
and geographic location. Additional customer specific marketing data is
obtained through the musicmaker.com Insider's Club. This information is used
to develop advertising strategies and marketing campaigns and serves as the
basis for our one-to-one marketing efforts. We intend to deploy push-marketing
programs consisting of targeted e-mails, which may include discount coupons
and information regarding new releases and special sales and promotions. We
have also developed a Music Advisor program based on "intelligent agent"
software licensed from Net Perceptions, Inc. that compares consumers'
interests based upon past purchases and other activities and provides
personalized recommendations. Musicmaker.com believes that such personalized
measures are important in building and maintaining customer loyalty and in
positioning musicmaker.com as a preferred source of custom CDs and digitally
downloaded music.
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Pricing
We price our custom CDs to be competitive with pre-recorded CDs sold in
retail locations. A five song custom CD is priced at $9.95 with each
additional song priced at $1.00, plus an additional charge for shipping and
handling. Songs digitally downloaded to a consumer's PC are priced at $1.00
per song.
Electronic Kiosks
We intend to offer our custom CDs through stand-alone, touch screen, user-
friendly kiosks placed in strategic locations in 1999. We intend to place
these kiosks in retail music stores, university bookstores, national movie
theater chains, major book chains, convenience stores, computer store chains,
video chains, and other places frequented by potential music purchasers. With
the musicmaker.com proprietary kiosk system, a consumer can select up to 20
songs from a library of music stored locally in the kiosk. The custom CD is
fabricated on a proprietary recording system housed within the kiosk and
delivered automatically to the consumer within approximately five minutes of
placing the order. We believe that the presence of these kiosks in strategic
locations will further promote musicmaker.com as the premier brand for custom
CDs.
Technology
Our technology enables us to rapidly manufacture and ship custom CDs that
are equivalent in sound quality to pre-recorded CDs. This process technology
consists of a distributed storage and high speed CD fabrication system running
across a high speed fiber local area network managed and controlled by
proprietary software we developed.
We store and maintain our digital library of music titles in uncompressed
(wav) format on storage arrays of hard drives. Each array consists of up to
eight 36 gigabytes magnetic hard disk drives that holds approximately 288
gigabytes of digital information, or approximately 10,000 songs. Music data is
typically received in digital format on pre-recorded CDs or DAT. Certain older
titles are converted to DAT from analog format prior to being transferred to
the arrays for permanent digital storage.
The array architecture is scalable and additional arrays can be added to
accommodate an increase in our online music library. Using this method, our
configuration can manage up to terabytes of musical data (or millions of songs
of storage capability). We believe that the array configuration is a cost-
effective storage method as it can scale to store additional data as
necessary; provide search and retrieval functions up to 100 times faster; and
provide a more reliable search, retrieval, and delivery capability than
alternative systems including CD jukeboxes and optical jukeboxes. Such
alternative systems do not scale as easily or effectively and also contain
fragile moving parts. Our arrays are complemented by a magnetic tape backup
system, and each array can be re-recorded in approximately 15 minutes.
Database Management
Our system uses a software program to manage the vast amount of digital
music and customer information stored in the arrays. This program enables the
system to:
. Scan the stored musical data by artist, title, music genre or key word.
. Retrieve the music from the arrays.
. Deliver the information to the fabrication units that produce the custom
CDs.
The software runs on our workstations' PCs that are linked to several magnetic
storage arrays. These PCs run in parallel on our high speed network. As a
result, any PC on the system can find musical information contained in any
array. The database is maintained on a Sun Microsystems, Inc. server and UNIX
operating system. The workstations and PCs that run our web, storage, and news
audio servers are built to our specifications.
CD Fabrication
Our CD fabrication units automatically write musical information to a CD as
well as print song titles, artist names, graphics, pictures and other
personalized information on the CD. Based on an average CD selection of ten
songs, the custom CD can be produced in five minutes, or eight times as fast
as manual fabrication. Musical information is received by the fabrication
unit, sits in a queue and is assigned a consumer order number so that a
customer can check on the status of their order online. A single CD
fabrication unit is capable of producing up
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to 1,500 CDs in a 24 hour period. The present capacity of our three
fabrication units is approximately 4,500 CDs per 24 hour period. Our
production system is scalable and can grow to support production of tens of
thousands of CDs per day (or millions of CDs per year). The scalable feature
of the fabrication units does not involve any modification to our software.
Fault Tolerance
Our storage and production architecture uses redundant servers and a tape
storage system for backup, to minimize downtime due to system outages or
maintenance needs. The largest single point of failure in our storage system
is a single magnetic disk or 36 gigabytes (or approximately 1,000 songs), a
relatively small portion of our music library. Our architecture provides a
back-up system that allows continuous operation through redundant servers in
the event of occasional component failure. Even in the event of a complete
failure of an array, the system can redeposit the data digitally on the arrays
using high speed backup at a rate of approximately 4,000 songs per hour.
musicmaker.com Website.
Musicmaker.com's website is easy to use, graphical in design and allows
custom music selection of titles from our music library. The website has a
built-in full-text search engine to allow customers to search by artist,
title, genre and keyword to find and display appropriate songs or artists.
Furthermore, each song has a 30-second Real Audio sample track which customers
can listen to prior to making a song selection.
The web site's personalization capabilities offer the option of printing a
40-character message on the CD surface itself, on the tray card and on the
sides (spines) of the jewel box. Musicmaker.com also provides the capability
for the customer to select an occasion-specific graphic (e.g., birthday cake,
rose, diploma, etc.) to be printed on the CD surface, or upload a digital
picture or graphic to the server for printing in color on the CD surface.
Digital Downloading of Music over the Internet
Customers can also download songs from our music library directly to their
PCs. As of January 1999, approximately 5.0 million MP3 players have been
downloaded by consumers, indicating that MP3 is rapidly becoming a favorable
method of obtaining music files over the internet. Music files in an MP3
format can be downloaded in approximately 10 minutes using a 56K modem. To
date, MP3 music files may be easily copied and transferred.
We provide Liquid Audio and Secure-MP3, two secure downloading formats to
protect the copyrights of the record label and the recording artist. We
license Liquid Audio, a downloading format that prevents the transference of
downloaded music to other PCs. In addition, we have developed a new, secure
MP3 format called Secure-MP3. Secure-MP3 incorporates a watermarking
technology licensed from Aris Technologies. Our system embeds a permanent
watermark into each MP3 music file downloaded from our library, allowing the
music file to be tracked by us or by industry copyright protection agencies.
During a Secure-MP3 or Liquid Audio download, an on-screen display notifies
the consumers that they are receiving a copyrighted file and provides the name
of the licensing record label. Both the Secure-MP3 and Liquid Audio formats
require downloading a software player to decrypt and play downloaded music
files.
Quality Assurance and Customer Service
We believe that high levels of consumer service and support are critical to
retaining and expanding our user base. After a CD is manufactured, it is
loaded into our testing facilities where the music is sampled by computer to
assure quality. The system also monitors the production process real time
during fabrication, and performs error checking throughout. Custom CDs are
then shipped within 24 hours of order.
Our representatives respond to inquiries regarding our products and register
consumers' credit card information over the phone. We believe that these
representatives are a valuable source of consumer feedback which we use to
improve our services. Customer service will be assisted by automated e-mails
which notify consumers about the status of their orders.
Competition
The market for providing music (either pre-recorded CDs or custom CDs) on
the Internet is highly competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of
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websites on the Internet competing for consumers' attention and spending has
proliferated. With no substantial barriers to entry, we expect that
competition will continue to intensify.
Currently, there are more than 100 music retailing websites on the Internet,
most of which sell pre-recorded music CDs which can be purchased in most
retail music stores. In addition to intense competition from Internet music
retailers, we also face competition from traditional retail stores, including
chains and megastores, mass merchandisers, consumer electronics stores and
music clubs. The most visible custom compilation competitors include Custom
Revolutions, Inc., CDuctive, and amplified.com. Additionally, the major record
labels, often with resources greater than musicmaker.com's, may decide to
enter the custom CD business directly and would as a result be potential
competitors.
We also face significant and increasing competition in the growing market to
provide digitally downloaded music, specifically for music files in MP3
format. Competition to provide digitally downloaded music can currently be
found on the websites of existing online music retailers such as MP3.com and
GoodNoise Corporation, websites established by recording artists and websites
of record labels. Catalogs of songs available in MP3 format are also provided
by internet portals such as Lycos. We expect the competition to provide MP3
files to intensify with further entry by additional record labels, artists and
portals, including those with greater resources and music content than
musicmaker.com. Recently, the five major record labels announced that they
have joined with IBM to conduct a market trial of a digital distribution
system, providing over 1,000 albums to cable subscribers in the San Diego
area. We expect additional market trials and alliances by technology and music
industry participants to continue as the music industry attempts to integrate
emerging technology into its existing distribution methods. See "Risk
Factors--Our industry may encounter changes in music distribution methods" and
"Risk Factors--The online music industry is extremely competitive."
We believe that our primary competitive advantages in providing music
entertainment products and services via the Internet are:
. Brand recognition. . High quality custom CDs.
. Ease of use of our customization . Availability and high level of
process. consumer support.
. Competitive price of our custom . Technical expertise and
CDs. experience.
. Large online library of music . Music industry relationships
available for custom CDs and and experience.
digital downloading.
. Scalable, cost-effective
technology.
Our success in this market will depend heavily upon our ability to provide
high quality, entertaining content, along with cutting-edge technology and
value-added Internet services. Other factors that will affect our success
include our continued ability to attract experienced marketing, sales and
management talent.
Many of our current and potential competitors in the Internet and music
entertainment businesses have longer operating histories, significantly
greater financial and marketing resources, greater name recognition and larger
existing consumer bases than musicmaker.com. These competitors may be able to
respond more quickly to new or emerging technologies and changes in consumer
requirements and to devote greater resources to the development, promotion and
sale of their products or services than musicmaker.com. There can be no
assurance that we will be able to compete successfully against current or
future competitors.
Given the large growth potential of this marketplace, we believe that
competitors will enter the marketplace. We believe, however, that we have a
significant first mover advantage. We have established preliminary music and
marketing alliances with significant music marketing companies and maintain a
strong foundation of technological and music industry expertise. We believe
that we will succeed in building a high level of brand awareness to establish
dominance prior to the market entrance of a significant competitor. See "Risk
Factors--The online music industry is extremely competitive."
EMPLOYEES
We believe that our employees and their knowledge and capabilities are a
major asset of musicmaker.com. We have been successful in attracting and
retaining employees skilled in our core business competencies and intend to
continue to employ highly skilled personnel.
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As of January 31, 1999, we employed 15 full-time employees and consultants.
We believe that our relations with our employees are good. None of our
employees are covered by collective bargaining agreements.
There is significant competition for employees with the managerial,
technical, marketing and sales skills required to operate our business. Our
success will depend in part upon our ability to attract, retain, train and
motivate highly skilled employees. See "Risk Factors--We depend upon hiring
and retaining qualified employees."
Intellectual Property and Proprietary Rights
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as contractual restrictions to protect our technology. It is our
policy to require that those persons with access to our proprietary technology
and information enter into confidentiality agreements with us upon the
commencement of their employment, consulting or other contractual
relationships.
We seek to protect our storage and fabrication system under patents and our
brand names under trademarks as noted below. Except as noted below, we
presently have no other patents, trademarks or patent/trademark applications
pending. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or duplicate aspects of our production system or
to obtain and use information that we regard as proprietary. Policing
unauthorized use of our intellectual property is difficult, and there can be
no assurance that our efforts to protect our proprietary rights will be
adequate or that our competition will not independently develop and patent
similar or superior technology. In addition, the laws of some foreign
countries may not provide protection of our proprietary rights to as great an
extent as do the laws of the United States.
There can be no assurance that third parties will not claim infringement by
us with respect to others' current or future patent or proprietary rights. We
expect that Internet music content providers will be increasingly subject to
infringement claims as the number of issued Internet related and business
model patents and music delivery websites increases and the functionality of
music delivery systems based upon new technologies trend toward a similar
appearance. Defending against any such claims, with or without merit, could be
time consuming, result in costly litigation, cause product shipment delays or
require us to enter into additional royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, and could have a material adverse effect upon our
business, results of operations, and financial condition.
Patents. We have been issued a notice of allowance for a patent application
by the U.S. PTO for a system for and method of producing custom CDs, which
resulting patent will expire in 2016. We own two related U.S. patent
applications currently pending in the U.S. PTO. We also own a pending
international counterpart patent application corresponding to the subject
matter of these U.S. patent applications. In addition, we have filed three
U.S. patent applications relating to kiosk technology and CD jewel cases.
Trademarks. We own a number of trademarks based on our use of those marks in
commerce, and have applied to the U.S. PTO to federally register such marks as
well as others based on our intent to use them. We use the marks MUSIC
CONNECTIONTM and MUSICMAKERTM, in commerce, and have applied to register each
of these trademarks with the U.S. PTO. We have also filed two additional
trademark applications for CD KITTM and MUSICMAGICTM based on our intent to
use such marks. See "Risk Factors--We depend upon intellectual property rights
and risk having such rights infringed."
Property
Our headquarters occupy approximately 4,500 square feet of general office
space. The monthly rent for this space is approximately $8,000. Our current
lease is set to expire in June 2005. We believe that our current leasehold
facilities are adequate for our intended use for the foreseeable future.
Legal Proceedings
We are not currently a party to any pending lawsuits, nor do we know of any
potential claims which, in the aggregate, could have a material adverse effect
on our business, financial condition or results of operations. Certain aspects
of our business and potential changes with regard to government regulation of
Internet commerce may, however, increase our risk of liability. See "Risk
Factors."
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MANAGEMENT
The following table sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <S> <C>
Robert P. Bernardi....... 46 Chairman of the Board of Directors and Co-Chief Executive Officer
Devarajan S. Puthukarai.. 55 Director, President, Co-Chief Executive Officer and
Chief Operating Officer
Irwin H. Steinberg....... 78 Director, Vice Chairman of the Board of Directors
William Crowley.......... 44 Vice President of Marketing and Sales
Mark A. Fowler........... 38 Chief Financial Officer and Director of Finance and Administration
Edward J. Mathias........ 54 Director
</TABLE>
Executive Officers and Directors
Robert P. Bernardi. Mr. Bernardi is musicmaker.com's founder, Chairman of
the Board of Directors and Co-Chief Executive Officer. Mr. Bernardi has served
as a director since Inception. From 1990 to 1996, Mr. Bernardi was a co-
founder, Chairman of the Board of Directors and Chief Executive Officer of
TREEV, Inc. (formerly Network Imaging Corporation), a publicly-held software
company for which he continues to serve as a director. From 1988 to 1990, Mr.
Bernardi was an independent consultant in the document imaging and
telecommunications fields. From 1987 to 1988, Mr. Bernardi was a co-founder,
President and Chief Executive Officer of TranSwitch Corporation, a publicly-
held company that designed high-speed telecommunications chips. From March
1984 to December 1987, Mr. Bernardi was Chairman of the Board of Directors and
Chief Executive Officer of Spectrum Digital Corporation, a publicly-held
telecommunications equipment manufacturing company. From 1984 to 1987, Mr.
Bernardi was a co-founder and director of PictureTel Corporation, a publicly-
held manufacturer of full-motion video conferencing systems. Prior to 1984,
Mr. Bernardi held various executive management positions with MCI
Communications Corporation, Mobil Corporation, Booz, Allen & Hamilton, Inc.
and The MITRE Corporation. Mr. Bernardi earned a Bachelor of Science degree in
Physics and a Master of Science degree in Business and Economics from the
State University of New York at Stonybrook.
Devarajan S. Puthukarai. Mr. Puthukarai is musicmaker.com's President, Co-
Chief Executive Officer and Chief Operating Officer and has served as director
since April 1997. From 1991 to April 1997, Mr. Puthukarai was President of
Warner Music Media, a division of Warner Music Enterprises, a Time Warner Inc.
company engaged in the business of promoting new and upcoming artists. From
1984 to 1990, Mr. Puthukarai was President of RCA Direct Marketing Inc./BMG
Direct Marketing Inc., launching the country's first CD music club and
building the world's largest classical music club. Mr. Puthukarai earned his
Bachelor of Science and Bachelor of Law degrees from Madras University in
India. Mr. Puthukarai earned a Master of Business Administration degree from
the Indian Institute of Management, a Harvard/Ford Foundation school in
Ahemadabad, India.
Irwin H. Steinberg. Mr. Steinberg has been a musicmaker.com director and
Vice Chairman of the Board of Directors since January 1997. Mr. Steinberg also
serves as a consultant to musicmaker.com. From 1982 to the present, Mr.
Steinberg has been President of IHS Corporation, a consulting firm
specializing in the music industry. From 1975 to 1982, Mr. Steinberg was
Chairman and Chief Executive Officer of PolyGram Records, Inc. Mr. Steinberg
was co-founder of Mercury Records Corporation. From 1946 to 1975, Mr.
Steinberg was employed with Mercury Records Corporation where he progressed
from Chief Financial Officer to Executive Vice President to President, which
later position he held from 1968-1975. While employed by PolyGram Records,
Inc. and Mercury Records Corporation, Mr. Steinberg was a member of the RIAA.
Mr. Steinberg currently serves as an adjunct Professor at Columbia College of
the Arts, in Chicago, where he teaches graduate courses in music business. Mr.
Steinberg holds a Bachelors degree from the University of Chicago Business
School and a Masters degree from the California State University at Domingo
Hills.
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William Crowley. Mr. Crowley has served as musicmaker.com's Vice President
of Marketing and Sales since August 1996. From 1995 to 1996, Mr. Crowley was a
Vice President at Warner Music Enterprises where he was responsible for
advertising, creative services and circulation marketing for its sampling
programs and roster of music magazines. From 1993 to 1995, Mr. Crowley was
Vice President at PolyGram Group Distribution, Inc. where he was responsible
for direct development of both music products and new channels of distribution
for PolyGram labels. From 1990 to 1993, Mr. Crowley was the Director of
Marketing and Product Development at Time Life Music where he was responsible
for new product and business activities for popular and classical music
products. From 1981 to 1990, Mr. Crowley was Director of Artists Repertoire
and Merchandising at BMG Direct Marketing, Inc. where he was responsible for
product selection and development, and merchandising and market research for
BMG music clubs. Mr. Crowley earned a Masters degree in Business
Administration from New York University and a Bachelors degree in Political
Science and Economics from Northwestern University.
Mark Fowler. Mr. Fowler has served as musicmaker.com's Chief Financial
Officer since January 1999 and as its Director of Finance and Administration
since April 1998. From 1995 to 1998, Mr. Fowler was the Controller at
BioReliance Corporation, a publicly-held international contract research
organization. From 1994 to 1995, Mr. Fowler was the Controller at Fusion
Lighting, Inc., an international research and development company. From 1991
to 1994, Mr. Fowler was the Controller at Excalibur Technologies Corporation,
a publicly-held software development firm. Prior to 1991, Mr. Fowler held
several positions, including a consultant position with Booz, Allen &
Hamilton, Inc. Mr. Fowler is a certified public accountant in the State of
Virginia. He earned a Bachelor of Science degree in Finance from Radford
University and is currently enrolled at the Johns Hopkins University pursuing
a Masters degree in Business Administration.
Edward J. Mathias. Mr. Mathias has served as a musicmaker.com director
since December 1996. Mr. Mathias is a Managing Director and assisted in
founding The Carlyle Group L.P., a Washington, D.C.-based merchant bank. Mr.
Mathias is also a special limited partner in Trident Capital, a partnership
focusing on business and information service companies. Mr. Mathias currently
serves as a director for Sirrom Capital Corporation, U.S. Office Products
Company, Inc., Condor Technology Solutions, Inc. and U.S.A. Floral Products,
Inc., each a publicly-held company. In addition, Mr. Mathias sits on a number
of advisory committees for private equity partnerships. From 1971 to 1993, Mr.
Mathias held various positions with T. Rowe Price Associates, Inc., an
investment management organization, most recently as a Managing Director. Mr.
Mathias has served on T. Rowe Price's Board of Directors and was a member of
its Management Committee for over ten years. Mr. Mathias holds a Masters
degree in Business Administration from Harvard Business School and a Bachelors
degree from the University of Pennsylvania.
Musicmaker.com intends to appoint an additional independent director prior
to the consummation of this offering.
Classified Board of Directors and Executive Officers
Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three classes of
directors, designated Class A, Class B and Class C directors, serving
staggered three year terms. With respect to the present Board (consisting of
five members), the term of the Class A director, , will expire at the
2000 annual meeting of stockholders, the terms of the Class B directors,
Mr. Mathias and Mr. Steinberg, will expire at the 2001 annual meeting of
stockholders and the terms of the Class C directors, Mr. Bernardi and Mr.
Puthukarai, will expire at the 2002 annual meeting of stockholders. One
additional independent director will be designated prior to the completion of
this offering in order to fill the vacancy presently existing on the Board of
Directors. Directors will be elected at annual meetings of stockholders to
serve a three year term and until their respective successors are duly elected
and qualify, or until their earlier resignation, removal from office, or
death. The remaining directors may fill any vacancy on the Board of Directors
for an unexpired term.
Executive officers are appointed by and serve at the discretion of the Board
of Directors.
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Committees of the Board of Directors and Compensation
The Board of Directors has designated an Audit Committee of the Board of
Directors, currently consisting of and Mr. Mathias. The Audit Committee
is responsible for reviewing, along with our independent public accountants,
the scope of our accounting audits, as well as our corporate accounting
practices and policies. The Audit Committee shall also review our accounting
and financial controls, and be available to our independent public accountants
for any necessary consultation.
The Board of Directors has also designated a Compensation Committee of the
Board of Directors, currently consisting of Mr. Bernardi, Mr. Mathias and
. The Compensation Committee shall review the performance of our
management and recommend and approve the compensation of and the issuance of
stock options to certain executive officers and employees pursuant to our
stock option plan.
Musicmaker.com directors currently do not receive a fee for their service on
the Board of Directors or any committee thereof. Directors receive
reimbursement to cover their reasonable expenses incurred in attending such
meetings. Directors are eligible to receive stock options under
musicmaker.com's stock option plan. Pursuant to the terms of his consulting
agreement, Mr. Steinberg, musicmaker.com's Vice Chairman of the Board,
receives compensation of $1,200 per meeting of the Board of Directors or any
committee.
Compensation Interlocks and Insider Participation
The current members of the Compensation Committee are Mr. Bernardi, Mr.
Mathias and . Accordingly, to date, the Compensation Committee,
including directors who are or were executive officers of musicmaker.com, has
made all determinations concerning compensation of musicmaker.com's executive
officers. During his term on the Compensation Committee, Mr. Bernardi has
agreed not to participate in decisions regarding his own compensation. The
Board of Directors has provided for the reconfiguration of the Compensation
Committee which, upon completion of this offering, will be composed of two
non-employee directors of musicmaker.com. See "--Committees of the Board of
Directors and Compensation" and "--Stock Option Plan."
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to musicmaker.com in all capacities during the
fiscal year ended December 31, 1998, by musicmaker.com's chief executive
officer and other executive officers whose salary and bonus for fiscal year
1998 exceeded $100,000 (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual Compensation Number of Shares
-------------------- Underlying
Name and Principal Position Salary ($) Bonus ($) Options (#)
--------------------------- ---------- --------- -------------------
<S> <C> <C> <C>
Robert P. Bernardi..................... $175,000 -- 129,870
Chairman of the Board of Directors and
Co-Chief Executive Officer
Devarajan S. Puthukarai................ $250,000 $100,000 129,870
President, Co-Chief Executive Officer
and Chief Operating Officer
</TABLE>
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<PAGE>
The following table sets forth information regarding the grant of options to
purchase musicmaker.com's common stock to each of the Named Executive Officers
during the fiscal year ended December 31, 1998.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation for Option
Individual Grants Term (1)
--------------------------------------------- ---------------------------
Number of Percentage of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted Fiscal 1998 Per Share Date 5% 10%
---- ---------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Bernardi...... 83,117 23.7% $5.29 2003 $ 1,960,000 $ 3,960,000
46,753 13.3 4.81 2008 1,125,000 2,250,000
Devarajan S.
Puthukarai............. 83,117 23.7 5.29 2003 1,960,000 3,960,000
46,753 13.3% $4.81 2008 $ 1,125,000 $ 2,250,000
</TABLE>
- --------
(1) Potential Realizable Value assumes that the common stock appreciates at
the indicated annual rate (compounded annually) from the grant date until
the expiration of the option term and is calculated based on the
requirements promulgated by the Securities and Exchange Commission.
Potential Realizable Value does not represent musicmaker.com's estimate of
future stock price growth.
The following table sets forth certain information regarding the number and
value of securities underlying options held by each of the Named Executive
Officers at the end of fiscal 1998. No options were exercised by any of the
Named Executive Officers during 1998.
Aggregate Option Exercises and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
Options at December 31, 1998
--------------------------------
Name Exercisable Unexercisable
---- ------------- ---------------
<S> <C> <C>
Robert P. Bernardi........................... 20,780 109,090
Devarajan S. Puthukarai...................... 20,780 109,090
</TABLE>
Employment Agreements and Consulting Agreements
Mr. Bernardi and Mr. Puthukarai each have employment agreements with initial
terms through December 7, 2002. These agreements require that each commit
substantially all of his time and effort to furthering musicmaker.com's
interests and restrict competition with musicmaker.com during the term of the
agreement and for one year following termination. Under the employment
agreements, Mr. Bernardi and Mr. Puthukarai receive base salaries of $175,000
and $250,000 per annum, respectively. Each is eligible for payment of bonuses
and stock options as determined by the Compensation Committee of the Board of
Directors. Mr. Puthukarai is guaranteed a minimum annual bonus of $100,000.
Upon termination by musicmaker.com without cause, or termination by Mr.
Bernardi or Mr. Puthukarai upon certain non-compliance by musicmaker.com,
their respective employment agreements provide for payment of all accrued
salary, benefits and bonus plus a sum equal to the salary, benefits and bonus
that would have been received if the initial or any renewal term had been
completed, discounted by three percent. Each agreement is automatically
renewable on a year-to-year basis following expiration of the initial term,
and any renewal term unless certain notice of non-renewal is given by either
party. Should musicmaker.com decide not to renew their respective agreements,
Mr. Bernardi and Mr.
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<PAGE>
Puthukarai shall be entitled to a severance payment equal to one year's salary
and benefits, as in effect prior to termination.
Under a consulting agreement between musicmaker.com and IHS Corporation, Mr.
Steinberg is required to provide consulting services to musicmaker.com for not
less than fifteen days in any given month. Mr. Steinberg seeks to obtain, on
musicmaker.com's behalf, additional license agreements and content
relationships with record labels in an effort to expand musicmaker.com's music
library. The Steinberg Consulting Agreement is non-exclusive; however, Mr.
Steinberg is restricted from providing consulting services to any of
musicmaker.com's competitors. For his services, Mr. Steinberg is paid a
minimum monthly payment of $9,000. Mr. Steinberg also receives compensation of
$1,200 per day in connection with his attendance at meetings of
musicmaker.com's Board of Directors or any committee thereof.
Key Man Insurance
Musicmaker.com has applied for key man insurance covering Mr. Bernardi and
Mr. Puthukarai.
Stock Option Plan
Musicmaker.com has adopted a stock option plan for the purpose of promoting
our long-term growth and profitability by (i) providing key people with
incentives to improve stockholder value and contribute to the growth and
financial success of musicmaker.com, and (ii) enabling musicmaker.com to
attract, retain and reward talented and skilled persons for positions of
substantial responsibility. Musicmaker.com has used stock options as a
significant component of compensation for our officers and key employees.
The stock option plan provides for the award to eligible participants,
including employees, officers, directors and consultants, of stock options
(including non-qualified options and incentive stock options pursuant to
Section 422 of the Internal Revenue Code) and stock appreciation rights
(including free standing, tandem and limited stock appreciation rights). Under
the stock option plan 779,221 shares of common stock are reserved for
issuance, representing % of the shares of common stock expected to be
outstanding immediately subsequent to this offering. As of the date of this
prospectus, options to purchase a total of 532,182 shares of common stock were
outstanding, at exercise prices ranging from $0.385 to $5.29 per share. No
options have been exercised and no stock appreciation rights have been granted
to date.
Subsequent to this offering, the stock option plan will be administered by
the Compensation Committee of the Board of Directors, which will include at
least two "disinterested persons," for purposes of Rule 16b-3 under the
Exchange Act, and "outside directors," within the meaning of Section 162(m) of
the Internal Revenue Code. The Compensation Committee will select the
participants and establish the terms and conditions of each option or other
rights granted under the stock option plan, including the exercise price, the
number of shares subject to options or other equity rights and the time at
which such options become exercisable. See "--Committees of the Board of
Directors and Compensation." The exercise price of all "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code,
granted under the stock option plan must be at least equal to 100% of the fair
market value of the option shares on the date of grant. The term of any
incentive stock option granted under the stock option plan may not exceed ten
years. Where the eligible stock option plan participant owns over 10% of the
total combined voting power of all classes of stock of musicmaker.com,
however, the exercise price must be at least equal to 110% of the fair market
value of the option shares on the date of grant and the term cannot exceed
five years.
To the extent required to comply with Rule 16b-3 under the Exchange Act, if
applicable, and in any event in the case of an incentive stock option or stock
appreciation right granted with respect to an incentive stock option, no award
granted under the stock option plan shall be transferable by a grantee
otherwise than by will or by the laws of descent and distribution. Other terms
and conditions of each award are set forth in the grant agreement governing
that award and determined by the Compensation Committee.
40
<PAGE>
Indemnification of Directors and Officers
Musicmaker.com's Charter and Bylaws provide that it shall indemnify all of
its directors and officers to the full extent permitted by the Delaware
General Corporation Law (the "DGCL"). Under such provisions, any director or
officer who, in his or her capacity as such, is made or threatened to be made
a party to any suit or proceeding, may be indemnified if the Board determines
such director or officer acted in good faith and in a manner such director
reasonably believed to be in, or not opposed to, the best interests of
musicmaker.com. The Charter, Bylaws, and the DGCL further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under our Charter, Bylaws, any agreement, any vote of
stockholders or disinterested directors, or otherwise.
Musicmaker.com has the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of
musicmaker.com, or is or was serving at the request of musicmaker.com as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against any expense, liability, or
loss incurred by such person in any such capacity or arising out of his status
as such, whether or not musicmaker.com would have the power to indemnify such
person against such liability under the DGCL.
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<PAGE>
CERTAIN TRANSACTIONS
In July 1996, we sold 551,948 shares of common stock to Mr. Bernardi, our
founder, Chairman of the Board of Directors and Co-Chief Executive Officer,
for nominal cash consideration in connection with musicmaker.com's formation.
In July 1996, we acquired CD Kit, S.A. in exchange for 649,351 shares of
common stock, payable to the stockholders of CD Kit, S.A. In exchange we
received 8,000 shares of CD Kit, SA, all of its outstanding capital stock. In
connection with the acquisition of CD Kit, S.A., Bruno Costa-Marini and Jean
Francois Dockes, each a former stockholder of CD Kit, S.A., became the
beneficial owners of 285,714 and 188,312 of such shares of our common stock,
respectively.
Between December 1996 and May 1997, musicmaker.com sold 12% convertible
notes to accredited investors for $650,000. The notes were convertible into
our common stock at $6.74 per share. Of these investors, Mr. Bernardi and Mr.
Mathias, one of our directors, participated in the offering, purchasing notes
and paying an aggregate consideration of $50,000 and $150,000, respectively.
These purchases were on the same terms as those applying to non-affiliated
investors participating in the convertible notes offering.
In connection with a June 1997 private placement of securities, we converted
the principal and all accrued interest under the terms of the outstanding
convertible notes at a price of $3.85 per share, rather than $6.74 a share as
stated in the original offering. In connection with the conversion of the
notes and the private placement of our common stock, Mr. Bernardi and Mr.
Mathias received 13,815 and 41,446 shares of our common stock, respectively.
The conversion of the notes belonging to Mr. Bernardi and Mr. Mathias was
conducted on the same terms as that provided to non-affiliated investors
participating in the conversion. In addition to the common stock received upon
the conversion above, Mr. Bernardi purchased an additional 6,494 shares of
common stock in the June 1997 private placement at $3.85 per share.
In October 1997, we issued 194,805 common stock warrants to Mr. Puthukarai,
musicmaker.com's President, Co-Chief Executive Officer and Chief Operating
Officer, as part of his compensation and in exchange for services previously
rendered to musicmaker.com. The warrants have an exercise price of $3.85 per
share and expire on October 15, 2007.
In December 1997, musicmaker.com issued and sold 375,701 shares of our
Series A outstanding preferred stock, par value $.01, to Rho Management Trust
I, a venture capital firm. Mr. Bernardi and Mr. Puthukarai also purchased
51,948 and 12,987 shares of our Series A outstanding preferred stock,
respectively. The shares were purchased at a price of $3.85 per share.
Additionally, 715,622, 98,949 and 24,737 Series B outstanding preferred
warrants were issued to Rho, Mr. Bernardi and Mr. Puthukarai, respectively.
The Series B outstanding preferred warrants expire on December 8, 2002 and are
exercisable for Series B outstanding preferred stock, par value $.01 per
share, at an exercise price of $4.62 per share. We also issued 188,103, 26,009
and 6,502 Series C outstanding preferred warrants to Rho, Mr. Bernardi and Mr.
Puthukarai, respectively. The Series C outstanding preferred warrants expire
on December 8, 2001 and are exercisable for Series C outstanding preferred
stock, par value $.01 per share, at an exercise price of $5.78 per share.
Musicmaker.com received $1,696,450 in aggregate consideration from the
investors above in connection with this round of venture financing. In March
and June, 1998, holders of the Series B outstanding preferred warrants
exercised 364,654 warrants which were converted to Series B outstanding
preferred stock at $4.62 per share. Of the 364,654 warrants exercised, Mr.
Bernardi and Mr. Puthukarai received 41,229 and 10,307 shares of Series B
outstanding preferred stock, respectively. Mr. Bernardi and Mr. Puthukarai
received the shares above in exchange for their relinquishment of $133,334 in
accrued salary and $33,333 in accrued bonus, respectively. Rho received an
additional 305,903 shares of Series B outstanding preferred stock, in
connection with the exercise of the warrants.
In January 1998, 72,727 common stock warrants, with an exercise price of
$3.85 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to
42
<PAGE>
obtaining license agreements with record labels on behalf of musicmaker.com.
These warrants expire January 15, 2008. In August 1998, musicmaker.com issued
25,974 common stock warrants to four members of Mr. Steinberg's family as
record holders. The warrants were granted as compensation for consulting
services rendered to musicmaker.com by Mr. Steinberg and he is the beneficial
owner of such warrants. The warrants are convertible by the holders into
common stock at an exercise price of $4.62 per share and expire on August 15,
2008.
In September 1998, we issued 259,741 shares of our common stock to Platinum
at a value of $1,650,000. In exchange for shares of our common stock and
pursuant to the terms of a stock exchange agreement, dated September 30, 1998,
and each of a licensing agreement and a marketing agreement of even date
therewith, we entered into a strategic marketing and content alliance under
which we market and sell our custom CDs on Platinum's website and have a
license to use their song library. We also received 111,457 shares of
Platinum's common stock, having an aggregate value of $750,000. In November
1998, an additional 83,116 shares of our common stock were issued to Platinum
in connection with, and as payment under, the stock exchange agreement noted
above. See "Business--Marketing."
In December 1998, we loaned $81,519 to Mr. Puthukarai all of which was
outstanding at December 31, 1998, and all of which is currently outstanding.
The loan is to be repaid without interest and upon demand under a note held by
musicmaker.com. The funds were loaned for payment of federal and state income
taxes.
We believe that the above-described transactions are as fair to
musicmaker.com as could have been obtained with unaffiliated parties. We
intend that all future transactions with officers, directors or principal
stockholders of musicmaker.com will be approved or ratified by a majority of
the Board of Directors, including a majority of the disinterested, independent
directors. We intend that such future transactions will be on terms no less
favorable to musicmaker.com than could be obtained from unaffiliated third
parties.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding shares of our
common stock beneficially owned as of January 31, 1999, and as adjusted to
reflect the offering by (i) each person or group known to musicmaker.com, that
beneficially owns more than five percent of our outstanding common stock;
(ii) musicmaker.com's directors and Named Executive Officers, and (iii) all of
musicmaker.com's executive officers and directors as a group. Beneficial
ownership is calculated in accordance with Rule 13d-3(d) under the Securities
Exchange Act of 1934. Shares of common stock subject to options and warrants
that are currently exercisable or are exercisable within 60 days of January
31, 1999, are deemed outstanding with respect to the person holding such
options but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated, each
person possesses sole voting and investment power with respect to the shares
identified as beneficially owned. Except as otherwise indicated in the table,
the address of the stockholders listed below is that of musicmaker.com's
principal executive office. See "Risk Factors--Certain existing investors own
a large percentage of our voting securities" and "Certain Transactions."
<TABLE>
<CAPTION>
Shares Beneficially
Shares Beneficially Owned Owned After the
Name and Address Prior to the Offering (1) Offering
---------------- -------------------------------- --------------------------
Number Percent Number Percent
--------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Rho Management Trust I.. 1,207,864(2) 25.6% 1,207,864
767 Fifth Avenue
New York, NY 10053
Robert P. Bernardi...... 920,220(3) 21.0% 920,220
Devarajan S.
Puthukarai............. 448,679(4) 10.0% 448,679
Platinum Entertainment,
Inc.................... 342,857 8.2% 342,857
2001 Butterfield Rd.
Suite 1400
Downers Grove, IL 60515
Bruno Costa-Marini...... 294,372(5) 7.0% 294,372(5)
Abdulla Mohammed Al-
Romaizan............... 259,740(6) 6.1% 259,740(6)
P.O. Box 768
Riyadh 11421
Kingdom of Saudi Arabia
Irwin H. Steinberg...... 150,649(7) 3.5% 150,649(7)
Edward J. Mathias....... 67,420 1.6% 67,420
All executive officers
and directors as a
group (6 persons)...... 1,645,410(8) 34.3% 1,645,410(8)
</TABLE>
- --------
(1) Shares beneficially owned prior to the offering are as adjusted to reflect
and include the automatic conversion of (i) all outstanding preferred
stock and outstanding preferred warrants into common stock and common
stock warrants, respectively, and (ii) all outstanding convertible notes
into common stock, upon completion of the offering.
(2) Includes: (i) 375,701 shares of Series A and 305,903 shares of Series B
outstanding preferred stock to be converted into 375,701 and 305,903
shares of common stock, respectively, and (ii) 338,156 Series B and
188,104 Series C outstanding preferred warrants to be converted into
338,156 and 188,104 common stock warrants, respectively, upon the
completion of this offering. Rho Management Partners L.P., a Delaware
limited partnership may be deemed the beneficial owner of shares
registered in the name of Rho Management Trust I, pursuant to an
investment advisory relationship by which Rho Management Partners L.P.
exercises sole voting and investment control over such shares and
warrants.
(3) Includes (i) 51,948 shares of Series A and 41,229 shares of Series B
outstanding preferred stock to be converted into 51,948 and 41,229 shares
of common stock, respectively, and (ii) 117,089 Series B and 26,009 Series
C outstanding preferred warrants to be converted into 117,089 and 26,009
common stock
44
<PAGE>
warrants, respectively, upon the completion of this offering, and (iii)
64,935 vested options for common stock with exercise prices ranging from
$4.81 to $5.29 per share.
(4) Includes (i) 194,805 common stock warrants with an exercise price of $3.85
per share, (ii) 12,987 shares of Series A and 10,307 shares of Series B
outstanding preferred stock to be automatically converted into 12,987 and
10,307 shares of common stock, respectively, and (iii) 29,272 Series B and
6,502 Series C outstanding preferred warrants to be converted into 29,272
and 6,502 common stock warrants, respectively, upon the completion of this
offering, and (iv) 64,935 vested options for common stock with exercise
prices ranging from $4.81 to $5.29 per share.
(5) Includes 8,658 vested options for common stock with an exercise price of
$3.85 per share.
(6) Includes 51,948 common stock warrants with an exercise price of $4.81 per
share.
(7) Includes 98,701 common stock warrants with exercise prices ranging from
$3.85 to $4.62 per share.
(8) Includes: (i) 64,935 shares of Series A and 51,536 shares of Series B
outstanding preferred stock, to be converted into 64,935 and 51,536 shares
of common stock, respectively, and (ii) 146,362 Series B and 32,511 Series
C outstanding preferred warrants to be converted into 146,362 and 32,511
common stock warrants, respectively, upon completion of this offering.
Also includes 293,506 outstanding common stock warrants and 136,364 vested
options for common stock.
45
<PAGE>
DESCRIPTION OF SECURITIES
General
Pursuant to our Charter, musicmaker.com is authorized to issue up to
15,584,415 shares of common stock, par value $.01 and 1,547,924 shares of
preferred stock, par value $.01 per share. Prior to this offering,
2,960,058 shares of common stock were issued and outstanding and an additional
3,091,546 were reserved for issuance pursuant to outstanding options, warrants
and conversion features of other securities issued. As of January 31, 1999,
there were approximately 100 holders of our common stock (after giving effect
to the conversion of all outstanding outstanding preferred stock and
convertible notes upon consummation of this offering).
The following description of our capital stock is a summary and is qualified
in its entirety by the provisions of our Charter, Bylaws and applicable law.
These documents have been filed as exhibits to the registration statement, of
which this prospectus forms a part.
Reverse Stock Split
Musicmaker.com's Board of Directors and stockholders have approved a reverse
stock split by which each issued and outstanding share of our common stock
will be reclassified in a one-for-3.85 reverse split to be effected on ,
1999. The reverse stock split similarly affected the holders of our
outstanding options and warrants for common stock, and the conversion features
of the holders of our outstanding preferred stock, outstanding preferred
warrants, and convertible notes.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Holders of common stock are
entitled to share in any and all dividends that our Board of Directors, in its
discretion, declares from funds legally available therefor. In the event of
any liquidation or dissolution of musicmaker.com, the holders of common stock
are entitled to participate in and share pro rata in the assets available for
distribution to stockholders. Any such distribution would be subsequent to
payment of our liabilities and may be subject to any preferential rights of
any preferred stock or other senior security then outstanding. The holders of
common stock have no cumulative voting, preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered hereby upon issuance and
sale will be, fully paid and non-assessable. The rights, preferences and
privileges of the holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any shares of preferred stock or
senior securities which musicmaker.com may designate in the future.
Preferred Stock
Pursuant to musicmaker.com's Charter, our Board of Directors may, without
further action by stockholders, from time to time, issue one or more series of
preferred stock. Blank check preferred stock may be issued with such rights,
preferences, privileges and limitations as the Board of Directors may
determine and as permitted by the DGCL, including:
. The number of shares constituting the series and the distinctive
designation of the series of preferred stock.
. The dividend rate on such preferred stock, the dates of payment and
whether such dividends shall be cumulative.
. The extent of voting rights, if any, to be granted to holders of any
series of preferred stock.
. Other rights, privileges and preferences, including conversion into
common stock, redemption by the holder or musicmaker.com and priority
upon liquidation, dissolution or winding up of musicmaker.com.
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<PAGE>
Registration Rights
Holders of our outstanding preferred stock and outstanding preferred
warrants, including Mr. Bernardi, Mr. Puthukarai, Rho, and an additional
investor, have been granted certain demand registration rights. These demand
registration rights may require musicmaker.com to file, on not more than two
occasions, a registration statement under the Securities Act covering all, or
a portion of their common stock issued or issuable, upon the automatic
conversion of the outstanding preferred stock and outstanding preferred
warrants upon consummation of this offering. In connection with the issuance
to Columbia House of a warrant for 129,870 shares of common stock,
musicmaker.com granted certain registration rights permitting the holders to
require that musicmaker.com, on not more than two occasions, file a
registration statement under the Securities Act covering all, or a portion of
the common stock issued or issuable pursuant to the warrant. Under the terms
of his consulting agreement with musicmaker.com, Mr. Steinberg,
musicmaker.com's Vice Chairman of the Board of Directors, was granted
registration rights equivalent to those received by Mr. Bernardi.
In addition, each of the holders indicated above, the noteholders and Boston
Financial & Equity Corporation, a lessor of certain equipment, have certain
"piggyback" registration rights. If musicmaker.com proposes to register any of
its common stock under the Securities Act (other than pursuant to this
offering or in connection with the registration of securities issuable under
an employee benefit plan or a registered exchange offer) holders of
"piggyback" rights may require that musicmaker.com include all or a portion of
their common stock, issued or issuable pursuant to certain exercise rights, in
such registration. In connection with any such offering, the managing
underwriter thereof, shall have certain rights to limit the number of
securities held by persons with "piggyback" registration rights to be included
in such registration. All expenses incurred in connection with the
registration rights above will be borne by musicmaker.com.
The underwriters have requested that all holders of registration rights
forego any request for registration for a period of 180 days following the
date of effectiveness of this prospectus.
Delaware General Corporation Law and certain provisions in our Charter
Our Charter provides that musicmaker.com shall indemnify its currently
acting and former directors and officers against any and all liabilities and
expenses incurred in connection with their services in such capacities to the
maximum extent permitted by the DGCL. Our Charter similarly requires
musicmaker.com to advance expenses to our officers and directors entitled to
indemnification to the maximum extent permitted by the DGCL. Advancement of
expenses to directors and officers is conditioned upon receipt of an
undertaking by such director or officer to repay the amount of any advancement
if it shall ultimately be determined that such person is not entitled to be
indemnified by musicmaker.com. The terms and conditions of such advancement
are to be determined by musicmaker.com's Board of Directors.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors and officers, musicmaker.com has been informed that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy, as expressed in the Securities Act, and is therefore
unenforceable.
Our Charter provides that our directors shall not be personally liable to
musicmaker.com or our stockholders for monetary damages to fullest extent
permitted by the DGCL. Section 102(b)(7) of the DGCL currently permits
elimination of a director's personal liability to a corporation and its
stockholders except for liability:
. For any breach of the director's duty of loyalty to the corporation or
its stockholders.
. For acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law.
. Under Section 174 of the DGCL for unlawful dividends, distributions or
unlawful stock repurchases or redemptions.
. For any transaction from which the director derives an improper personal
benefit.
Under our Charter and the DGCL, our directors will be protected from
monetary damages for other negligent acts on their part. Stockholders and
musicmaker.com seeking redress against directors may bring an action for
equitable remedies such as an injunction or rescission based upon a director's
breach of fiduciary
47
<PAGE>
duties, even where monetary remedies are unavailable. Any amendment to the
DGCL that increases or decreases the protection from monetary damages afforded
directors in Delaware shall be automatically incorporated into our Charter.
Charter provisions that could delay or prevent a change in control
Upon effectiveness of our registration statement, of which this prospectus
is a part, our Board of Directors will be divided into three separate classes,
with only one class, or roughly one-third of the Board of Directors, standing
for election in any given year. This "staggered" structure of the Board of
Directors may have the effect of delaying the ability of stockholders to
change the composition of the Board of Directors and possibly delaying or
preventing a corresponding change in control of musicmaker.com.
Musicmaker.com's Charter also contains a provision which enables the Board
of Directors to issue preferred stock without the approval of stockholders.
The Board of Directors may fix the rights, preferences, privileges and
limitations of such securities at its discretion. The provision grants to the
Board of Directors the right to issue what is often called "blank check"
preferred stock. The provision may be used to permit the Board of Directors to
institute a rights plan, or "poison pill" by which the Board of Directors
issues preferred stock or grants rights to acquire preferred stock, often with
voting rights, to certain holders of common stock. The effect of such
preferred stock grants may be to deter possible takeovers or acquisitions,
making such a transaction prohibitively expensive for potential acquirers.
Issuance of such preferred stock could discourage potential bids for
musicmaker.com, deny stockholders a potential premium on their shares and may
make a change in control of musicmaker.com more difficult. See "Risk Factors--
Anti-takeover effects of our Charter and Bylaws."
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding shares
of common stock. Of these shares, the shares of common stock sold in
this offering (assuming no exercise of the Underwriter's over-allotment
option) will be freely tradable in the public market without restrictions
under the Securities Act, except that any shares purchased by affiliates of
musicmaker.com, as defined in Rule 144 under the Securities Act, may only be
sold in compliance with the applicable provisions of Rule 144 discussed below.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted securities" for at least
one year, including a person who may be deemed an affiliate of musicmaker.com,
is entitled to sell within any three-month period the number of shares of
common stock that does not exceed the greater of (i) one percent of the then
outstanding shares of common stock of musicmaker.com or (ii) the average
weekly trading volume of common stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 are subject
to certain restrictions relating to manner of sale, notice and the
availability of current public information about musicmaker.com. Generally, a
person who is not an affiliate of musicmaker.com and who has satisfied a two-
year holding period will be able to sell without any volume limitations. As of
January 31, 1999, the one-year holding period had expired with respect to
2,056,006 shares of common stock. As of January 31, 1999, the two-year holding
period had expired with respect to 1,327,273 shares of common stock.
Shares of outstanding preferred stock, including all outstanding preferred
warrants, shall be automatically converted into shares of common stock and
common stock warrants, respectively, upon completion of this offering. As a
result of this automatic conversion, 819,199 shares of restricted common stock
shall be issued to the former holders of the outstanding preferred stock and
728,725 warrants for common stock shall be issued in exchange for the
outstanding preferred warrants. Outstanding convertible notes shall
automatically convert into 415,584 shares of common stock upon completion of
this offering.
Stockholders holding approximately of our outstanding common stock and
outstanding options and warrants for common stock, are expected to agree not
to offer, pledge, sell, contract to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any securities of musicmaker.com
they currently hold without prior written consent of the representatives for a
period of 180 days following the date of the final prospectus.
Upon completion of this offering, we will sell to the representatives, for
nominal consideration, warrants entitling the representatives to purchase an
aggregate of shares of common stock at an initial exercise price equal
to 110% of the initial public offering price. The representatives' warrants
will be exercisable for a period of four years commencing one year after the
effective date of the registration statement of which this prospectus is a
part. Subject to the limitations of Rule 144, the holders of the
representatives' warrants may sell shares of common stock acquired by exercise
of the warrant one year from the date of exercise thereof without
registration. See "Underwriting."
Prior to this offering, there has been no market for our common stock. No
predictions can be made as to the effect, if any, that sales of shares of
common stock under Rule 144 will have on the market price of our common stock.
Sales in the public market of such common stock under Rule 144 could adversely
affect the market price of our common stock or the ability of musicmaker.com
to raise funds through a public offering of its equity securities. See "Risk
Factors--Shares eligible for future sale."
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, the
underwriters named below, for whom Ferris, Baker Watts, Incorporated and
Fahnestock & Co., Inc. are acting as the representatives, have severally
agreed to purchase from us, and we have agreed to sell to the underwriters,
the respective number of shares of common stock set forth opposite each
underwriters named below:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Ferris, Baker Watts, Incorporated.................................
Fahnestock & Co. Inc..............................................
---
Total...........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The nature of the underwriter's
obligation is such that they are committed to purchase and pay for all shares
of common stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of
this prospectus and to certain securities dealers at such price less a
concession not in excess of $ per share. The underwriters may allow, and
such selected dealers may re-allow, a concession not in excess of $ per
share to certain brokers and dealers. After this offering, the price to the
public, concession, allowance and re-allowance may be changed by the
representatives. The representatives have informed us that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
We have granted the underwriters an option exercisable during the 30-day
period after the date of this prospectus, to purchase up to additional
shares of common stock at the initial public offering price solely to cover
over-allotments, if any. To the extent that the underwriters exercise this
option, each of the underwriters will be committed, subject to certain
conditions, to purchase such additional shares of common stock in
approximately the same proportions as set forth in the above table.
The offering of common stock is made for delivery when, as and if accepted
by the underwriters and subject to prior sale to withdrawal, cancellation or
modification of the offer without notice. The underwriters reserve the right
to reject any order for the purchase of common stock.
We have agreed to issue warrants to the representatives to purchase up to
shares of common stock, at an exercise price per share equal to 110% of
the initial public offering price per share. The representatives' warrants are
exercisable for a period of four years, commencing one year from the effective
date of the registration statement of which this prospectus is a part. The
representatives' warrants will not be sold, offered for sale, transferred,
assigned or hypothecated for a period of one year from the effective date of
the registration statement other than to officers, employees or partners of
the respective representatives and members of the selling group and their
officers and partners. The holders of the representatives' warrants will have
no voting, dividend or other stockholders' rights until the representatives'
warrants are exercised. We have granted the representatives certain demand and
piggyback registration rights related to the representatives' warrants, which
are applicable during the period that the representatives' warrants are
exercisable. We also have agreed to pay the underwriters a nonaccountable
expense allowance of 1% of the gross proceeds of this offering.
We have agreed to enter into a financial advisory agreement with GunnAllen
Financial, Inc. whereby we will pay GunnAllen an advisor fee of $125,000 upon
the completion of the offering.
50
<PAGE>
We have agreed not to issue, and all of our officers and directors, and all
security holders of musicmaker.com are expected to agree not to offer, pledge,
sell, contract to sell, or otherwise transfer or dispose of directly or
indirectly any shares of our capital stock or other equity securities of
musicmaker.com for a period of 180 days after the date of this prospectus
without the prior written consent of Ferris, Baker Watts, Incorporated. In
addition, those officers, directors and each security holder of musicmaker.com
to whom we granted certain registration rights in connection with the issuance
of shares of our common stock or other equity securities of musicmaker.com are
expected to agree not to make any demand for, exercise any right, or file (or
participate in the filing of) a registration statement with respect to the
registration of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Ferris, Baker
Watts, Incorporated.
We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
was determined by negotiation among musicmaker.com and the Representatives.
Among the factors considered in determining the public offering price were:
. The preliminary demand for our common stock.
. The history of and the prospects for musicmaker.com.
. The condition of the industry and markets in which we compete.
. An assessment of our management.
. Our past earnings and the trend and future prospects of such earnings.
. The present state of our business operations and development.
. The general conditions of the securities market at the time of the
offering; and the market prices of publicly traded common stocks of
comparable companies in related industries in recent periods.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
The initial public offering price set forth on the cover page of this
prospectus should not be considered an indication of the actual value of our
common stock. Such price is subject to change as a result of market conditions
and other factors. We cannot assure you that our common stock can be resold at
or above the initial public offering price.
In order to facilitate this offering, certain persons participating in the
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after the offering in
accordance with Regulation M under the Securities Exchange Act of 1934, as
amended. Specifically, the underwriters may over-allot or otherwise create a
short position in the common stock for their own account by selling more
shares of common stock than have been sold to them by us. The underwriters may
elect to cover any such short position by purchasing shares of common stock in
the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the
price of the common stock by bidding for or purchasing shares of common stock
in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions and use of penalty bids may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages
resales. No representation is made as to the magnitude or effect of any such
stabilization or other transactions. Such transactions may be effected on the
Nasdaq National Market or otherwise and, if continued, may be discontinued at
any time.
51
<PAGE>
TRANSFER AGENT, ESCROW AGENT AND REGISTRAR
The transfer agent, escrow agent and registrar for the common stock is
.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for
musicmaker.com by its counsel, Venable, Baetjer and Howard, LLP of McLean,
Virginia. Certain legal matters will be passed upon for the underwriters by
its counsel Katten Muchin & Zavis, Washington, D.C. Certain matters in
connection with United States patents and trademarks and international patents
will be passed upon for musicmaker.com by Darby & Darby, P.C. of New York, New
York.
EXPERTS
The consolidated financial statements of musicmaker.com, Inc. (formerly The
Music Connection Corporation) at December 31, 1998 and 1997, and for the years
ended December 31, 1998 and 1997 and for the period from April 23, 1996
(inception) through December 31, 1996, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
Certain matters dealing with patents and trademarks set forth in "Risk
Factors--We depend upon intellectual property rights and risk having such
rights infringed" and "Business--Intellectual Property and Proprietary Rights"
have been included in this prospectus in reliance upon the written opinion of
Darby & Darby, P.C. of New York, New York, as experts in such matters. See
"Legal Matters."
ADDITIONAL INFORMATION
Musicmaker.com has filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to musicmaker.com and this offering, reference is made to the
registration statement, including the exhibits filed therewith, copies of
which may be obtained at prescribed rates from the SEC at the public reference
facilities maintained by the SEC at Judiciary Plaza Building, 450 Fifth
Street, NW, Washington, D.C. 20549 and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, NY 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Descriptions
contained in this prospectus as to the contents of any contract or other
documents filed as an exhibit to the registration statement are not
necessarily complete and each such description is qualified by reference to
such contract or document. The SEC maintains a website on the Internet that
will contain all future reports, proxy and information statements and other
information that musicmaker.com is required to file electronically with the
SEC. The address of the SEC's website is http://www.sec.gov.
This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by Jupiter Communications and the Record Industry
Association of America. These industry publications generally indicate that
they have obtained information from sources believed to be reliable, but do
not guarantee the accuracy and completeness of such information. While we
believe those industry publications to be reliable, we have not independently
verified such data. We also have not sought, in certain circumstances, the
consent of these organizations to refer to their reports in this prospectus.
52
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Deficit............................ F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
We have audited the accompanying consolidated balance sheets of
musicmaker.com, Inc. (formerly The Music Connection Corporation) as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for the period from April
23, 1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
musicmaker.com, Inc. (formerly The Music Connection Corporation) at December
31, 1997 and 1998, and the consolidated results of its operations and its cash
flows for the period from April 23, 1996 (inception) through December 31,
1996, and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Vienna, Virginia
February 5, 1999, except Note 11,
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 for the reverse stock split as
described in Note 11 to the financial statements.
/s/ Ernst & Young LLP
Vienna, Virginia
February 18, 1999
F-2
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, Pro Forma
------------------------ December 31,
1997 1998 1998 (Note 10)
----------- ----------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,401,982 $ 972,954 $ 2,286,579
Accounts receivable................ 12,750 17,510 17,510
Related party account receivable
(Note 8).......................... -- 81,519 81,519
Prepaid expenses and other current
assets............................ 17,503 25,395 25,395
----------- ----------- -----------
Total current assets............. 1,432,235 1,097,378 2,411,003
Property and equipment, net (Note
2).................................. 297,140 360,709 360,709
Investments (Note 1)................. -- 750,000 750,000
Intangibles, net (Note 3)............ -- 967,395 855,000
Other assets......................... -- 58,481 58,481
----------- ----------- -----------
Total assets..................... $ 1,729,375 $ 3,233,963 $ 4,435,193
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Accounts payable................... $ 328,450 $ 455,095 $ 455,095
Accrued expenses................... 91,369 261,974 261,974
Accrued compensation payable to
related parties (Note 8).......... 761,221 625,219 625,219
Current portion of long-term
obligation (Note 4)............... -- 42,857 42,857
----------- ----------- -----------
Total current liabilities........ 1,181,040 1,385,145 1,385,145
Long-term obligation (Note 4)........ -- 214,286 214,286
Convertible notes payable (Note 4)... -- 512,500 --
Commitments (Note 7)
Convertible preferred stock, $0.01
par value, 1,547,924 shares
authorized (Note 5):
Series A convertible preferred
stock, 454,545 shares designated;
454,545 shares issued and
outstanding....................... 1,750,000 1,750,000 --
Series B convertible preferred
stock, 865,801 shares designated;
0 and 364,654 shares issued and
outstanding....................... -- 1,684,700 --
Series C convertible preferred
stock, 227,578 shares designated;
no shares issued and outstanding.. -- -- --
Series A convertible preferred
stock subscribed.................. (50,000) -- --
Stockholders' (deficit) equity(Note
5):
Common stock, $0.01 par value,
5,194,805 shares authorized;
2,056,006, 2,707,954 shares issued
and outstanding, respectively
(3,942,737 pro forma shares)...... 20,560 27,080 39,427
Additional paid-in capital......... 1,279,244 4,766,488 10,188,841
Accumulated deficit................ (2,451,469) (7,106,236) (7,392,506)
----------- ----------- -----------
Total stockholders' (deficit)
equity.......................... (1,151,665) (2,312,668) 2,835,762
----------- ----------- -----------
Total liabilities and
stockholders' (deficit) equity.. $ 1,729,375 $ 3,233,963 $ 4,435,193
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Pro Forma
April 23, 1996 Year ended
(inception) to Year ended December 31, December 31,
December 31, ------------------------ 1998
1996 1997 1998 (Note 10)
-------------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 74,028
Cost of sales........... (2,590) (2,955) (46,821) (46,821)
--------- ----------- ----------- -----------
Gross profit............ 5,765 10,477 27,207 27,207
Operating expenses:
Sales and marketing... -- 7,780 929,661 929,661
Operating and
development.......... 64,029 692,041 1,435,690 1,435,690
General and
administrative....... 306,381 1,360,856 2,334,438 2,620,708
--------- ----------- ----------- -----------
370,410 2,060,677 4,699,789 4,986,059
--------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (4,958,852)
Other income (expense):
Interest income....... -- -- 17,815 17,815
Interest expense...... (2,667) (33,957) -- --
--------- ----------- ----------- -----------
(2,667) (33,957) 17,815 17,815
--------- ----------- ----------- -----------
Net loss................ $(367,312) $(2,084,157) $(4,654,767) $(4,941,037)
========= =========== =========== ===========
Basic and diluted net
loss per share (Note
9)..................... $ (0.44) $ (1.20) $ (2.13) $ (1.73)
========= =========== =========== ===========
Weighted average shares
outstanding............ 830,076 1,734,328 2,186,488 2,863,521
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 1,327,273 $13,273 $ 8,467 $ -- $ 21,740
Net loss............... -- -- -- (367,312) (367,312)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1996................... 1,327,273 13,273 8,467 (367,312) (345,572)
Issuance of common
stock.................. 524,415 5,244 435,696 -- 440,940
Issuance of common
stock and warrants for
services to non-
employees.............. 25,974 260 150,240 -- 150,500
Conversion of notes
payable................ 178,344 1,783 684,841 -- 686,624
Net loss............... -- -- -- (2,084,157) (2,084,157)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1997................... 2,056,006 20,560 1,279,244 (2,451,469) (1,151,665)
Issuance of common
stock.................. 651,948 6,520 2,987,782 -- 2,994,302
Issuance of warrants
and options to non-
employees............. -- -- 499,462 -- 499,462
Net loss............... -- -- -- (4,654,767) (4,654,767)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1998................... 2,707,954 $27,080 $4,766,488 $(7,106,236) $(2,312,668)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
April 23, 1996
(inception) to Year ended December 31,
December 31, ------------------------
1996 1997 1998
-------------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net loss............................ $(367,312) $(2,084,157) $(4,654,767)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization...... 7,700 29,887 203,122
Conversion of accrued interest to
common stock...................... -- 36,624 --
Services received in exchange for
stock and warrants................ -- 150,500 499,462
Changes in operating assets and
liabilities:
Accounts receivable.............. (38,387) 25,637 (4,760)
Related party account
receivable...................... -- -- (81,519)
Prepaid expenses and other
current assets.................. (8,994) (8,509) (7,892)
Other assets..................... -- -- (58,481)
Accounts payable................. 166,018 162,432 126,645
Accrued expenses................. 46,025 45,344 170,605
Accrued compensation payable to
related parties................. 217,587 543,634 30,665
Long-term obligation............. 2,667 (2,667) 257,143
--------- ----------- -----------
Net cash provided by (used in)
operating activities.......... 25,304 (1,101,275) (3,519,777)
Investing activities
Purchases of property and
equipment........................... (34,972) (299,755) (217,961)
--------- ----------- -----------
Net cash used in investing
activities.................... (34,972) (299,755) (217,961)
Financing activities
Proceeds from issuance of
convertible notes payable........... 400,000 250,000 512,500
Payment of fees on convertible notes
payable............................. -- -- (116,125)
Issuance of convertible preferred
stock............................... -- 1,700,000 1,568,033
Issuance of common stock............ 21,740 440,940 1,344,302
--------- ----------- -----------
Net cash provided by financing
activities.................... 421,740 2,390,940 3,308,710
--------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 412,072 989,910 (429,028)
Cash and cash equivalents at
beginning of period................. -- 412,072 1,401,982
--------- ----------- -----------
Cash and cash equivalents at end of
period.............................. $ 412,072 $ 1,401,982 $ 972,954
========= =========== ===========
Non-cash investing and financing
activities
Issuance of common stock............ $ 18,230 $ -- $ --
========= =========== ===========
Conversion of notes payable to
common stock (Note 4)............... $ -- $ 686,624 $ --
========= =========== ===========
Common stock issued for licensing
agreement (Note 5).................. $ -- $ -- $ 1,650,000
========= =========== ===========
Conversion of accrued compensation
to preferred stock (Note 5)......... $ -- $ -- $ 166,667
========= =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies
The Company
Musicmaker.com, Inc. (formerly The Music Connection Corporation) (the
"Company") was incorporated in Delaware on April 23, 1996. The Company is an
e-commerce provider of customized music CD compilations on the Internet. The
Company's website, "www.musicmaker.com," as well as mail-order promotions,
allow customers to order custom compiled music CDs. Customers can also
digitally download songs from the Company's online library directly to their
personal computers.
Since inception, management has been primarily involved in recruiting
personnel, developing the technological infrastructure necessary to create
custom CDs on the Internet, building an operating infrastructure and
establishing relationships with record labels and vendors. The Company
continues to rely on outside sources of capital to develop and exploit its
products and markets.
In February 1999, the Company plans to file a registration statement with
the Securities and Exchange Commission relating to the initial public offering
(the "IPO") of the Company's common stock.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, CD Kit, as of December 31, 1996
and 1997. As of December 31, 1998, CD Kit was inactive with no remaining
assets or liabilities. All significant inter-company transactions and balances
have been eliminated in consolidation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Net sales are recognized at the time merchandise is shipped to customers for
custom CDs and upon execution of orders for digitally downloaded songs.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Investments
In connection with exclusive music license, stock exchange and marketing
agreements signed with Platinum Entertainment, Inc. ("Platinum") on September
30, 1998, the Company received 111,457 shares of unregistered common stock of
Platinum (see Note 5). The Company's investment in these equity securities was
recorded at the fair market value on the date of the transaction and is
accounted for using the cost method.
F-7
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Royalty Advances and Operating and Development Costs
In accordance with Statement of Financial Accounting Standards No. 50,
"Financial Reporting in the Record and Music Industry," royalty advances and
minimum guarantees to music labels are recorded as an asset if the past
performance and current popularity of the music to which the advance relates
provide a sound basis for estimating the probable future recoupment of such
advances. Advances are then expensed as subsequent royalties are earned. Any
portion of advances that subsequently appear not to be fully recoverable from
future royalties are charged to expense during the period in which the loss
becomes evident.
Operating and development costs relating to the Company's proprietary custom
CD compilation software technology are expensed as incurred. Operating and
development costs also include recoupable but not returnable advances and
network and website costs. The Company has expensed as operating and
development costs royalty advances that were paid upon signing of certain
initial royalty agreements with independent music labels, due to management's
expectations of minimal revenues expected during the one year period following
the signing of the contracts. These charges resulted in increases to operating
and development costs of approximately $447,500 and $614,000 for the years
ended December 31, 1997 and 1998, respectively. The Company is required to
make additional advances upon the anniversaries of the signing of these
initial contracts. The Company will capitalize these future advances and then
amortize the expense to match the revenues. Once significant revenues have
been generated, the Company will classify these costs as costs of sales.
Advertising Costs
The Company expenses all advertising costs as incurred. The Company incurred
$0, $7,800 and $328,959 in advertising costs for the period from April 23,
1996 (inception) to December 31, 1996, and the years ended December 31, 1997
and 1998, respectively.
Fair Value of Financial Instruments
The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash, accounts receivable,
investments, accounts payable and related party payables, to approximate the
fair value of the respective assets and liabilities.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Financial Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
Net Loss Per Share
The Company has adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share," ("SFAS 128") which established new standards for
computing and presenting net income per share information. Basic net loss per
share was determined by dividing net loss by the weighted average number of
common shares outstanding during each period. Diluted net loss per share
excludes common equivalent shares,
F-8
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
unexercised stock options and warrants as the computation would be anti-
dilutive. A reconciliation of the net loss available for common shareholders
and the number of shares used in computing basic and diluted net loss per
share is in Note 9.
Basic and diluted loss per share is also computed pursuant to SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an
initial public offering, be included in the calculation of basic and diluted
loss per share as if they were outstanding for all periods presented. To date,
the Company has not had any nominal issuances or grants at nominal prices.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), allows companies to account for stock-based
compensation either under the new provisions of SFAS 123 or under the
provisions of Accounting Principles Bulletin No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted. The Company has elected to account for its stock-based
compensation in accordance with the provisions of APB 25 (see Note 5).
Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the presentation of the 1998 financial
statements.
Recent Pronouncements
In 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
In 1998, the Company adopted FASB Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which establishes
standards for disclosures about products, geographies and major customers. The
Company's implementation of this standard does not have any effect on its
financial statements.
The Accounting Standards Executive Committee (AcSEC) recently issued SOP 98-
5, "Reporting on the Costs of Start-up Activities." SOP 98-5 is effective for
fiscal years beginning after December 15, 1998 and requires the costs of
start-up activities, including organization costs, to be expensed as incurred.
The Company has elected early adoption of SOP 98-5. However, the early
adoption of the new rules does not have a material effect on the Company's
financial position or results from operations.
2. Property and Equipment
Property and equipment are stated at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated
useful life or the lease term, ranging from three to seven years. Depreciation
and amortization expense was $7,700, $29,887 and $154,392 for the period from
April 23, 1996 (inception) through December 31, 1996, and the years ended
December 31, 1997 and 1998, respectively.
F-9
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Computer equipment and software......................... $328,166 $ 506,120
Leasehold improvements.................................. -- 36,823
Furniture and equipment................................. 6,561 9,745
-------- ---------
334,727 552,688
Less accumulated depreciation and amortization.......... (37,587) (191,979)
-------- ---------
$297,140 $ 360,709
======== =========
</TABLE>
3. Intangibles
In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company recorded an intangible asset for
licensing fees of $900,000 (see Note 5). The asset is the difference in fair
market values of musicmaker.com's common stock issued to Platinum and the
Platinum common stock issued to the Company. The Company is amortizing the
intangible on a straight-line basis over the five year period of the license
agreement. The carrying value of the intangible asset will be reviewed if the
facts and circumstances suggest impairment. If such a review indicates that
the carrying value will not be recoverable as determined based on undiscounted
cash flows over the remaining amortization period, the Company will reduce the
carrying value by the estimated shortfall of cash flows.
In connection with the private placement of convertible notes payable, the
Company recorded loan fees of $116,125 (see Note 4). The Company is amortizing
this intangible through December 31, 2000, the maturity date of the
convertible notes payable.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Licensing fees.......................................... $ -- $ 900,000
Loan fees............................................... -- 116,125
------- ----------
-- 1,016,125
Less accumulated amortization........................... -- (48,730)
------- ----------
$ -- $ 967,395
======= ==========
</TABLE>
4. Convertible Notes Payable and Long-term Obligations
In December 1996, the Company received $400,000 and issued 12% convertible
notes to certain investors (including the founding stockholders and a director
of the Company). The Company had the right, at its option, between the date of
issuance and June 15, 1997, to convert all of the principal and accrued
interest owed to note holders into shares of the Company's common stock. In
1997, the Company issued two additional convertible notes totaling $250,000
with the same terms. In June 1997, the Company converted the principal amount
of $650,000 of convertible notes payable plus the accrued interest of $36,624
into 178,344 shares of common stock.
In October 1998, the Company initiated an offering for 8% convertible
secured subordinate promissory notes which are convertible at any time at the
election of the holder and are mandatorily convertible upon the
F-10
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
closing of an initial public offering with gross proceeds of $5,000,000 or
more or upon certain mergers and consolidations of the Company. The conversion
price is $4.81 per share of common stock, subject to certain adjustments. The
convertible notes payable are secured by a lien on the assets of the Company
pursuant to a security agreement and the principal and accrued interest are
due on December 31, 2000. As of December 31, 1998, the Company had convertible
notes payable of $512,500 and had recorded loan fees of $116,125 (see Note 3).
On July 1, 1998, the Company entered into a mutual coexistence agreement
with Music Maker Relief Foundation, Inc. ("Music Maker Relief Foundation"), an
unaffiliated not-for-profit corporation that owns the trademark MUSICMAKER and
the Internet domain name MUSICMAKER.ORG. In consideration of avoiding any
possible conflict regarding names, marks, goods and services, the Company
agreed to pay $300,000 to Music Maker Relief Foundation. The Company paid
$42,857 upon signing of the agreement and has a remaining obligation of
$257,143 ($42,857 on April 15th of each of the years 1999 through and
including 2004). The Company expensed $300,000 upon signing of the agreement.
5. Common Stock and Convertible Preferred Stock
Common Stock and Warrants
On July 3, 1996, the two founders of the Company purchased a total of
649,351 shares of common stock for $2,500. In July 1996, 649,351 shares of
common stock were issued to the former stockholders of CD Kit, S.A., giving
them a 50% interest in the then issued and outstanding common stock of the
Company. Two outside investors purchased 2,597 and 25,974 shares of common
stock in October and December of 1996, respectively.
In 1997, 524,416 shares of common stock were issued to both outside
investors and the founding stockholders at prices ranging from $0.04 per share
to $3.85 per share. The Company also issued 25,974 shares of common stock for
services to consultants valued at $50,500. Additionally, the Company issued
25,974 warrants to purchase common stock at an exercise price of $3.85 per
share to a consultant for services related to signing royalty agreements with
record labels and valued at $100,000. The Company recorded $150,500 of expense
related to the issuance of these shares of common stock and warrants to
consultants for services. The Company also issued 194,805 warrants to purchase
common stock at an exercise price of $3.85 per share to a stockholder and
officer of the Company for services related to signing royalty agreements with
record labels. All of these warrants expire on October 15, 2007.
In 1998, the Company issued a total of 309,091 shares of common stock at
$4.81 per share to seven investors for a total of $1,487,500. The Company paid
a finders fee of $143,198 related to this private placement and is obligated
to issue 46,764 warrants in 1999 related to the completion of the private
placement (see Note 11). The Company also issued warrants to purchase 51,948
shares of common stock at an exercise price of $4.81 per share to one of the
investors and recorded an expense of $88,000 for the value of the warrants.
On June 12, 1998, the Company signed an agreement with Columbia House with a
three year term beginning September 1, 1998, under which the Company will
offer custom CDs for sale to Columbia House's customers through Columbia
House's websites and promotional inserts in Columbia House's mailings. The
Company will design and supply promotional material to Columbia House,
manufacture the custom CDs and process all orders (shipping, billing and
collecting) and will pay a share of the net profits derived from the sale of
CDs to Columbia House's customers to Columbia House. In connection with this
agreement, the Company issued 129,870 warrants to purchase common stock at an
exercise price of $4.62 per share to Columbia House and recorded an expense of
$160,000 for the value of the warrants. These warrants expire on September 1,
2001.
F-11
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1998, a stockholder and officer of the Company returned 72,727
stock options to the Company in exchange for warrants to purchase 72,727
shares of common stock with an exercise price of $3.85 per share and valued at
$148,400. These warrants expire on January 15, 2008. This individual is also
the beneficial owner of warrants for 25,974 shares of common stock granted to
members of his family as compensation for his consulting services in August
1998 with an exercise price of $4.62 per share valued at $64,000. The Company
recorded an expense of $212,400 related to the issuance of these warrants.
These warrants expire on August 15, 2008.
In connection with the exclusive music license, stock exchange and marketing
agreements signed with Platinum, the Company issued 342,857 shares of common
stock to Platinum (valued at $1,650,000) and Platinum issued 111,457 shares of
its unregistered common stock to the Company (having an aggregate value of
$750,000). The Company recorded the difference in the fair market values of
the two stocks as licensing fees (see Note 3).
Convertible Preferred Stock and Warrants
On December 8, 1997, the Company sold 389,610 shares of the Company's Series
A preferred stock at $3.85 per share. Additionally, 64,935 shares of the
Company's Series A preferred stock were purchased by two existing stockholders
at $3.85 per share. The Company did not receive payment for 12,987 shares of
the Series A preferred stock until 1998 and has therefore shown a reduction to
the preferred stock on the accompanying December 31, 1997 balance sheet.
The Company also issued 865,801 warrants to purchase Series B preferred
stock at a price of $4.62 per share, and 227,578 warrants to purchase Series C
preferred stock at a price of $5.78 per share. The warrants to purchase Series
B preferred stock are exercisable, in whole or in part, at any time commencing
on the date of grant through the fifth anniversary thereof. The warrants to
purchase Series C preferred stock are exercisable, in whole or in part, at any
time commencing on the date of grant through the fourth anniversary thereof.
Each holder of preferred stock is entitled to vote on all matters as if
their shares of preferred stock were converted to voting common stock. All
outstanding shares of preferred stock have an automatic conversion feature
upon the consummation of a firm commitment underwritten public offering of at
least $15 million with a valuation of the Company greater than $50 million
immediately prior to the initial public offering, or upon an affirmative vote
of the holders of at least 50.1% of the outstanding shares of preferred stock
to complete such a conversion. The conversion ratio is initially on a one-for-
one basis for all series of preferred stock; however, the conversion price of
each series shall be subject to adjustment for certain diluting issues as
described in the Company's Restated Certificate of Incorporation.
The preferred stock is redeemable at the election of at least 50.1% of the
preferred stock holders in two equal installments, if notice is provided to
the Company on or before October 8, 2002. The redemption price would be $3.85
per share, $4.62 per share and $5.78 per share plus a further amount per share
equal to any declared and unpaid dividends for Series A, Series B and Series C
preferred stock, respectively. The first installment would be on or about
December 8, 2002, and the second installment would be on or about December 8,
2003, subject to the Company having funds legally available. If sufficient
funds are not legally available for redeeming the preferred stock at either of
the installment dates, the Company will have to apply the available funds to
redeem the preferred stock on a ratable basis and then redeem the remaining
shares as soon as practicable after the Company has the funds legally
available.
F-12
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the event of either a voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the preferred stock shall be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to holders of the common stock, $3.85 per share plus declared
and unpaid dividends on Series A preferred stock, $4.62 per share plus
declared and unpaid dividends on Series B preferred stock and $5.78 per share
plus declared and unpaid dividends on Series C preferred stock.
On March 16, 1998, an investor exercised 89,453 warrants to purchase Series
B preferred stock at a price of $4.62 per share for $413,272 in cash. Two
officers of the Company were required to exercise 15,461 warrants to purchase
Series B preferred stock at the same price.
On June 30, 1998, two investors exercised 223,665 warrants to purchase
Series B preferred stock at a price of $4.62 per share for $1,033,333 in cash.
Two officers of the Company were required to exercise 36,075 warrants to
purchase Series B preferred stock at the same price. The exercise of the
36,075 warrants was offset by a reduction to accrued liabilities for
consulting services.
Stock Option Plan
The 1996 Stock Option Plan (the "Plan") was adopted by the Board of
Directors and approved by the stockholders in 1996. The purpose of the Plan is
to promote the long-term growth and profitability of the Company by providing
key people with incentives to contribute to the growth and financial success
of the Company. The aggregate number of shares of common stock for which
options may be granted under the Plan shall not exceed 779,221 shares (see
Note 11). Additional information with respect to stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1998
---------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......... 19,480 $0.39 215,298 $3.54
Options granted........................... 195,818 $3.85 389,611 $4.88
Options exercised......................... -- $ -- -- $ --
Options canceled or expired............... -- $ -- (72,727) $3.85
------- ----- ------- -----
Outstanding at end of year................ 215,298 $3.54 532,182 $4.48
======= ===== ======= =====
Exercisable at end of year................ 19,480 $0.39 126,312 $3.79
======= ===== ======= =====
</TABLE>
The options outstanding at December 31, 1998 range in price from $0.39 per
share to $5.29 per share and have a weighted average remaining contractual
life of 7.6 years.
The Company applies APB 25 in accounting for its stock option plan and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS 123's fair value method to the
Company's stock-based awards results in net losses of $372,951, $2,093,571 and
$4,872,452 in 1996, 1997 and 1998, respectively, with a net loss per share of
$0.45, $1.21 and $2.23, respectively. The weighted average fair value of the
options granted in 1997, used as a basis for the above pro forma disclosures,
was estimated as $1.69 as of the date of grant using a minimum value method
option pricing model. The weighted average fair value of the options granted
during 1998 was estimated as $1.95 as of the date of grant using the Black-
Scholes option-
F-13
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pricing model with the following assumptions: dividend yield 0%, volatility of
25%, risk-free interest rate of 6.5% and expected lives of 5 or 10 years. The
effect of applying SFAS 123 on 1997 and 1998 pro forma net loss as stated
above is not necessarily representative of the effects on reported net income
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.
Warrants
The following table summarizes all common and preferred stock warrant
activity:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Outstanding at beginning of year..................... -- 1,314,158
Warrants issued...................................... 1,314,158 280,519
Warrants exercised................................... -- 364,654
----------- -----------
Outstanding at end of year........................... 1,314,158 1,230,023
=========== ===========
</TABLE>
The weighted average fair value of the warrants granted during 1998 was
estimated as $1.66 using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 25%, risk-free
interest rate of 6.5% and expected lives ranging from 3.5 to 10 years.
6. Income Taxes
At December 31, 1998, the Company had net operating loss carry-forwards of
approximately $4,260,000. The timing and manner in which the operating loss
carry-forwards may be utilized in any year will be limited to the Company's
ability to generate future earnings and by limitations imposed due to change
in ownership. Current net operating loss carry-forwards will expire in the
year 2018. As the Company has not generated earnings and no assurance can be
made of future earnings, a valuation allowance in the amount of the deferred
tax assets has been recorded. The change in the valuation allowance was
$1,748,542. There was no current or deferred provision for income taxes for
the period from April 23, 1996 (inception) through December 31, 1996 or the
years ended December 31, 1997 or 1998.
Net deferred tax assets consist of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Start up expenses................................. $ 555,944 $ 460,108
Deferred compensation............................. 287,365 237,583
Warrants.......................................... 57,189 227,795
Trademark expense................................. -- 114,000
Net operating loss carry-forward.................. 10,985 1,620,539
--------- -----------
Deferred tax assets before valuation allowance.... 911,483 2,660,025
Less valuation allowance............................ (911,483) (2,660,025)
--------- -----------
Net deferred tax assets............................. $ -- $ --
========= ===========
</TABLE>
The Company has not paid any income taxes since inception.
F-14
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to the loss before income taxes due to the
effects of the following:
<TABLE>
<CAPTION>
Period from
April 23, 1996
(inception) to Year ended December 31,
December 31, ------------------------
1996 1997 1998
-------------- ----------- ------------
<S> <C> <C> <C>
Expected tax benefit at federal
statutory tax rate.............. $(124,886) $ (708,613) $ (1,582,621)
Future state benefit, net of
federal benefit................. (16,305) (79,801) (186,191)
Nondeductible expenses and
other........................... (12,943) 31,065 20,270
Increase in valuation allowance.. 154,134 757,349 1,748,542
--------- ---------- ------------
$ -- $ -- $ --
========= ========== ============
</TABLE>
7. Commitments
Royalty Agreements
The Company has signed contracts with record labels for non-exclusive rights
to manufacture, advertise, market, promote, distribute and sell custom CDs and
digitally downloaded songs over the Internet. The agreements contain a master
use royalty rate of 15% of the selling price less any sales, excise or similar
taxes. If the Company enters into a more favorable royalty rate with another
licensor, the majority of these contracts contain clauses allowing the
licensor to also receive the more favorable royalty terms. As discussed in
Note 1, the majority of the contracts require advances upon the anniversary
dates of the signing of the contracts. The more recent agreements provide for
the Company to pay advances based on actual royalties earned by the label in
the previous year, as opposed to a fixed amount.
Fixed royalty commitments on contracts entered into as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1999.............................................................. $527,500
2000.............................................................. 183,333
--------
$710,833
========
</TABLE>
Operating Leases
The Company leases its office facility, certain computer equipment and
office furniture under operating lease agreements that were entered into
during 1998. Operating lease expense for the period from April 23, 1996
(inception) to December 31, 1996, and the years ended December 31, 1997 and
1998 was $1,800, $21,000, and $110,000, respectively.
Financial Consulting Agreement
In connection with the Company's planned IPO, the Company signed an
agreement on December 23, 1998 obligating it to pay $125,000 at the closing of
the IPO.
F-15
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
1999.............................................................. $188,912
2000.............................................................. 164,656
2001.............................................................. 115,297
2002.............................................................. 118,584
Thereafter........................................................ 299,618
--------
$887,067
========
</TABLE>
8. Related Party Transactions
Accrued compensation of $756,221 and $625,219 as of December 31, 1997 and
1998, respectively, are amounts due to stockholders for consulting services
rendered to the Company. Additionally, in December 1998, the Company advanced
a stockholder and officer $81,519 against his 1999 bonus.
9. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
Period from
April 23, 1996 Year ended Year ended Pro Forma
(inception to December December Year ended
December 31, 31, 31, December 31,
1996 1997 1998 1998
-------------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net loss.............. $(367,312) $(2,084,157) $(4,654,767) $(4,941,037)
========= =========== =========== ===========
Denominator:
Denominator for basic
net loss per share--
weighted average
shares............... 830,076 1,734,328 2,186,488 2,863,521
Effect of dilutive
securities:
Preferred stock....... -- -- -- --
Stock options......... -- -- -- --
Warrants.............. -- -- -- --
--------- ----------- ----------- -----------
Dilutive potential
common shares.......... -- -- -- --
Denominator for diluted
net loss per share--
adjusted weighted
average shares......... 830,076 1,734,328 2,186,488 2,863,521
========= =========== =========== ===========
Basic net loss per
share.................. $ (0.44) $ (1.20) $ (2.13) $ (1.73)
========= =========== =========== ===========
Diluted net loss per
share.................. $ (0.44) $ (1.20) $ (2.13) $ (1.73)
========= =========== =========== ===========
</TABLE>
F-16
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:
<TABLE>
<CAPTION>
Period from
April 23, 1996 Pro Forma
(inception) to Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1996 1997 1998 1998
-------------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Preferred stock:
Series A.............. -- 454,545 454,545 --
Series B.............. -- -- 364,654 --
Preferred stock
warrants:
Series B.............. -- 865,801 501,147 --
Series C.............. -- 227,578 227,578 --
Stock options........... 19,480 215,298 532,182 532,182
Warrants................ -- 220,779 501,298 1,230,023
</TABLE>
10. Pro Forma Financial Information (unaudited)
The financial statements include pro forma information as of December 31,
1998 to give effect to (i) the one-for-3.85 reverse stock split to be effected
prior to the completion of the IPO, (ii) the automatic conversion, upon the
completion of the IPO, of all outstanding shares of convertible preferred
stock into 819,199 shares of common stock, (iii) the automatic conversion of
all outstanding convertible notes payable into 415,584 shares of common stock
($512,500 of convertible notes payable outstanding at December 31, 1998 and
$1,487,500 of convertible notes payable issued in January 1999), and (iv) the
write-off of all capitalized loan fees related to the convertible notes
payable ($112,395 capitalized at December 31, 1998 and $173,875 capitalized in
January 1999).
11. Subsequent Events
On November 20, 1998, the Board of Directors approved an increase in the
aggregate number of shares of common stock for which options may be granted
under the Stock Option Plan to be 779,221 shares, subject to the approval of
the stockholders. The stockholders approved the authorized shares increase in
February 1999. The stockholders also authorized the Company's Amended and
Restated Certificate of Incorporation in February 1999, which increased the
total number of authorized shares of common stock to 15,584,416 shares.
In January 1999, the Company completed its private placement of convertible
notes payable and received an additional $1,487,500. In connection with the
convertible notes payable issued in January, the Company recorded loan fees of
$173,875 and issued a warrant to purchase 41,558 shares of common stock at an
exercise price of $4.81, which expires on January 11, 2004.
In January 1999, the Company completed its common stock private placement
and issued an additional 252,104 shares of common stock at $4.81 per share for
a total of $1,213,250 in cash. The Company paid a commission of approximately
$97,000 related to this private placement and issued a warrant to purchase
46,764 shares of common stock with an exercise price of $4.81, which expires
on January 14, 2004.
F-17
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 8, 1999, the Company signed a lease line agreement which provides
leasing for computer and related equipment as well as CD fabrication equipment
up to $200,000 between the signing of the agreement and June 8, 1999. Any
equipment leased under this agreement will have a 24 month lease term, and at
the end of the lease term the Company will either be obligated to buy the
equipment at 10% of the original equipment cost or extend the lease term for
an additional 24 months. The Company also signed the first lease under this
agreement which will have a monthly rental payment of $8,261. As part of the
lease line agreement, the Company issued a warrant to purchase 6,234 shares of
its common stock at $4.81 per share which expires on January 8, 2009.
On February 12, 1999, the Company signed a commitment letter with a
financial institution for a credit facility of up to $250,000 in a revolving
line of credit for equipment and software purchases and general working
capital and up to $100,000 in a cash secured letter of credit. The credit
facility matures six months from the date of the loan unless $5,000,000 in new
equity has been raised prior to maturity. In that case, the portion of the
credit facility used for equipment and software purchases will be termed-out
for 24 months. If the term of the credit facility is extended, the financial
institution will have the right to purchase warrants equal to 4% of the
commitment amount.
In February 1999, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock in the IPO.
On , 1999, the Board of Directors approved a one-for-3.85 reverse stock
split of the Company's common stock, which will become effective on .
All references in the accompanying financial statements to the number of
shares of common stock and per-share amounts have been restated to reflect the
split. Additionally, all references in the accompanying financial statements
to the number of shares of preferred stock and per-share amounts have been
restated to reflect the split in accordance with the Company's Restated
Articles of Incorporation.
Immediately upon completion of the IPO, all outstanding shares of Series A,
Series B and Series C convertible preferred stock will convert into 819,199
shares of common stock and all outstanding convertible notes payable will
convert into 415,584 shares of common stock.
F-18
<PAGE>
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
We estimate that our expenses to be paid in connection with the offering
(other than underwriting discounts, commissions and reasonable expense
allowances) will be as follows:
<TABLE>
<S> <C>
SEC registration fee........................................... $ 8,340
NASD filing fee................................................ $ 3,500
Nasdaq National Market listing fee............................. $75,625
Printing and engraving expenses................................ $ *
Accounting fees and expenses................................... $ *
Legal fees and expenses........................................ $ *
Miscellaneous.................................................. $ *
-------
Total.................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Musicmaker.com is organized under the laws of the State of Delaware.
Musicmaker.com's Charter and Bylaws provide that musicmaker.com shall
indemnify and advance expenses to its directors, officers, employees and
agents, and all persons who at any time served as directors, officers,
employees or agents of musicmaker.com, to the fullest extent permitted, and in
the manner provided under the laws of the State of Delaware.
The DGCL provides that a Delaware corporation has the power generally to
indemnify its directors, officers, employees and other agents serving, or who
have served, musicmaker.com (each, a "Corporate Agent") against expenses and
liabilities (including amounts paid in settlement) in connection with any
proceeding involving such person by reason of his being a Corporate Agent,
other than a proceeding by or in the right of the corporation, if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal proceeding, such person had no reasonable cause to believe his
conduct was unlawful.
In the case of an action brought by or in the right of the corporation,
indemnification of a Corporate Agent is permitted if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation; however, no indemnification is permitted in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that
the Court of Chancery or the court in which such proceeding was brought shall
determine upon application that despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to such indemnification.
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in the defense of such
proceeding, whether or not by or in the right of the corporation, or in the
defense of any claim, issue or matter therein, the corporation is required to
indemnify such person for expenses in connection therewith. Expenses incurred
by a Corporate Agent in connection with a proceeding may, under certain
circumstances, be paid by the corporation in advance of the final disposition
of the proceeding as the corporation deems appropriate. Musicmaker.com's
Charter permits the advancement of expenses by musicmaker.com to officers or
directors defending a qualified civil or criminal action upon receipt of an
undertaking by such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to indemnification.
The terms and conditions of such advancement are to be determined by
musicmaker.com's Board of Directors.
II-1
<PAGE>
The power to indemnify and advance the expenses under the DGCL does not
exclude other rights to which a Corporate Agent may be entitled to under the
certificate of incorporation, by laws, agreement, vote of stockholders or
disinterested directors or otherwise.
Pursuant to Delaware law and musicmaker.com's Charter, a director, officer,
employee or agent of musicmaker.com that is successful on the merits or
otherwise in defense of any action, suit or proceeding, or in defense of any
claim, issue or matter therein, may require musicmaker.com to provide
indemnification for expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
Unless ordered by a relevant court, indemnification for qualified persons
shall be authorized on behalf of musicmaker.com by: (i) a majority of a quorum
of the Board of Directors, if a quorum consisting of the directors not party
to such action suit or proceeding can be obtained; or (ii) by independent
legal counsel in a written opinion, if a quorum of (i) above is not obtainable
or if such disinterested quorum so directs; or (iii) stockholder approval.
Under the DGCL and musicmaker.com's Charter, musicmaker.com is permitted to
purchase and maintain insurance on behalf of Corporate Agents of
musicmaker.com or persons serving at the request of musicmaker.com as
Corporate Agents of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and
incurred by him or her in such capacity or arising out of his or her status as
such, whether or not musicmaker.com would have had the power to indemnify such
person.
The purpose of these provisions is to assist musicmaker.com in retaining
qualified individuals to serve as officers, directors or other Corporate
Agents by limiting their exposure to personal liability for serving as such.
Item 15. Recent Sales of Unregistered Securities.
During the past three years, the following securities were issued by
musicmaker.com without registration under the Securities Act:
In July 1996, in connection with its formation, musicmaker.com issued and
sold 551,948 and 97,403 shares of common stock to Mr. Bernardi,
musicmaker.com's founder, Chairman of the Board of Directors and Co-Chief
Executive Officer, and an accredited investor, respectively, for nominal
consideration.
In July 1996, musicmaker.com issued 649,351 shares of common stock to seven
foreign stockholders in connection with the acquisition of all of the
outstanding securities of CD Kit, S.A.
Between December 1996 and May 1997, musicmaker.com issued and sold 12%
convertible notes to eight accredited investors for $650,000. The notes were
convertible into common stock.
Between October 1996 and May 1997, musicmaker.com issued and sold 353,247
shares of common stock to various accredited investors for total aggregate
consideration of approximately $13,510. In May 1997, 12,987 shares of common
stock were issued in exchange for, and as compensation for services rendered
to musicmaker.com.
Between July 1997 and November 1997, musicmaker.com issued and sold 167,273
shares of common stock to investors for total aggregate consideration of
$303,440. In July 1997, 12,987 shares of common stock were issued to a
consultant in exchange for, and as compensation for services rendered to
musicmaker.com.
In July 1997, the outstanding notes issued between December 1996 and May
1997 were converted to 178,344 shares of common stock at a conversion price of
$3.85 per share. Also, five note holders including one of our officers
invested $25,000 each and each received 6,494 shares.
In October 1997, musicmaker.com issued 194,805 common stock warrants to Mr.
Puthukarai, musicmaker.com's President, Co-Chief Executive Officer and Chief
Operating Officer and a warrant for 25,974
II-2
<PAGE>
shares of common stock to another investor. The warrants are exercisable by
the holders into common stock at an exercise price of $3.85 per share.
In December 1997, musicmaker.com issued and sold 454,545 shares of Series A
preferred stock to Rho, Mr. Bernardi and Mr. Puthukarai, and another investor
at a price of $3.85 per share. Additionally, musicmaker.com issued 865,801
Series B and 227,578 Series C preferred warrants to the persons above. The
Series B preferred warrants are exercisable into Series B preferred stock at
an exercise price of $4.62 per share and the Series C preferred warrants are
exercisable into Series C preferred stock at an exercise price of $5.78 per
share. Musicmaker.com's outstanding preferred stock and outstanding preferred
warrants shall automatically convert into common stock, and warrants therefor,
upon completion of the offering.
Effective February 18, 1999, musicmaker.com's stockholders approved and
adopted an amendment to our stock option plan which authorized musicmaker.com
to grant options to purchase up to 779,221 shares of common stock. As of
January 31, 1999, 532,182 options for shares of common stock were granted and
outstanding. No shares of common stock have been issued pursuant to the
exercise of options under the stock option plan. The exercise price of the
options for musicmaker.com's common stock ranges from $0.385 to $5.29 per
share.
In January 1998, 72,727 common stock warrants, with an exercise price of
$3.85 per share, were issued to Mr. Steinberg, musicmaker.com's Vice Chairman
of the Board of Directors, for consulting services related to obtaining
license agreements with record labels on behalf of musicmaker.com. These
warrants expire January 15, 2008. In August 1998, musicmaker.com issued 25,974
common stock warrants to four members of Mr. Steinberg's family as record
holders. The warrants were granted as compensation for consulting services
rendered to musicmaker.com by Mr. Steinberg. The warrants are convertible by
the holders into common stock at an exercise price of $4.62 per share and
expire on August 15, 2008.
In June 1998, musicmaker.com issued a warrant for 129,870 shares of common
stock to Columbia House in connection with entering into a marketing alliance.
The warrant is convertible by the holder into common stock at an exercise
price of $4.62 per share.
In September 1998, musicmaker.com issued 259,740 shares of common stock to
Platinum at a value of $1,650,000 in connection with a marketing agreement,
licensing arrangement and a stock exchange agreement under which
musicmaker.com purchased 111,457 shares of common stock of Platinum. In
November 1998, an additional 83,117 shares of common stock were issued
pursuant to the terms of the stock exchange agreement above.
Between September 1998 and January 1999, musicmaker.com issued shares of its
common stock in a private placement to accredited investors at $4.81 per
share. Musicmaker.com used the financial advisory services of Ryan, Lee &
Company, Incorporated, on a best efforts basis, which received a 7% commission
and warrants for 46,764 shares of our common stock exercisable at $4.81 per
share as compensation for their assistance in the private placement.
Musicmaker.com received consideration in connection with this private
placement of approximately 701,494. The offering closed on January 14, 1999.
Between November 1998 and January 1999, musicmaker.com issued an aggregate
value of $2,000,000 8% convertible notes to accredited investors. The
convertible notes were issued at a cost of $25,000 per note and each note is
convertible into 5,195 shares of musicmaker.com's common stock at $4.81 per
share. Musicmaker.com received consideration in connection with the above sale
of convertible notes of approximately $1,800,000. Musicmaker.com utilized the
services of GunnAllen Financial, Inc., on a best efforts basis, which received
a 10% discount and commission for their assistance in the sale above, and
41,558 warrants for our common stock with an exercise price of $4.81 per
share. The offering of convertible notes above closed on January 11, 1999.
II-3
<PAGE>
All the above transactions were exempt from registration pursuant to
Sections 3(b), 4(2) or 4(6) of the Securities Act.
Item 16. Exhibits.
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
----------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement between musicmaker.com and
Ferris, Baker Watts, Incorporated and Fahnestock & Co.,
Inc. as Representatives.*
3.1 Restated Certificate of Incorporation.*
3.2 Bylaws.*
4.1 Form of Common Stock Certificate.*
4.2 Representatives' Warrant Agreement.*
5.1 Opinion of Venable, Baetjer and Howard, LLP regarding
legality.*
5.2 Opinion of Darby & Darby, P.C.*
10.1 Amended and Restated Employment Agreement between the
Company and Robert P. Bernardi, as amended, dated
February 12, 1999.
10.2 Amended and Restated Employment Agreement between the
Company and Devarajan S. Puthukarai, as amended, dated
February 12, 1999.
10.3 Consulting Agreement dated January 23, 1997, between the
Company and Irwin H. Steinberg, as amended on January 1,
1998, and by letters to the Company dated August 28, 1998
and August 31, 1998.
10.4 Letter Agreement dated June 12, 1998, between the Company
and The Columbia House Company.
10.5 The Company's Amended Stock Option Plan.*
10.6 Marketing Agreement dated September 30, 1998, between
Platinum Entertainment, Inc. and the Company.
10.7 Memorandum of Understanding between the Company and Audio
Book Club, Inc. dated January 18, 1999.
10.8 Office/Warehouse/Showroom Lease dated January 15, 1998
between the Company and Century Properties Fund XX.
10.9 Form of Lock-up Agreement.*
10.10 Letter Agreement dated February 12, 1999 between the
Company and Imperial Bank.*
10.11 Master Equipment Lease dated January 8, 1999 between the
Company and Boston Financial & Equity Corporation.*
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5.1).*
23.3 Consent of Darby & Darby, P.C.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
Item 17. Undertakings.
(a) The undersigned musicmaker.com hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement). Notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities 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 Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Reston, Virginia, on the 17th day of
February 1999.
MUSICMAKER.COM, INC.
/s/ Robert P. Bernardi
By__________________________________:
Robert P. Bernardi
President and Co-Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert P. Bernardi and Devarajan S.
Puthukarai and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration
statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
II-6
<PAGE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert P. Bernardi Chairman and Co-Chief February 17, 1999
______________________________________ Executive Officer
Robert P. Bernardi (Principal Executive
Officer)
/s/ Mark A. Fowler Director of Finance and February 17, 1999
______________________________________ Administration and Chief
Mark A. Fowler Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Irwin H. Steinberg Vice Chairman February 8, 1999
______________________________________
Irwin H. Steinberg
/s/ Devarajan S. Puthukarai Co-Chief Executive February 6, 1999
______________________________________ Officer, President, Chief
Devarajan S. Puthukarai Operating Officer and
Director
/s/ Edward J. Mathias Director February 17, 1999
______________________________________
</TABLE> Edward J. Mathias
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
----------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement between musicmaker.com and
Ferris, Baker Watts, Incorporated and Fahnestock & Co.,
Inc. as Representatives.*
3.1 Restated Certificate of Incorporation.*
3.2 Bylaws.*
4.1 Form of Common Stock Certificate.*
4.2 Representatives' Warrant Agreement.*
5.1 Opinion of Venable, Baetjer and Howard, LLP regarding
legality.*
5.2 Opinion of Darby & Darby, P.C.*
10.1 Amended and Restated Employment Agreement between the
Company and Robert P. Bernardi, as amended, dated
February 12, 1999.
10.2 Amended and Restated Employment Agreement between the
Company and Devarajan S. Puthukarai, as amended, dated
February 12, 1999.
10.3 Consulting Agreement dated January 23, 1997, between the
Company and Irwin H. Steinberg, as amended on January 1,
1998, and by letters to the Company dated August 28, 1998
and August 31, 1998.
10.4 Letter Agreement dated June 12, 1998, between the Company
and The Columbia House Company.
10.5 The Company's Amended Stock Option Plan.*
10.6 Marketing Agreement dated September 30, 1998, between
Platinum Entertainment, Inc. and the Company.
10.7 Memorandum of Understanding between the Company and Audio
Book Club, Inc. dated January 18, 1999.
10.8 Office/Warehouse/Showroom Lease dated January 15, 1998
between the Company and Century Properties Fund XX.
10.9 Form of Lock-up Agreement.*
10.10 Letter Agreement dated February 12, 1999 between the
Company and Imperial Bank.*
10.11 Master Equipment Lease dated January 8, 1999 between the
Company and Boston Financial & Equity Corporation.*
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5.1).*
23.3 Consent of Darby & Darby, P.C.
24 Power of Attorney (Contained on the signature page).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 10.1
AMENDMENT TO THE ROBERT P. BERNARDI
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
OF DECEMBER 8, 1997
This Amendment is made and entered into as of this 12th day of February,
1999, by and between The Music Connection Corporation, a Delaware corporation
(the "Company") and Robert P. Bernardi (the "Employee") (the "Agreement").
WHEREAS, the Company and the Employee are parties to that certain Amended
and Restated Employment Agreement of December 8, 1997 (the "Employment
Agreement"); and
WHEREAS, the Company and the Employee desire to amend that certain
Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each of the parties hereto,
such parties, intending to be legally bound, covenant and agree as follows:
1. Amendment. The Employment Agreement is amended so as to provide that
---------
the Employee's employment, as defined in Section 1 of the Employment Agreement,
be for the term of five (5) years, and that the Employee's term, as defined in
Section 2 of the Employment Agreement, be extended to continue through and
including December 7, 2002.
2. Authorizing Actions. Each party agrees promptly to do all things and
--------------------
take all actions as may be necessary or desirable to authorize and facilitate
the performance of this Agreement.
3. Counterparts. This Agreement may be executed in counterparts, each of
-------------
which when so executed and delivered shall constitute an original, but all of
such counterparts taken together shall constitute one and the same instrument.
4 Entire Agreement. This Agreement together with the Employment
-----------------
Agreement represents the entire understanding of the parties pertaining to the
subject matter hereof and supersedes any and all prior agreements, negotiations
and discussions, whether written or oral, between the parties with respect to
the subject matter hereof.
5. Governing Law. The validity of this Agreement, its interpretation and
--------------
construction shall be governed by the laws of the Commonwealth of Virginia,
without regard to principles of conflict of laws.
6. Amendment. This Agreement may modified only by a written instrument
---------
signed by each of the parties hereto.
7. Recitals. The Recitals to this Agreement are incorporated herein and
--------
made a part hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized
representatives as of the date first above written.
THE MUSIC CONNECTION CORPORATION
By: /s/ Raju Puthukarai
-----------------------------
Raju Puthukarai
President
EMPLOYEE
By: /s/ Robert P. Bernardi
-----------------------------
Robert P. Bernardi
2
<PAGE>
Robert P. Bernardi
Amended and Restated Employment Agreement
AGREEMENT by and between The Music Connection Corporation, a Delaware
corporation (herein called the "Company") and Robert P. Bernardi (herein called
the "Employee").
WITNESSETH:
The parties entered into an Employment Agreement, dated March 20, 1997,
which the parties now desire to amend and restate in its entirety as follows:
For and in consideration of the mutual promises and covenants herein
contained, the parties hereto mutually agree as follows:
Section 1. Employment. The Company hereby employs the Employee for the term of
two (2) years and upon the terms and conditions hereinafter set forth, the
Employee hereby accepts such employment and agrees to perform services for the
Company, as provided in this Agreement.
Section 2. Term. The Employee's employment hereunder shall be for a term
commencing on December 8, 1997 and continuing through and including December 7,
1999, renewable automatically from year to year thereafter unless either the
Company or the Employee provides the other with written notice of non-renewal at
least 90 days prior to the expiration of the initial term or of any renewal
term.
Section 3. Duties; Control and Direction by Board of Directors.
Section 3(a). Duties. Employee shall be employed on a full time basis to
serve as Chairman and Chief Executive Officer of the Company. As such, the
Employee (i) shall assist the Company in the development of all phases of the
Company's operating activities and (ii) shall perform such other appropriate
executive duties as from time to time may be assigned to him by the Board of
Directors of the Company. The Company intend to maintain an office in the
Northern Virginia metropolitan area out of which the Employee shall work. Unless
the Employee otherwise consents, the Employee shall not be required to work out
of any office outside of the Northern Virginia metropolitan area.
Section 3(b). Rules and Regulations. The Employee shall comply with all
Company rules and regulations applicable to the executive employees of the
Company or to its employees generally and with all Company policies established
by the Board of Directors.
Section 4. Extent of Services. During the term of this Agreement, the Employee
shall devote substantially all of his time and his best efforts to the business
of the Company and the furthering of its interests and to the discharge of his
duties, functions and responsibilities hereunder.
<PAGE>
Section 5. Compensation. As compensation during the term of the Employee's
employment hereunder, the Company shall pay to the Employee, and the Employee
shall accept, a salary at the rate of $175,000 per annum, or at such higher rate
as the Compensation Committee of the Board of Directors (the "Compensation
Committee"), after periodic review, at its option and in its sole discretion,
may fix. Any future compensation, including bonuses and stock options, if any,
shall be determined by the Compensation Committee in its sole discretion, and
will to the extent granted, be based on milestones and performance.
Section 6. Fringe Benefits. The Company agrees to maintain a $1,000,000 term
life insurance policy on the life of the Employee to the extent insurable. Such
policy shall be owned by the Company and the Employee, and the Employee shall
designate the beneficiary or beneficiaries under the policy. Furthermore, the
Employee shall have the right to participate, on the same terms and subject to
the same conditions, limitations, restrictions and requirements as the executive
employees of the Company in such medical, health, insurance, pension, profit
sharing, stock option and other plans, if any, as the Company may from time to
time provide for the benefit of its employees and in which executive employees
of the Company are eligible to participate.
Section 7. Expenses. The Employee is authorized to incur reasonable expenses
in performing services for and in promoting the business of the Company,
including expenses for business entertainment and travel. The Company shall
promptly reimburse the Employee for such expenses provided that the Employee
presents an itemized statement of the same together with such supporting
vouchers as the Company may from time to time require and are normally
available.
Section 8. Proprietary Information Agreement. On or prior to the date hereof,
the Employee shall have executed and delivered to the Company a Proprietary
Information Agreement in the form annexed hereto as Exhibit A.
Section 9. Insurance. The Employee agrees to submit to the usual and customary
medical examinations and otherwise cooperate with the Company in its procurement
of such insurance policies on the Employee's life as the Company may desire. If
at any time in the Employee's lifetime the Employee ceases to be employed by the
Company, then the Company shall promptly, if requested by the Employee and
subject to the applicable regulations of the insurance company or companies
concerned, transfer, assign and deliver to the Employee, upon payment of the
then cash surrender value thereof, if any, any and all insurance policies on the
life of the Employee then held and/or owned by the Company. Premiums shall be
adjusted to the date of such transfer, assignment and delivery.
Section 10. Participation in Competing Business. During the period beginning
on the date of this Agreement and ending one year following the expiration of
the term of this Agreement (the "Non-Competition Period"), Employee shall not
without the prior written consent of the Company: (i) call upon any customer or
business prospect of the Company for the purpose of soliciting or selling
similar services in competition with the Company's business (for the purposes of
this section, the term "customer" shall mean any past or present customer with
whom the Company is
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<PAGE>
conducting business or has conducted business within the immediately preceding
one-year period, the term "business prospect" shall mean any past or present
business prospect with respect to the Company's business which the Company is
soliciting or has actively solicited within the immediately preceding one-year
period and the term "Company's business" shall mean the online custom
compilation of music; (ii) call upon any employee of the Company for the
purpose or with the intent of enticing the employee away or out of the employ of
the Company for any reason whatsoever; and (iii) be the owner of more than five
(5%) of the outstanding capital stock of any U.S. publicly traded corporation,
or an officer, director or employee of any corporation which is engaged in the
Company's business within the United States.
Section 11. Termination of the Agreement and of the Employee's Employment
Hereunder.
Section 11(a). Termination for Cause by the Company. The Company shall have
the right to terminate this Agreement and Employee's employment hereunder at any
time for cause (as defined in Section 18 hereunder) upon written notice of such
termination specifying the reasons therefor. In the event of such termination
for cause, the Employee shall be entitled to receive accrued salary and benefits
as of the date of termination.
Section 11(b). Termination Without Cause by the Company or for Good Reason
by the Employee. In the event that:
(1) the Company terminates this Agreement and the Employee's employment
hereunder without cause, that is, for any reason other than "cause" (as defined
in Section 18 hereof), death or incapacity; or
(2) the Employee terminates this Agreement for "Good Reason" (as
defined in Section 18 hereof); then, in either such case: the Employee shall
receive from the Company as of the effective time of such termination: (i) all
Employee's accrued salary and bonuses and the Employee's accrued benefits
through the date of such termination; and (ii) a sum equal in the aggregate to
the full amount, discounted by three percent (3%), of (a) the salary which the
Employee would have received and the benefits which the Employee would have
received, at the average rate or rates in effect during the six-month period
immediately prior to termination and (b) the annual bonus or bonuses which the
Employee would have received, at the rate of the Employee's annual bonus for the
last full fiscal year of the Company ending prior to termination, had, with
respect to both (a) and (b), the Employee's employment under this Agreement
continued for the full initial term or renewal term thereof, as the case may be,
as provided in Section 2 hereof. For purposes of the immediately preceding
sentence, the remaining full initial term or the remaining renewal term, as the
case may be, shall not be less than 12 months. The Employee shall not be
required to mitigate the amount of any payments provided for in this Section
11(b) by seeking other employment or otherwise, and any such employment, if
obtained, shall not be deemed to mitigate such amount nor shall Employee be
obligated to resell to the Company any shares of the Company's stock the
Employee may own.
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<PAGE>
Section 12. Termination by Reason of Death or Incapacity of the Employee.
Section 12(a). This Agreement will terminate upon the Employee's death.
Section 12(b). Incapacity:
(i) In the event Employee, during the term of employment, shall fail
substantially to perform his duties hereunder for a period of six
(6) consecutive months because of illness or other incapacity, he
shall, upon the furnishing by a physician (acceptable to both
Company and Employee or his family) of a written statement that
Employee is totally incapacitated or that it would be unsafe or
unwise for serious health reasons for Employee to perform his
duties hereunder, be deemed to be totally incapacitated. In the
event a physician cannot be located who is acceptable to both
parties, each shall select a physician who shall together select a
third, whose decision shall be final. In the event of a dispute or
inability to select a third, a physician shall be selected by the
American Arbitration Association, and such physician's decision
shall be final.
(ii) If Employee shall be deemed totally incapacitated as set forth
above, the Company, unless this Agreement shall have earlier
terminated, may at its option, by giving the Employee written
notice of its intention to do so, terminate Employee's employment
hereunder effective as of the end of the calendar month in which
such notice is given, and the Company shall pay the Employee prior
to the effective time of such termination a sum equal in the
aggregate to an additional twelve (12) months' base salary, less
any amounts the Employee receives through disability policies
maintained by the Company.
(iii) In the event Employee shall not have been deemed totally
incapacitated as provided above, but shall have failed as a result
of temporary incapacitation to perform his duties hereunder for an
aggregate of more than twelve (12) months in any period of twenty-
four (24) consecutive months, the Company may at its option, by
giving the Employee written notice of its intention to do so,
terminate Employee's employment hereunder effective as of the end
of the calendar month in which such notice is given, and the
Company shall pay the Employee prior to the effective time of such
termination a sum equal in the aggregate to an additional twelve
(12) months' base salary, less any amounts the Employee receives
through disability policies maintained by the Company.
Section 13. Severance. In the event that the Company elects not to renew the
Employee's contract as specified in Section 2 of this Agreement, then the
Employee shall be entitled to receive from the Company at the effective time of
such termination a one year severance equal to the Employee's base salary and
benefits in effect immediately prior to termination.
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<PAGE>
Section 14. Effect of Termination. The provisions of Sections 5 and 7 (as to
amounts owing prior to termination), 8, 10, 11, 12 and 15 through 22 shall
survive the termination of this Agreement.
Section 15. Medical Examination. The Employee shall be required to have a
medical examination annually by a physician acceptable to the Company and at the
Company's cost, the results of which shall be submitted to the Company.
Section 16. Waiver of Breach. Forbearance by a party to require performance of
any provision hereof shall not constitute or be deemed a waiver by such party of
such provision or of the right thereafter to enforce the same, and no waiver by
a party of any breach or default hereunder shall constitute or be deemed a
waiver of any subsequent breach or default, whether of the same or similar
nature or of any other nature, or a waiver of the provision or provisions
breached or with respect to which such default occurred.
Section 17. Notices. All notices and other communications required or permitted
hereunder shall be in writing and may be personally delivered, deposited in the
United States mail (first class postage prepaid, return receipt requested), sent
by nationally recognized overnight courier service, transmitted by telecopier or
telex, or sent by a private messenger or carrier which issues delivery receipts,
addressed to the party for whom they are intended at the following addresses:
Address for the Company: President
The Music Connection Corporation
250 Exchange Place, Suite A
Herndon, Virginia 20170
Address for the Employee: 10607 Creamcup Lane
Great Falls, Virginia 22066
Such notices and other communications shall be deemed effective upon receipt.
The above addresses may be changed by notice given pursuant to this Section 17.
Section 18. Definitions. As used in this Agreement:
Person. The term "person" shall mean and include any individual, partnership,
firm, corporation, trust, unincorporated organization, or joint venture.
Cause. The term "cause" for termination by the Company of this Agreement and of
Employee's employment shall mean (i) such act or omission to act, or series of
acts or omissions to act, or course of conduct of the Employee that would
constitute willful or criminal misconduct or (ii) Employee's breach of Sections
4, 8, or 10 under the Agreement.
-5-
<PAGE>
Good Reason. The term "Good Reason" for termination by the Employee of this
Agreement and of Employee's employment hereunder shall mean a failure by the
Company to comply with any material provision of this Agreement where such
noncompliance has not been cured by the Company within thirty (30) days after
the giving of written notice thereof by the Employee to the Company.
Section 19. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not invalidate or render unenforceable any other
provisions of this Agreement.
Section 20. Binding Effect. The rights and obligations of the Company and the
Employee under this Agreement shall inure to the benefit of and be binding upon
them and their respective successors and assigns. This Agreement shall be
binding upon the Employee and, except that the Employee may not delegate his
obligations hereunder, shall inure to the benefit of the Employee and his heirs,
executors and administrators.
Section 21. Governing Law. This Agreement shall be governed by, and construed
under and in accordance with, the laws of the Commonwealth of Virginia.
Section 22. Entire Agreement. This instrument embodies the entire agreement and
understanding by and between the parties hereto and supersedes all prior
agreements (written or oral), arrangements and discussions between the parties,
with respect to the subject matter hereof. This Agreement may not be changed,
modified or amended in whole or in part except by a writing signed by all the
parties. No waiver of any party's rights hereunder shall be effective or
binding unless such waiver shall be in writing and signed by the party against
whom such waiver is sought to be enforced.
Section 23. Prior Agreement. This Agreement shall supersede in its entirety a
prior Employment Agreement in effect between the Company and Mr. Bernardi which
was signed effective March 20, 1997 which Agreement is null and void and of no
further force or effect. Notwithstanding the foregoing, the Company acknowledges
that it continues to owe Employee for certain accrued salary and bonus payments
for the period commencing July 1, 1996 and ending December 8, 1997.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of this 8th day
of December, 1997
The Music Connection Corporation
By: /s/ Raju Puthukarai
------------------------------
Raju Puthukarai
President
Employee:
By: /s/ Robert P. Bernardi
------------------------------
Robert P. Bernardi
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<PAGE>
Exhibit 10.2
AMENDMENT TO THE DEVARAJAN S. PUTHUKARAI
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
OF DECEMBER 8, 1997
This Amendment is made and entered into as of this 12th day of February,
1999, by and between The Music Connection Corporation, a Delaware corporation
(the "Company") and Devarajan S. Puthukarai (the "Employee") (the "Agreement").
WHEREAS, the Company and the Employee are parties to that certain Amended
and Restated Employment Agreement of December 8, 1997 (the "Employment
Agreement"); and
WHEREAS, the Company and the Employee desire to amend that certain
Employment Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each of the parties hereto,
such parties, intending to be legally bound, covenant and agree as follows:
1. Amendment. The Employment Agreement is amended so as to provide that
----------
the Employee's duties, as defined in Section 3(a) of the Employment Agreement,
shall include employment on a full time basis to serve as President, Co-Chief
Executive Officer and Chief Operating Officer of the Company.
2. Authorizing Actions. Each party agrees promptly to do all things and
--------------------
take all actions as may be necessary or desirable to authorize and facilitate
the performance of this Agreement.
3. Counterparts. This Agreement may be executed in counterparts, each of
-------------
which when so executed and delivered shall constitute an original, but all of
such counterparts taken together shall constitute one and the same instrument.
4 Entire Agreement. This Agreement together with the Employment
-----------------
Agreement represents the entire understanding of the parties pertaining to the
subject matter hereof and supersedes any and all prior agreements, negotiations
and discussions, whether written or oral, between the parties with respect to
the subject matter hereof.
5. Governing Law. The validity of this Agreement, its interpretation and
--------------
construction shall be governed by the laws of the Commonwealth of Virginia,
without regard to principles of conflict of laws.
6. Amendment. This Agreement may modified only by a written instrument
---------
signed by each of the parties hereto.
7. Recitals. The Recitals to this Agreement are incorporated herein and
--------
made a part hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized
representatives as of the date first above written.
THE MUSIC CONNECTION CORPORATION
By: /s/ Robert P. Bernardi
------------------------------------
Robert P. Bernardi
Chairman and Chief Executive Officer
EMPLOYEE
By: /s/ Raju Puthukarai
-------------------------------------
Raju Puthukarai
2
<PAGE>
Devarajan S. Puthukarai
Amended and Restated Employment Agreement
AGREEMENT by and between The Music Connection Corporation, a Delaware
corporation (herein called the "Company") and Devarajan S. Puthukarai (herein
called the "Employee").
WITNESSETH:
The parties entered into Employment Agreements, dated April 14, 1997, which
the parties now desire to amend and restate in its entirety as follows:
For and in consideration of the mutual promises and covenants herein
contained, the parties hereto mutually agree as follows:
Section 1. Employment. The Company hereby employs the Employee for the term of
five (5) years and upon the terms and conditions hereinafter set forth the
Employee hereby accepts such employment and agrees to perform services for the
Company, as provided in this Agreement. In the event that Rho Management
exercises all of its Series B Warrants (other than those that may be assigned to
Employee and/or Robert Bernardi), then the Employee agrees that the term of
employment shall be three (3) years from the date hereof.
Section 2. Term. Subject to the second sentence of Section 1, the Employee's
employment hereunder shall be for a term commencing on December 8, 1997 and
continuing through and including December 7, 2002, renewable automatically from
year to year thereafter unless either the Company or the Employee provides the
other with written notice of non-renewal at least 90 days prior to the
expiration of the initial term or of any renewal term.
Section 3. Duties; Control and Direction by Board of Directors.
Section 3(a). Duties. Employee shall be employed on a full time basis to
serve as President and Chief Operating Officer of the Company. As such, the
Employee (i) shall assist the Company in the development of all phases of the
Company's operating activities and (ii) shall perform such other appropriate
executive duties as from time to time may be assigned to him by the Board of
Directors of the Company. The Company intends to maintain an office in New York
City out of which the Employee shall work. In the event that the Company does
not maintain an office in New York City, the Employee shall work out of his
home. Unless the Employee otherwise consents, the Employee shall not be required
to work out of any office outside of the New York metropolitan area.
Section 3(b). Rules and Regulations. The Employee shall comply with all
Company rules and regulations applicable to the executive employees of the
Company or to its employees generally and with all Company policies established
by the Board of Directors.
<PAGE>
Section 4. Extent of Services. During the term of this Agreement, the Employee
shall devote substantially all of his time and his best efforts to the business
of the Company and the furthering of its interests and to the discharge of his
duties, functions and responsibilities hereunder.
Section 5. Compensation. As compensation during the term of the Employee's
employment hereunder, the Company shall pay to the Employee, and the Employee
shall accept, a salary at the rate of $250,000 per annum, or at such higher rate
as the Compensation Committee of the Board of Directors (the "Compensation
Committee"), after periodic review, at its option and in its sole discretion,
may fix. The Employee will also receive an annual bonus based on the performance
of the Employee. Such bonus will be determined annually by the Compensation
Committee, but shall not be less than $100,000 to be paid pro-rata on a
quarterly basis.
Section 6. Fringe Benefits. The Company agrees to maintain a $1,000,000 term
life insurance policy on the life of the Employee. Such policy shall be owned by
the Company and the Employee, and the Employee shall designate the beneficiary
or beneficiaries under the policy. Furthermore, the Employee shall have the
right to participate, on the same terms and subject to the same conditions,
limitations, restrictions and requirements as the executive employees of the
Company in such medical, health, insurance, pension, profit sharing, stock
option and other plans, if any, as the Company may from time to time provide for
the benefit of its employees and in which executive employees of the Company are
eligible to participate.
Section 7. Expenses. The Employee is authorized to incur reasonable expenses in
performing services for and in promoting the business of the Company, including
expenses for business entertainment and travel. The Company shall promptly
reimburse the Employee for such expenses provided that the Employee presents an
itemized statement of the same together with such supporting vouchers as the
Company may from time to time require and are normally available.
Section 8. Proprietary Information Agreement. On or prior to the date hereof
the Employee shall have executed and delivered to the Company a Proprietary
Information Agreement in the form annexed hereto as Exhibit A.
Section 9. Insurance. The Employee agrees to submit to the usual and customary
medical examinations and otherwise cooperate with the Company in its procurement
of such insurance policies on the Employee's life as the Company may desire. If
at any time in the Employee's lifetime the Employee ceases to be employed by the
Company, then the Company shall promptly, if requested by the Employee and
subject to the applicable regulations of the insurance company or companies
concerned, transfer, assign and deliver to the Employee, upon payment of the
then cash surrender value thereof, if any, any and all insurance policies on the
life of the Employee then held and/or owned by the Company. Premiums shall be
adjusted to the date of such transfer, assignment and delivery.
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<PAGE>
Section 10. Participation in Competing Business. During the period beginning on
the date of this Agreement and ending one year following the expiration of the
term of this Agreement (the "Non-Competition Period"), Employee shall not
without the prior written consent of the Company: (i) call upon any customer or
business prospect of the Company for the purpose of soliciting or selling
similar services in competition with the Company's business (for the purposes of
this section, the term "customer" shall mean any past or present customer with
whom the Company is conducting business or has conducted business within the
immediately preceding one-year period, the term "business prospect" shall mean
any past or present business prospect with respect to the Company's business
which the Company is soliciting or has actively solicited within the immediately
preceding one-year period and the term "Company's business" shall mean the
online custom compilation of music; (ii) call upon any employee of the Company
for the purpose or with the intent of enticing the employee away or out of the
employ of the Company for any reason whatsoever; and (iii) be the owner of more
than five (5%) of the outstanding capital stock of any U.S. publicly traded
corporation, or an officer, director or employee of any corporation which is
engaged in the Company's business within the United States.
Section 11. Termination of the Agreement and of the Employee's Employment
Hereunder.
Section 11(a). Termination for Cause by the Company. The Company shall have
the right to terminate this Agreement and Employee's employment hereunder at any
time for cause (as defined in Section 18 hereunder) upon written notice of such
termination specifying the reasons therefor. In the event of such termination
for cause, the Employee shall be entitled to receive accrued salary and minimum
guaranteed bonus as of the date of termination.
Section 11(b). Termination Without Cause by the Company or for Good Reason
by the Employee. In the event that:
(1) the Company terminates this Agreement and the Employee's employment
hereunder without cause, that is, for any reason other than "cause" (as defined
in Section 18 hereof), death or incapacity; or
(2) the Employee terminates this Agreement for "Good Reason" (as
defined in Section 18 hereof); then, in either such case: the Employee shall
receive from the Company as of the effective time of such termination: (i) all
Employee's accrued salary and bonuses and the Employee's accrued benefits
through the date of such termination; and (ii) a sum equal in the aggregate to
the full amount, discounted by three percent (3%) of (a) the salary which the
Employee would have received and the benefits which the Employee would have
received, at the average rate or rates in effect during the six-month period
immediately prior to termination, and (b) the annual bonus which the Employee
would have received, at the rate of the minimum guaranteed bonus, as provided in
Section 5 hereof. With respect to both (a) and (b), the Employee's employment
under this Agreement continued for the full initial term or renewal term
thereof, as the case may be, as provided in Section 2 hereof. For purposes of
the immediately preceding sentence, the remaining full initial term or the
remaining renewal term, as provided in Section 2 hereof, shall
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<PAGE>
not be less than 12 months. The Employee shall not be required to mitigate the
amount of any payments provided for in this Section 11(b) by seeking other
employment or otherwise, and any such employment, if obtained, shall not be
deemed to mitigate such amount nor shall Employee be obligated to resell to the
Company any shares of the Company's stock the Employee may own.
Section 12. Termination by Reason of Death or Incapacity of the Employee.
Section 12(a). This Agreement will terminate upon the Employee's death.
Section 12(b). Incapacity:
(i) In the event Employee, during the term of employment, shall fail
substantially to perform his duties hereunder for a period of six
(6) consecutive months because of illness or other incapacity, he
shall, upon the furnishing by a physician (acceptable to both
Company and Employee or his family) of a written statement that
Employee is totally incapacitated or that it would be unsafe or
unwise for serious health reasons for Employee to perform his duties
hereunder, be deemed to be totally incapacitated. In the event a
physician cannot be located who is acceptable to both parties, each
shall select a physician who shall together select a third, whose
decision shall be final. In the event of a dispute or inability to
select a third, a physician shall be selected by the American
Arbitration Association, and such physician's decision shall be
final.
(ii) If Employee shall be deemed totally incapacitated as set forth
above, the Company, unless this Agreement shall have earlier
terminated, may at its option, by giving the Employee written notice
of its intention to do so, terminate Employee's employment hereunder
effective as of the end of the calendar month in which such notice
is given, and the Company shall pay the Employee prior to the
effective time of such termination a sum equal in the aggregate to
an additional twelve (12) months' base salary, less any amounts the
Employee receives through disability policies maintained by the
Company.
(iii) In the event Employee shall not have been deemed totally
incapacitated as provided above, but shall have failed as a result
of temporary incapacitation to perform his duties hereunder for an
aggregate of more than twelve (12) months in any period of twenty-
four (24) consecutive months, the Company may at its option, by
giving the Employee written notice of its intention to do so,
terminate Employee's employment hereunder effective as of the end of
the calendar month in which such notice is given, and the Company
shall pay the Employee prior to the effective time of such
termination a sum equal in the aggregate to an additional twelve
(12) months' base salary, less any amounts the Employee receives
through disability policies maintained by the Company.
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<PAGE>
Section 13. Severance. In the event that the Company elects not to renew the
Employee's contract as specified in Section 2 of this Agreement, then the
Employee shall be entitled to receive from the Company at the effective time of
such termination a one year severance equal to the Employee's base salary and
benefits in effect immediately prior to termination.
Section 14. Effect of Termination. The provisions of Sections 5 and 7 (as to
amounts owing prior to termination), 8, 10, 11, 12 and 15 through 22 shall
survive the termination of this Agreement.
Section 15. Medical Examination. The Employee shall be required to have a
medical examination annually by a physician acceptable to the Company and at the
Company's cost the results of which shall be submitted to the Company.
Section 16. Waiver of Breach. Forbearance by a party to require performance of
any provision hereof shall not constitute or be deemed a waiver by such party of
such provision or of the right thereafter to enforce the same, and no waiver by
a party of any breach or default hereunder shall constitute or be deemed a
waiver of any subsequent breach or default, whether of the same or similar
nature or of any other nature, or a waiver of the provision or provisions
breached or with respect to which such default occurred.
Section 17. Notices. All notices and other communications required or permitted
hereunder shall be in writing and may be personally delivered, deposited in the
United States mail (first class postage prepaid, return receipt requested), sent
by nationally recognized overnight courier service, transmitted by telecopier or
telex, or sent by a private messenger or carrier which issues delivery receipts,
addressed to the party for whom they are intended at the following addresses:
Address for the Company: Chairman
The Music Connection Corporation
250 Exchange Place, Suite A
Herndon, Virginia 20170
Address for the Employee: 36 Stoney Brook Rd
Holmdel, New Jersey 07733
Such notices and other communications shall be deemed effective upon receipt.
The above addresses may be changed by notice given pursuant to this Section 17.
Section 18. Definitions. As used in this Agreement:
Person. The term "person" shall mean and include any individual, partnership,
firm, corporation, trust, unincorporated organization, or joint venture.
-5-
<PAGE>
Cause. The term "cause" for termination by the Company of this Agreement and of
Employee's employment shall mean (i) such act or omission to act, or series of
acts or omissions to act, or course of conduct of the Employee that would
constitute willful or criminal misconduct or (ii) Employee's breach of Sections
4, 8 or 10 under the Agreement.
Good Reason. The term "Good Reason" for termination by the Employee of this
Agreement and of Employee's employment hereunder shall mean a failure by the
Company to comply with any material provision of this Agreement where such
noncompliance has not been cured by the Company within thirty (30) days after
the giving of written notice thereof by the Employee to the Company.
Section 19. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not invalidate or render unenforceable any other
provisions of this Agreement.
Section 20. Binding Effect. The rights and obligations of the Company and the
Employee under this Agreement shall inure to the benefit of and be binding upon
them and their respective successors and assigns. This Agreement shall be
binding upon the Employee and except that the Employee may not delegate his
obligations hereunder, shall inure to the benefit of the Employee and his heirs,
executors and administrators.
Section 21. Governing Law. This Agreement shall be governed by, and construed
under and in accordance with, the laws of the Commonwealth of Virginia.
Section 22. Entire Agreement. This instrument embodies the entire agreement and
understanding by and between the parties hereto and supersedes all prior
agreements (written or oral), arrangements and discussions between the parties,
with respect to the subject matter hereof. This Agreement may not be changed,
modified or amended in whole or in part except by a writing signed by all the
parties. No waiver of any party's rights hereunder shall be effective or binding
unless such waiver shall be in writing and signed by the party against whom such
waiver is sought to be enforced.
Section 23. Prior Agreement. This Agreement shall supersede in its entirety a
prior Employment Agreement in effect between the Company and Mr. Puthukarai
which was signed effective April 14, 1997 which Agreement is null and void and
of no further force or effect. Notwithstanding the foregoing, the Company
acknowledges that it continues to owe Employee for certain accrued salary and
bonus payments for the period commencing April 14, 1997 and ending December 8,
1997.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of this 8th day
of December, 1997.
The Music Connection Corporation
By: /s/ Robert Bernardi
---------------------------------
Robert Bernardi
Chairman and CEO
Employee:
By: /s/ Raju Puthukarai
---------------------------------
Raju Puthukarai
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<PAGE>
Exhibit 10.3
THE MUSIC CONNECTION CORPORATION
1430 SPRING HILL ROAD SUITE 200
MCLEAN, VIRGINIA 22102
(703) 821-3966 FAX (703) 790-0370
January 23, 1997
Mr. Irwin H. Steinberg
IHS Corporation
One Lincoln Plaza, Apt. 33D
New York, NY 10023
Dear Mr. Steinberg:
On behalf of the MUSIC CONNECTION CORPORATION (TMC), I am pleased to offer you
a position as Vice Chairman of the Board of Directors of TMC, and a two year
consulting contract with IHS Corporation in accordance with the terms of this
letter.
Beginning with your acceptance of this offer, you agree to serve as Vice
Chairman of the Board of Directors and consultant to TMC with the primary
responsibility for obtaining agreements from major record companies to furnish
their music repertoire to TMC for its newly launched custom music CD service
called "Music Maker". Your services will be non-exclusive to us except that you
will not consult with any competitor of the Company engaged in providing a
custom music CD service on the Web.
For your services as a consultant, you will earn a fee at the rate of $1,200 per
day or part thereof actually spent performing services for TMC. TMC will
guarantee you a minimum of 5 days compensation per calendar month, prorated for
any partial month. The minimum guarantee of $6000 per month will be paid on the
1st of each month and for days in excess of the minimum, the fee will be paid
upon billing. In addition to the foregoing fees, TMC will reimburse you for
reasonable expenses incurred by you in performing the consulting services. Said
reimbursement will be made currently upon submission by you of invoices
supported by such receipts or other supporting documentation as TMC may
reasonably request. The first $6,000.00 payment to be paid on 2/1/97.
1
<PAGE>
Upon your acceptance of this agreement, you will be immediately entitled to
purchase, upon payment of $1,000, a total of 100,000 shares of common stock of
TMC representing approximately 2 percent equity interest in TMC. The stock will
be issued directly to Irwin Steinberg. This 2 percent interest (100,000 shares
of common stock) is based upon the present capitalization of TMC and will be
subject to the same dilution as all other present interests in TMC in connection
with any future private or public offering. It is mutually understood that TMC
is now preparing to raise $5-10 million dollars through a public or private
offering of stock. If you should leave the service of TMC (whether as a
consultant or Vice Chairman) within the first year following your purchase of
said TMC shares, then you shall be obligated to resell all of said shares to TMC
at the same price you paid for them. During the second year, one-half of your
shares will be subject to this restriction. After two years, this restriction
will lapse as to all shares. Your right to purchase TMC shares and your resale
obligations with respect thereto shall apply to the equivalent equity interest
in TMC resulting from any merger, consolidation, reorganization, stock split,
stock dividend, liquidating distribution, or other change in the capitalization.
Any piggy back rights or other special registration rights granted to the other
founders of TMC will also be granted to you.
As a bonus incentive to obtain repertoire from major music labels, TMC is
prepared to issue you 25,000 stock options at fair market price at the time of
grant for each major label for which you successfully complete an agreement for
mutually agreeable (based on quality and quantity of recognizable hit tunes)
music repertoire and issue you 10,000 stock options for each independent label
you successfully complete an agreement. In lieu of the bonus stock options, at
your choice, you may receive a bonus of $ 25,000 and $ 10,000 respectively for
each major and/or independent label which you complete an agreement for music
repertoire. The stock options will be issued pursuant to TMC's employee stock
option plan which is based on 3 year vesting.
In addition to your consulting agreement, you agree to become Vice Chairman of
the Board of Directors of TMC. You will be expected to attend a minimum of 4
Board meetings per year and you will be entitled to receive $ 1,200 per day plus
reasonable expenses. It is planned that Board meetings will be held in either
New York or Washington DC (McLean, Va.). It is planned that TMC will obtain
Director and Officer (D&O) insurance for the directors and officers of TMC.
If these terms are acceptable to you, please countersign this letter and return
it to me, and this will constitute a contract between us.
2
<PAGE>
Very Truly Yours,
The Music Connection Corporation
By /s/ Robert P. Bernardi
---------------------------------
Robert P. Bernardi
Chairman & CEO
Accepted:
By /s/ Irwin H. Steinberg
-----------------------------
Irwin H. Steinberg, President
IHS Corporation
Date: 1/28/97
--------------------------
3
<PAGE>
AMENDMENT TO AGREEMENT OF JANUARY 23, 1997
This AMENDMENT, dated January 1, 1998, amends the existing Agreement dated
January 23, 1997, between THE MUSIC CONNECTION and IRWIN H. STEINBERG,
doing business as (dba) THE I.H.S. CORP. as follows:
1. As of January 1, 1998, compensation by THE MUSIC CONNECTION to IRWIN H.
STEINBERG, dba THE I.H.S. CORP. is to be $9,000.00 per month rather than
the previously agreed-upon amount of $6,000 per month.
2. As of January 1, 1998, IRWIN H. STEINBERG, dba THE I.H.S. CORP. is to
provide to THE MUSIC CONNECTION fifteen (15) days of service per month
rather than the previously agreed-upon five (5) days per month.
3. This Amendment extends the relationship between IRWIN H. STEINBERG, dba THE
I.H.S. CORP. and THE MUSIC CONNECTION from the previously agreed-upon
termination date of January 23, 1999, to a new termination date of January
23, 2000.
ACKNOWLEDGED AND ACCEPTED: ACKNOWLEDGED AND ACCEPTED:
/s/ Robert Bernardi /s/ Irwin H. Steinberg
- ------------------------------- ------------------------------
Robert Bernardi, Chairman Irwin H. Steinberg, dba
THE MUSIC CONNECTION THE I.H.S. CORP.
<PAGE>
Irwin Hugh Steinberg
Dominique Moyse Steinberg
One Lincoln Plaza
New York, NY 10023 (212) 874-7325
August 28, 1998
Mr. Robert Bernardi, Chairman
The Music Connection
1831 Wiehle Avenue
Reston, Virginia 20190
Dear Bob:
I am awaiting the 280,000 warrants which will replace my 280,000 ISO's.
Thus, this letter confirms that (1) the part of my contract with The Music
Connection that relates to stock incentives for each license achieved will cease
with the issuance of an additional 100,000 warrants and (2) an addendum to that
agreement will be forwarded to you bearing my signature.
Given below are the names and warrant amounts for the above-described additional
warrants due under my contract, as agreed, totalling 100,000. Please issue them
as follows:
Issue to: # Warrants Address
- --------- ---------- -------
Dominique M. Steinberg 25,000 One Lincoln Plaza
New York, NY 10023
(212) 874-7325
Beth Steinberg Wickham 25,000 65191 Highland
Bend, Or 97701
(541) 385-5947
Mark L. Steinberg 25,000 1508 Sunnyside
Chicago, Il 60657
(773) 561-9495
Steven J. Steinberg 25,000 943 S. Masselin
Los Angeles, Ca 90036
(213) 933-3426
Sincerely,
/s/ Irwin H. Steinberg
- ----------------------------
Irwin H. Steinberg
IHS/dhm
<PAGE>
Irwin Hugh Steinberg
Dominique Moyse Steinberg
One Lincoln Plaza
New York, NY 10023 (212) 874-7325
August 31, 1998
Mr. Robert Bernardi, Chairman
The Music Connection
1831 Wiehle Avenue, Suite 128
Reston, Virginia 20190
Dear Bob:
You have received my fax of 8/28/98 (a copy of which follows this fax,
pertaining to my agreement of 1/23/97 as amended on 1/1/98.
With the action taken re the 280,000 ISO's and the additional 100,000 warrants
to be issued as described in that fax of 8/28/98, so much of the above-noted
agreement that pertains to the issuance of incentive options is hereby
cancelled.
Would you please acknowledge this by returning a signed copy of this letter to
me.
Sincerely,
/s/ Irwin H. Steinberg
Irwin H. Steinberg
IHD/dhm
ACKNOWLEDGED:
---------------------------------
ROBERT BERNARDI, CHAIRMAN
THE MUSIC CONNECTION
Dated:
---------------------------
<PAGE>
Exhibit 10.4
[LETTERHEAD OF COLUMBIA HOUSE APPEARS HERE]
June 12, 1998
The Music Connection Corporation
250 Exchange Place, Suite A
Herndon, Virginia 20170
Ladies and Gentlemen:
The following, when signed by you and by us, will constitute our agreement
with you:
1. (a) "Custom CD's", below, means compact disc compilations of music
sound recordings produced on a custom basis for individual consumers, each
consisting of selections requested separately by the customer concerned.
(b) During the Term of this agreement (defined below), you will
offer Custom CD's for sale to our customers, through our Columbia House and
Total E websites (the "CHC Websites") and through promotional inserts in our
mailings. All sound recordings which you are authorized to distribute in Custom
CD's (currently, about 40,000 titles) will be available for selection by our
customers for Custom CD's under this agreement. All references below to sales to
our customers will include sales to prospective customers resulting from our
mailings to them and sales by you to customers accessing your websites from the
CHC websites.
(c) We will not authorize any other supplier of Custom CD's to offer
them through the CHC Websites or our mailings during the Term of this agreement,
except a supplier offering a significant repertoire of sound recordings which
you do not make available to our customers under this agreement.
(d) You will not authorize any other music club operation to offer,
sell or distribute Custom CD's during the Term of this agreement without our
consent. If we consent to such an arrangement the profits derived from your
distributions through that club operation will be shared equally by you and us,
in accordance with a formula to be agreed upon in that event.
-1-
<PAGE>
2. (a) You will do the following:
(1) Design and implement an interface and links between the CHC
Websites and your websites offering Custom CD's (the "TMC Websites"), for the
purpose of providing our customers with access to the TMC Websites in order to
select and order Custom CD's, and to enable them to return to the CHC Websites.
Your design and implementation of the interface and links will be subject to our
prior written approval;
(2) Design, produce and supply us with promotional materials
offering Custom CD's to our customers, for insertion in our mailings. The
inserts will be subject to our prior written approval;
(3) Manufacture the Custom CD's to be sold to our customers,
conforming to the same quality standards as the units of the highest quality
which you distribute to other customers;
(4) Process all orders for our customers for Custom CD's
including every aspect of each transaction, including but not limited to
receipt, credit card authorization processing, fulfillment, billing, collection
of payments, tracking, transaction security, and all customer service functions.
(b) You will obtain all licenses or other authorizations and make
all royalty and other payments required in connection with the Custom CD's
distributed under this agreement, including authorizations from and payments to
owners of copyright in the sound recordings and musical compositions reproduced
in them;
(c) You will perform your obligations under this agreement in
consultation with our Chairman or his designees. All sales to our customers
under this agreement will be conducted as transactions between the customers and
you, and we will not be a party to them.
(d) You will not make any use of names or addresses of our customers
or other information about them which you acquire in the course of your
activities under this agreement, except for the limited purpose of servicing
their orders as required by section 2(a)(4). Without limiting the generality of
the preceding sentence, all such customer data will constitute "Confidential
Information" for the purposes of paragraph 8.
-2-
<PAGE>
3. (a) We will display your "Musicmaker" icon on the CHC Websites as a
link to the TMC Websites, and will include promotional inserts supplied by you
in mailings to our customers and prospective customers, at our election, at
least six (6) times per year during the Term. You will reimburse us for our
actual expenses incurred directly in doing so (not including any indirect costs
or allocations of overhead), promptly upon our request.
(b) If the Sony Music or Warner Music organization authorizes us to
use its sound recordings in Custom CD's on an exclusive basis, we will make
those recordings available to you for use in the Custom CD's to be offered to
our customers under this agreement, to the extent to which those authorizations
permit us to do so, and you will make them available for selection by our
customers. You will index, digitize and store those recordings in your database
and supply us with copies of those digitizations in accordance with our
requests.
4. (a) The term of this agreement (the "Term") will be the three (3)
year period beginning September 1, 1998.
(b) If we so request during the last 90 days of the Term, you will
negotiate with us in good faith regarding renewal of this agreement.
(c) We may terminate the Term in our discretion, upon not less than
thirty (30) days' notice to you, if:
(1) We determine, at any time after we have completed the first
six (6) promotional mailings offering Custom CD's under this agreement,
that our financial returns under it do not justify its continuance, in our
discretion; or
(2) if Devarajan S. Puthukarai ceases to function as your
President and Chief Operating Officer (but we will not terminate for this
reason if his successor is appointed in a timely manner and we deem him/her
compatible with our interest in the project contemplated by this agreement,
in our discretion.
5. Net Profits. You will pay us a share of your Net Profits derived from
------------
the sale of Custom CD's to our customers, in accordance with this paragraph 5.
-3-
<PAGE>
(a) Definition. "Net Profits", in this agreement, means all
-----------
revenues derived by you in connection with sales of Custom CD's to our customers
(including shipping and handling charges but excluding transactional taxes),
less only the following amounts:
(1) Your actual expenses incurred directly in performing the
functions referred to in subparagraph 2(a) (not including any indirect
costs or allocations of overhead);
(2) the royalties and any other payments referred to in
subparagraph 2(b);
(3) reimbursements for our expenses actually paid to us under
subparagraph 3(a); and
(4) your actual expenses incurred directly in indexing,
digitizing and storing Sony and Warner recordings under subparagraph 3(b),
and in establishing a separate TMC Website for the purpose of offering them
to our customers only (not including any indirect costs or allocations of
overhead).
(b) Net Profit Share Calculation. The amount of our participation in Net
-----------------------------
profits will be determined as follows:
(1) "Selection", below, means each designation of a sound recording
by our customers for inclusion in Custom CD's they order. (For example: if a
single recording is designated for inclusion on each of four Custom CD's, those
designations will be treated as four Selections.)
(2) You will determine the aggregate number of Selections included
in each of the following categories:
(i) Any recordings you use under licenses entered into in the
future, requiring you to pay the licensors concerned at least fifty percent
(50%) of your profits from the use of the recordings on Custom CD's ("Co-
Ventured Recordings", below);
(ii) the Sony and Warner recordings we make available to you
under subparagraph 3(b) ("Sony/Warner Recordings"); and
(iii) all other recordings ("Other Recordings").
-4-
<PAGE>
(3) The total amount of the Net Profits concerned will be allocated
to three separate funds, in proportion to the allocation of Selections to the
categories listed in section 5(b)(2). (For example: if 90% of the Selections
used in Custom CD's sold to CHC Customers are Other Recordings, 90% of the Net
Profits concerned will be allocated to the Other Recordings fund.)
(4) You will pay us the following percentages of the Net Profits
allocated to those funds:
(i) Twenty-five percent (25%) of the Co-Ventured Sound
Recordings fund;
(ii) sixty-five percent (65%) of the Sony/Warner Recordings
fund; and
(iii) fifty percent (50%) of the Other Recordings fund.
(c) Initial Mailings - Minimum Payments.
------------------------------------
(1) You will make separate computations of the Net Profits due us
from sales of Custom CD's resulting from each of the first six (6) mailings to
our customers under this agreement. Each of those computations will include only
revenues derived and expenses incurred solely in connection with the mailing
concerned (for example, those computations will not reflect any deductions for
website interface and link expenses referred to in section 2(a)(l) or expenses
for digitizing Sony/Warner recordings under subparagraph 3(b).)
(2) If the amount of our Net Profit participation computed under
section 5(c)(l) in connection with any of those six initial mailings is less
than the amount we would charge a third party for a "ride-along" insertion in a
comparable promotional mailing (or the amount fixed by our rate card then in
effect if there is no comparable mailing during the time period concerned), you
will pay us the difference promptly upon our request. If you fail to make any
such payment we will have the right to terminate the Term of this agreement upon
five (5) days' notice, without limiting our other rights.
(d) Your revenues derived from sales of Custom CD's to our customers will
be segregated and will not be commingled with your other funds, but will held in
trust in a separate account or accounts designated as Columbia House trust
accounts until disbursed in the following order of priority:
-5-
<PAGE>
(1) To us, in payment of any expense reimbursements due us under
subparagraph 3(a) and not previously paid to us.
(2) To you, to the extent of the direct expenses deductible in
computing Net Profits under subparagraph 5(a).
(3) In ratable shares paid simultaneously as follows: (i) To us in
payment of our participation in Net Profits under this paragraph 5; and
(ii) to you as your property to the extent of the balance of those Net
Profits.
(e) You will compute and pay all amounts due us, accompanied by
accounting statements reflecting sales, expenses, and Net Profits, within sixty
(60) days after the end of each calendar quarter for the preceding calendar
quarter. Each of us will furnish the other with documentation of all expenses
deducted in computing Net Profits or to be reimbursed.
(f) We may, at our expense, examine your books and records relating to
the sales of Custom CD's and the computation of Net Profits under this
agreement, during your regular business hours and at the place where you
regularly keep them, for the purpose of verifying the accuracy of the statements
furnished to us under subparagraph 5(e). You will keep an accurate and auditable
account of your sales, expenses and payments, and Net Profits under this
agreement and will retain all records concerning those sales, expenses and
payments, and Net Profits.
7. As additional consideration for our execution of this agreement, you
are entering into a Warrant Agreement with us granting us warrants to purchase
shares of your capital stock on the terms prescribed in the Warrant Agreement.
8. (a) "Confidential Information", below, means: (1) All information
regarding either party or its business, acquired by the other party in
connection with this agreement or any activities conducted under it; and (2) the
terms of this agreement.
(b) Neither party will disclose to any other person any Confidential
Information of the other party, except to its employees and advisors with a need
to know it
-6-
<PAGE>
in the course of their duties or for the purposes of performing the obligations
of the party concerned under this agreement. "Confidential Information" shall
not include information already lawfully known to or independently developed by
the receiving party, disclosed in published materials, generally known to the
public, lawfully obtained from any third party, or required to be disclosed by
law. If any such disclosure may be required by law, the party from whom it is
sought will notify the other party promptly and will cooperate with the latter
as it reasonably requests to oppose the requirement. The parties acknowledge
that money damages would not constitute adequate compensation for a breach of
this paragraph; either party will be entitled to injunctive relief to restrain
any such threatened breach in addition to any other relief to which it may be
entitled.
9. You will at all times indemnify and hold us harmless from and against
any and all claims, damages, liabilities, cost and expenses, including legal
expenses and reasonable counsel fees, arising out of any violation of law or the
rights of any person by reason of anything contained in the Custom CD's sold to
our customers or their packaging, advertising, or marketing, or otherwise
arising out of or related to your activities under this agreement.
10. All notices under this agreement will be in writing and given by
courier or other personal delivery or registered or certified mail at the
appropriate address indicated above or at a substitute address designated by
notice by the party concerned. Each notice to us will be addressed for the
attention of our Senior Vice President, Electronic Media, and a copy of each
notice sent to us will be sent simultaneously to our Senior Vice President and
General Counsel. Notices shall be deemed given when delivered to the courier,
personally delivered, or mailed, except that a notice of change of address will
be effective only from the date of its receipt.
11. The parties are independent contractors. Neither party will be
authorized or purport to act as an agent of the other, or to make any
commitments on behalf of the other.
12. Neither party will mention the other in advertising or promotional
literature, or issue or authorize any publicity about the other party or the
subject matter of
-7-
<PAGE>
this agreement, without the prior written approval of the other party in each
instance.
13. (a) This agreement contains the entire understanding of the parties
relating to its subject matter and cannot be changed orally. A waiver of any
provision of this agreement in any instance will not be deemed to waive it for
the future.
(b) THIS AGREEMENT HAS BEEN ENTERED INTO IN THE STATE OF NEW YORK,
AND ITS VALIDITY, INTERPRETATION AND LEGAL EFFECT WILL BE GOVERNED BY THE LAWS
OF THAT STATE APPLICABLE TO CONTRACTS ENTERED INTO AND ENTIRELY PERFORMED THERE.
THE NEW YORK COURTS (STATE AND FEDERAL), ONLY, WILL HAVE JURISDICTION OF ANY
CONTROVERSIES REGARDING THIS AGREEMENT; ANY ACTION OR OTHER PROCEEDING WHICH
INVOLVES SUCH A CONTROVERSY WILL BE BROUGHT IN THOSE COURTS, IN NEW YORK COUNTY,
AND NOT ELSEWHERE. ANY PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY, AMONG OTHER
METHODS, BE SERVED BY DELIVERING IT OR MAILING IT, BY REGISTERED OR CERTIFIED
MAIL, DIRECTED TO THE APPLICABLE ADDRESS ABOVE OR SUCH OTHER ADDRESS AS THE
PARTY CONCERNED MAY DESIGNATE PURSUANT TO PARAGRAPH 16. ANY SUCH DELIVERY OR
MAIL SERVICE WILL HAVE THE SAME EFFECT AS PERSONAL SERVICE WITHIN THE STATE OF
NEW YORK.
(c) The invalidity or unenforceability of any provision of this
agreement shall in no way affect the validity or enforceability of any other
provision of this agreement.
(d) Neither party shall be entitled to recover damages or to
terminate the Term by reason of any breach of this agreement by the other party,
unless the latter party has failed to remedy the breach concerned within twenty-
one (21) days after notice.
Very truly yours,
THE COLUMBIA HOUSE COMPANY
By: /s/ The Columbia House Company
-------------------------------
Sr. V.P.
AGREED:
THE MUSIC CONNECTION CORPORATION
By: /s/ Devarajan Puthukarai
---------------------------------
President & COO
-8-
<PAGE>
Exhibit 10.6
MARKETING AGREEMENT
-------------------
AGREEMENT made this 30th day of September, 1998 between THE MUSIC
CONNECTION CORPORATION for its "Music Maker" custom music CD compilation
service, having an office at 1831 Wiehe Avenue, Suite 128, Reston, Virginia
20190 (herein called "Music") and Platinum Entertainment, Inc., 2001 Butterfield
Road - Suite 1400, Downers Grove, IL 60515 (herein called "Platinum").
Music and Platinum desire to engage in certain joint marketing activities
in connection with the exploitation of sound recordings owned or controlled by
Platinum by means of custom compilation compact discs produced by Music and the
electronic transmission by Music of audio files featuring such sound recordings
by means of the Internet to personal computers for individual use. The parties
hereby agree as follows:
1. Definitions.
-----------
(a) "Custom CDs" shall mean compilation compact discs produced on a
custom basis for individual consumers, each consisting of Selections requested
separately by the customer concerned, from which sounds, without visual images,
can be perceived, reproduced or otherwise communicated, and shall include the
object in which sounds are so fixed.
(b) "Audio File" shall mean a Master in the form of a digitized computer
file capable of being transmitted electronically from Music's Site (as
hereinafter defined) as separately requested on a custom basis to a personal
computer for playback or reproduction on a CD-R.
(c) "Masters" shall mean the sound recordings of individual musical
compositions that comprise the entire repertoire of sound recordings that are
owned or controlled by Platinum or its subsidiaries, and with respect to which
Platinum presently has the right to license to Music during the Term the rights
to manufacture, advertise, market, distribute, and sell Custom CDs embodying
such basic source material coupled with sound recordings from other sources.
"Masters" shall also mean all other sound recordings, which Platinum acquires or
clears licensing rights with respect to after the commencement of and during the
Term.
(d) "Territory" shall mean the world.
(e) "Platinum's Identity" shall mean Platinum's tradenames, trademarks,
trade dress, and other elements of Platinum's trade identity, in the approved
form and style to be furnished by Platinum.
(f) "Selection" shall mean an individual sound recording as designated
by Music to its customers, whether sold for inclusion on a Custom CD or as an
Audio File.
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
2. Business Arrangements
---------------------
(a) During the term of this Agreement, Music will offer Custom CDs,
featuring Masters and Audio Files, for sale to its customers from its Internet
computer service presently known as MUSICMAKER, having the URL of
http://www.musicmaker.com (the "Music Site").
(b) Music and Platinum will design and implement an interface and links
between the Music Site and Platinum's Internet computer service having the URL
of http://www.platinumcd.com (the "Platinum Site") for the purpose of providing
visitors to the Platinum Site access to the Music Site in order to select and
order Custom CDs and Audio Files, and to enable them to return to the Platinum
Site. The design and implementation of the interface and links will be mutually
approved by Music and Platinum.
(c) Music will manufacture Custom CDs and transmit Audio Files sold to
customers accessing the Music Site from the Platinum Site ("Platinum
Customers"), conforming to the same quality standards as the units or music
files of the highest quality that Music distributes to other customers. Music
will also process all orders for Custom CDs and Audio Files placed by Platinum
Customers, including every aspect of each transaction, including, but not
limited to, receipt, credit card authorization processing, fulfillment, billing,
collection of payments, tracking, transaction security, and all customer service
functions. Music will also obtain all licenses or other authorization and make
all royalty and other payments required in connection with the Custom CDs and
Audio Files distributed under this Agreement, including authorizations from and
payments to owners of copyright in the sound recordings and musical compositions
reproduced in them. All sales to Platinum Customers under this Agreement will be
conducted as transactions between the Platinum Customers and Music, and Platinum
shall not be a party to them. Music will not make any use of names or addresses
of Platinum Customers or other information about them that Music acquires in the
course of its activities under this Agreement, except for the limited purpose of
servicing their orders as required hereunder. Music agrees that all information
concerning customers of Music who purchase Selections embodying Masters, whether
compiled in Custom CDs or as Audio Files, shall be available to Platinum at its
request without cost to Platinum for use by Platinum at its election, subject
only to any restrictions imposed on information concerning customer orders
obtained from Columbia House in existence as of the date of this Agreement.
(d) Platinum will display Music's MUSICMAKER icon on the Platinum Site
as a link to the Music Site, and will otherwise promote the availability of
Custom CDs and Audio Files from the
2
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
Music Site by means mutually agreeable to Music and Platinum. Music will display
Platinum's icon on the Music Site as a link to the Platinum Site. During the
period the Masters are licensed by Platinum to Music on an exclusive basis,
Platinum will not authorize any other supplier of Custom CDs to offer them
through the Platinum Site.
(e) During the term of this Agreement, Platinum agrees to properly
maintain the Platinum Site and all links to the Music Site, and Music agrees to
properly maintain the Music Site and all links to the Platinum Site, so as to
fulfill the purposes and intent of this Agreement.
3. Term of Agreement
-----------------
(a) The initial term of the Agreement shall mean a period of five (5)
years commencing on the date hereof (the "Initial Term"). The parties hereto
agree that the Initial Term of the Agreement shall be automatically extended for
additional consecutive periods of one (1) year each unless either party elects
to terminate the Agreement, which election may be exercised by either party by
written notice to the other of its election to do so delivered at any time prior
to the expiration of the Initial Term or any option term.
(b) Notwithstanding the foregoing, the term of this Agreement shall be
co-terminous with the term of the Licensing Agreement between Platinum and Music
dated as of September 30, 1998 (the "Licensing Agreement") and shall terminate
automatically and without further notice upon the date of the termination of the
Licensing Agreement.
(c) No breach of this Agreement by either party shall be deemed material
unless the party claiming a breach serves written notice thereof on the other
party, specifying the nature thereof, and the party receiving notice fails to
cure such breach, if any, within thirty (30) days after receipt thereof.
4. Payments to Platinum
--------------------
Music will pay to Platinum a share of its proceeds derived from the sale of
Custom CDs and Audio Files in accordance with this Paragraph 4.
(a) Music shall pay the following amounts of Net Profits to Platinum:
(i) Music shall pay to Platinum fifty percent (50%) of the Net
Profits ("Exclusive Base Net Profit Share") realized
3
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
from all orders received by Music from all customers other than those customers
identified in Paragraph 4(a) (iii) for Selections embodying Masters licensed to
Music by Platinum on an exclusive basis.
(ii) Music shall pay to Platinum twenty percent (20%) of the Net
Profits ("Nonexclusive Base Net Profit Share") realized from all orders received
by Music from all customers other than those customers identified in Paragraph
4(a)(iii) for Selections embodying Masters licensed to Music by Platinum on a
non-exclusive basis.
(iii) Music shall pay to Platinum sixty six and two-thirds percent (66
2/3%) of the Exclusive Base Net Profit Share or Nonexclusive Base Net Profit
Share, as applicable, for all Net Profits realized from all orders received by
Music for Selections embodying Masters from customers electronically linked or
referred to Music under a profit-sharing joint marketing agreement with Columbia
House, N2K, or other profit-sharing joint marketing partner of Music receiving
equivalent consideration from Music as that received by Columbia House or N2K
(individually and collectively "Marketing Partner"), and from all orders
generated through print or direct mail promotions by such Marketing Partners to
their customers.
(b) "Net Profits", for purposes of this Agreement, shall mean all revenue
derived by Music in connection with the sale of Masters on Custom CDs or as
Audio Files (excluding shipping and handling charges and transactional taxes),
less only the following:
(i) royalty obligations to parties other than Music for master use fees
and mechanical licenses;
(ii) a $.10 per Master charge for orders originating from print
advertising and direct mail; and
(iii) the proportionate cost of (A) the actual per unit manufacturing
cost of a Custom CD, including the disc, jewel case, tray card, cover insert,
and thermal printing on the disc, tray card, and cover insert ("Manufacturing
Costs"), and (B) Music's out-of-pocket costs associated with on-line hosting
of the Music Site, management of the Music Site, and on-line storage of files
("Site Costs"). The amount of Manufacturing Costs and Site Costs charged to
determine Net Profits shall be determined by multiplying the total of all such
costs for the applicable accounting period by a fraction, the numerator of which
shall be the number of Selections embodying Masters sold during the applicable
accounting period and the denominator of which shall be the total number of
Selections sold during the applicable
4
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
accounting period;
provided, however, that (A) in no event shall the total costs described above in
Paragraphs 4 (b) (i), (ii), and (iii) for a Custom CD for purposes of
determining Net Profits exceed the amount of $4.00; and (B) in no event shall
Music's indirect costs or general overhead, or the amount of profits payable to
any third party, be included in the calculation of Net Profits.
(c) Music shall pay to Platinum twenty percent (20%) of all proceeds net
of shipping and handling fees realized by Music from all orders for Selections
embodying sound recordings other than Masters from customers electronically
linked or referred to Music by Platinum or any affiliate of Platinum.
5. Statements
----------
During the Term, Music shall quarterly compute all amounts due pursuant
to Paragraphs 4(a) and 4(c) hereunder, and send a separate statement thereof for
each to Platinum within thirty (30) days following the end of each calendar
quarter period. With respect to the amounts due pursuant to Paragraph 4 (a),
each statement shall show the number of units of Selections embodying Masters
(on a Master-by-Master basis) sold, the price at which each Selection was
sold, and all costs applied to determine Net Profits, identified by category and
amount. Together with each such statement, Music shall supply Platinum with
copies of all invoices supporting all costs applied to determine Net Profits.
With respect to the amounts due pursuant to Paragraph 4(c), each statement shall
show the number of units of Selections sold and the price at which each
Selection was sold. Each statement prepared pursuant to Paragraphs 4(a) and 4(c)
shall be accompanied with the payments shown to be due thereon. Music may
establish reasonable reserves for unpaid or returned records. Such reserves
shall become payable by the payment date of the accounting period immediately
following the accounting period in which such reserves were established. Music
shall keep an accurate and auditable account of its sales, expenses, payments,
and Net Sales under this Agreement, and will retain all records concerning those
sales, expenses, payments, and Net Sales for the period of Platinum's right to
audit such records. Platinum shall have the right, upon thirty (30) days prior
notice in writing, to audit and copy Music's books and records pertaining to
Music's statements hereunder and the computation of Net Profits and other
payments payable to Platinum once each calendar year during the Term and once
within three (3) years of the end of the Term. Any such audit may be conducted
only once with respect to any particular statement, shall be made during regular
business hours where Music's books and records are regularly maintained, and
shall be conducted on
5
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
Platinum's behalf at its expense by a Certified Public Accountant familiar with
record industry accounting practices. Any payment not made when due shall bear
simple interest at an annual rate equivalent to the Prime Rate of interest
reported from time to time by the Wall Street Journal, plus Two Percent (2%),
for the period commencing when the payment should have originally been made to
Platinum and ending on the date of payment in full. All royalty statements and
accounts shall be binding upon Platinum unless Platinum specifically objects to
such statement or accounts in writing within thirty-six (36) months from the
date rendered. Platinum will be foreclosed from maintaining any action with
respect to any statement or accounting unless such action is commenced against
Music in a court of competent jurisdiction within forty-eight (48) months after
such statement or account is rendered.
6. Force Majeure
-------------
In the event that Music's manufacture and sale of Custom CDs is
interrupted for any cause beyond the reasonable control of the Music, such as
war, fire, earthquake, strike, civil commotion, or acts of any government, then
Music, at its option, may extend the Term for a period equal to the length of
the interruption, not, however, to exceed six (6) months.
7. General Warranties and Representations
--------------------------------------
(a) Platinum warrants and represents it has the right to enter this
Agreement and to perform all of the obligations to be performed by it hereunder.
(b) Music warrants and represents it has the right to enter this
agreement and to perform all of the obligations to be performed by it hereunder.
8. Indemnities
-----------
(a) Platinum indemnifies and agrees to hold Music harmless from and
against any damages awarded in any judgment entered against Music, together with
the reasonable costs, expenses, and reasonable counsel fees of Music, by reason
of any breach of the warranties above set forth by Platinum or by reason of any
claim or claims made by any person or persons arising from the act or ommission
of Platinum with respect to the manufacture, promotion, distribution,
advertising, and sale of Records hereunder or any failure of Platinum to perform
its obligations hereunder (except to the extent such damages resulted from
Platinum's reliance upon information supplied by Music). Music shall promptly
notify Platinum in writing of any such claim or litigation. Platinum may,
6
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
at its option, assume the handling, settlement, or defense of any such claim or
litigation, in which event the obligation of Platinum shall be limited to
holding Music harmless from and against any final judgment paid on account
thereof or any settlement effected by Platinum.
(b) Music indemnifies and agrees to hold Platinum harmless from and
against any damages awarded in any judgment entered against Platinum, together
with the reasonable costs, expenses, and reasonable counsel fees of Platinum, by
reason of any breach of the warranties above set forth by Music or by reason of
any claim or claims made by any person or persons arising from the act or
ommission of Music with respect to the manufacture, promotion, distribution,
advertising, and sale of Records hereunder or any failure of Music to perform
its obligations hereunder (except to the extent such damages resulted from
Music's reliance upon information supplied by Platinum). Platinum shall promptly
notify Music in writing of any such claim or litigation. Music may, at its
option, assume the handling, settlement, or defense of any such claim or
litigation, in which event the obligation of Music shall be limited to holding
Platinum harmless from and against any final judgment paid on account thereof or
any settlement effected by Music.
9. Notices
-------
All notices required to be given to a party hereto must be sent to the
address for the party first mentioned herein or to such new address, if changed,
as described below, in order to be effective. All payments and statements will
be sent to Platinum at Platinum's address mentioned herein. Each party may
change its respective address hereunder by notice in writing to the other. All
notices shall be served by depositing them addressed as aforesaid, postage
prepaid, in the mail, by delivering them by facsimile (with confirmation of
receipt) or by delivering them, charges prepaid. Any notices served by mail
shall be certified or registered with return receipt requested. The date of
mailing of any such notice, the date of delivery thereof, or the date of sending
by facsimile of any such notice shall constitute the date of service.
10. Assignment
----------
This Agreement is personal to the parties and may not be assigned
without the consent of the other party, except that Music and Platinum may
assign this Agreement, in whole or in part, to its parent, to any subsidiary
corporations of such party, to any affiliated company, or to any company by
which it is acquired, and such rights may be assigned by an assignee thereof to
a similar
7
<PAGE>
Musicmaker -w- Platinum
September 30, 1998
assignee, provided that such assignment shall not release or alter any
liability, undertaking, or obligation of either party hereunder. This Agreement
and all rights and obligations hereunder shall be binding upon the successors,
assigns, and legal representatives of both parties.
11. Merger
------
This Agreement sets forth the entire Agreement between the parties as
to the subject matter hereof, and neither party shall be bound by any amendment
or modification hereto except as may be set forth subsequent to the date hereof
in writing signed by a properly authorized representative of both parties.
12. Governing Law & Jurisdiction
----------------------------
This Agreement shall be governed by and be construed in accordance with
the internal law of the State of Illinois.
13. Confidentiality
---------------
The terms and conditions hereof are confidential to the parties hereto. The
parties may disclose this Agreement to their employees, officers, directors,
attorneys, and accountants, all of whom shall be bound by the aforesaid
confidentiality requirement.
The parties may also disclose this Agreement if so required by a governmental
agency or by a court of competent jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this agreement as of the
date set forth above.
THE MUSIC CONNECTION CORPORATION
By: /s/ Robert Bernardi
------------------------------------------
An Authorized Signer
PLATINUM ENTERTAINMENT, INC.
By: /s/ Platinum Entertainment, Inc.
------------------------------------------
An Authorized Signer
Federal ID No. 36-38032328
------------------------------
8
<PAGE>
Exhibit 10.7
MEMORANDUM OF UNDERSTANDING
---------------------------
Agreement dated 1/18/99 by and between The Music Connection Corporation, 1831
Wiehle Avenue, Suite 128, Reston, Virginia 20190. A De1aware corporation
organized under the laws of United States of America (herein called TMC) and
Audio Book Club Inc., an organization involved in the direct to consumer
marketing of Audio Books, with offices at 20 Community Place, Morristown, New
Jersey 07960 (herein called ABC) to enter into an exclusive marketing
arrangement to promote and market TMC's Custom CD's and Digital Downloading
products to ABC's customers through ABC's websites and print insert promotions
in the catalog mailed to its customers under the following terms and conditions:
1) PRODUCTS: All music and music related video repertoire under license, with
---------
rights cleared by repertoire owners available for promotion to ABC's
customers for TMC's Custom CD's, Digital Downloading, Digital Video Disc
and Digital Audio Disc products.
2) TERRITORY: Worldwide on ABC's websites subject to TMC's licensing rights
----------
and USA for insert promotions in ABC's customer catalogs.
3) EXCLUSIVITY: ABC will not authorize any other supplier to offer any
------------
products covered under this agreement as specified in paragraph 1 above
through ABC's websites or through any print promotion mailings to its
customers during the Term of this agreement.
4) TERMS: The term of this agreement (the Term) will be the three (3) year
------
period beginning January 20, 1999 with automatic three (3) year renewal
terms thereafter under terms no less favorable than the terms herein. Both
parties agree to negotiate in good faith during the last 90 days of the
initial Term or any Renewal Term for the continuation of this agreement.
ABC may terminate this Agreement with 30 days written notice at anytime
alter six (6) months from the date of this Agreement.
5) ADVERTISING AND PROMOTION: ABC will display TMC's "musicmaker" icon on its
--------------------------
websites as a link to TMC's websites, and will include inserts supplied by
TMC in mailings to its customers at least six (6) times per year during the
Term. ABC, in addition to the ongoing link to TMC's websites, agrees to
feature two (2) special event oriented promotions per year during the Term
(a) Christmas promotion and (b) Valentine Day promotion or other on its
websites. TMC will supply and up front the costs of printing and inserting
the inserts for inclusion in the six (6) mailings per year to ABC customers
and ABC agrees that it will not charge TMC any rental fees or insertion
fees for these insert promotions.
6) NET PROFIT FORMULA: For purposes of calculation of the Net Profits to be
-------------------
shared by TMC and ABC on all orders from ABC customers, the formula will be
as follows: Net Revenue received from the sale of a Custom CD or Digital
Download of a given single music recording excluding any shipping and
handling charges and transactional taxes, less direct out of pocket costs
incurred for 1) manufacturing costs including the CD-R, the jewel case, the
jay cards, thermal printing on the CD-R, printing of the jay cards 2)
direct labor costs in picking and packing 3) direct customer service
charges incurred servicing ABC customers 4) credit card fees 5) all
<PAGE>
third party royalty obligations including royalty due to the artists, the
record labels, music publisher copyright fees and any other royalties due
to the holders of rights to the music sound recording 6) the printing costs
of the inserts included in the mailings to ABC customers 7) the software
licensing fee for digital downloading. TMC agrees that all costs will be
direct out of pocket costs and will be substantiated and will not include
any indirect costs or allocation of overhead.
7) PROFIT SHARING: TMC and ABC will share the Net Profits as follows on two
---------------
distinct repertoire groups as follows:
(a) on "Co-Ventured Recordings", where TMC has agreements with owners of
music content to share 50% of the profits in addition to the royalty,
ABC will receive twenty-five percent (25%) of the Net Profits from all
orders from ABC customers and
(b) on all "Other Recordings", where TMC has regular licensing agreements
with owners of music content, ABC will receive fifty percent (50%) of
the Net Profits from all orders from ABC customers.
8) ACCOUNTING: TMC will compute and pay all amounts due ABC, accompanied by
-----------
accounting statement reflecting sales, expenses, and Net Profits, within
thirty (30) days after the end of each calendar month for the preceding
calendar month. TMC will provide separate accounting for orders received
from ABC's websites and from its insert promotional mailings to its
customers.
9) CONFIDENTIAL INFORMATION: Neither party will use for it's own purposes or
-------------------------
disclose to any other person any confidential information of the other
party including the names and addresses of any of its customers except to
its employees with a need to know it in the course of their duties or for
the purpose of performing the obligations of the party concerned under this
agreement.
10) INDEPENDENT CONTRACTORS: The parties are independent contractors. Neither
------------------------
party will be authorized or purport to act as an agent of the other, or to
make any commitments on behalf of the other.
11) GOVERNING LAWS: This agreement has been entered into in the State of
---------------
Virginia, and its validity, interpretation and legal effect will be
governed by the laws of that state.
This agreement contains the entire understanding of the parties relating to its
subject matter and cannot be changed orally.
Very truly yours,
THE MUSIC CONNECTION CORPORATION
By: /s/ Devarajan Puthukarai
-----------------------------
Title: President
--------------------------
Date: 1/18/99
--------------------------
AGREED:
AUDIO BOOK CLUB INC.
By: /s/ Audio Book Club Inc.
-----------------------------
Title: Co-CEO
--------------------------
Date: 1/19/99
--------------------------
<PAGE>
Exhibit 10.8
OFFICE/WAREHOUSE/SHOWROOM LEASE
BASIC LEASE INFORMATION
- --------------------------------------------------------------------------------
Date of Lease: January 15, 1998
Landlord: Century Properties Fund XX
Tenant: The Music Connection Corporation
Name and Location of Building: Linpro Park I
[Paragraph 1(a)] 1831 Wiehle Avenue
Reston, Virginia
Net Rentable Area of Premises: 4,523 sq. ft.
[Paragraph 1(b)]
Base Year or Estimated Operating Expenses Calendar Year 1998
(Circle one):
[Paragraph 1(c) or 1(d)2]
Tenant's percentage Share: 6.0153%
[Paragraph 1(i)]
Net Rentable Area of Building: 75,191 sq. ft.
[Paragraph 1(i)]
Term Commencement: April 1, 1998
[Paragraph 3]
Term Expiration: February 28, 2005
[Paragraph 3]
Minimum Rent:* $22.50 per sq. ft.
[Paragraph 4(a)] (See Addendum One)
Date of First CPI Rental Adjustment: N/A
[Paragraph 4(b)]
Permitted Use: General Office Use
[Paragraph 9]
Security Deposit: $8,480.63 Security Deposit
[Paragraph 31] $8,480.63 Advance Rent Deposit
---------- for First Month's Rent
$16,961.26 Total Cash Deposit
==========
$50,000.00 Letter of Credit
(See Addendum One)
Tenant's Address for Notices: See Addendum One
[Paragraph 36]
Landlord's Address for Notices: See Addendum One
[Paragraph 36]
Exhibits:
Exhibit A - Legal Description of Building
Exhibit B - Floor Plan of Premises
Exhibit C - Rules and Regulations
Exhibit D - Guaranty
Additional Provisions: See Addendum One
[Paragraph 45]
**[Usufruct]
[Paragraph 46]
*Plus applicable sales taxes (for use in Florida
and Arizona only)
**For use in Georgia only.
- --------------------------------------------------------------------------------
<PAGE>
The provisions of the Lease identified above in brackets are those
provisions where reference to particular Base Lease Information appear. Each
reference to an item of Basic Lease Information, wherever it may appear in the
Lease, shall incorporate the applicable Basic Lease Information set forth above.
In the event of any conflict between any Basic Lease Information and the Lease,
the latter shall control.
TENANT LANDLORD
By: /s/ Robert Bernardi CENTURY PROPERTIES FUND XX,
------------------------------ a California limited partnership
owner of Linpro Park I
By:
------------------------------ By: Metric Management, Inc.,
a Delaware Corporation,
* its agent
- ---------------------------------
Witness By: /s/ Richard A. Faber
------------------------------
Richard A. Faber
* Vice President
- ---------------------------------
Witness *
---------------------------------
Witness
Acknowledgment**
*
---------------------------------
Seal*** Witness
Ateam/Linpro/basic4.doc
*For use in Florida only
**For use in Washington, Arizona and North and South Carolina.
***For use in Georgia only.
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions ........................................................... 1
2. Premises .............................................................. 2
3. Term .................................................................. 2
4. Rent .................................................................. 2
5, Taxes and Assessments ................................................. 3
6. Operating Expenses .................................................... 3
7. Estimated Payments .................................................... 3
8. Common Areas .......................................................... 4
9. Use ................................................................... 4
10. Utilities ............................................................. 5
11. Alterations, Fixtures, and Improvements ............................... 5
12. Liens ................................................................. 5
13. Repair and Maintenance of Premises .................................... 5
14. Damage and Destruction ................................................ 6
15. Indemnification ....................................................... 6
16. Insurance ............................................................. 6
17. Condemnation .......................................................... 7
18. Compliance with Legal Requirements .................................... 8
19. Assignment and Subletting ............................................. 8
20. Rules and Regulations ................................................. 8
21. Landlord's Access ..................................................... 8
22. Default ............................................................... 8
23. Landlord's Right to Cure Default ...................................... 10
24. Attorney's Fees ....................................................... 10
25. Subordination ......................................................... 10
26. No Merger ............................................................. 11
27. Sale by Landlord ...................................................... 11
28. Estoppel Certificate .................................................. 11
29. Holdover Tenancy ...................................................... 11
30. Parking ............................................................... 11
31. Security Deposit ...................................................... 11
32. No Partnership ........................................................ 11
33. Recording ............................................................. 11
34. Modification and Financing Conditions ................................. 11
35. Waiver ................................................................ 12
36. Notices and Consents .................................................. 12
37. Complete Agreement .................................................... 12
38. Corporate Authority ................................................... 12
39. Limits to Tenant's Remedy ............................................. 12
40. Brokers ............................................................... 12
41. No Light and Air Easement ............................................. 12
42. Miscellaneous ......................................................... 12
43. Signs ................................................................. 12
44. Surrender of Premises ................................................. 13
45. Additional Provisions ................................................. 13
*[46 Usufruct19]
*/For use in Georgia only.
<PAGE>
OFFICE/WAREHOUSE/SHOWROOM LEASE
THIS LEASE, DATED January 15, 1998, for purposes of reference only, is
made and entered into by and between Century Properties Fund XX ("Landlord")
and The Music Connection Corporation ("Tenant").
WITNESSETH:
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord
the premises described in paragraph 1 (b) below for the term and subject to the
terms, covenants, agreements and conditions hereinafter set forth, to each and
all of which Landlord and Tenant hereby mutually agree.
1. Definitions. Unless the context otherwise specified or requires, the
following terms shall have the meanings herein specified:
(a) The term "Building" shall mean the parcel of real property described on
Exhibit A attached hereto, situated in the location and commonly known by the
name specified in the Basic Lease Information, which name the Landlord may
change at any time, and all other improvements on or appurtenances to such
parcel.
(b) The term "premises" shall mean that portion of a floor of the Building
outlined in red on the diagrams attached hereto as Exhibit B. The premises
contain the net rentable area specified in the Basic Lease Information.
(c) The term "Base Year" shall mean the calendar year specified in the
Basic Lease Information as the Base Year.
(d) The term Base Operating Expenses shall mean (i) The operating expenses
paid or incurred by Landlord in the Base Year as specified in the Basic Lease
Information or (ii) the amount per square foot specified in the Basic Lease
Information as "Estimated Operating Expenses," which shall be an estimate of
current year expenses. In the event of any conflict regarding Base Operating
Expenses, the Base Year shall prevail.
(e) The term "Operating Expense" shall mean all costs paid or incurred in
connection with the operation, maintenance and repair of the Building (excluding
those expenses which are the responsibility of Tenant pursuant to paragraphs
6,10,13 and 16 hereof) including without limitation, all costs and expenses paid
or incurred with respect to the following: operating, cleaning, sweeping,
restriping, repairing and resurfacing the parking lot and driveway areas;
maintenance and replanting and landscaping; maintenance, repair and replacement
of landscape sprinkler systems, parking bumpers, directional signs and other
signs and markets, fire protection systems, lights and light standards
(including bulb replacement), drainage systems and utility systems (including
heating, ventilation and air-conditioning of the Building, including any common
area); janitorial services; operation and maintenance of Building signs,
including depreciation on such signs if purchased and rent for such signs if
leased; depreciation on all equipment purchased for the purpose of operating
and/or maintaining the common area, or rent for such equipment if leased, and
maintenance and repair of such equipment; rental of space outside the boundaries
of the Building, if needed, for use as storage and/or maintenance of equipment,
supplied, props and other items used in connection with the common area;
cleaning, maintenance and repair of all sidewalks, including those situated on
the perimeter of and outside the boundaries of the Building (but nothing herein
contained shall be construed as obligating Landlord to clean, maintain or repair
any areas of improvements outside the Building boundaries); operation,
maintenance and repair of any public address system, music system. and security
and alarm systems, including depreciation on such systems if purchased and rent
for such systems if leased; the reasonable cost of personnel to implement such
services and to regulate and administer employee parking and to police and
provide security for the common area and for the buildings in the Building,
including all social security and other contribution, and including workmen's
compensation insurance costs paid or incurred with respect to such personnel;
all premiums for public liability and property damage insurance (including,
without limitation, extended and broad form coverage, risks, mudslide, land
subsidence, volcanic eruption, flood and earthquake), workmen's compensations,
and rental loss insurance (notwithstanding anything contained in this Lease to
the contrary). Tenant's pro rata share of insurance premiums shall be in the
same proportion as the rentable area of the premises bears to the total occupied
rentable area of all space in all the buildings which are covered by the
insurance policies herein described); fees to any property manager (including
Landlord if Landlord performs property management services); the cost of
compliance with all state, federal or local governmental regulations affecting
the Building, including without limitation, any cleanup, removal, remedial or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Material (defined in paragraph 9
below) present in or about any part of the Building, including without
limitation, the soil or ground water under the Building; any assessment or other
charges imposed by any governmental agency including, but not limited to,
assessments or other charges related to federal or state environmental
protection regulations; all Property Taxes (as defined in subparagraph (h)
below) and personal property taxes on all land, improvements and personal
property comprising the common area and all costs and expenses incurred by
Landlord in attempts to obtain reductions in taxes or assessments affecting the
common area (the allocation of such taxes, assessments, costs and expenses
between land constituting the common area and land under tenant leased premises
to be made on a straight area prorations, and the allocation of such taxes,
assessments, costs and expenses, between improvements constituting common area
improvements and improvements constituting non-common area improvements to be
based upon the respective original construction costs of such improvements);
depreciation on mechanical equipment; or rental of such equipment if leased, and
maintenance and repair of such equipment, costs of electricity, water and other
utilities used with respect to the operation and maintenance of the common area;
garbage and refuse removal; audit expenses; reasonable legal expenses incurred
in contesting real property tax assessments and in connection with attempts to
control trespassing, picketing, demonstrations, gatherings or assemblies,
vandalism, thefts and any other interferences with use of the common area by
persons not authorized to use the common area.
(f) The term "common area" shall refer to all areas, spaces, equipment,
special services, improvements, and facilities in or near the Building provided
by Landlord for the common or joint use and benefit of the occupants of the
Building, their officers, agents, employees, servants, customers and invitees,
including but not limited to, all parking areas, access roads, streets,
driveways, entrances, exits, sidewalks, courts, loading docks,
1
<PAGE>
package pick-up stations, ramps, corridors, halls, stairs, retaining walls and
landscaped areas.
(g) The term "Lease Year" shall mean each twelve month period during the
term hereof ending on December 31, provided that the first Lease Year shall
commence upon the commencement of the term hereof and shall end of the next
succeeding December 31, and the last Lease year shall end upon the expiration of
the term hereof.
(h) The term "Property Taxes" shall mean any form of real or personal
property taxes, assessments, special assessments, fees, charges, levies,
penalties, service payments in lieu of taxes, excises, assessments and charges
for transit, housing or any other purpose, impositions or taxes of every kind
and nature whatsoever, assessed or levied or imposed by any authority having the
direct or indirect power to tax including, without limitation, any city, county,
state, or federal government, or any improvement or assessment district of any
kind or nature whatsoever, whether or not consented to or joined in by Landlord
against the Building or any legal or equitable interest of Landlord therein or
any personal property of Landlord used in the operation thereof, whether now or
hereafter imposed, whether or not now customary or in the contemplation of the
parties on the date of this Lease, excepting only taxes measured by the net
income of Landlord from all sources; provided that Property taxes shall not
include any taxes, assessments or other charges payable by Tenant pursuant to
paragraph 5 below.
(i) The term "Tenant's percentage share" shall mean the percentage figure
specified in the Basic Lease Information. Landlord and Tenant acknowledge the
Tenant's percentage share has been obtained by dividing the rentable area of the
premises as specified in the Basic Lease Information, by the total occupied
rentable area of the existing rental space in the Building as specified in the
Basic Lease Information and multiplying such quotient by 100. In the event
either the rentable area of the premises or the total occupied rentable area of
the Building is changed, Tenant's percentage share shall be appropriately
adjusted, and as to the calendar year in which such change occurs, Tenant's
percentage share shall be determined as of the last day of the calendar quarter.
2. Premises.
(a) Tenant hereby acknowledges that the premises shall be delivered in an
"as is" condition and that Landlord, except as may be expressly agreed by
Landlord in writing, has no obligation to alter, repair, renovate, or render fit
for Tenant's occupancy, any part of the premises. Landlord reserves to itself
the use of the roof, exterior walls and the area beneath the premises, together
with the right to install, maintain, use, repair and replace plumbing, telephone
facilities, equipment, machinery, connections, pipes, ducts, conduits, and wires
leading through the premises and serving other parts of the Building in a manner
and in locations which will not unreasonably interfere with Tenant's use.
(b) In the event Landlord determines to permit early occupancy of the
premises and, therefore, informs Tenant in writing that the premises are ready
for occupancy prior to the date set forth in the Basic Lease Information for the
commencement of the term of the Lease, Tenant shall have the right to take early
occupancy of the premises on such date as Landlord and Tenant shall agree in
writing, and notwithstanding the provisions of paragraph 3 below, the term of
the Lease shall commence upon such occupancy.
(c) The occupancy by Tenant of the premises shall constitute an
acknowledgment by Tenant that the premises are then in good, sanitary and
tenantable condition and repair.
3. Term. The term of this Lease shall commence and, unless sooner terminated,
shall end on the dates respectively specified in the Basic Lease Information. If
Landlord for any reason cannot deliver possession of the premises to Tenant by
the date specified for term commencement, this Lease shall not be void or
voidable nor shall landlord be liable to Tenant for any damage resulting
therefrom, but in that event, provided that the delay is not occasioned by the
act or omission of Tenant, rental shall be waived for the period between the
commencement of such term and the date when possession is delivered. Provided,
however, if Landlord has not delivered the premises to Tenant within six months
of the Term Commencement, this Lease shall be deemed null and void without
liability to either party, so long as such failure is not due to a delay caused
by the act or omission of Tenant.
4. Rent. Tenant shall pay to Landlord as rental for the use and occupancy of the
premises, at the times and in the manner hereinafter provided, the following
sums of money:
(a) Tenant shall pay to Landlord [applicable sales taxes and]* minimum rent
in the amount specified in the Basic Lease Information per year, payable in
equal monthly installments in advance on the commencement of the term hereof and
on or before the first day of each and every successive calendar month during
the term hereof. If the term commences on other than the first day of a calendar
month, the first payment of rent shall be appropriately prorated on the basis of
a 30-day month.
(b) Effective as of the first day of each Lease Year following the first
Lease year, the minimum rent set forth in the Basic Lease Information shall be
adjusted upward in direct proportion to any increase in the Consumer Price Index
measured from the month in which this Lease is dated to the month immediately
preceding the Lease Year for which the adjustment is to be made. As used herein,
the term "Consumer Price Index" shall mean the Consumer Price Index for All
Urban Consumers, all items, U.S. City Average (1967 equals 100), published by
the Bureau of Labor Statistics of the United States Department of Labor. In the
event that the Bureau of Labor Statistics should cease to publish said Consumer
Price Index, Landlord shall have the exclusive right to choose and apply any
similar authoritative Consumer Price Index published by any other branch or
department of the U.S. Government. In any event, the base used by the new
Consumer Price Index shall be approximately reconciled to the 1967 equals 100
base Consumer Price Index. In the event the Consumer Price Index for the month
preceding any Lease Year is not available on the commencement date of such Lease
Year, Tenant shall continue to pay the minimum rent than in effect until such
time as such Consumer Price Index is available; Tenant shall pay to Landlord the
full amount of any difference between the minimum rental paid during such
interim period and the actual adjusted minimum rental at the time of the next
monthly rental payment following notice from Landlord of the adjustment of
minimum rental.
*/For use in Florida and Arizona only.
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(c) Tenant shall pay, as additional rent, all sums of money required to be
paid to Landlord pursuant to paragraphs 5, 6, 7, 10, 13 and 16 below, and all
other sums of money or charges required to be paid by Tenant hereunder in
addition to minimum rental, whether or not the same are designated "additional
rent". If such amounts or charges are not paid at the time provided in this
Lease, they shall nevertheless be collectible as additional rent with the next
installment of minimum rental thereafter falling due, but nothing herein
contained shall be deemed to suspend or delay the payment of any amount of money
or charge at the time the same becomes due and payable hereunder, or limit any
other remedy of Landlord. All amounts of money payable by Tenant to Landlord
under this Lease, if not paid when due, shall bear interest from the due date
until paid at the rate of the greater of 15% per annum or the prime rate
publicly announced by the Bank of America, N.T. & S.A. at its main office in San
Francisco, California, but not to exceed the maximum rate of interest permitted
by law ("Default Interest"). All payments due from Tenant to Landlord hereunder
shall be made to Landlord without deduction or offset in lawful money of the
United States of America at Landlord's address for notices hereunder, or to such
other person at such other place as Landlord may from time to time designate in
writing to Tenant.
(d) Tenant hereby acknowledges that late payment by Tenant to Landlord of
rent and other sums due hereunder after the expiration of any applicable grace
period will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Landlord by the terms of any mortgage or trust
deed covering the premises. Accordingly, if any installment of rent or any other
sums due from Tenant shall not be received by Landlord when due, Tenant shall
pay to Landlord a late charge equal to 6% of such overdue amount, provided that
if such payment is not received by Landlord within 10 days after the due date
such late charge shall be 10% of the overdue amount. The parties hereby agree
that such last charge represents a fair and reasonable estimate of the costs
Landlord will incur by reason of late payment by Tenant. Acceptance of such late
charge by Landlord shall in no event constitute a waiver of Tenant's default
with respect to such overdue amount, affect Tenant's obligation to pay interest
on the overdue amount as provided above, or prevent Landlord from exercising any
of the other rights and remedies available to Landlord hereunder or at law.
5. Taxes and Assessments. In addition to the monthly rental and other charges to
be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any
and all taxes, assessments, levies, fees charges and impositions whatsoever
levied or imposed or assessed by any authority having the direct or indirect
power to tax including, without limitation, any city, county, state or federal
government or any improvement or other assessment district, whether or not
consented to or joined in by Landlord, payable by Landlord (other than income
taxes, measured by the net income of Landlord from all sources), whether or not
now customary or within the contemplation of the parties hereto on the date of
this Lease: (a) upon, measured by or reasonable attributable to the cost or
value of Tenant's equipment, furniture, fixtures and other personal property
located in the premises or by the cost or value of any leasehold improvements
made in or to the premises by or for Tenant, other than building standard tenant
improvements made by Landlord, regardless of whether title to such improvements
shall be in Tenant or Landlord; (b) upon or measured by the rental payable
hereunder including. without limitation, any gross income tax or excise tax
levied by any city, county, state, federal or other governmental body with
respect to the receipt of such rental; (c) upon or with respect to the
possession, leasing, operation, management, maintenance, improvement,
alteration, repair, use or occupancy by Tenant of the premises or portion
thereof; (d) upon this transaction or any document to which Tenant is a party
creating or transferring an interest or an estate in the premises. In the event
that it shall not be lawful for Tenant so to reimburse Landlord, the monthly
rental payable to Landlord under this Lease shall be revised to net Landlord the
same net rental after such Imposition as would have been payable to Landlord
prior to such Imposition.
6. Operating Expenses. Tenant shall, during the entire term hereof, pay to
Landlord Tenant's percentage share of the amount by which all Operating Expenses
paid or incurred by Landlord in any Calendar Year exceed Base Operating
Expenses, if Base Year used or actual expenses in a calendar year if estimated
Operating Expense used. The amount of all sums payable hereunder shall be paid
by Tenant to Landlord in the manner set forth in paragraph 7 below.
7. Estimated Payments. Unless otherwise expressly designated herein, all
monetary amounts payable by Tenant to Landlord pursuant to this Lease shall be
payable as follows:
(a) During December of each Calendar Year or as soon thereafter as
practicable, Landlord shall give Tenant Notice of its estimate of amounts
payable hereunder for the ensuing Calendar Year. On or before the first day of
each month during the ensuing Calendar Year, Tenant shall pay to Landlord 1/12
of such estimated amounts, provided that if such notice is not given in
December, Tenant shall continue to pay on the basis of the prior year's estimate
until the month such notice is given. If at any time or times it appears to
Landlord that the amounts payable for the current Calendar Year will vary from
its estimate by more than 5%, Landlord shall, by notice to Tenant, revise its
estimate for such year, in which case subsequent payments by Tenant for such
year shall be based upon such revised estimate.
(b) Within 90 days after the close of each Calendar Year or as soon after
such 90-day period as practicable, Landlord shall deliver to Tenant a statement
of amounts payable for such Calendar Year. If on the basis of such statement
Tenant owes an amount that is less than the estimated payments for such Calendar
Year previously made by Tenant and Tenant is not in default hereunder, Tenant
shall receive a credit in the amount of such excess against the next
installments due under paragraphs 6 and 7 hereof. If on the basis of such
statement, Tenant owes an amount that is more than the estimated payments for
such Calendar Year previously made by Tenant, Tenant shall pay the deficiency to
Landlord within thirty (30) days after delivery of the statement
(c) If this Lease shall terminate on other than the last day of a calendar
year, the adjustment in rent applicable to the Calendar Year in which such
termination shall occur shall be prorated on the basis which the number of days
from the commencement of such Calendar Year to and including such expiration
date bears to 365. If the adjustment in rent is not determined until after the
termination of this Lease, any excess amounts due Tenant or deficiency amounts
due Landlord shall be paid in cash within 30 days after delivery of the
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statement setting forth such adjustment determination.
(d) Notwithstanding the foregoing, if, at any time, Landlord incurs for any
item actual costs or expenses which are reimbursable in whole or in part by
Tenant pursuant to this Lease and such costs or expenses are in excess of the
estimated amount budgeted for such item and otherwise payable by Tenant, then,
upon written demand from Landlord accompanied by a statement of such costs of
expenses, Tenant shall immediately pay to Landlord the full amount of any excess
reimbursable costs or expenses.
8. Use and Maintenance of Common Area.
(a) The use and occupation by Tenant of the premises shall include a right
to the use in common with others entitled thereto of the common areas and other
facilities as may be designated from time to time by Landlord, subject, however,
to the terms and condition of this Lease. All common areas and facilities not
within the premises, which Tenant may be permitted to use and occupy pursuant to
this paragraph, are to be used and occupied under a revocable license, and if
the amount of such areas be diminished, Landlord shall not be subject to any
liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such diminution of such areas be deemed
constructive or actual eviction.
(b) Landlord shall at all times dining the term of this Lease have the
following rights with respect to the common area:
(1) Landlord shall have the right from time to time to make changes
in common area, except that Landlord shall not make any materially detrimental
change in the parking ratio or in the nature of the parking facilities
concerning that portion of the common area which is reasonably and customarily
used by Tenant's customers.
(2) Landlord shall have the right to establish and from time to time
change, alter, amend and to enforce against Tenant and other users of the common
areas, such reasonable rules and regulations (including the exclusion of
employees' parking therefrom) as may be deemed necessary or advisable for the
proper and efficient operation and maintenance of the common area.
(3) Landlord shall have the sole and exclusive control of the common
area, and may at any time and from time to time exclude and restrain any person
from use or occupancy thereof, excepting however, bona fide customers, patrons
and service suppliers of Tenant, and other tenants of Landlord who make use of
the common area in accordance with the rules and regulations established by
Landlord from time to time with respect thereof. Nothing herein shall limit the
rights of Landlord at any time to remove any authorized persons from the common
area or to restrain the use of any of said area by unauthorized persons.
(4) Landlord shall have the right to post temporary or permanent
signs and to temporarily close any portion or all of the common area from time
to time and to such extent as Landlord reasonably deems necessary to prevent a
dedication or other prescriptive right therein in favor of the public or any
group or individual and to prevent the accrual of any such right, and Landlord
shall have the right by temporary closure or other reasonable means to
discourage or prevent the use of the common area by persons other than those
expressly authorized hereby.
(5) Landlord shall have the right to designate specific areas from
time to time, either in the Building or reasonably close thereto, for the
parking of vehicles of the employees of Tenant. If a vehicle of Tenant or its
officers, agents or employees is at any time parked in a part of the Building
other than the designated area, Landlord shall have the right to have the
vehicle towed and to collect towing and storage charges as a condition of
releasing such vehicle to its owner.
9. Use.
(a) The premises shall be used solely for the permitted use as described in
the Basic Lease Information and no other. Tenant shall not use or permit the
premises to be used for any other purpose without Landlord's prior written
consent. Landlord and Tenant hereby further acknowledge that the identity of
Tenant, the specific character of Tenant's business and anticipated use of the
premises and the relationship between such use and other uses within the
Building has been material consideration to Landlord's entry into this Lease.
Any material change in the character of Tenant's business or use shall
constitute a default under this Lease.
(b) Tenant shall not do or permit to be done in, on or about the premises,
nor bring or keep or permit to be brought or kept therein, anything which is
prohibited by or will in any way conflict with any law, statute, ordinance or
governmental rule or regulation now in force or which may hereafter be enacted
or promulgated, or which is prohibited by the standard form of fire insurance
policy or will in any way increase the existing rate of or affect any fire or
other insurance upon the Building, or cause a cancellation of any insurance
policy covering the Building or any part thereof of any of its contents. Tenant
shall not do or permit anything to be done in or about the premises which will
in any way obstruct or interfere with the rights of other tenants of the
Building or injure or annoy them, or use or allow the premises to be used for
any improper, immoral, unlawful or objectionable purpose. Nor shall Tenant
cause, maintain or permit any nuisance in or about or commit or suffer to be
committed any waste in or upon the premises.
(c) Tenant shall not cause or permit any Hazardous Material to be brought
upon, kept or used in or about the premises or the Building. If Tenant breaches
the obligations stated in the preceding sentence, or if the presence of
Hazardous Material on the premises or the Building caused or permitted by Tenant
results in contamination of the premises or the Building then Tenant shall
indemnify, defend and hold Landlord harmless for, from and against any and all
claims, judgments, damages, penalties, fines, costs, liabilities or losses
(including without limitation, diminution in value of the Building, damages for
the loss or restriction on use of rentable or usable space or of any amenity of
the Building, damages arising from any adverse impact on marketing of space in
the Building, and sums paid in settlement of claims, reasonable attorneys' fees,
consultant fees and expert fees) which arise during or after the Lease Term as a
result of such contamination. This indemnification of Landlord by Tenant
includes, without limitation, costs incurred in connection with any
investigation of site conditions or any clean-up, remedial, removal or
restoration work required by any federal state or local governmental agency or
political subdivision because of Hazardous Material present in or about any part
of the Building including, without limitation, the soil or ground water under
the Building.
As used herein, the term "Hazardous Material" means any hazardous or toxic
substance, material or waste which is or becomes regulated by any federal, state
or other local governmental authority including, without limitation, any
material or substance which is designated as a "hazardous substance" pursuant to
Section 311 of
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the Federal Water Pollution Control Act (33 U.S.C. Subsection 1317), defined as
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, (42 U.S.C. 6901 et seq.), or defined as a "hazardous waste"
pursuant to Section 1010 of the comprehensive Environmental Response,
Compensation and Liability Act, (42 U.S.C. Subsection et seq.).
10. Utilities. Tenant shall pay all initial utility deposits and fees, and all
monthly service charges for water, electricity, sewage, gas, telephone and any
other utility services furnished to the premises and the improvements thereon
during the entire term of this Lease. In the event any such services are not
separately metered or billed to Tenant but rather are billed to and paid by
Landlord, Tenant shall pay to Landlord its pro rata share of the cost of such
services, as determined by Landlord, together with its pro rata share of the
cost of making such determination. Landlord shall not be liable for any reason
for any loss or damage resulting from an interruption of any of the above
services.
11. Alteration, Fixtures and Improvements.
(a) Tenant shall not make or suffer to be made any alterations, additions,
or improvements to or of the premises or any part thereof, or attach any fixture
or equipment thereto, without first obtaining Landlord's written consent Any
alterations, additions or improvements to the premises consented to by Landlord
shall be made by Tenant at Tenant's sole cost and expense according to plans and
specifications approved by Landlord. Landlord may require, at its option, that
Tenant provide Landlord at Tenant's sole cost and expense, payment and
performance bonds in an amount equal to twice the estimated cost of any
contemplated alternations, fixtures, and improvements, to insure Landlord
against any liability for mechanic's or materialmen's liens and to insure the
completion of such work. All alternations, additions, fixtures and improvements,
whether temporary or permanent in character, made in or upon the premises either
by Tenant or Landlord (other than furnishings, trade fixtures and equipment
installed by Tenant), shall be Landlord's property and, at the end of the term
hereof, shall remain on the premises without compensation to Tenant; provided
that, if Landlord so requests, Tenant shall remove all such alterations,
fixtures and improvements from the premises and return the premises to the
condition in which they were delivered to Tenant. Upon such removal Tenant shall
immediately and fully repair any damage to the premises occasioned by the
removal.
(b) Landlord may perform or cause to be performed, substantial renovation
and remodeling to the exterior and interior of the Building and Landlord
reserves the right to enter the premises in connection therewith. Landlord shall
reasonably attempt to minimize any interruption of Tenant's business caused by
such renovation and remodeling.
12. Liens. Tenant shall keep the premises and the Building free from any liens
arising out of any work performed, material furnished or obligations incurred by
Tenant. In the event that Tenant shall not, within 10 days following the
imposition of any such lien, cause the same to be released of record, Landlord
shall have in addition to all other remedies provided herein and by law, the
right but not the obligation to cause the same to be released by such means as
it shall deem proper, including payment of the claim giving rise to such liens.
All sums incurred by it in connection therewith including, without
limitation, any attorneys' fees, court costs, and expenses of litigation,
together with Default Interest thereon, shall be payable to Landlord by Tenant
on demand. Nothing in this Lease shall be construed in any was as constituting
the consent or request of the Landlord, expressed or imposed, by inference or
otherwise to any contractor, subcontractor, laborer, or materialmen, for the
performance of any labor, or the furnishing of any material for any specific
improvement, alteration and repair of or to the premises or as giving Tenant the
right, power or authority, to contract for or permit the rendering of any
service or the furnishing of any material that would give rise to the filing of
any mechanic's liens against the premises. Landlord shall have the right to post
and keep posted on the premises any notices that may be provided by law or which
Landlord may deem to be proper for the protection of Landlord, the premises and
the Building from such liens, and Tenant shall give Landlord at least 5 days'
prior notice of date of commencement of any construction on the premises in
order to permit the posting of such notices.
13. Repairs and Maintenance.
(a) Tenant shall at all times during the term of this Lease keep and
maintain at its own cost and expense, in good order, condition and repair the
entire premises (including without limitation, all improvements, fixtures and
equipment thereon) making all repairs and replacements interior and exterior,
above or below ground, and ordinary or extraordinary; provided, however, that if
the premises are only a portion of a building which contains other leasable
space, then Landlord shall keep in good order, condition and repair the
foundations and exterior walls (excluding the interior of all walls and the
exterior and interior of all doors, plate glass, display and other windows, and
excluding interior ceiling) of the premises, except for any damage thereto
caused by any act, negligence or omission of Tenant or Tenant's employees,
agents, contractors or customers, except for reasonable wear and tear and except
for any structural alterations or improvements required by any governmental
agency by reason of Tenant's use and occupancy of the premises. Tenant shall
reimburse Landlord for Tenant's pro rata share of the costs which Landlord
incurs in performing its foregoing repair and maintenance obligations with
respect to all of the building within the Building which Landlord is obligated
to repair and maintain. Tenant's pro rata share shall be in the same proportion
as the rentable area of the premises bears to the total occupied rentable area
of all of the buildings in the Building which Landlord is obligated to repair
and maintain. Reimbursement by Tenant to Landlord for its share of such costs
shall be made in the manner set forth in paragraphs 6 and 7 hereof. It is an
express condition precedent to all obligations of Landlord to repair that Tenant
shall have notified Landlord in writing of the need for such repair. If Landlord
shall fail to commence the making of repairs as it is obligated to do by the
terms hereof within thirty (30) days after such notice and the failure to repair
has materially interfered with Tenant's use of the premises, Tenant's sole right
and remedy for such failure on the part of the Landlord shall be to cause such
repairs to be made and to charge Landlord the reasonable cost therefor; provided
that, if the repair to be performed by Landlord is of an emergency type and if
Landlord after receiving notice from Tenant of such emergency fails to commence
repair of same as soon as reasonably possible, Tenant may do at Landlord's cost
without waiting thirty (30) days.
(b) Tenant's obligation to keep and maintain the premises in good order,
condition and repair shall
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include, without limiting the generality of Tenant's obligation, all plumbing
and sewage facilities in the premises, floors (including floor coverings),
doors, locks and closing devices, window casements and frames, glass and plate
glass, grilles, all electrical facilities and equipment, HVAC system and
equipment, all other appliances and equipment of every kind and nature, and all
landscaping upon, within or attached to the premises. In addition, Tenant shall
at its sole cost and expense install or construct any improvements, equipment,
or fixtures required by any governmental authority or agency as a consequence of
Tenant's use and occupancy of the premises. Tenant shall replace any damaged
plate glass within forty-eight (48) hours of the occurrence of such damage.
(c) Landlord shall assign to Tenant, and Tenant shall have the benefit of,
any guarantee or warranty to which Landlord is entitled under any purchase,
construction or installation contract relating to a component of the premises
which Tenant is obligated to repair and maintain. Tenant shall have the right to
call upon the contractor to make such adjustments, replacements, or repairs
which are required to be made by the contractor under such contract.
(d) Landlord may at Landlord's option employ and pay a firm satisfactory to
Landlord, engaged in the business of maintaining systems, to perform periodic
inspections of the HVAC systems serving the premises and to perform any
necessary work, maintenance or repair thereon, provided said rates are
competitive. In such event, Tenant shall reimburse Landlord for all sums paid by
Landlord in connection therewith, such reimbursement to be made in the manner
set forth in paragraph 6 and 7 above.
(e) Upon the expiration or termination of this Lease, Tenant shall
surrender the premises to Landlord in good order, condition and state of repair,
ordinary wear and tear excepted. Tenant hereby waives the right to make repairs
at Landlord's expense under the provisions of any laws permitting repairs by a
tenant at the expense of a landlord to the extent allowed by law; Landlord and
Tenant have by this Lease made specific provision for such repairs and have
expressly defined their respective obligations.
14. Damage and Destruction.
(a) If the premises of the portion of the Building necessary for Tenant's
occupancy should be damaged or destroyed during the term hereof by any casualty
insurance under standard fire and extended coverage insurance policies, Landlord
shall (except as hereafter provided) repair or rebuild the premises to
substantially the condition in which the premises were immediately prior to such
destruction.
(b) Landlord's obligation under this paragraph shall in no event exceed the
lesser of (1) with respect to the premises, the scope of building standard
improvements installed by Landlord in the original construction of the premises,
or (2) the extent of proceeds received by Landlord of any insurance policy
maintained by Landlord pursuant to paragraph 16(b) below, unless Landlord
nevertheless elects to repair or rebuild the premises.
(c) The minimum rent shall be abated proportionately during any period in
which, by reason of any damage or destruction not occasioned by the negligence
or willful misconduct of Tenant or Tenant's employees or invitees, there is a
substantial interference with the operation of the business of Tenant. Such
abatement shall be proportional to the measure of business in the premises which
Tenant may be required to discontinue. The abatement shall continue for the
period commencing with such destruction or damage and ending with the completion
by Landlord of such work, repair or reconstruction as Landlord is obligated to
do.
(d) Notwithstanding the foregoing, if the premises, or the portion of the
Building necessary for Tenant's occupancy should be damaged or destroyed (1) to
the extent of 10% or more of the then replacement value of either, (2) in the
last 3 years of the term hereof, (3) by a cause of casualty other than those
covered by fire and extended coverage insurance, or (4) to the extent that it
would take, in Landlord's opinion, in excess of ninety (90) days to complete the
requisite repairs, then Landlord may either terminate this Lease or elect to
repair or restore said damage or destruction, in which event Landlord shall
repair or rebuild the same as provided in subparagraph (a) above. If such damage
or destruction occurs and this Lease is not so terminated by Landlord, this
Lease shall remain in full force and effect The parties hereby waive the
provisions of any law that would dictate automatic termination or grant either
party an option to terminate in the event of damage or destruction. Landlord's
election to terminate Landlord's obligation under this paragraph shall be
exercised by written notice to Tenant given within sixty (60) days following the
damage or destruction. Such notice shall set forth the effective date of the
termination of this Lease.
(e) Upon the completion of any such work of repair or restoration by
Landlord, Tenant shall forthwith repair and restore all other parts of the
premises including without limitation, non-building standard leasehold
improvements and all trade fixtures, equipment, furnishings, signs and other
improvements originally installed by Tenant, subject to the requirements of
paragraph 11(a) above.
(f) Tenant agrees during any period of reconstruction or repair of the
premises to continue the operation of its business in the leased premises to the
extent reasonably practicable from the standpoint of good business.
15. Indemnification. Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the premises of the Building by
or from any cause whatsoever, including, without limitation, acts of other
tenants or other third parties, gas fire, oil, electricity or leakage of any
character from the roof, walls, basement or other portion of the premises or the
Building. Tenant shall hold Landlord and any ground landlord harmless for, from
and against and defend Landlord against any and all claims, liability, damage or
loss, and for, from and against all costs and expenses, including reasonable
attorneys' fees, arising out of any injury to or death of any person or damage
to or destruction of any property, from any cause whatsoever (except any cause
resulting solely from the gross negligence or willful act of Landlord, its
authorized agents or employees) occurring in or about the premises or the
Building and, if occurring on or about any portion of the common areas or
elsewhere in or about the Building, when such injury or damage shall be caused
in whole or in part by the act, neglect, default or omission of any duty by
Tenant, its agents, employees or invitees or otherwise by any conduct or
transactions of any of said persons in or about or concerning the premises,
including any failure of Tenant to observe or perform any of its obligations
hereunder. The provisions of this paragraph 15 shall survive the termination of
this Lease with respect to any damage, injury or death occurring prior to such
termination.
16. Insurance.
(a) Tenant shall procure and maintain in full force and effect during the
entire term hereof, at its own
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expense and in companies acceptable to Landlord, the following policies of
insurance:
(1) Comprehensive liability insurance, including property damage,
insuring Landlord and Tenant (and any mortgagee, ground landlord or other person
or persons having an insurable interest in the Building, as Landlord may
designate hereinafter called "additional designated insured") from and against
all claims, demands, actions or liability for injury to or death of any persons,
and for damage to property arising from or related to the use of occupancy of
the premises or the operation of Tenant's business. No deductible shall be
carried under this coverage without the prior written consent of Landlord. Such
policy shall contain, but not be limited to; coverage for premises and
operations, products and completed operations, blanket contractual, personal
injury, operations, ownership, maintenance and use of owned, non-owned, or hired
automobiles, bodily injury and property damage. The policy shall have limits in
amounts not less than one million dollars ($1,000,000.00) per person and per
occurrence. This insurance shall carry a contractual coverage endorsement
specifically insuring the performance by Tenant of its indemnity agreement
contained in paragraph 15 above. If in the opinion of Landlord's insurance
advisor, based on a substantial increase in recovered liability claims, the
aforesaid amounts of coverage are no longer adequate, then such coverage shall
be proportionately increased.
(2) Worker's Compensation Insurance and Employer's Liability
Insurance shall have a minimum coverage of one million dollars ($1,000,000.00)
per person and per occurrence.
(3) Fire Insurance with standard extended coverage of "all risk"
endorsement including, without limitation, vandalism and malicious mischief, to
the extent of 90% of the replacement value of all furnishings, trade fixtures,
leasehold improvements, equipment, merchandise and other personal property and
leasehold improvements from time to time situated in, on or upon the premises.
As long as this Lease is in effect, the proceeds from any such insurance shall
be held in trust to be used only for the repair or replacement of the
improvements, fixtures and other property so insured.
(b) Landlord may elect to procure and maintain liability insurance and
insurance covering fire and such other risks of direct or indirect loss or
damage as it deems appropriate, including extended and broad form coverage
risks, mudslide, land subsidence, volcanic eruption, flood and earthquake, on
leasehold improvements in the Building. Tenant shall reimburse Landlord for the
costs of all such insurance as part of Operating Expenses reimbursable pursuant
to paragraph (6). Any insurance coverage herein provided shall be for the
benefit of Landlord, Tenant and any additional designated insured, as their
interests may appear. Tenant shall not adjust losses or execute proofs of loss
under such policies without Landlord's prior written approval.
(c) Should this Lease be cancelled pursuant to the provisions of paragraph
14 above by reason of damage or destruction and Tenant is thus relieved of its
obligation to restore or rebuild the improvements on the premises, any insurance
proceeds for damage to the premises, including all fixtures and leasehold
improvements thereon, shall belong to Landlord, free and clear of any claims by
Tenant.
(d) All policies of insurance described in this paragraph 16 of which
Tenant is to procure and maintain, shall be issued by good, responsible
companies, reasonably acceptable to Landlord and any additional designated
insureds within ten (10) days after delivery of possession of the premises to
Tenant and thereafter within thirty (30) days prior to the termination or
expiration of the term of each existing policy. All public liability and
property damage policies shall contain the following provisions: (1) Landlord,
and any additional designated insureds although named as insured, shall
nevertheless be entitled to recovery under said policies for any loss occasioned
to them, their servants, agents and employees by reason of the negligence of
Tenant, its officers, agents or employees; (2) the company writing such policy
shall agree to give Landlord and any additional designated insured not less than
thirty (30) days' notice in writing prior to any cancellation, reduction or
modification of such insurance; and (3) at the election of Landlord's mortgagee,
the proceeds of any insurance shall be paid to a trustee or depository
designated by Landlord's mortgagee. All public liability, property damage and
other casualty policies shall be written as primary policies, not entitled to
contribution from, nor contributing with, any coverage which Landlord may carry.
(e) Notwithstanding anything to the contrary within this paragraph.
Tenant's obligations to carry the insurance provided for herein may be brought
within the coverage of a so-called blanket policy or policies of insurance
carried and maintained by Tenant; provided, however, that (1) Landlord and such
other persons shall be named as additional insureds thereunder as their interest
may appear; (2) the coverage afforded to Landlord and such other persons will
not be reduced or diminished by reason of the use of such blanket policy of
insurance; and (3) all other requirements set forth herein are otherwise
satisfied.
(f) If Tenant should fail either to acquire the insurance required pursuant
to this paragraph 16 and to pay the premiums therefor or to deliver required
certificates or policies, Landlord may in addition to any other rights and
remedies available to Landlord, acquire such insurance and pay the requisite
premiums therefor, which premiums shall be payable by Tenant to Landlord
immediately upon demand.
(g) Landlord and Tenant hereby waive any rights each may have against the
other for loss or damage to its property, or property in which it may have an
interest, where such loss is caused by a peril of the type generally covered by
fire insurance with extended coverage or arising from any cause which the
claiming party was obligated to insure against under this Lease, and each party
on behalf of its insurer waives any right of subrogation that the insurer might
otherwise have against the other party. The parties agree to cause their
respective insurance companies insuring the premises or insuring their property
on or in the premises to execute a waiver of any such rights of subrogation.
17. Condemnation.
(a) The term "total taking" means the taking of the fee title or Landlord's
master leasehold estate to so much of the premises or a portion of the Building
necessary for Tenant's occupancy by right of eminent domain or other authority
of law, or a voluntary transfer under the threat of the exercise thereof, that
the premises are not suitable for Tenant's intended use. The term "partial
taking" means the taking of only a portion of the premises or the Building which
does not constitute a total taking as above defined.
(b) If during the term hereof there shall be a total taking, then this
Lease, and the leasehold estate of Tenant in and to the premises, shall cease
and terminate as of the date possession is taken. As used in this paragraph the
phrase "date possession is taken" means the date of taking actual physical
possession thereof by the condemning authority of such earlier date as the
condemning authority gives notice that it shall be deemed to have taken
possession.
(c) If during the term hereof there shall be a partial taking of the
premises, this Lease shall terminate
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as to the portion of the premises taken on the date on which actual possession
of the portion of the premises is taken pursuant to the eminent domain
proceedings and this Lease shall continue in full force and effect as the
remainder of the premises. The minimum rent payable by Tenant for the balance of
the term shall be abated in the ratio that the net rentable area of the premises
taken bears to the net rentable area of the premises immediately prior to such
taking, and Landlord shall make all necessary repairs or alterations to make the
remaining premises a complete architectural unit.
(d) All compensation and damages awarded for the taking of the premises,
any portion thereof, or the whole or any portion of the common areas or Building
shall, except as otherwise herein provided belong to and be the sole property of
Landlord, and Tenant shall not have any claim or be entitled to any award for
diminution in value of its rights hereunder or for the value of any unexpired
term of this Lease; provided, however, that Tenant shall be entitled to make its
own claim for, and receive separate award that may be made for Tenant's loss of
business or for the taking of or injury to Tenant's improvements, or on account
of any cost or loss Tenant may sustain the removal of Tenant's trade fixtures,
equipment, and furnishing, or as a result of any alterations, modifications or
repairs which may be reasonably required by Tenant in order to place the
remaining portion of the premises not so condemned in a suitable condition for
the continuance of Tenant's occupancy. The Tenant's award pursuant to this
subparagraph shall not reduce Landlord's award.
(e) If this Lease is terminated pursuant to the provisions of this
paragraph 17, then all rentals and other charges payable by Tenant to Landlord
hereunder shall be paid up to the date upon which possession shall be taken by
the condemning agency and any rentals and other charges paid in advance and
allocable to the period after the date possession is taken, shall be repaid to
Tenant by Landlord, and the parties shall thereupon be released from all further
liability hereunder.
18. Compliance With Legal Requirements. Tenant shall at its sole cost and
expense promptly comply with all laws, statutes, ordinances and governmental
rules, regulations or requirements now in force or which may hereafter be in
force, with the requirements of any board of fire underwriters or other similar
body now or hereafter constituted, with any direction or occupancy certificate
issued pursuant to any law by any public officer or officers, as well as the
provisions of all recorded documents affecting the premises, as they relate to
or affect the condition, use or occupancy of the premises, excluding
requirements of structural changes not related to or affected by improvements
made by or for Tenant or Tenant's use of the premises.
19. Assignment and Subletting. Tenant shall not assign this Lease, or any
interest herein, and shall not sublet the said premises, or any part thereof or
any right or privilege appurtenant thereto, or suffer any other person (the
agents, servants, business visitors and customers of Tenant excepted) to occupy
or use the premises or any part thereof without the written consent of Landlord
provided, however, that Landlord's consent thereto shall not be unreasonably
withheld; and a consent to one assignment, subletting, occupation or use by any
other person shall not be deemed to be a consent to any subsequent assignment,
subletting, occupation, or use by another person. Any such assignment or
subletting without such consent shall be void and shall at the option of
Landlord, terminate this Lease. This Lease shall not, nor shall any interest
herein, be assignable as to the interest of Tenant by operation of law, without
the written consent of Landlord.
20. Rules and Regulations. Tenant shall faithfully observe and comply with the
rules and regulations attached to this Lease as Exhibit C and, after notice
thereof, all reasonable modifications thereof and additions thereto from time to
time promulgated in writing by Landlord. Landlord shall not be responsible to
Tenant for the nonperformance by any other tenant or occupant of the Building of
any of such rules and regulations.
21. Landlord's Access. Landlord may enter the premises at reasonable hours to
(1) inspect the same; (2) exhibit the same to prospective purchasers, mortgagees
or tenants; (3) determine whether Tenant is complying with all its obligations
hereunder; (4) supply any service to be provided by Landlord to Tenant
hereunder, (5) post notices of non-responsibility; (6) post `To Lease' signs of
reasonable size upon the premises during the last 90 days of the term hereof;
and (7) make repairs required of Landlord under the terms hereof or repairs to
any adjoining space or utility service or make repairs, alterations or additions
to the premises or any other portion of the Building, provided, however, that
all such work shall be done as promptly as reasonably possible and so as to
cause as little interference to Tenant as reasonably possible and that any
repairs, alterations, or additions to the premises shall, when completed, not
materially and adversely affect Tenant's use of the premises. Tenant hereby
waives any claim for damages for any injury or inconvenience to or interference
with Tenant's business and any loss of occupancy or quiet enjoyment of the
premises. Landlord shall have the right to use any and all means which Landlord
may deem proper to open such doors in an emergency in order to obtain entry to
the premises. Any entry to the premises obtained by Landlord by any means, or
otherwise, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the premises or an eviction,
actual or constructive, of Tenant from the premises, or any portion thereof.
22. Default If: (1) Tenant shall fail to pay any rent or other sum payable
hereunder for a period of five (5) days after the same is due; (2) Tenant shall
fail to observe, keep or perform any of the other terms, covenants, agreements
or conditions contained herein or in the rules and regulations to be observed or
performed by Tenant and such default continues for a period of thirty (30) days
after notice by Landlord or beyond the time reasonably necessary for cure if
such default is of a nature to require in excess of thirty (30) days to remedy;
(3) Tenant shall become bankrupt or insolvent or make a transfer in fraud of
creditors, or make an assignment for the benefit of creditors, or take or have
taken against Tenant any proceedings of any kind under any provision of the
Federal Bankruptcy Act or under any other insolvency, bankruptcy or
reorganization act or, in the event any such proceedings are involuntary, such
involuntary proceedings are not dismissed within sixty (60) days thereafter; (4)
a receiver is appointed for a substantial part of the assets of Tenant; (5)
Tenant shall vacate or abandon the premises; or (6) this Lease or any interest
of Tenant hereunder shall be levied upon by any attachment or execution, then
any such event shall constitute an event of default by Tenant. Upon the
occurrence of any event of default by Tenant hereunder, Landlord may, at its
option and without any further notice or demand, in additions to any other
rights and remedies given hereunder or by law do any of the following:
(a) Landlord shall have the right, so long as such default continues to
give notice of termination to
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Tenant. On the date specified in such notice (which shall not be less than three
(3) days after the giving of such notice) this Lease shall terminate.
(b) In the event of any such termination of this Lease, Landlord may then
or at any time thereafter, re-enter the premises and remove therefrom all
persons and property and again repossess and enjoy the premises, without
prejudice to any other remedies that Landlord may have by reason of Tenant's
default or of such termination.
(c) The amount of damages which Landlord may recover in event of such
termination shall include, without limitation, (1) the amount at the time of
award of (A) unpaid rental earned and other sums owed by Tenant to Landlord
hereunder, as of the time of termination, together with interest thereon as
provided in this Lease, (B) the amount by which the unpaid rent which would have
been earned during the period from termination until the award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided
(computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent), (2) all legal
expenses and other related costs incurred by Landlord following Tenant's default
including reasonable attorneys' fees incurred in collecting any amount owed
hereunder, (3) all costs incurred by Landlord in restoring the premises to good
order and condition, or in remodeling, renovating or otherwise preparing the
premises for reletting, and (4) all costs (including, without limitation, any
brokerage commissions) incurred by Landlord in reletting the premises. For the
purpose of determining the unpaid rent in the event of a termination of this
Lease, the monthly rent reserved in this Lease shall be deemed to be the sum of
(1) the minimum rent and (2) the Operating Expense charge and any other amounts
last payable by Tenant pursuant to paragraphs 5, 6, 7, 10, 13 and 16 above.
(d) Following the termination of this Lease or Tenant's right to possession
hereunder (or upon Tenant's failure to remove its personal property from the
premises after the expiration of the term of this Lease), Landlord may remove
any and all personal property located in the premises and place such property in
a public or private warehouse or elsewhere at the sole cost and expense of
Tenant; such warehouser shall have all rights and remedies provided by law
against Tenant as the owner of such property. In addition, in the event that
Tenant shall not immediately pay the cost of storage of such property after the
same has been stored for a period of thirty (30) days or more, Landlord may sell
any or all thereof at a public or private sale in such manner and at such times
and places as Landlord in its sole discretion may deem proper, without notice to
or demand upon Tenant. Tenant waives all claims for damages that may be caused
by Landlord's removing or storing or selling the property as herein provided,
and Tenant shall indemnify and hold Landlord free and harmless for, from and
against any and all losses, costs and damages, including without limitation all
costs of court and attorneys' fees of Landlord occasioned thereby. Tenant hereby
irrevocably appoints Landlord as Tenant's attorney-in-fact with the rights and
powers necessary in order to effectuate the provisions of this subparagraph (d).
Such appointment shall be deemed coupled with an interest.
(e) Landlord shall have the right to cause a receiver to be appointed in
any action against Tenant to take possession of the premises and to collect the
rents or profits derived therefrom. The appointment of such receiver shall not
constitute an election on the part of Landlord to terminate this Lease unless
notice of such intention is given to Tenant.
(f) Even though Tenant has breached this Lease and/or abandoned the
premises, this Lease shall continue in effect for so long as Landlord does not
terminate this Lease, the Landlord may enforce all its rights and remedies under
this Lease, including the right to recover the rental in periodic actions as it
becomes due under this Lease. In such event, Landlord may re-enter the premises
and remove all persons and property if the premises have not been vacated, using
any available summary proceeding, without such re-entry or removal being deemed
a termination or acceptance of surrender of this Lease. Landlord may then elect
to relet the premises for the account of Tenant for a period which may extend
beyond the term hereof, and upon such other terms as Landlord may reasonably
deem appropriate. Tenant shall reimburse Landlord upon demand for all costs
incurred by Landlord in connection with such reletting, including, without
limitation, necessary restoration, renovation, or improvement costs, reasonable
attorneys' fees and brokerage commissions. The proceeds of such reletting shall
be applied first to any sums then due and payable Landlord from Tenant,
including the reimbursement described above. The balance, if any, shall be
applied to the payment of future rent as it becomes due hereunder.
(g) Tenant hereby grants to Landlord a continuing personal property lien
and security interest in (1) all fixtures, furnishings and equipment now owned
or hereafter acquired by Tenant that are located in the premises and used in
connection with the operation of Tenant's business in the premises and all
proceeds from the sale or other disposition of such fixtures, furnishings and
equipment, and (2) Tenant's interest under any lease of such fixtures,
furnishings and equipment (hereinafter collectively referred to as the
"Collateral"), as security for the full and faithful performance by Tenant of
all of its obligations under the Lease. This lien and security interest are
given in addition to Landlord's statutory lien, if any, and shall be cumulative
thereto. Tenant hereby waives any exemption laws, to the extent permitted by
law. As to the fixtures, furnishings and equipment that constitute part of the
Collateral, Tenant shall keep the Collateral in good condition and repair and
shall not remove the Collateral from the premises, provided that so long as
Tenant is not in default under the Lease, Tenant shall have the right to discard
or dispose of, in the ordinary course of its business in the premises, items of
the Collateral which become broken, inoperable, obsolete or useless to the
operation of Tenant's business in the premises, and provided further that Tenant
shall replace all items of the Collateral necessary to keep the premises fully
fixturized, furnished and equipped. As to any equipment lease that constitutes
part of the Collateral, Tenant shall perform the terms thereof and not permit
the same to be modified, amended or terminated without Landlord's prior written
consent. If Landlord so elects, a breach of the foregoing covenants shall
constitute an event of default under this Lease. Upon the occurrence of an event
of default under the Lease, Landlord shall have all of the rights and remedies
provided for by law in respect to this security interest. Tenant hereby waives
all right to require Landlord to proceed against Tenant or any other person,
firm or corporation, to apply any Collateral it may hold at any time or to apply
any Collateral in any order, or to pursue any other remedy whatsoever which it
may possess. Tenant hereby authorizes and empowers Landlord to exercise its
right and remedies under this paragraph without taking any action against any
other person, firm or corporation and without proceeding against or applying any
Collateral held by it or for its benefit, in its sole discretion. At Landlord's
request, concurrently with the execution of the Lease at anytime thereafter,
Landlord and Tenant shall execute and file appropriate Financing Statement
covering the Collateral. Tenant shall execute
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and deliver to Landlord any further documents which it may reasonably request in
order to perfect the security interest created hereby.
[(h) Landlord may change door locks if Tenant is delinquent in paying rent,
provided Landlord posts notices as required by law. If Tenant abandons the
premises, Landlord may permanently change the locks and Tenant shall not be
entitled to a key or re-entry. No other notice requirements or lockout rights
shall apply and Tenant Waiver any and all duties and/or liabilities imposed on
Landlord by Section 92.008, TX. Prop. Code.]*
23. Landlord's Right to Cure Default. All covenants and agreements to be
performed by Tenant under any of the terms of this Lease shall be at its sole
cost and expense and without any abatement of rent. If Tenant shall fail to pay
any sum of money, other than rent, required to be paid by it hereunder or shall
fail to perform any other act on its part to be performed hereunder and such
failure shall have become an event of default under paragraph 22 above, Landlord
may, but shall not be obligated to so, and without waiving or releasing Tenant
from any obligations of Tenant, make any such payment or perform any such other
act on Tenant's part to be made or performed as in this Lease provided. All sums
so paid by Landlord and all necessary incidental costs shall be deemed
additional rent hereunder and shall be payable to Landlord on demand together
with Default Interest from the date of expenditure by Landlord until repaid.
24. Attorneys' Fees. If as a result of any breach or default in the performance
of any of the provisions of this Lease or in order to enforce its rights
hereunder, Landlord uses the services of an attorney in a nonjudicial action, at
trial, or upon an appeal, to secure compliance with such provisions or recover
damages therefor, to exercise such rights, or to terminate this Lease or evict
Tenant, Tenant shall reimburse Landlord upon demand for any and all reasonable
attorneys' fees and expenses so incurred by Landlord. If Tenant shall be the
prevailing party in any legal action brought by Landlord against Tenant, Tenant
shall be entitled to recover for the fees of its attorneys in such amount as the
court may adjudge reasonable. Tenant, to the extent permitted by law, does
hereby waive any further right to attorneys' fees provided by applicable state
or federal law.
25. Subordination.
(a) This Lease shall be subject and subordinated at all times to all ground
or underlying leases which may hereafter by executed affecting the Building, and
the lien of all mortgages and deeds of trust in any amount or amounts whatsoever
now or hereafter placed on or against the Building or on or against Landlord's
interest or estate therein or on or against all such ground or underlying
leases, all without the necessity of having further instruments executed on the
part of Tenant to effectuate such subordination. Notwithstanding the foregoing
(1) in the event of termination for any reason whatsoever of any ground or
underlying lease hereafter executed, this Lease shall not be barred, terminated,
cut off or foreclosed nor shall the rights and possession of Tenant hereunder be
disturbed if Tenant shall not then be in default in the payment of rental or
other sums or be otherwise in default under the terms of this Lease, and Tenant
shall attorn to the Landlord of any such ground or underlying Lease, or, if
requested, enter into a new lease for the balance of the original or extended
term hereof then remaining upon the same terms and provisions as are in this
Lease contain; (2) in the event of a foreclosure of any such mortgage or deed of
trust hereafter executed or of any other action or proceeding for the
enforcement thereof, or of any sale thereunder, this Lease will not be barred,
terminated, cut off or foreclosed nor will the rights and possession of Tenant
thereunder be disturbed if Tenant shall not then be in default in the payment of
rental or other sums or be otherwise in default under the terms of this Lease,
and Tenant shall attorn to the purchaser at such foreclosure, sale or other
action or proceeding; and (3) Tenant agrees to execute and deliver upon demand
such further instruments evidencing such subordination of this Lease, ground or
underlying leases, and to the lien of any such mortgages or deeds of trust as
may reasonably be required by Landlord. Tenant's covenants to subordinate this
Lease to ground or underlying leases, and mortgages or deeds of trust hereafter
executed is conditioned upon each such senior instrument containing the
commitments specified in the preceding clauses (1) and (2); and (4) Tenant
further waives the provisions of any statue or rule of law, now or hereafter in
effect, which may give or purport to give Tenant any right or election to
terminate or otherwise adversely affect the Lease and the obligations of Tenant
hereunder in the event of such foreclosure or sale.
(b) Tenant shall mail by certified or registered post, return receipt
requested, or personally deliver to any landlord under a ground lease or
mortgage lender a duplicate copy of any and all notices in writing which Tenant
may from time to time give to or serve upon Landlord pursuant to the provisions
of this Lease, and such copy shall be mailed or delivered at, or as near as
possible to, the same time such notices are given or served by Tenant. No notice
by Tenant to Landlord hereunder shall be deemed to have been given unless and
until a copy thereof shall have been so mailed or delivered to any ground lease
landlord or mortgage lender. Upon the execution of any ground lease or mortgage,
Tenant shall be informed in writing of the vesting of the interest evidenced by
the ground lease or mortgage.
(c) Should any event of default by Landlord under this Lease occur, any
ground lease landlord or mortgage lender shall have thirty (30) days after
receipt of written notice from Tenant setting forth the nature of such event of
default within to remedy the default; provided that in the case of a default
which cannot with due diligence be cured with such 30-day period, the ground
lease landlord or mortgage lender shall have the additional time reasonably
necessary to accomplish the cure, provided that (i) it has commenced the curing
within such thirty (30) days and (ii) thereafter diligently prosecutes the cure
to completion. If the default is such that the possession of the premises may be
reasonably necessary to remedy the default, any ground lease landlord or
mortgage lender shall have a reasonable additional time after the expiration of
such 30-day period within which to remedy such default, provided that (i) it
shall have fully cured any default in the payment of any monetary obligations of
Landlord under this Lease within such thirty (30) day period and shall continue
to pay currently such monetary obligations as and when the same are due and (ii)
it shall have acquired Landlord's estate or commenced foreclosure or other
appropriate proceedings within such period, or prior thereto, and is diligently
prosecuting any such proceedings.
*/For use in Texas only.
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26. No Merger. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not work a merger, and shall, at the option
of Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
27. Sale by Landlord. In the event the original Landlord hereunder, or any
successor owner of the Building shall sell or convey the Buildings, all
liabilities and obligations on the part of the original Landlord, or such
successor owner, under this Lease accruing thereafter shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
owner. Tenant agrees to attorn to such new owner.
28. Estoppel Certificate. At any time from time, but on not less than ten (10)
days prior notice by Landlord, Tenant will execute, acknowledge and deliver to
Landlord, promptly upon request, a certificate certifying (a) that this Lease is
unmodified and in full force and effect (or, if there have been modifications,
that this Lease is in full force and effect as modified, and stating the date
and nature of each such modification), (b) the date, if any, to which rental and
other sums payable hereunder have been paid, (c) that no notice has been
received by Tenant of any default which has not been cured, except as to
defaults specified in said certificates, and (d) such other matters as may be
reasonably requested by Landlord. Tenant hereby appoints Landlord as Tenant's
attorney-in-fact to execute, acknowledge and deliver such certificate if Tenant
shall fail to do so within the above-prescribed time period. Any such
certificate may be relied upon by any prospective purchaser, mortgagee or
beneficiary under any deed of trust of the Building.
29. Holdover Tenancy. If, without objection by Landlord, Tenant holds possession
of the premises after expiration of the term of this Lease, Tenant shall become
a tenant from month to month upon all of the terms specified in this Lease as
applicable immediately prior to expiration of such term except that minimum rent
will be 150% of that applicable immediately prior to expiration of such term.
Each party shall give the other notice of its intention to terminate such
tenancy at least one month prior to the date of such termination.
30. Parking.
(a) Any parking areas appurtenant or within the Building, or designated
thereof, shall be available for the use of tenants of the Building, and, to the
extent designated by Landlord, the employees, agents, customers and invitees of
said tenants, subject to the rules, regulations, charges and rates as set forth
by the Landlord from time to time; provided, however, that Landlord may restrict
to certain portions of the parking areas, parking for Tenant or other tenants of
the Building and their employees and agents, and may designate other areas to be
used only by customers and invitees of tenants of the Building. Notwithstanding
anything herein contained, Landlord reserves the right from time to time to make
reasonable changes in, additions to, and deletions from parking areas as now or
hereafter constituted.
(b) Landlord, or its agents, shall have the right to cause to be removed
any cars, trucks, trailers, or other motorized or nonmotorized vehicles of
tenants, its employees, agents, guests or invitees that are parked in violation
hereof or in violation of regulations of the Building, without liability of any
kind to Landlord, its agents or employees, and Tenant agrees to hold and defend
it against any and all claims, losses, or damages and demands asserted or
arising in respect to or in connection with the removal of any such vehicles as
aforesaid.
31. Security Deposit. Tenant has deposited with Landlord the sum specified in
the Basic Lease Information (the "deposit"). The deposit shall be held by
Landlord as security for the faithful performance by Tenant of all of the
provisions of this Lease to be performed or observed by Tenant. If Tenant fails
to pay rent or other charges due hereunder, or otherwise defaults with respect
to any provision of this Lease, Landlord may use, apply or retain all or any
portion of the deposit for the payment of any rent or other charge in default or
for the payment of any other sum to which Landlord may become obligated by
reason of Tenant's default, or to compensate Landlord for any loss or damage
which Landlord may suffer thereby. If Landlord so uses or applies all or any
portion of the deposit, Tenant shall within ten (10) days after demand therefore
deposit cash with Landlord in an amount sufficient to restore the deposit to the
full amount thereof. Tenant's failure to so do shall be a material breach of
this Lease. Landlord shall not be required to keep the deposit separate from its
general accounts. If Tenant performs all of Tenant's obligations hereunder, the
deposit, or so much thereof as has not theretofore been applied by Landlord,
shall be returned, without payment of interest or other increment for its use,
to Tenant (or at Landlord's option, to the last assignee, if any, of Tenant's
interest hereunder) at the expiration or earlier termination of the term hereof,
and after Tenant has vacated the premises; provided that Landlord may retain
such security deposit as security for the payment of any adjustment in rent
following an expiration or by reason of Tenant's default, or to compensate
Landlord for any loss or damage which Landlord may suffer thereby. Landlord may
retain such security deposit as security for the payment of any adjustment in
rent following an expiration or termination pursuant to paragraph 7 (c) above
and shall, upon termination of such adjustment, apply the retained security
deposit against any deficiency due Landlord and return the balance, if any, to
Tenant. No trust relationship is created herein between Landlord and Tenant with
respect to the deposit. Such security deposit shall not be considered an advance
payment of rental or a measure of Landlord's damages in cash of default by
Tenant.
32. No Partnership. It is expressly understood that Landlord does not, in any
way or for any purpose, become a partner of Tenant in the conduct of its
business, or otherwise, or joint venturer or a member of a joint
enterprise with Tenant.
33. Recording. Tenant shall not record this Lease without the prior written
consent of Landlord.
34. Modification and Financing Conditions. Landlord has obtained financing and
may seek to obtain further financing for the Building, portions thereof, and the
operation thereof, secured by mortgages or deeds of trust encumbering the
Building. Landlord may also elect to enter into a ground lease of the Building.
If any mortgage lender should require, as a condition of such financing, or
pursuant to rights of approval set forth in the mortgage
11
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or deed of trust encumbering the Building, or if any ground lessee should
require, as a condition of such ground lease pursuant to rights of approval set
forth therein, any modification of the terms or conditions of this Lease, Tenant
agrees to execute such modification or amendment, provided that such
modification or amendment (1) shall not increase the rental or Tenant's share of
any costs in addition to minimum rent, (b) shall not materially interfere with
Tenant's use or occupancy, and (c) if requested by a mortgage lender with a lien
on the Building or a ground lessee pursuant to a ground lease effective as of
the date hereof, shall have been requested prior to thirty (30) days after the
date hereof. If Tenant should refuse to execute any modifications so required
within ten (10) days after receipt of same, Landlord shall have the right by
notice to Tenant to cancel this Lease, and upon such cancellation Landlord shall
refund any unearned rental or security deposit, and neither party shall have any
liability thereafter accruing under this Lease except as provided in paragraph
15 above.
35. Waiver. The waiver by Landlord of any term, covenant, agreement or condition
herein contained shall not be deemed to be a waiver of any other then existing
or subsequent breach of the same or any other term, covenant, agreement or
condition herein contained. Nor shall any custom or practice which may develop
between the parties in the administration of the terms hereof be construed to
waive or to lessen the right of the Landlord to insist upon the performance by
Tenant in strict accordance with such term. The subsequent acceptance of rent or
any other sum of money or other performance hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any term, covenant,
agreement or condition of this Lease, other than the failure of Tenant to pay
the particular rent or other sum so accepted, regardless of Landlord's knowledge
of such preceding breach at the time of acceptance of such rent or other sum or
performance.
36. Notices and Consents. All notices, demands, consents or approvals which may
be given by either party to the other hereunder shall be in writing and shall be
deemed to have been fully given when deposited in the United States mail,
registered or certified, return receipt requested, postage prepaid, and
addressed as follows: to Tenant at the address specified in the Basic Lease
Information, or to such other place as Tenant may from time to time designate in
a notice to Landlord at the address specified in the Basic Lease Information, or
to such place as Landlord may from time to time designate in a notice to Tenant;
or, in the case of Tenant, delivered to Tenant at the premises. Tenant hereby
appoints as its agent to receive the service of all dispossessory or distraint
proceedings and notices thereunder and person or persons in charge of or
occupying the premises at the time, and, if no person shall be in charge of or
occupying the same, then such service may be made by attaching the same on the
main entrance of the premises.
37. Complete Agreement. There are no oral agreements between Landlord and Tenant
affecting this Lease and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, agreements, understandings, if any
between Landlord and Tenant or displayed by Landlord to Tenant with respect to
the subject matter of this Lease or the Building. There are no representations
between Landlord and Tenant other than those contained in this Lease and all
reliance with respect to any representations is solely upon the representation
contained herein. This Lease may not be amended or modified in any respect
whatsoever except by an instrument in writing signed by Landlord and Tenant.
38. Corporate Authority. If Tenant signs as a corporation, each of the persons
executing this Lease on behalf of the Tenant does hereby covenant and warrant
that Tenant is a duly authorized and existing corporation, that Tenant is
qualified to do business in the state in which the Building is situated, that
the corporation has full right and authority to enter into this Lease, and that
each person signing on behalf of the corporation is authorized to do so.
39. Limits to Tenant's Remedy. If Landlord should default in the performance of
its obligations hereunder, it is understood and agreed that any claims by Tenant
against Landlord shall be limited in recourse to Landlord's interest in the
Building. Tenant expressly waives any and all rights otherwise to proceed on a
recourse basis against Landlord, the individual partners or Landlord, or the
officers, directors and shareholders of any corporate partner of Landlord.
40. Brokers. Tenant warrants that it has had no dealing with any real estate
broker or agents in connection with the location or negotiation of this Lease
other than any broker or agent identified in paragraph 45 below.
41. No Light and Air Easement. No diminution or shutting off of light, air, or
view by any structure which may be erected on lands adjacent to or in the
vicinity of the Building shall in any way affect this Lease or impose any
liability on Landlord.
42. Miscellaneous. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. If there be more than one Tenant,
the obligations hereunder imposed upon Tenant shall be joint and several. Time
is of the essence of this Lease and each and all of its provisions. Submission
of this instrument for examination or signature by Tenant does not constitute a
reservation of or option for lease, and it is not effective as a lease or
otherwise until execution and delivery by both Landlord and Tenant. The terms,
covenants, agreements and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of the parties hereto. If any provisions of this
Lease shall be determined to be illegal or unenforceable, such determination
shall not affect any other provisions of this Lease and all such other
provisions shall remain in full force and effect. Landlord and Tenant agree that
each party and its counsel have reviewed this Lease and that the normal rule of
construction to the effect that ambiguities are to be resolved against the
drafting party is not appropriate and shall not be employed in the
interpretation of this Lease. This Lease shall be governed by and construed
pursuant to the laws of the state in which the Building is situated.
43. Signs.
(a) Tenant shall purchase and erect one sign on the front of the premises
not later than the date Tenant opens for business or within thirty (30) days of
date of commencement of the Lease, whichever is sooner. Such
12
<PAGE>
sign shall be subject to Landlord's approval including, without limitation,
location, size and design. It is Tenant's responsibility to maintain, repair and
replace said sign as required by Landlord during the tenure of this Lease. Upon
termination of this Lease said sign shall immediately become the property of the
Landlord, and by execution of this Lease, Tenant assigns all ownership of said
sign to Landlord upon said termination.
(b) Tenant shall keep the display windows and signs of the premises well
lighted until 12:00 midnight each night or such shorter period as may be
prescribed by any applicable policies or regulations adopted by any utility or
governmental agency, and shall maintain adequate night lights thereafter.
(c) Without the prior written consent of Landlord, Tenant shall not place
or permit to be placed (1) any sign, advertising material or lettering upon the
exterior of the premises or (2) any sign, advertising material or lettering upon
the exterior or interior surface of any door or show window or at any point
inside the premises from which the same may be visible from outside the
premises. Upon request of Landlord, Tenant shall immediately remove any sign,
advertising material or lettering which Tenant has placed or permitted to be
placed in, on or about the premises contrary to the provisions of the preceding
sentence, and if Tenant fails so to do, Landlord may enter upon the premises to
remove the same at Tenant's expense. Tenant shall comply with such regulations
as may from time to time be promulgated by Landlord governing signs, advertising
material or lettering of all tenants in the retail area, provided that Tenant
shall not be required to change any sign or lettering that was in compliance
with applicable regulations at the time it was installed or placed in, on or
adjacent to the premises.
44. Surrender of Premises. At the termination of this Lease, or any renewal term
thereof, Tenant shall surrender the premises in the same condition (subject to
the removals herein required) as the premises were on the date the Tenant opened
the premises for business with the public, reasonable wear and tear expected,
and shall surrender all keys for the premises to Landlord at the place then
fixed for the payment of rent and shall inform Landlord of all combinations on
locks, safes, and vaults, if any, in the premises. Tenant, during the last
thirty (30) days of such term, shall remove all its trade fixtures, and to the
extent required by Landlord by written notice, any other installations,
alterations or improvements provided for in paragraph 11 hereof, before
surrendering the premises as aforesaid and shall repair any damage to the
premises caused thereby. Tenant's obligation to observe or perform any covenant
of this Lease shall survive the expiration or other termination of the Lease
Term.
45. Additional Provisions.
See Addendum One.
*** [46. Usufruct. This contract and Lease shall create the relationship of
landlord and tenant between Landlord and Tenant; no estate shall pass out of
Landlord and Tenant has only a usufruct which is not subject to levy and sale.]
13
<PAGE>
IN WITNESS HEREOF, Landlord and Tenant have caused this instrument to be duly
executed, sealed and delivered on the date set forth below.
TENANT LANDLORD
By /s/ Robert Bernardi CENTURY PERTIES FUND XX,
---------------------------------- a California limited partnership
owner of Linpro Park I
- ------------------------------------
By By: Metric Management, Inc.,
---------------------------------- a Delaware Corporation,
its agent
- ------------------------------------
Date of Execution Date of Execution
By Tenant: /s/ Robert Bernardi By Landlord: /s/ Richard A. Faber
-------------------------- ------------------------
Richard A. Faber
Vice President
* /s/ Witness *
- --------------------------- -------------------------------------
Witness Witness
* *
- --------------------------- -------------------------------------
Witness Witness
Acknowledgment Attached**
Seal***
*For use in Florida only.
**For use in Washington, Arizona and North and South Carolina.
***For use in Georgia only.
14
<PAGE>
EXHIBIT A
Legal Description of Building
All that tract of land situated in the County of Fairfax, Virginia, and more
particularly described as follows:
Parcel 1-B, being part of Block 1, Section 911, RESTON, containing 4.41172 acres
as the same appears duly dedicated platted and resubdivided in Deed Book 5644,
page 764, among the land records of Fairfax County, Virginia.
TOGETHER WITH Sanitary Sewer Easement across a portion of Block 3, Section 911,
RESTON, recorded in Deed Book 5626, page 1350 among the aforesaid land records.
AND FURTHER TOGETHER WITH 10' Sanitary Sewer Easement recorded in Book 2870,
page 526, and shown on plat recorded in Deed Book 4775, page 139, among the
aforesaid land records.
AND TOGETHER WITH AND SUBJECT TO Easements contained in Declaration of Covenants
and Cross-Easement Agreement recorded in Deed Book 5821, page 4, among the
aforesaid land records.
Private/Team/Ateam/linpro/exhbt-A.doc
<PAGE>
EXHIBIT B
---------
Rentable
Floor Suite Square Feet
- ----- ----- -----------
1st 105 4,523
<PAGE>
EXHIBIT B
[GRAPHIC APPEARS HERE]
LINPRO PARK I DONNALLY, LEDERER, VUJCIC, L.L.C.
- --------------------------------------------------------------------------------
PROJECTS\STUDLEY\LINPRO\BASEBLDG 9401 KEY WEST AVE. ROCKVILLE MD 20860
SCA1E: 1:30 DVC BY: RLM 9/23/97 PH. (301) 590--9666, FAX (301) 590--2671
<PAGE>
7. In the case of invasion, mob, riot, public excitement, or other circumstances
rendering such action advisable in Landlord's opinion, Landlord reserves the
right to prevent access to the Building during the continuance of the same by
such an action as Landlord deems appropriate, including closing entrances to the
Building.
8. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by the Tenant who, or whose employees or invitees, shall have caused
it.
9. Except with prior consent of Landlord, no Tenant shall sell, or permit the
sale in the premises or use or permit the use of any common area for the sale of
newspapers, magazines, periodicals, theatre tickets or any other goods,
merchandise or service. Tenant shall not carry on, or permit or allow any
employee or other person to carry on the business of stenography, typewriting,
or any similar business in or from the premises for the service or accommodation
of occupants of any other portion of the Building, nor shall the premises of any
Tenant be used for manufacturing of any kind, or any business or activity other
than that specifically provided for in such Tenant's lease.
10. Tenant shall not use any advertising media which may be heard outside of the
premises, and Tenant shall not place or permit the placement of any radio or
television, or other communications antenna, loudspeaker, sound amplifier,
phonograph, searchlight, flashing light or other device of any nature on the
roof or outside of the boundaries of the premises (except for Tenant's approved
identification sign or signs) or at any place where the same may be seen or
heard outside of the premises.
l1. All loading and unloading of merchandise, supplies, material, garbage and
refuse shall be made only through such entryways and elevators and at such times
as Landlord shall designate. In its use of the loading areas the Tenant shall
not obstruct or permit the obstruction of said loading area and at no time shall
park or allow its officers, agents or employees to park vehicles therein except
for loading area and at no time shall park or allow its officers, agents or
employees to park vehicles therein except for loading and unloading.
12. Landlord shall have the right, exercisable without notice and without
liability to any Tenant, to change the name and street address of the Building.
l3. The freight elevator shall be available for use by all Tenants in the
Building, subject to such reasonable scheduling as Landlord in its discretion
shall deem appropriate. The persons employed to move such equipment in or out of
the Building must be acceptable to Landlord. Landlord shall have the right to
prescribe the weight, size and position of all equipment, materials, furniture
or other property brought into the Building. Heavy objects shall, if considered
necessary by Landlord, stand on wood strips of such thickness as is necessary to
properly distribute the weight. Landlord will not be responsible for loss of or
damage to any such property from any cause, and all damage done to the Building
by moving or maintaining such property shall be repaired at the expense of the
Tenant.
14. The directory of the Building will be provided for the display of the name
and location of Tenants and a reasonable number of the principal officers,
partners and employees of Tenants, and Landlord reserves the right to exclude
any other names therefrom. Any additional name which Tenant shall desire to
place upon said bulletin board must first be approved by Landlord, and, if so
approved, a charge will be made therefor.
<PAGE>
15. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hangings or decorations shall be attached to, hung or placed in, or
used in connection with any window of the Building without the prior written
consent of Landlord. In any event, with the prior written consent of Landlord,
such items shall be installed on the office side of Landlord's standard window
covering and shall in no way be visible from the exterior of the Building.
16. No Tenant shall obtain for use in the premises, ice, drinking water, food
beverage, towel or other similar services, except at such reasonable hours and
under such reasonable regulations as may be fixed by Landlord.
17. Each Tenant shall see that the doors of its premises are closed, locked and
that all water faucets, water apparatus and utilities are shut off before Tenant
or Tenant's employees leave the premises, so as to prevent waste or damage, and
for any default or carelessness in this regard Tenant shall be liable for, and
shall indemnify Landlord against and hold Landlord harmless for, from and
against all injuries sustained by other Tenants or occupants of the Building or
Landlord. On multiple-tenancy floors, all Tenants shall keep the doors to the
Building corridors closed at all times except for ingress or egress.
18. No Tenant shall use any portion of the common area for any purpose when the
premises of such Tenant are not open for business or conducting work in
preparation therefor.
19. The requirements of the Tenants will be attended to only upon application by
telephone or in person at the office of the Building. Employees of Landlord
shall not perform any work or do anything outside of their regular duties unless
under special instructions from Landlord.
20. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular Tenant or Tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the Tenants of the Building.
21. These Rules and Regulations are in addition to and shall not be construed to
in any way modify, alter or amend, in whole or in part, the terms, covenants,
agreements and conditions of any Lease of premises in the Building.
22. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building, and for the preservation of good order
therein.
<PAGE>
ADDENDUM ONE
------------
This Addendum is attached to and made a part of the Lease by and between Century
Property Fund XX (Landlord) and The Music Connection Corporation and sets forth
additional terms agreed upon by the parties. In the event of any conflict
between any provisions of this Addendum and any provisions of the Lease and
Exhibits thereto, the provisions of this Addendum shall control. Except as
otherwise modified herein, all terms and provisions of this Lease shall remain
in full force and effect.
1) RENT
----
A) The Minimum Rent hereinafter referred to as "Base Rental" shall be
increased annually by 3% above the preceding year's Base Rental
commencing with the first anniversary of the Lease. This annual
increase shall be known as the "Base Rental Adjustment."
Period Base Rental
------ -----------
Year One $22.50 psf
Year Two $23.18 psf
Year Three $23.87 psf
Year Four $24.59 psf
Year Five $25.32 psf
Year Six $26.08 psf
Year Seven $26.87 psf
B) Current Rent shall be defined as the current monthly rent equal to the
sum of the current monthly Base Rental plus the current monthly charge
for Excess Operating Expenses.
2) OPERATING EXPENSES
------------------
A) Base Year shall be defined as calendar year 1998 which commences the
1st of January and ends on the 31st of December.
B) Tenant's prorata share of Operating Expenses that exceed Base
Operating Expenses shall be known as "Excess Operating Expenses".
C) In the event the Building is less than 90% occupied during the Base
Year, Base Operating Expenses shall be grossed up to reflect 95%
occupancy. In addition, Property Taxes shall reflect a fully improved
and fully assessed Building for purposes of calculating Base Year
Property Taxes in determining the Base Operating Expenses.
D) (i) Section 1(e) of the Lease shall be modified to include all utility
costs paid or incurred in connection with the operation, maintenance
and repair of the Building. Such utilities shall include but not be
limited to electric, gas, water, sewer, waste disposal and other
reasonable utility costs.
(ii) Section 1(e) shall be further modified to include other
reasonable and customary costs paid or incurred in connection with the
operation, maintenance and repair of the Building provided they do not
conflict with any Operating Expense exclusions provided for in the
Lease or Addendum.
<PAGE>
3) OPERATING EXPENSES EXCLUSIONS
-----------------------------
A) Operating Expenses shall be defined so as to exclude the following:
(i) Any ground lease rental;
(ii) Capital expenditures required by Landlord's failure to
comply with laws enacted on or before the Building
receives a Temporary Certificate of Occupancy;
(iii) Costs incurred by Landlord with respect to goods and
services (including utilities sold and supplied to tenants
and occupants of the Building) to the extent that Landlord
is entitled to reimbursement for such costs;
(iv) Costs incurred by Landlord for the repair of damage to or
defects in the Building or the Development to the extent
that Landlord is reimbursed by insurance proceeds or by
warranties;
(v) Costs, including permit, license and inspections costs,
incurred with respect to the installation or repair of
tenant improvements made for other tenants in the Building
or the Development or incurred in renovating or otherwise
improving, decorating, painting or redecorating vacant
space for tenants or other occupants of the Building or
the Development;
(vi) Depreciation and amortization, except on materials, tools,
supplies and vendor-type equipment purchased by Landlord
to enable Landlord to supply services Landlord might
otherwise contract for with a third party where such
depreciation and amortization would otherwise have been
included in the charge for such third party's services,
all as determined in accordance with generally accepted
accounting principles, consistently applied, and when
depreciation or amortization is permitted or required, the
item shall be amortized over its reasonably anticipated
useful life;
(vii) Leasing commissions, attorneys' fees, and other costs and
expenses incurred in connection with negotiations or
disputes with present or prospective tenants or other
occupants of the Building or the Development;
(viii) Costs incurred by Landlord for alterations which are
considered capital improvements and replacement under
generally accepted accounting principles, consistently
applied, except as provided in (vi) above or (xxi) below;
(ix) Costs of a capital nature; except as provided in (vi)
above or (xxi) below, including, without limitation,
capital improvements, capital repairs, capital equipment
and capital tools, all as determined in accordance with
generally accepted accounting principles, consistently
applied;
(x) Expenses in connection with services or other benefits
which are not offered to Tenant or for which Tenant is
charged directly but which are provided to another tenant
or occupant;
(xi) Costs incurred by Landlord due to the violation by
Landlord or any tenants of the terms and conditions of any
lease or due to the gross negligence or willful misconduct
of Landlord or Landlord's agents, employees or
representatives or of independent contractors;
(xii) Overhead and profit increments paid to Landlord or to
subsidiaries or affiliates of Landlord for services in the
Building or the Development to the extent the same exceeds
the costs of such services rendered by unaffiliated third
parties on a competitive basis;
(xiii) Interest points and fees on debt or amortization on any
mortgage or mortgages encumbering the Building or the
Development;
<PAGE>
(xiv) Subject to (xii) above and to the management and
administrative fee for the Building and supervision fee
for the Common Areas described in the lease, Landlord's
(or any of its partners') general corporate overhead and
general and administrative expenses;
(xv) Any compensation paid to floor parking attendants in the
parking facilities or persons in commercial concessions
operated by Landlord in the Building or in the parking
facilities;
(xvi) Subject to (xxi), rentals and other related expenses
incurred in leasing air conditioning systems, elevators or
other equipment ordinarily considered to be of a capital
nature, except equipment not affixed to the Building which
is used in providing janitorial or similar services;
(xvii) All items and services for which Tenant or any other
tenant reimburses Landlord or which Landlord provides
selectively to one or more tenants (other than Tenant)
without reimbursement;
(xviii) Advertising and promotional expenditures;
(xix) Electric power costs or other utilities for which any
tenant directly contracts with the local public service
company;
(xx) Services provided and costs incurred in connection with
restriping (other than repairs and maintenance) any of the
parking facilities or in connection with providing tandem
parking;
(xxi) a) Costs for capital improvements made to reduce Operating
Expenses above the amount reasonably anticipated to be
saved as the result of such capital improvement; i.e.,
except as otherwise provided herein, costs for capital
items may be passed through as an Operating Expenses
cost only to the extent such items are, in the
reasonable discretion of Landlord, anticipated to
reduce Operating Expenses, and such costs will be
adjusted as the reduction in specific Operating
Expenses are known so that costs for that capital
improvement will be included as an Operating Expense
each year only to the extent of actual savings each
year;
b) Costs for capital improvements required by governmental
authority for compliance with any applicable laws,
regulations, rules or orders which become effective
subsequent to the execution date of this Lease;
c) All capital improvement costs shall be amortized over
their useful life as reasonably determined by Landlord
in accordance with customary property management
practice and the amortization shall include interest at
the greater of 10% per annum or the prime rate
published in the Wall Street Journal at the time the
capital improvement is made;
(xxii) Tax penalties incurred as a result of Landlord's
negligence or inability or unwillingness to make payments
when due, it being agreed that all assessments which are
not specifically charged to Tenant because of what Tenant
has done, which can be paid by Landlord in installments
shall be paid by Landlord in the maximum number of
installments permitted by law and charged as Operating
Expenses only in the year in which the assessment
installment is actually paid;
(xxiii) Taxes and assessments directly attributable to the above
standard tenant improvements of other tenants or taxes and
assessments attributable to the property of other tenants
whether or not such taxes or assessments are separately
paid by such tenants;
(xxiv) Costs of construction and maintenance of exterior or
monument signage identifying and belonging to any
tenant(s) of the Building. Monument signage for the
project which includes tenant identification is an
allowable operating cost;
<PAGE>
(xxv) Costs of replacing or retrofitting the HVAC system to
comply with current laws that regulate or prohibit the use
or release of chloroflourocarbons (CFC's) or hydrocarbons
(HCFC's); and
(xxvi) Any other items expressly excluded from Operating Expenses
pursuant to the provisions of this Lease.
4) TAXES
-----
A) Notwithstanding any provision of this paragraph expressed or implied
to the contrary, "real property taxes" shall not include Landlord's
federal or state income, franchise, inheritance or estate taxes or any
taxes excluded from Operating Expenses pursuant to Section 3 of this
Addendum.
5) SQUARE FOOTAGE
--------------
A) The Premises contain 4,523 square feet of rentable area as defined in
the Lease and Exhibit B thereto. All references to square footage in
the Lease, Exhibits and Addendums attached thereto shall be rentable
square feet unless otherwise specifically noted.
6) IMPROVEMENTS
------------
A) Landlord shall deliver the Premises in "as is" condition and provide
Tenant with a renovation allowance equal to $15.00 per square foot.
Tenant shall be responsible for all renovation costs including but not
limited to demising partition, demolition, construction, permits,
architectural and MEP fees. Tenant may use up to $2.00 per square foot
out of its allowance for "non improvement costs" including those
associated with data, phone and security systems. Landlord shall have
the right to review and approve Tenant's final space plan. Landlord
shall perform the renovations contained in Tenant's final space plan
and Tenant shall reimburse Landlord for any and all costs associated
therewith in excess of the renovation allowance. Tenant shall
reimburse Landlord for such excess renovation cost under the following
schedule: 50% advance deposit prior to commencing renovations and the
50% remaining balance shall be due upon the earlier of 1) substantial
completion of the renovations or 2) occupancy of the premises by
Tenant. Any work performed by Tenant shall be completed in a lien free
manner in accordance with paragraph 12 of the Lease.
7) OPTION TO RENEW
---------------
A) So long as Tenant is not in default under this Lease, either at the
time of exercise or at the time the extended term commences, Tenant
will have the option to extend the initial seven (7) year term of this
Lease for an additional period of five (5) years (the "Option
Period") on the same terms, covenants, and conditions of this Lease,
except that the monthly rent during the option period will be
determined pursuant to paragraph (B). Tenant will exercise its option
by giving Landlord written notice ("Option Notice") at least nine (9)
months prior to the expiration of the initial term of this Lease.
B) The Current Rent for the Option Period will be determined as follows:
(i) Landlord and Tenant will have fifteen (15) days after Landlord
receives the Option Notice within which to agree on the then-fair
market rental value of the premises, as defined in paragraph
(B)(iii), and rental increases to the monthly rent for the Option
Period. If Landlord and Tenant agree on the Current Rent for the
Option Period within fifteen (15) days, they will amend this
Lease by stating the initial monthly rent and rental increases
for the Option Period.
(ii) If Landlord and Tenant are unable to agree on the Current Rent
for the Option Period within fifteen (15) days, then, the Current
Rent for the Option Period will be the then-fair market rental
value of the premises as determined in accordance with
paragraph(B)(iv) and the periodic rental increases will be
consistent with the current market standards for rent increases
at that time, in amounts and at frequencies determined by the
appraisers pursuant to paragraph (B)(iv).
<PAGE>
(iii) The "then-fair market rental value of the premises" means what a
landlord under no compulsion to lease the premises and a tenant
under no compulsion to lease the premises would determine as
rents (including monthly rental and rental increases) for the
Option Period as of the commencement of the Option Period,
taking into consideration the uses permitted under this Lease,
the quality, size, design and location of the premises, and the
rent for comparable buildings located in the vicinity of Reston,
Virginia. In addition, prevailing market concessions then being
offered in Reston for comparable buildings shall also be taken
into account. The then-fair market rental value of the premises
and the rental increases in the monthly rent for the Option
Period will not be less than 105% of the previous lease year's
Base Rental.
(iv) Within seven (7) days after the expiration of the fifteen (15)
day period set forth in paragraph (B)(ii), Landlord and Tenant
will each appoint a real estate appraiser with at lease five (5)
years' full-time commercial appraisal experience in the area in
which the premises are located to appraise the then-fair market
rental value of the premises. If either Landlord or Tenant does
not appoint an appraiser within ten (10) days after the other
has given notice of the name of its appraiser, the single
appraiser appointed will be the sole appraiser and will set the
then-fair market rental value of the premises. If two (2)
appraisers are appointed pursuant to this paragraph, they will
meet promptly and attempt to set the then-fair market rental
value of the premises. If they are unable to agree within thirty
(30) days after the second appraiser has been appointed, they
will attempt to elect a third appraiser meeting the
qualifications stated in this paragraph within ten (10) days
after the last day the two (2) appraisers are given to set the
then-fair market rental value of the premises. If they are
unable to agree on the third appraiser, either Landlord or
Tenant, by giving ten (10) days' prior notice to the other, can
apply to the then-presiding judge of the Fairfax County Court
for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Landlord and Tenant
will bear one-half (1/2) of the cost of appointing the third
appraiser and of paying the third appraiser's fee. The third
appraiser, however selected, must be a person who has not
previously acted in any capacity for either Landlord or Tenant.
Within thirty (30) days after the selection of the third
appraiser, a majority of the appraisers will set the then-fair
market rental value of the premises. If a majority of the
appraisers are unable to set the then-fair market rental value
of the premises within thirty (30) days after the selection of
the third appraiser, the three (3) appraisals will be averaged
and the average will be the then-fair market rental value of the
premises.
8) SUPPLEMENTAL HVAC
-----------------
A) All supplemental HVAC units for Tenant's premises shall be separately
metered and the cost of the meter installation and all utility charges
the sole responsibility of the Tenant.
B) Landlord shall supply (existing extra) HVAC unit to be used by tenant
for computer room at no additional charge.
9) SERVICES
--------
A) Landlord shall maintain the public and common areas of the Building,
including lobbies, stairs, elevators, corridors, restrooms, windows,
mechanical, plumbing and electrical systems and the structure itself,
in reasonably good order and condition except for damage occasioned by
the act of Tenant or Tenant's invitees, which damage shall be repaired
by Landlord at Tenant's expense.
Landlord shall furnish the Premises with (1) electricity for lighting
and the operation of office machines, (2) heat and air conditioning to
the extent reasonably required for comfortable occupancy by Tenant in
its use of the Premises during regular building hours (except
holidays), or such shorter period as may be prescribed by any
applicable policies or regulations adopted by any utility or
governmental agency, [(3) elevator service], (4) initial lighting
installation (for building standard lights), (5) restroom supplies,
(6) window washing with reasonable frequency, (7) janitorial service
five nights per week (except labor holidays) furnished in the manner
that such service is customarily furnished in comparable office
buildings in the locale of the Building. Landlord shall not be in
default hereunder or be liable for any damages directly or indirectly
resulting from, nor shall the rental herein reserved be abated by
reason of (i) the installation, use or interruption of use of any
equipment in connection with the furnishing of any of the foregoing
services, (ii) failure to furnish or delay in furnishing any such
services when such failure or delay is caused by accident or any
condition beyond the reasonable control of Landlord or by the making
of necessary repairs or improvements to the Premises or to the
Building, or (iii) the limitation, curtailment, rationing or
restrictions on use of water, electricity, gas or any other form of
energy serving the Premises or the
Page 5 of 9
<PAGE>
Building, subject to Paragraph 10 of the Lease and Section 8(c) of
this Addendum. Landlord shall use reasonable efforts diligently to
remedy any interruption in the furnishing of such services.
Whenever heat generating machines or lighting equipment other than
building standard lights are used in the Premises by Tenant which
affect the temperature otherwise maintained by the air conditioning
system, Landlord shall have the right to install supplementary air
conditioning facilities in the Premises or otherwise modify the
ventilating and air conditioning system serving the Premises, and the
cost of such facilities and modifications shall be borne by Tenant.
Tenant shall also pay as additional rent the cost of providing all
heating or cooling energy to the Premises in excess of that required
for normal office use or during hours requested by Tenant when heat or
air conditioning is not otherwise furnished by Landlord. If Tenant
installs lighting requiring power in excess of that required for
normal office use in the Building or if Tenant installs equipment
requiring power in excess of that required for normal desk-top office
equipment or normal copying equipment, Tenant shall pay for the cost
of such excess power as additional rent, together with the cost of
installing any additional risers or other facilities that may be
necessary to furnish such excess power to the Premises.
Landlord at the commencement of this Lease shall equip the standard
electrical fixtures of the Premises with light globes and fluorescent
tubes and ballasts, as the case may be; replacement thereof shall be
Tenant's responsibility and cost, and if Tenant shall request Landlord
to replace same, then the cost shall be paid by Tenant to Landlord.
B) Regular building hours are 7:30 a.m. to 6:00 p.m. Monday through
Friday and Saturday 8:00 a.m. to 12:00 p.m. (Noon) exclusive of
building holidays which for purposes of this Lease are:
. New Years Day
. Martin Luther King Day
. George Washington Day
. Memorial Day
. Independence Day
. Labor Day
. Columbus Day
. Veterans Day
. Thanksgiving Day
. Christmas Day
C) In the event Landlord shall be unable to supply power, water or HVAC
services for seven (7) consecutive days, Landlord shall abate Tenant's
rent until such services are restored.
D) In the event the HVAC system is insufficient to meet reasonable
standards for comparable properties in Reston, Virginia, the cost of
any HVAC modifications or additions shall be borne by Landlord.
E) Tenant shall have access to the Premises 24 hours daily during the
term of the Lease.
10) INDEMNIFICATION
---------------
A) Landlord shall hold Tenant harmless for, from and against and defend
Tenant against any and all claims, liability, damage or loss, and for,
from and against all costs and expenses, including reasonable
attorneys' fees, arising out of any injury to or death of any person
or damage to or destruction of any property, from any cause whatsoever
occurring in or about the common areas or a portion of the Building
not occupied by Tenant, except when such injury or damage shall be
caused in whole or in part by the act, neglect, default or omission of
any duty by Tenant, its agents, employees or invitees or otherwise by
any conduct or transactions of any said persons in or about or
concerning the common areas or portions of the Building not occupied
by Tenant
11) PARKING
-------
A) Tenant shall have the right to park 5.0 automobiles per 1,000 square
feet leased on the surface parking area free of charge during the term
of this Lease. Notwithstanding anything contained herein to the
contrary, the parking area will be impacted by VDOT during the
widening of Wiehle Avenue which Tenant acknowledges is beyond
Landlord's control and shall not constitute a Landlord default or
interruption in services due to the activities associated with the
road work. Landlord will use commercially reasonable efforts to
alleviate problems in the event of material parking problems caused by
VDOT.
Page 6 of 9
<PAGE>
12) HOLDOVER
--------
A) The holdover rental pursuant to Section 29 of the Lease shall be as
follows:
. Holdover with Landlord's consent will be 150% of the Current Rent
(subject to continuing escalations) up to a maximum of three
months. Holdover thereafter shall be 200% of the Current Rent
(subject to continuing escalations).
. Holdover without Landlord's consent will be 200% of the Current
Rent (subject to continuing escalations).
13) ASSIGNMENT AND SUBLETTING
-------------------------
A) Tenant shall have the right to fully assign or sublease all or any
part of the Premises, or allow any other person or entity to occupy or
use all or any part of the Premises, subject only to obtaining
Landlord's prior written consent regarding the Subtenant, which
consent will not be unreasonably withheld or delayed. Approval or
consent shall not be required for a sublet or assignment to any
related entity or affiliate or successor of Tenant. Any assignment,
encumbrance or sublease without Landlord's prior written consent shall
be void and shall constitute a default. No consent to any assignment,
encumbrance or sublease shall constitute a waiver of the provisions of
this Section with respect to any subsequent assignment, encumbrance or
sublease. Landlord shall have the right to require any assignee or
subtenant which is not a Tenant related entity or affiliate, to
establish a reasonable Security Deposit prior to Landlord consent.
Tenant shall be and remain liable and responsible for payment and
performance of all obligations under the Lease pursuant to any
permitted assignment or sublease.
B) If for any proposed assignment or sublease approved by Landlord,
Tenant receives rent or other consideration, either initially or over
the term of the assignment or sublease, in excess of the rent called
for hereunder, or, in case of the sublease of a portion of the
Premises, in excess of such rent fairly allocable to such portion,
after appropriate adjustments to assure that all other payments called
for hereunder are taken into account, Tenant shall pay to Landlord as
additional rent hereunder fifty percent (50%) of the profit or other
consideration received by Tenant promptly after its receipt, unless
such subtenant or assignee is a Tenant related entity or affiliate in
which case Tenant may keep one-hundred percent (100%) of the profit
payments received by Tenant. Profits shall be defined as sublet
revenue less sublet expenses which shall include by way of example and
not be limited to: rental abatement, operating expenses,
construction/renovation costs, architectural and design fees, legal
and accounting fees, brokerage commissions, marketing and advertising
costs, moving allowances, cash allowances, and other reasonable and
customary expenses.
C) Occupancy of all or part of the Premises by parent, subsidiary, or
affiliated companies of Tenant shall not be deemed an assignment or
subletting. Regarding this paragraph (c) and any change in Tenant's
controlling interest as stated herein as of the date of this Lease,
Tenant shall provide Landlord with financial or other reasonable
information requested by Landlord, regarding any such change in
Tenant's interest. Landlord's consent regarding any change in Tenant's
controlling interest shall not be unreasonably withheld or delayed.
Provided Tenant is not in default, Landlord shall not have the ability
to recapture any subleased space during the initial or any extended
term of the Lease.
14) REPAIRS AND MAINTENANCE
-----------------------
A) Notwithstanding the provisions of Section 13 of the Lease, Landlord
shall repair and maintain the structural portions of the Building,
including but not limited to the roof, the basic plumbing, air
conditioning, heating and electrical systems, installed and furnished
by Landlord, unless such maintenance and repairs are caused in part or
in whole by the act, neglect, fault or omission of any duty by Tenant,
its agents, servants, employees or invitees, in which case Tenant
shall pay to Landlord the reasonable cost of such maintenance and
repairs. Landlord shall not be liable for any failure to make any such
repairs or to perform any maintenance unless such failures shall
persist for an unreasonable time, considering all factors, including
the availability of material, utilities and labor, after written
notice of the need of such repairs or maintenance is given to Landlord
by Tenant. There shall be no abatement of rent and no liability of
Landlord by reason of any injury to interference with Tenant's
business arising from the making or failure to make any repairs,
alterations or improvements in or to any portion of the Building or
the Premises or in or to fixtures, appurtenances, and equipment
therein, except where such injury is a result of Landlord's
negligence. Landlord shall be responsible for the cost of damage,
repairs or maintenance directly resulting from the negligence or
willful misconduct of the Landlord, its authorized agents or
employees.
Page 7 of 9
<PAGE>
B) Except for maintenance and repairs caused by Tenant as described in
Paragraph (A) above, Tenant's responsibilities under the repairs and
maintenance provisions of this Lease shall be limited to those
improvements constructed specifically for Tenant and shall not include
building mechanical, plumbing or electrical systems unless such
systems were constructed as a part of Tenant's improvements (for
example, supplemental HVAC).
15) SIGNAGE
-------
A) Tenant shall have the right to install its sign or logo on 50% of the
area contained on a single standard sign panel located on each of the
project's exterior monument signs. The signage text or logo color
shall be consistent with existing standard project signage and
Landlord shall have sole and absolute discretion regarding the
approval of any and all signage.
B) Paragraphs (a) and (b) of Section 43 in the Lease are hereby deleted.
16) BROKERAGE AND AGENCY DISCLOSURE
-------------------------------
A) In this transaction, Julien J. Studley, Inc. represents the Landlord.
The Landlord shall be responsible for all brokerage fees associated
with this transaction. Landlord and Tenant hereby acknowledge that the
above agency disclosures were made at the beginning of the transaction
process and the parties hereby consent to the above.
B) Tenant and Landlord each represent and warrant that they have not
dealt with any real estate brokers, agents or finders other than
Julien J. Studley, Inc. and The Trammell Crow Company. Each party
hereby agrees to indemnify the other from liability arising from any
breach of such representation and warranty including costs of
reasonable attorneys fees in connection therewith.
17) USE
---
A) Landlord represents that it is unaware of any "Hazardous Materials" on
the site or in the building. In addition, Landlord represents and
warrants that the air in the Demised Premises and the Common Areas are
free and shall remain free, during the term of this Lease, of any
concentrations of asbestos or radon that violate any Federal, State
Local laws or present a health hazard to Tenant's employees or
customers. Landlord shall promptly cure any such asbestos or radon
hazard. Tenant has the duty to notify Landlord of any hazardous
materials that Tenant or Tenant's employee's become aware of so that
Landlord may initiate appropriate action.
18) ADDRESSES FOR NOTICE
--------------------
Tenant's address for notices:
(Prior to occupancy) (After occupancy)
THE MUSIC CONNECTION CORP. THE MUSIC CONNECTION CORP.
250 Exchange Place 1831 Wiehle Avenue
Suite A Suite 105
Herndon, VA 20170 Reston, VA 20190
Landlord's address for notices:
Metric Property Management
1100 Circle 75 Parkway
Suite 710
Atlanta, GA 30339
Attn: Regional Vice President
19) SECURITY DEPOSIT/LETTER OF CREDIT
---------------------------------
In addition to the cash security deposit equal to one month's rent, Tenant
shall provide Landlord with an irrevocable Letter of Credit in the amount
of $50,000 within five (5) days of execution of this Lease. The Letter of
Credit shall be in a form acceptable to Landlord and from a national or
large regional financial institution approved by Landlord in its sole but
reasonable discretion. The Letter of Credit can be removed upon three (3)
years of Tenant faithfully meeting its lease obligations without any events
of default occurring. The Letter of Credit shall be treated as an
additional security deposit under the terms and conditions contained in
Section 31 of the Lease.
Page 8 of 9
<PAGE>
TENANT
THE MUSIC CONNECTION CORPORATION
BY: /s/ Robert Bernardi
------------------------------
NAME:
----------------------------
TITLE:
---------------------------
DATE:
----------------------------
WITNESS:
-------------------------
LANDLORD
CENTURY PROPERTIES FUND XX,
a California limited partnership
owner of Linpro Park I
By: Metric Management, Inc.,
a Delaware Corporation,
its agent
By: /s/ Richard A. Faber 1/27/98
-----------------------------------
Richard A. Faber
Vice President
Page 9 of 9
<PAGE>
AMENDMENT TWO
-------------
This Amendment Two is attached to and made a part of the Lease by and between
Century Properties Fund XX (Landlord) and The Music Connection Corporation and
sets forth additional terms agreed upon by the parties. In the event of any
conflict between any provisions of this Amendment Two and any provisions of the
Lease (including Addendum One, Amendment One and Exhibits thereto), the
provisions of this Amendment Two shall control. Except as otherwise modified
herein, all terms and provisions of the Lease shall remain in full force and
effect.
1) TERM COMMENCEMENT/RENT COMMENCEMENT/EXPIRATION
----------------------------------------------
The Term Commencement Date is June 26, 1998, which represents the Tenant move-in
date. The Term Expiration Date shall be June 30, 2005. Rent shall commence and
be payable effective June 26, 1998. The prorated rent due for June is one
thousand four hundred thirteen and 44/100 ($1,413.44).
TENANT
THE MUSIC CONNECTION CORPORATION
BY: /s/ Robert Bernardi
-----------------------------------
NAME: Robert P. Bernardi
---------------------------------
TITLE: Chairman/CEO
--------------------------------
DATE: 7/27/98
---------------------------------
WITNESS: /s/ witness
------------------------------
LANDLORD
CENTURY PROPERTIES FUND XX,
a California limited partnership
Owner of Linpro Park One
By: Metric Management, Inc.,
a Delaware Corporation,
Agent For Owner
By:
-----------------------------------
Tim Brock, Regional Vice President
<PAGE>
1) TERM COMMENCEMENT AND EXPIRATION
--------------------------------
The Lease is scheduled to commence on April 1, 1998. However, the Premises might
not be ready for occupancy by that date. Provided that Tenant has diligently
pursued all tasks required to complete the renovation improvements and has not
caused any delays by its actions or failure to act, Landlord will consider
adjusting the Term Commencement Date to reflect the actual completion date.
The Lease term shall run for seven (7) years from the actual Term Commencement
Date through the Term Expiration Date. The actual Term Commencement Date will
documented in an estoppel certificate which shall be completed shortly after
occupancy. In the event the Term Commencement Date commences on a date other
than the first of the month, the Term Expiration Date shell be seven (7) years
starting from the first full month following the Term Commencement Date.
2) SECURITY DEPOSIT/LETTER OF CREDIT
---------------------------------
In lieu of the Letter of Credit Tenant is required to provide as described in
Addendum One, Tenant shall have the option to provide Landlord with an
additional cash security deposit in the amount of $50,000 Landlord shall place
the supplemental security deposit in an interest bearing account (certificate of
deposit or money market at Landlord's discretion). This supplemental security
deposit plus accrued interest shall be returned upon three (3) years of Tenant
faithfully meeting its lease obligations without any events of default
occurring. The Letter of Credit and/or the supplemental security deposit shall
be treated as an additional security deposit under the terms and conditions
contained in Section 31 of the Lease.
TENANT
THE MUSIC CONNECTION CORPORATION
BY: /s/ Robert Bernardi
-----------------------------------
NAME: Robert P. Bernardi
---------------------------------
TITLE: Chairman/CEO
--------------------------------
DATE: March 20, 1998
---------------------------------
WITNESS: /s/ witness
------------------------------
LANDLORD
CENTURY PROPERTIES FUND XX,
a California limited partnership
By: Metric Management, Inc.,
a Delaware Corporation,
as Attorney-In-Fact
By: /s/ Richard A. Faber
-----------------------------------
Richard A. Faber
Vice President
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "EXPERTS" and to the
use of our report dated February 5, 1999 (except for Note 11, as to which the
date is , 1999) in the Registration Statement (Form S-1 No. 33-00000) and
the related Prospectus of musicmaker.com, Inc. (formerly The Music Connection
Corporation) dated February 19, 1999.
Ernst & Young LLP
Vienna, Virginia
, 1999
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the restatement of the capital accounts for the reverse stock split as
described in Note 11 to the financial statements.
/s/ Ernst & Young LLP
Vienna, Virginia
February 19, 1999
<PAGE>
EXHIBIT 23.3
Consent of Darby & Darby P.C.
-----------------------------
We consent to the reference to our firm under the captions "Risk Factors--We
Depend Upon Intellectual Property Rights and Risk Having Such Rights Infringed"
and "Business--Intellectual Property and Proprietary Rights" in the Registration
Statement (Form S-1, No. ________________) and the related Prospectus of
musicmaker.com, Inc. (formerly the Music Connection Corporation), dated February
19, 1999.
/s/ Darby & Darby P.C.
New York, New York
February 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 972,954
<SECURITIES> 0
<RECEIVABLES> 99,029
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,097,378
<PP&E> 552,688
<DEPRECIATION> (191,979)
<TOTAL-ASSETS> 3,233,963
<CURRENT-LIABILITIES> 1,385,145
<BONDS> 0
3,434,700
0
<COMMON> 27,080
<OTHER-SE> (2,339,748)
<TOTAL-LIABILITY-AND-EQUITY> 3,233,963
<SALES> 74,028
<TOTAL-REVENUES> 74,028
<CGS> 46,821
<TOTAL-COSTS> 46,821
<OTHER-EXPENSES> 4,699,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,654,767)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,654,767)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
