<PAGE>
As filed with the Securities and Exchange Commission on June 15, 1999
Registration No. 333-72685
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
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)
---------------
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)
---------------
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)
---------------
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
---------------
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. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) per Share Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share 9,660,000 shares $14.00 $135,240,000 $37,597
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</TABLE>
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(1) Includes 1,260,000 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.
(3) $8,632 was previously paid.
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>
Subject to completion: dated June 15, 1999.
PROSPECTUS
[logo of Musicmaker.com, Inc. appears here]
8,400,000 shares of common stock
$ per share initial public offering price
This is our initial public offering. We seek to sell 5,000,000 shares of our
common stock and one of our stockholders named in this prospectus seeks to sell
3,400,000 shares. 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 $12.00 and $14.00 per share. We have filed an application for our
common stock to be quoted on the Nasdaq National Market under the symbol
"HITS."
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....................
Net offering proceeds to selling stockholder....................
</TABLE>
The underwriters have reserved up to 250,000 shares of our common stock
offered hereby for sale at the initial public offering price to selected
officers, directors, employees, business associates and other persons
associated with musicmaker.com. We have granted the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase a maximum
of 1,260,000 additional shares to cover over-allotments. Because the
underwriters may choose not to exercise their over-allotment option, the
calculations in the table above do not account for exercise of that option.
------------
Investing in our common stock involves risks.
See "Risk Factors" section beginning on page 5 of this prospectus.
------------
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
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.
<PAGE>
[At the top of the page of the inside front cover, "musicmaker.com" and the
slogan, "Freedom of Choice in Music" appear.]
[Below the slogan appears a box with a list of artists whose songs
musicmaker.com offers on its website. Underneath the list of artists are
pictures of a computer and a custom CD. Above the computer and the custom CD,
there are arrows pointing from text to the pictures and the text reads "Choose
Your Method of Delivery." Below the computer is the text: "Secure MP3 Digital
Download" and below the custom CD is the text "Your Custom CD."]
[At the top of and spread across both gatefold pages appears the text,
"Create Your Own Custom Music." The gatefold consists of two sections,
containing several duplications of visual page screen shots from
musicmaker.com's website and textual descriptions of the steps a customer
takes to order a Custom CD on the website. The gatefold pages have three
screens on each page, in a step-by-step diagram with arrows pointing from one
screen to the next on that particular page.]
[On the left side, top third of the first page of the gatefold, is a screen
shot of musicmaker.com's home page. The screen includes a search engine,
genres, specials, and collections offered to customers. The screen also
displays the steps to begin the process of ordering a CD or to download
digital tracks.
To the right of Musicmaker.com's home page appears "1. Choose your own songs
by Genre or Artist. Browse our collection to find your favorite songs or check
out our Search Helpers. Listen to samples of every song and you can add up to
20 tracks or up to 70 minutes on your CD."]
[On the right side, in the middle of the first page of the gatefold, is the
screen that appears when the jazz genre is chosen. In addition to the buttons
that appear on the homepage, the jazz genre screen includes the jazz catalog,
a list of the top jazz artists, and buttons to choose to browse alphabetically
by artist name.
To the left of the jazz genre screen appears: "2. If Jazz is your bag, just
click on the "alphabetically by artist" list and then select your favorite
artist."]
[Below and to the left of the jazz genre screen, in the bottom third of the
first page of the gatefold, is the sample artist screen for Miles Davis, which
includes in addition to the buttons that appear on the homepage listed a list
of the most ordered Miles Davis' tracks and buttons that can be used to add,
play or get information about a song by the artist chosen. The price of the
custom CD and the option to play the tracks appear below the tracks listed.
To the right of the Miles Davis screen appears: "3. Once you've selected
your artist take a look at our catalog of songs, click on the Add box and
start building your custom selections."]
[On the left side, top third of the second page of the gatefold appears:
Personalize Your Custom CD screen, including the buttons appearing on the top
of the homepage, an explanation of how to personalize the CD and what it will
look like, and icons that can be chosen to be printed on the CD. At the bottom
of the screen are buttons giving the customer the option to make changes or
ignore changes.
To the right of the personalization screen appears: "4. You can Personalize
your CD. Choose the order of your songs, a title and graphic of your choice
for your CD. Your Title will be printed on the CD, as well as on the spines of
the jewel case and back cover. Select a Graphic for the right occasion."]
[Below and to the right of the Personalize Your Custom CD screen, in the
middle of the second page of the gatefold, appears the View/Edit screen
containing the buttons from the top of the homepage. The View/Edit Screen also
has the options to view and to edit the personalized message and art, to view
and edit the content of the CD, and to play all, delete all, change the
sequence or buy the Custom CD.
To the left of the View/Edit screen appears: "5. Check your list to make
sure your selection of songs, title and graphic is correct. Click on Ready to
Buy."]
[Below and to the left of the View/Edit screen the second page of the
gatefold is the order form page. The screen allows the customer to input the
desired quantity and to recalculate the order price. The page shows the order
statement with the product/CD content, quantity, any Insider's Club member's
bonus and the price. The page has a button to complete the order or to get
feedback.
To the right of the order form page appears: "6. Now just fill out your
Order Form so we can start processing your Custom CD. Click on Complete
Order."]
<PAGE>
Prospectus Summary
You should read this summary together with the more detailed information and
financial statements and related notes 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 April 8,
1999; and a 2.33-for-one stock split effected on June 14, 1999.
Musicmaker.com is a leading provider of customized music CD compilations over
the Internet. Our music library currently contains over 150,000 song titles
licensed from independent record labels. We have recently entered into an
exclusive license agreement with Virgin Holdings, Inc., an affiliate of EMI
Recorded Music, the third largest music company in the world. Our new
relationship with EMI gives musicmaker.com the potential for access to tracks
from EMI artists and the extensive music catalog of a major record company.
Under our agreement with EMI, we were granted an exclusive five-year worldwide
license to music content that EMI makes available for use in online sales of
our custom CDs. EMI may also grant us a non-exclusive license to digitally
download tracks from its music catalog once a standard for downloading is
approved by the record industry. EMI now holds a controlling interest in our
common stock.
Our customers can search our extensive online music library and sample and
select songs to make their own customized compilation CDs. Our custom CDs can
be further personalized by including selected graphics and 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 privately developed technology, which can
digitally store approximately five million songs, provides advanced
search/retrieval capabilities and automates the high speed production of our
custom CDs. The U.S. Patent and Trademark Office has notified us that they will
issue a patent for our storage and production system.
Our customers can also download selected music from our existing music
library using:
. Secure-MP3, an MP3 format designed to discourage piracy;
. Liquid Audio format; or
. MS-Audio 4.0, a compression format developed by Microsoft Corporation.
Musicmaker.com has amassed a library of music in multiple genres including
significant catalogs of jazz, blues and classical music. Musicmaker.com has
music content agreements with over 100 independent record labels. Artists in
our music library currently 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
Under our exclusive license agreement, EMI may grant musicmaker.com music
content from its labels which include Blue Note, Capitol Records, Chrysalis,
EMI Records and Virgin Records.
1
<PAGE>
We sell our custom CDs through our website as well as the websites of record
labels, music retailers and online broadcasters, including Platinum
Entertainment, Inc., Trans World Entertainment Corporation and Spinner
Networks, Inc. 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 also entered into a similar
exclusive marketing alliance with Audio Book Club, Inc., a direct marketer of
audio books through the Internet and club member catalogs, with over 1.5
million audio buyers and users. We intend to seek marketing alliances with
additional music and non-music retailers.
Our custom CDs allow customers to compile their favorite songs on one CD. We
believe that our custom CDs also benefit record labels by providing an
additional source of revenue for songs in its catalog that are not on any
current music charts. 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 digital downloads.
Musicmaker.com believes that the following trends provide us an opportunity
to achieve 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.
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.
. Former President of Warner Music Media and RCA Direct Marketing,
Inc./BMG Direct Marketing, Inc.
. Senior Vice President of Worldwide New Media for EMI Recorded Music.
. Former Vice President of Strategic Planning and New Business Development
at Comedy Central.
. Co-founder of PictureTel Corporation and TranSwitch 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 strategic 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.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by
musicmaker.com......... 5,000,000 shares
Additional common stock
offered by selling
stockholder............ 3,400,000 shares
Common stock outstanding
after this offering.... 29,944,773 shares
Does not include........ . 840,000 shares of common stock underlying
outstanding warrants issued to Ferris, Baker
Watts, Incorporated and Fahnestock & Co.
Inc., as representatives of the underwriters,
. 1,260,000 shares of common stock that may be
issued upon exercise of the underwriters'
overallotment option.
. 1,806,041 shares of common stock underlying
outstanding common stock warrants.
. 1,697,929 shares of common stock underlying
warrants issued upon conversion of the
outstanding preferred warrants.
. 1,892,882 shares of common stock underlying
stock options issued under our stock option
plan and outstanding as of the date of this
prospectus.
. 2,307,118 additional shares reserved for
issuance under our stock option plan.
Directed shares......... . 250,000 shares reserved by the underwriters
to be offered at the initial public offering price
to employees, business associates and selected
other persons associated with musicmaker.com.
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.......... "HITS"
</TABLE>
3
<PAGE>
Summary Financial Data
The following table summarizes our financial data. You should read this
information together with our consolidated financial statements and related
notes appearing elsewhere in this prospectus. As indicated in the table, we
have presented some of our financial data:
Pro forma to give effect to:
. The issuance of 15,170,860 shares of common stock in exchange for
licensing rights with EMI valued at approximately $47 million.
Pro Forma as adjusted to give effect to:
. The sale of 5,000,000 shares of common stock in this offering at an
assumed initial public offering price of $13.00 per share, the midpoint
of the range.
. The application of the net proceeds of this offering.
. The automatic conversion, upon completion of the offering, of all
outstanding shares of preferred stock into 1,908,729 shares of common
stock.
. The automatic conversion, upon completion of the offering, of all
outstanding convertible notes into 968,311 shares of common stock which
include $2,000,000 in principal amount of convertible notes outstanding
at March 31, 1999.
. The expensing of all capitalized loan fees related to the convertible
notes which include $227,501 capitalized at March 31, 1999.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
------------------------ ------------------------
Period from
April 23, 1996
(inception) to
December 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 22,416 $ 20,160
Cost of sales........... 2,590 450,455 677,700 232,800 463,283
--------- ----------- ----------- ----------- -----------
Gross profit............ 5,765 (437,023) (603,672) (210,384) (443,123)
Operating expenses:
Sales and marketing... -- 7,780 929,661 397,729 259,852
Operating and
development.......... 64,029 244,541 804,811 203,644 253,256
General and
administrative....... 306,381 1,360,856 2,334,438 433,731 824,629
--------- ----------- ----------- ----------- -----------
Total operating
expenses............... 370,410 1,613,177 4,068,910 1,035,104 1,337,737
--------- ----------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (1,245,488) (1,780,860)
Net interest (expense)
income................. (2,667) (33,957) 17,815 5,250 (23,867)
--------- ----------- ----------- ----------- -----------
Net loss................ $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727)
========= =========== =========== =========== ===========
Basic and diluted net
loss per share(1)...... $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27)
========= =========== =========== =========== ===========
Weighted average shares
outstanding(1)......... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561
========= =========== =========== =========== ===========
Pro forma basic and
diluted net loss per
share(1)............... $ (0.26) $ (0.13)
=========== ===========
Pro forma weighted
average shares
outstanding(1)......... 21,842,134 20,884,288
=========== ===========
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................ $ 1,685,234 $ 1,685,234 $ 60,185,234
Working capital.......................... 225,558 225,558 58,725,558
Total assets............................. 4,444,315 51,324,227 109,596,726
Debt, long-term portion.................. 2,214,286 2,214,286 214,286
Convertible preferred stock.............. 2,817,888 2,817,888 --
Total stockholders' (deficit) equity..... (2,214,599) 44,665,313 107,755,700
</TABLE>
- --------
(1) Computed on the basis described in Note 9 of the notes to the consolidated
financial statements.
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 described below are the most significant factors that make
an investment in musicmaker.com speculative and risky. 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 of these
adverse effects 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 these losses may continue for the foreseeable future as our
operating expenses continue to increase. We reported a net loss of $1,804,727
for the quarter ended March 31, 1999. We reported net losses of $4,654,767 for
the year ended December 31, 1998 and $2,084,157 for the year ended
December 31, 1997. As of March 31, 1999, we had an accumulated deficit of
$9,082,395. In connection with our license agreement with EMI, we will
amortize approximately $9,400,000 in each of the next five years. There can be
no assurance that we will ever achieve profitable operations or generate
significant revenue with our current products and strategy. Investors seeking
further financial data and analysis should review the consolidated financial
statements included in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The success of our business and growth of our online music library
significantly depend upon our license agreement with EMI.
We believe that our license agreement with EMI is a critical component of
our operations and is necessary to our achievement of any significant
commercial success. We currently have exclusive rights under a five-year
worldwide license to include in online sales of our custom CDs the content
that EMI elects to make available. EMI is under no obligation to grant us any
content at all and has not provided any content to date. Should EMI decide to
make any of its music content available to musicmaker.com, our use of that
content may be severely limited and restricted by EMI. EMI can also revoke or
terminate any rights to music content previously granted. Our exclusive rights
under the license agreement automatically become non-exclusive upon the
occurrence of triggering events contained in our agreement. Our agreement does
not limit or prevent EMI or any of its affiliates from offering directly to
the public custom CDs manufactured by them, independent of musicmaker.com, nor
does it obligate EMI to grant us any music for digital downloading.
5
<PAGE>
In the event of a termination of our EMI agreement, any failure of EMI to
provide substantial or popular music content, or the occurrence of an event
making our rights non-exclusive, our business, results of operations and
financial condition will be materially adversely affected. We may not be able
to negotiate a comparable agreement with other major labels, on terms
favorable to us, if at all. We must obtain licenses for commercially popular
music titles in a timely fashion to meet public demand.
In addition to our EMI license agreement, we also rely upon our license
agreements with over 100 independent record labels as well as our ability to
enter into additional agreements for music content. We cannot be sure of the
effect our license agreement with EMI will have upon our existing content
alliances or on our ability to enter into additional content agreements,
specifically with additional major record labels. See "Business--Music
Content."
We need to develop and increase public recognition of 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 brand recognition is increased, that we
will experience a corresponding increase in our sales.
The success of our business significantly 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 and digitally downloaded music markets may not be viable without the
growth of Internet commerce.
Our operations significantly 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, bandwidth, data capacity
and security. Improvement of the Internet's infrastructure will also require
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 similar
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 new standards or government regulation
may also require us to incur substantial compliance costs.
6
<PAGE>
Sale of custom CDs and digital delivery of music online 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 additional 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.
Factors influencing consumers' acceptance of our custom CDs and digitally
downloaded music include:
. Our ability to 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 catalog that are not on any current music charts.
. The belief that custom CDs will generate additional revenue without
adversely affecting traditional distribution methods and existing retail
pricing for CDs.
. 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 never achieve profitability. See
"Business--musicmaker.com Strategy."
Intense competition for online music sales and continued entry by parties with
greater resources could harm our financial performance and industry position.
The market for online commerce is extremely competitive, and we believe
competition, particularly in connection with online music sales, will continue
to grow and intensify. Our most visible custom compilation competitors
currently include CustomDisc.com, 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. Online competitors include CDnow, Inc.,
Amazon.com, Inc., barnesandnoble.com inc., Columbia House and BMG Music
Service. 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. Our most visible competitors for
digitally downloaded music include GoodNoise Corporation (recently renamed
EMusic.com) and MP3.com. 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.
In February 1999, 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. In May 1999,
Matsushita Electric Industrial Co. Ltd., AT&T Corp., BMG Entertainment and
Universal Music Group announced an alliance to develop and test technology for
secure digital distribution of music to personal computers and new digital
music playback devices. In June 1999, media company Cox Enterprises Inc.
announced an investment in and joint venture with MP3.com. 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 has encountered and will continue to encounter rapid and significant
changes in music distribution methods."
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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. In April 1999, Universal and BMG, which collectively control
approximately 45% of the U.S. music market, announced a joint venture to
promote and sell their pre-recorded CDs through a series of Internet websites
organized by music categories. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities and Sony decided to make its music content available for
downloading from the Internet using Microsoft's multimedia software MS-Audio.
In June 1999, Sony announced a partnership with Digital On-Demand in which
Sony will make its music catalog available for digital delivery to retailers
through in-store kiosks.
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, including affiliated entities of EMI, decide to compete with us on
their own or through others by offering 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. Under our
agreement with EMI, EMI can grant us non-exclusive rights to selected music
content for digital downloading, in their sole discretion, once an industry-
wide, secure format is developed by the Secure Digital Music Initiative. If
EMI also grants licensing rights to our competitors, competition for digital
downloading could increase. Our 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
online music industry. The competitive pressures that we encounter could
materially adversely affect our business, financial condition and operating
results. See "Business--Competition."
We are significantly dependent upon our existing marketing alliances and our
ability to enter into future alliances.
We believe that future marketing of our custom CDs is heavily dependant upon
our 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. Expiration
and failure to renew our alliance with Columbia House on similar terms could
also cause our exclusive rights under our EMI license agreement to
automatically become non-exclusive.
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 marketing alliances in the
future could materially adversely affect the promotion of our musicmaker.com
brand and our custom CDs. See "Business--Marketing."
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Our industry has encountered and will continue to encounter rapid and
significant changes in music distribution methods.
New ways of selling music digitally 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 is now 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 was viewed by many as the first step
taken by the major record companies to consider the sale of digital music
online. In addition, Microsoft Corporation is currently trying to sign up
artists and record labels for its new compression software MS-Audio. The MS-
Audio distribution method is intended to compete with MP3 and other formats.
Microsoft claims this technology has improved sound quality and faster
downloading. AT&T Corp. has similarly developed its a2b proprietary format for
downloading music. Musicmaker.com is uncertain which distribution format will
achieve market acceptance.
A task force of record companies, software programmers and consumer
electronics makers, called the Secure Digital Music Initiative, is attempting
to develop security and delivery standards by which songs available in digital
format can be disseminated without infringing upon copyright or other
intellectual property rights. In May 1999, Matsushita Electric Industrial Co.
Ltd., AT&T Corp., BMG Entertainment and Universal Music Group announced an
alliance to develop a platform for digital delivery within the work of the
Secure Digital Music Initiative. In May 1999, RealNetworks, Inc. announced the
introduction of its RealJukebox which permits recording and playback of music
CDs and digital downloads through a user's PC as well as the customization of
user playlists. If a proprietary music delivery format or playback device
receives widespread industry and consumer acceptance, we will be required to
license additional technology and information from third parties. There can be
no assurance that this third-party technology and information will be
available to us on commercially reasonable terms, if at all.
We have made a business decision to provide licensed music content over the
Internet and to license our 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 have expanded since beginning our operations and anticipate a period of
rapid growth which may be difficult to manage and could strain our resources.
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, this 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."
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We may encounter security risks associated with our 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
confidential information or customer data. If any misappropriation occurs, we
could incur significant litigation expense to assert our property rights or to
defend possible claims of misuse of, or failure to secure, consumers' personal
information.
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.
Security concerns related to 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.
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. Moreover,
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. We must
continue to add hardware and enhance software to accommodate any increased
content and use of our website. If we are unable to increase the data storage
and processing capacity of our systems at least as fast as the growth in
demand, our website may fail to operate at an optimal level for unknown
periods of time. 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 music storage and fabrication system failure.
Our business heavily depends upon our ability to maintain our computer and
telecommunications equipment in effective working order. Expansion of our
storage and fabrication systems has 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. We also do not lease space on another server that would
perform our website functions in the event of a system failure. 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.
We depend upon intellectual property rights and risk having our rights
infringed.
We consider our trademarks, trade secrets and similar intellectual property
to be a valuable part of our business. To protect our 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 these 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
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patent technologies that are similar or superior to that of musicmaker.com.
There can also be no assurance that third parties will not claim infringement
by us with respect to others' current or future intellectual property rights
or trade secrets. It is also possible that third parties will obtain and use
our content or technology without authorization.
We may encounter 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 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 online materials. Our exposure to any
related 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. Liability or alleged
liability could further harm our business by diverting the attention and
resources of our management and by damaging our reputation in our industry and
with our customers.
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,
Chief Operating Officer and Director.
. 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. Under
the terms of our agreements, Mr. Puthukarai's departure could materially
adversely affect our relationships with Columbia House and EMI. See
"Business--Marketing" regarding Columbia House, see "Business--Music Content"
regarding EMI. Investors seeking biographical information regarding our
executive officers and directors should review "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 qualified 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. Inability to
retain or attract qualified personnel 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.
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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 Internet address
components, appoint additional companies or agencies to assign domain names or
modify the requirements for holding domain names. Recently, the Internet
Corporation for Assigned Names and Numbers, an entity that manages the United
States government oversight of domain name registration, announced that five
new companies, including America Online, will be permitted to assign internet
addresses. As a result of these and other changes, 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 intellectual
property 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 intellectual property 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. These agencies may seek to regulate areas including
user privacy, pricing, content and consumer protection standards for our
products and services. Compliance with additional regulation could hinder our
growth or prove to be prohibitively expensive. It is also possible that the
introduction of additional regulations could expose companies involved in
Internet commerce, or the provision of content over the Internet, to
significant liability. If enacted, these government regulations could
materially adversely affect the viability of Internet commerce, generally, as
well as our business, financial condition and results of operations.
Virgin Holdings, Inc. beneficially owns a controlling interest in
musicmaker.com's voting securities.
Virgin Holdings, Inc., an affiliate of EMI, will beneficially own 39.3% of
our outstanding shares of common stock following the completion of this
offering and 37.7% if the underwriters' overallotment option is exercised in
full. As a result, Virgin Holdings will exercise significant control over all
matters requiring stockholder approval. Under the terms of a stockholders'
agreement executed by Messrs. Bernardi, Puthukarai, Steinberg, Rho Management
Trust I, Virgin Holdings and RHL Ventures LLC, Virgin Holdings will be
entitled to designate three members to the Board of Directors. The
concentrated holdings of a single stockholder and the presence of three
designees on the Board of Directors may result in a delay or the deterrence of
possible changes in our control, which may reduce the market price of our
common stock. See "Principal Stockholders."
Our international expansion may create compliance and operational
difficulties.
We intend to expand our business into international markets. In the event
that we conduct international expansion, we will encounter many of the risks
associated with international business expansion, generally. These 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 held by our current stockholders may adversely affect our stock price.
We will have 29,944,773 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, under the Securities Act of 1933. Our common stock sold prior to the
offering and 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 their
corresponding purchase rights and the issuance of common stock, unless
registered, may only be sold under Rule 144 or an exemption from registration.
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. Under our stock option plan, options to purchase 1,892,882 shares of common
stock are issued and outstanding and upon exercise, the underlying common
stock may be freely traded subject to the limitations imposed by Rule 701
of the Securities Act. An additional 2,307,118 shares of common stock are
reserved for issuance under our stock option plan.
. 1,806,041 common stock warrants outstanding, 1,697,929 common stock
warrants to be issued upon conversion of the outstanding preferred warrants
and 840,000 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, in accordance with, and as limited by, Rule 144.
Stockholders holding approximately 24.6 million shares or 98.8% 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
these 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 $13.00 and after deducting
underwriting discounts and commissions and other expenses of the offering, we
will receive net proceeds of $58,500,000. 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. Management's
allocation of the net proceeds will affect how our business evolves. There can
be no assurance that management will choose to spend these proceeds in areas
that benefit our business. In addition, there can be no assurance that
management will choose to allocate proceeds to further our current business
strategy. Management's failure to do so could have a material adverse effect
on our business, financial condition and results of operations. 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
$10.99, or 85% 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" to review the dilution associated with this offering and "Shares
Eligible for Future Sale" to review information regarding securities that
could further dilute net tangible book value per share.
Sales and other taxes may be imposed on our online 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 sales tax could create additional
administrative burdens on our operations and slow the growth of Internet
commerce. The imposition of taxes on Internet based transactions could
materially adversely affect our ability to become profitable in the future.
Our common stock has never been publicly traded.
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 "HITS." There can be no assurance, however, that an active trading
market will develop, or, if developed, that an active trading market will be
maintained.
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Our common stock price and quarterly results are likely to be highly volatile.
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. These market fluctuations could materially adversely affect
the market price of our common stock. Further, 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 that may
affect our operating results and the market price of our common stock include:
. Any announcement, or introduction of new or enhanced websites, products,
services and strategic alliances by us, our alliance partners or our
competitors.
. Increases or decreases in our song library, including specifically
content either granted or revoked under our EMI license.
. Seasonality of music purchases.
. Level of customer satisfaction, including our ability to retain existing
customers and attract new customers.
. Price competition, the introduction of new competitors 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, conditions specific to Internet commerce
and the music industry and changes in estimates prepared by market
analysis.
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. Difficulties in connection with any
of the factors above may cause our operating results to be below expectations
of investors and market analysts, and adversely affect the market price of our
common stock. As a result, investors purchasing in this offering may not be
able to resell their shares at or above the initial public offering price and
could lose all of their investment. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Anti-takeover provisions in our Charter and Bylaws could deter or delay
possible takeovers.
Our Charter and Bylaws contain provisions that could discourage potential
acquisition proposals or proxy contests and might delay or prevent a change in
control of musicmaker.com. These provisions and Delaware General Corporation
Law 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.
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 some
breaches of 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 breaches of 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
some stockholder claims might have been successful and benefited stockholders.
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Future growth of our operations may make additional capital or financing
necessary.
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 in order to:
. Finance unanticipated working capital requirements.
. Develop or enhance existing services or products.
. Fund costs associated with strategic marketing alliances.
. Respond to competitive pressures.
. Acquire complementary businesses, technologies, content or products.
We cannot be certain that we will be able to obtain funds on favorable terms,
if at all. If we decide to raise 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 "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."
Warning regarding our use of forward-looking statements.
This prospectus contains forward-looking statements which 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," "could," "estimate," "predict," "potential" or
"continue," the negative of these terms or 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 above and appearing elsewhere in
this prospectus. We cannot guarantee future results, levels of activity,
performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them
to actual results or to changes in our expectations.
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USE OF PROCEEDS
Assuming an initial offering price of $13.00 and after deducting
underwriting discounts and commissions and other expenses of this offering, we
will receive net proceeds of $58,500,000 from the sale of 5,000,000 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
these 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 the
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 "Risk Factors--Our
management will have broad discretion in applying the net proceeds of this
offering."
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. On a pro forma basis to reflect:
. The issuance of 15,170,860 shares of common stock in exchange
for licensing rights with EMI valued at approximately $47
million.
. On a pro forma as adjusted basis, to reflect:
. The receipt of and application by musicmaker.com of the
estimated net proceeds from the offering.
. The automatic conversion, upon completion of the offering, of
all outstanding shares of preferred stock into 1,908,729 shares
of common stock.
. The automatic conversion, upon completion of the offering, of
all outstanding convertible notes into 968,311 shares of common
stock, which includes $2,000,000 in principal amount of
convertible notes outstanding at March 31, 1999.
. The expensing of all capitalized loan fees related to the
convertible notes which includes $227,501 capitalized at March
31, 1999.
The information below assumes an initial public offering price of $13.00 as
reduced for underwriting discounts, commissions and expenses incurred in
connection with the offering.
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- ------------
<S> <C> <C> <C>
Current portion of long-term
obligation............................ $ 42,857 $ 42,857 $ 42,857
=========== =========== ============
Convertible notes and long-term
obligation............................ $ 2,214,286 $ 2,214,286 $ 214,286
Series A preferred stock............... 1,067,788 1,067,788 --
Series B preferred stock............... 1,750,100 1,750,100 --
Stockholders' (deficit) equity:
Common stock, $0.01 par value;
100,000,000 shares authorized;
6,896,873 shares issued and
outstanding on an actual basis;
22,067,733 shares issued and
outstanding on a pro forma basis and
29,944,773 shares issued and
outstanding on a pro forma as
adjusted basis...................... 68,969 220,678 299,448
Additional paid-in capital........... 6,019,768 52,747,971 116,669,301
Warrants............................. 779,059 779,059 779,059
Accumulated deficit.................. (9,082,395) (9,082,395) (9,992,108)
----------- ----------- ------------
Total stockholders' (deficit) equity .. (2,214,599) 44,665,313 107,755,700
----------- ----------- ------------
Total capitalization................... $ 2,817,575 $49,697,487 $107,969,986
=========== =========== ============
</TABLE>
17
<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 by the number
of outstanding shares of common stock. The net tangible book value equals
total assets less total liabilities.
At March 31, 1999, our pro forma net tangible book value, (deficit), after
giving effect to the EMI transaction, was $(3,252,000) or $(0.15) per share of
common stock. After giving effect to the sale of the common stock in this
offering, assuming an initial public offering price of $13.00 after deducting
the estimated underwriting discounts, commissions and offering expenses and
after the conversion of preferred stock and the convertible notes to common
stock, our pro forma as adjusted net tangible book value as of March 31, 1999,
would have been $60,066,000 or $2.01 per share. This represents an immediate
increase in net tangible book value of $2.16 per share to the existing holders
of common stock and an immediate dilution to investors purchasing in this
offering of $10.99 per share. The following table illustrates the per share
dilution to investors purchasing in this offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $13.00
Pro forma net tangible book value (deficit) before
offering.................................................. (0.15)
Pro forma increase attributable to new investors........... 2.16
Pro forma as adjusted net tangible book value after
offering.................................................. 2.01
------
Pro forma dilution to investors purchasing in offering....... $10.99
======
</TABLE>
The following table summarizes as of March 31, 1999, 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 $13.00, before deducting the estimated underwriting discount and
commissions and estimated offering expenses:
The table below excludes the following:
. 1,806,041 common stock warrants issued and outstanding, 1,697,929 common
stock warrants to be issued upon conversion of the outstanding preferred
stock warrants, and 840,000 common stock warrants to be issued to the
representatives in connection with this offering; and
. 1,892,882 options issued as of June 14, 1999 under our stock option
plan.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 24,944,773 83.3% $ 58,468,749 47.4% $ 2.34
New investors................. 5,000,000 16.7 65,000,000 52.6 13.00
---------- ---- ------------ ---- ------
Total....................... 29,944,773 100% $123,468,749 100% $ 4.12
========== ==== ============ ==== ======
</TABLE>
To the extent that any of these options or warrants are exercised, there
would be further dilution to investors purchasing in the offering. See 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.
18
<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. . We
believe the interim financial data reflect all adjustments necessary to
present fairly the results of operations for the three months ended March 31,
1998 and March 31, 1999 and our financial position at March 31, 1999. These
adjustments are of a normal recurring nature. The results of operations of
prior periods are not necessarily indicative of results that may be expected
for any other period. As indicated in the table, we have presented some of our
financial data:
Pro forma to give effect to:
. The issuance of 15,170,860 shares of common stock in exchange for
licensing rights with EMI valued at approximately $47 million .
Pro forma as adjusted to give effect to:
. The sale of 5,000,000 shares of common stock to be sold in this offering
at an assumed initial public offering price of $13.00 per share.
. The application of the net proceeds from this offering.
. The automatic conversion, upon completion of the offering, of all shares
of outstanding preferred stock into 1,908,729 shares of common stock.
. The automatic conversion, upon completion of the offering, of all
outstanding convertible notes into 968,311 shares of common stock which
include $2,000,000 in principal amount of convertible notes outstanding
at March 31, 1999.
. The expensing of all capitalized loan fees related to the convertible
notes, which include $227,501 capitalized at March 31, 1999.
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Period from Three months
April 23, 1996 Year ended December 31, ended March 31,
(inception) to ------------------------ ------------------------
December 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 22,416 $ 20,160
Cost of sales........... 2,590 450,455 677,700 232,800 463,283
--------- ----------- ----------- ----------- -----------
Gross profit............ 5,765 (437,023) (603,672) (210,384) (443,123)
Operating expenses:
Sales and marketing... -- 7,780 929,661 397,729 259,852
Operating and
development.......... 64,029 244,541 804,811 203,644 253,256
General and
administrative....... 306,381 1,360,856 2,334,438 433,731 824,629
--------- ----------- ----------- ----------- -----------
Total operating
expenses............... 370,410 1,613,177 4,068,910 1,035,104 1,337,737
--------- ----------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (1,245,488) (1,780,860)
Net interest (expense)
income................. (2,667) (33,957) 17,815 5,250 (23,867)
--------- ----------- ----------- ----------- -----------
Net loss................ $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727)
========= =========== =========== =========== ===========
Basic and diluted net
loss per share(1)...... $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27)
========= =========== =========== =========== ===========
Weighted average shares
outstanding(1)......... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561
========= =========== =========== =========== ===========
Pro forma basic and
diluted net loss per
share(1)............... $ (0.26) $ (0.13)
=========== ===========
Pro forma weighted
average shares
outstanding(1)......... 21,842,134 20,884,288
=========== ===========
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................ $ 1,685,234 $ 1,685,234 $ 60,185,234
Working capital.......................... 225,558 225,558 58,725,558
Total assets............................. 4,444,315 51,324,227 109,596,726
Debt, long-term portion.................. 2,214,286 2,214,286 214,286
Convertible preferred stock.............. 2,817,888 2,817,888 --
Total stockholders' (deficit) equity..... (2,214,599) 44,665,313 107,755,700
</TABLE>
- --------
(1) Computed on the basis described in Note 9 of the notes to the consolidated
financial statements.
19
<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 related notes as well as 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 factors, including, but not
limited to, those factors set forth under "Risk Factors" and appearing
elsewhere in this prospectus.
Overview
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. In June 1999, musicmaker.com
entered into a license agreement with Virgin Holdings, Inc., an affiliate of
EMI Recorded Music. We were granted an exclusive worldwide license to include
the music content that EMI makes available for use in our online sales of
custom CDs. See "Business--Marketing."
Since commercial operations primarily began in the fourth quarter of 1997,
musicmaker.com has sold over 6,300 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.
Musicmaker.com and N2K conducted two joint promotions and established co-
branded websites through which N2K customers could purchase our custom CDs.
Our marketing alliance with N2K has expired and new terms will be negotiated
for future promotions and marketing, if any. 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 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. We will make royalty payments in
connection with our actual sales of custom CDs including any content made
available under the terms of our license agreement with EMI. 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
under its licensing agreements with record labels providing music content.
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
20
<PAGE>
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. Also included in general and administrative expenses are expenses
associated with the issuance of warrants to various consultants, a shareholder
and Columbia House. The fair market values of these warrants were calculated
using the Black-Scholes option pricing method and expensed upon issuance of
the warrants.
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.
We have recently entered into an exclusive five-year licensing agreement
with EMI. Our new relationship with EMI gives musicmaker.com the potential for
access to tracks from EMI artists and the extensive music catalog of a major
record company. In connection with our license agreement with EMI, we will
amortize approximately $9,400,000 in each of the next five years.
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. In addition, musicmaker.com's net sales depend
substantially upon the level of activity on its website, the amount and
quality of content provided under its EMI license agreement 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. 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."
Results of Operations
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
Net Sales. Net sales for the quarter ended March 31, 1999 were $20,160
compared to $22,416 for the quarter ended March 31, 1998. For the quarter
ended March 31, 1999, primarily all of musicmaker.com's net sales were through
our website of which $11,907 were from direct sales, $3,936 were from the
affiliation with Columbia House and $2,313 were from the affiliation with N2K.
For the quarter ended March 31, 1998, all of musicmaker.com's net sales were
from direct sales. 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.
21
<PAGE>
Cost of Sales. Cost of sales for the quarter ended March 31, 1999 were
$463,283 compared to $232,800 for the quarter ended March 31, 1998. Cost of
sales included royalty advances that were paid upon signing of royalty
agreements with independent music labels of $458,819 for the quarter ended
March 31, 1999 and $221,348 for the quarter ended March 31, 1998. For the
quarter ended March 31, 1999, these royalty advances were charged as content
costs and accounted for $458,819 or 99% of cost of sales and production costs
accounted for $4,464 or 1%. For the quarter ended March 31, 1998, content
costs accounted for $225,861 or 97% of cost of sales, which included the
royalty advances charge of $221,348. Production costs of $6,939 accounted for
3% of cost of sales for the quarter ended March 31, 1998.
Operating and Development Expenses. Operating and development expenses were
$253,256 for the quarter ended March 31, 1999 compared to $203,644 for the
quarter ended March 31, 1998. For the quarter ended March 31, 1999, operating
and development expenses were primarily attributable to our website
maintenance of $44,126, equipment expense of $69,238, consultant expense of
$44,504 and salary expense of $80,580. For the quarter ended March 31, 1998,
operating and development expenses were primarily attributable to our website
maintenance of $7,760, equipment expense of $59,356, consultant expense of
$105,500 and salary expense of $30,000.
Sales and Marketing Expenses. Sales and marketing expenses were $259,852 for
the quarter ended March 31, 1999 and $397,729 for the quarter ended March 31
1998. Sales and marketing expenses primarily consisted of consulting expenses
of $204,969 and salary expense of $36,346 for the quarter ended March 31,
1999. For the quarter ended March 31, 1998, sales and marketing expenses
primarily consisted of consulting expenses of $107,668 and advertising
expenses of $290,061.
General and Administrative Expenses. General and administrative expenses
were $824,629 for the quarter ended March 31, 1999 and $433,731 for the
quarter ended March 31, 1998. General and administrative expenses consisted
primarily of $208,028 for salary, bonus and other payroll related expenses,
$77,499 for amortization of intangibles, legal and professional fees of
$93,157, equipment leasing expense of $75,728, warrant expense of $169,624 and
rent expense of $53,464. For the quarter ended March 31, 1998, general and
administrative expense primarily consisted of $182,062 for consulting expense,
$114,794 for legal and professional expense, and $85,274 for warrant expense.
See Notes 5 and 12 of the notes to the consolidated financial statements for
further discussion of warrant expense.
Interest Expense/Income. Interest income for the quarter ended March 31,
1999 was $16,539 compared to $5,250 for the quarter ended March 31, 1998.
Interest expense for the quarter ended March 31, 1999 was $40,406 compared to
no interest expense for the quarter ended March 31, 1998. The interest expense
for the quarter ended March 31, 1999 was attributable to the interest
associated with the outstanding convertible notes.
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
$677,700 compared to $450,455 for the year ended December 31, 1997. Cost of
sales included royalty advances that were paid upon signing of license
agreements with independent music labels of $614,000 for the year ended
December 31, 1998 and $447,500 for the year ended December 31, 1997. For the
year ended December 31, 1998 content costs accounted for $10,258 or 2% of cost
of sales and production costs accounted for $32,086 or 5% of cost of sales.
Postage and mailing costs accounted for $2,382 and credit card costs accounted
for $2,095 for the year ended December 31, 1998, or a combined 1% of cost of
sales. For the year ended December 31, 1997, production costs accounted for
$2,955, or 1% of cost of sales.
22
<PAGE>
Operating and Development Expenses. Operating and development expense
include expenses associated with enhancing the features and functionality of
our website and related systems. Operating and development expenses were
$804,811 for the year ended December 31, 1998 compared to $244,541 for the
year ended December 31, 1997. For the period ended December 31, 1998,
operating and development expenses were primarily attributable to our network
and website maintenance of $138,996, equipment expense of $102,304, consultant
expense of $431,848 and salary expense of $117,937. For the year ended
December 31, 1997, operating and development expenses were primarily
attributable to our network and website maintenance of $122,211, and
consultant expense of $122,330.
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 and $1,360,856 for year
ended December 31, 1997. For the year ended December 31, 1998, general and
administrative expenses consisted primarily of $375,305 for salary, bonus and
other payroll related expense, $305,873 for amortization of intangibles,
$317,199 for legal and professional fees, $33,806 for equipment leasing
expense, $225,000 for warrant expense and $75,848 for rental expense. For the
year ended December 31, 1997, general and administrative expense primarily
consisted of $954,320 for consulting expense, $211,111 for legal and
professional expense, and $92,817 for travel expense.
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
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 $450,455 for the year ended December 31,
1997 compared to $2,590 for the Inception Period. Cost of sales included
royalty advances that were paid upon signing of license agreements with
independent music labels of $447,500 for the year ended December 31, 1997 and
$0 for the year ended December 31, 1996.
Operating and Development Expenses. Operating and development expenses were
$244,541 for the year ended December 31, 1997 compared to $64,029 for the
Inception Period. This increase was primarily attributable to costs incurred
to enhance the features and functionality of musicmaker.com's website and
related systems. We incurred research and development costs of approximately
$120,000 for the year ended December 31, 1997 compared to $64,000 for the
Inception Period.
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.
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.
23
<PAGE>
Liquidity and Capital Resources
Net cash used in operating activities totaled $1,616,747 for the quarter
ended March 31, 1999 as compared to net cash used in operating activities of
$1,324,417 for the quarter ended March 31, 1998. Net cash used in operating
activities for the quarter ended March 31, 1999 was primarily attributable to
the net loss of $1,804,727 and net changes in operating assets and liabilities
of $139,410 offset by the issuance of stock and warrants for services for
$169,621 and depreciation and amortization of $157,769. Net cash used in
operating activities for the quarter ended March 31, 1998 was primarily
attributable to the net loss of $1,240,238 and net changes in operating assets
and liabilities of $264,275 offset by the issuance of stock and warrants for
services for $156,317 and depreciation and amortization of $23,779.
Cash used in investing activities was $100,961 for the quarter ended
March 31, 1999 and $137,381 for the quarter ended March 31, 1998. In both
quarters, the cash used in investing activities was primarily for the purchase
of property and equipment, including computer equipment and software,
leasehold improvements, and furniture and other office equipment.
Net cash provided by financing activities was $2,429,998 for the quarter
ended March 31, 1999 compared to $534,700 for the quarter ended March 31,
1998. Net cash provided by financing activities, for the quarter ended
March 31, 1999 was primarily through the issuance of 8% convertible notes for
$1,313,625, net of fees of $173,875 and the issuance of common stock for
$1,116,363. Net cash provided by financing activities, for the quarter ended
March 31, 1998 was primarily through the issuance of convertible preferred
stock of $534,700.
Net cash used in operating activities totaled $3,519,777 for the year ended
December 31, 1998 as compared to 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 for the year ended December
31, 1998 and $299,755 for the year ended December 31, 1997. In both years the
cash used in investing activities was primarily for the purchase of property
and equipment, including computer equipment and software, leasehold
improvements, and furniture and other office equipment.
Net cash provided by financing activities was $3,308,710 for the year ended
December 31, 1998 and $2,390,940 for the year ended December 31, 1997. 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 and warrants 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
24
<PAGE>
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 14,524 shares of its
common stock at $2.06 per share which expires on January 8, 2009.
Musicmaker.com recorded an expense of $16,021 related to the issuance of the
warrant.
On February 12, 1999, musicmaker.com signed a loan and security agreement
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, all of
which has been borrowed. 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 has financial
covenants, including minimum net worth and liquidity ratios. At March 31,
1999, we have $250,000 outstanding 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 converted into a term loan, equal
payments of principal and interest will be due monthly for 24 months, starting
on the first month following the initial six month maturity. The initial six
month period runs from March 12, 1999. The credit facility will automatically
convert to a 24 month term loan after September 11, 1999, if $5,000,000 in new
equity is raised prior to that date. 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.
On April 8, 1999, musicmaker.com issued a warrant to purchase 242,077 shares
of common stock at $1.98 per share to a consultant for services rendered.
Musicmaker.com recorded an expense of $464,415 related to the issuance of this
warrant.
On June 8, 1999, musicmaker.com entered into a license agreement with
EMI. Under this agreement, musicmaker.com issued 15,170,860 shares of common
stock valued at our estimate of the fair market value of our common stock of
$3.09 per share in exchange for a five-year license which provides us with
exclusive rights to use the content they make available for online sales of
our custom CDs. The license fee of $46,879,912 will be written off as a non-
cash charge of $9,375,982 in each year over the next five years, the term of
the license. In addition, we will make royalty payments to EMI for sales of
custom CDs that include EMI's content.
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 necessary capital
equipment with its working capital, which will include the proceeds from this
offering.
As of March 31, 1999, musicmaker.com had $1,685,234 in cash and cash
equivalents, a net increase of $1,210,350 from the quarter ended March 31,
1998 and an increase of $712,280 from the year ended December 31, 1998.
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 additional
financing will be available on acceptable terms, if at all, or that any
additional financing will not dilute shares held by musicmaker.com's
stockholders. See "Risk Factors--Future growth of our operations may make
additional capital or financing necessary."
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."
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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, 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 our internal 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 those 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 a 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
. We are a leading provider of custom CDs over the Internet.
. We have a license agreement with EMI, the third largest music company in
the world, and content agreements with over 100 independent labels.
. We have a music library of over 150,000 licensed song titles.
. Customers can search our extensive online music library and sample and
select the songs of their choice for custom CDs.
. Our technology, which can digitally store approximately five million
songs, provides advanced search/retrieval capabilities and automates
high speed production of custom CDs.
. Our custom CDs sound equivalent to pre-recorded CDs available at retail
stores and are sold at competitive prices.
. Our customers can also download music from our music library using
Secure-MP3, Liquid Audio, or Microsoft MS-Audio format.
Industry Background
Historically, the music industry has benefited from advances in technology,
such as the introduction of the CD in 1982. During the last ten years much of
the industry's growth resulted from consumers replacing existing record or
tape music collections with CDs. Moreover, the Recording Industry Association
of America reported that the shipment of full-length CDs grew 12.5% in 1998
providing evidence that the CD format continues to be popular.
According to the Recording 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. In 1998, CD unit shipment increased 12.5% from 753
million units in 1997 to 847 million units, and CD dollar value grew 15% from
$9.9 billion in 1997 to $11.4 billion in 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 other advantages
over traditional retail channels as well. 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 songs that are not on any current
music chart. 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.
Within the prerecorded music market, sales of compilation CDs, CD singles
and sales made through mail order and record club operations have encountered
steady growth. According to the Recording Industry Association of America,
sales of CD singles have increased from $6 million in annual sales in 1990 to
$213 million in 1998 and from 1 million CD single units shipped to 56 million
units over the same period. The Recording Industry Association of America's
research indicates an 11.6% increase in units shipped to direct and special
markets which include mail order operations, record clubs and non-traditional
retailers and a 7.4% increase in dollar value from these music sales between
1997 and 1998. The Recording Industry Association of America estimates that
sales by mail order, record club and other non-traditional retail outlets
account for 24.4% of the total domestic market.
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 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
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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 as commercial use of the Internet
by this group continues to grow they 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. These 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. It is estimated that five
million MP3 players were downloaded as of January 1999. Online music sales
attributable to digital distribution remain a small, but we believe increasing
portion of the total pre-recorded online music sales market. A report by
Forrester Research Inc. predicts that digital music downloads will be a $1.1
billion market by 2003. MP3's ability to freely copy and distribute music
without making royalty payments to the music labels and to the artists holding
the rights is of substantial concern to the music industry.
The music industry, and control over commercially popular music content, is
significantly concentrated among the five major record labels below, which
together accounted for approximately 80% of the music sold in 1997:
<TABLE>
<S> <C>
. BMG Entertainment . Sony Music Entertainment
. EMI Recorded Music . Warner Music
. Universal Music Group
</TABLE>
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 was viewed by many as a first
step taken by the major record companies to consider the sale of digital music
online.
In April 1999, Universal and BMG, which collectively control approximately
45% of the U.S. music market, announced a joint venture to promote and sell
their pre-recorded CDs through a series of Internet websites organized by
music categories. In May 1999, Microsoft Corporation and Sony Corporation
announced an agreement to pursue a number of cooperative activities and Sony
decided to make its music content available for downloading from the Internet
using Microsoft's multimedia software MS-Audio.
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 privately
developed 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 production technology
provide the ability to create a novel product--the custom CD--
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that could not previously be mass marketed. We use a 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.
In June 1999, we entered into a five-year license agreement with EMI under
which we currently have exclusive rights to the content they make available
for use in online sales of our custom CDs. We also have entered into exclusive
and non-exclusive license agreements with more than 100 independent 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 strategic 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
are currently the exclusive provider or a featured retailer of custom CDs for
Columbia House, Platinum, Audio Book Club and Trans World. We have recently
entered into a strategic marketing alliance with Spinner Networks, an online
music broadcaster owned by America Online. 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. We
believe that our relationship with EMI, an international music company with
operations in over 50 countries and access to international recording artists,
will assist in developing our international presence.
Music Content
Our online library of songs is licensed from record labels and made
available to customers for custom CDs and digital downloading.
In June 1999, we entered into a license agreement with EMI, the third
largest music company in the world, with major record labels including Blue
Note, Capitol Records, Chrysalis, EMI Records and Virgin Records. EMI has
artists in every leading music market, representing most genres of music from
pop, rock, jazz, classical, urban, dance, Christian and country. It also has a
rich catalog of music not listed on any current music charts. EMI's current
roster of artists includes approximately 1,500 artists.
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Our license agreement with EMI expires in June 2004. During the term of our
license agreement, we have exclusive worldwide rights to include in our library
the music content that EMI makes available for use in online sales of our
custom CDs. EMI may also elect, in its sole discretion, to provide selected
music content to musicmaker.com for digital downloads once a secure industry-
wide standard has been approved by the Secure Digital Music Initiative.
EMI has no obligation, however, to make any of its, or its affiliates', music
available to musicmaker.com and has not provided any content to date. Any
rights granted to us under the agreement may be limited by additional
restrictions. These restrictions may include limiting the duration of our
rights to a particular song or artist, limiting the geographic scope of our
distribution and restricting the combination of artists or songs with other
artists or songs, or other restrictions. EMI may also revoke or terminate any
rights to music content granted to musicmaker.com. Musicmaker.com is further
restricted from allowing any customer to purchase any custom CD with fewer than
five songs or containing more than one-half of the songs contained on any EMI
album.
Our exclusive rights under the license agreement automatically become non-
exclusive, permitting EMI to grant similar rights to other providers of custom
CDs upon:
.Our failure to meet agreed upon sales targets.
.The expiration of, and failure to renew on similar terms, our alliance with
Columbia House.
.The reduction of EMI's stock ownership in musicmaker.com below 25%.
.The acquisition by any person of 50% of our voting rights.
. Mr. Puthukarai's ceasing to act as our President, or to be actively
involved in our day-to-day operations.
Our agreement also does not limit or prevent EMI or any of its affiliates
from offering directly to the public custom CDs manufactured by them,
independent of musicmaker.com, nor does it obligate EMI to grant us any content
for digital downloading.
Our management believes that our relationship with EMI has positioned
musicmaker.com for the growth of our business. We believe that our relationship
with EMI will be critical to our ability to:
.Enlist additional music content providers.
.Enter into future marketing and strategic alliances.
.Increase awareness of the musicmarker.com brand.
To date, we have also entered into content licenses with over 100 independent
record labels.
Our music collection currently contains over 150,000 tracks licensed from
independent record labels including:
<TABLE>
<S> <C>
. The All Blacks B.V. . Platinum Entertainment, Inc.
(Roadrunner) . Prestige Records, Ltd.
. Alligator Records . Reachout International Records, Inc.
. Brunswick Record Corp. (ROIR)
. Cakewalk LLC (32 Records . Rounder Records Corp.
Jazz) . Sacred Groove Records
. Del-Fi Records . Storyville Records
. Fantasy Records, Inc. . Sun Entertainment Corporation
. HNH International Limited . Surrey House Music
(Naxos) . Tuff Gong International
. Koch International L.P. . VelVel Records LLC
. Lightyear Entertainment, . Viceroy Entertainment Group
L.P.
. Minnesota Mining and
Manufacturing Company (3M)
. Nimbus Communications
International Limited
</TABLE>
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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.
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
. The Heptones Dots
. Gregory Isaacs . Marine Girls
. The Paragons . The Moon Seven Times
. Lee "Scratch" Perry . Plastic Noise
. Yellowman Experience
. Television
Folk . The Burns Sisters Bluegrass . Bela Fleck
. Ramblin' Jack Elliott . The Bluegrass Album
. John Fahey Band
. David Grisman . J.D. Crowe & The New
. Peter Keane South
. Leo Kottke . The Freight Hoppers
. John McCutcheon . John Hartford
. Tom Paxton . The Johnson Mountain
. Tony Rice Boys
. Dave Van Ronk . The Nashville
. Cheryl Wheeler Bluegrass Band
. Doc Watson
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 believe that we will continue to expand and diversify our existing music
catalog through our license agreement with EMI and through development of
content relationships with additional record labels.
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Downloading of Music on the Internet
As of January 1999, approximately five million MP3 players had been
downloaded by consumers, suggesting that MP3 is rapidly becoming a preferred
method of obtaining music files over the Internet. Music files in an MP3
format can be typically downloaded in approximately ten minutes using a 56K
modem. MP3 music files may be easily copied and transferred.
Under our agreement with EMI, EMI may elect to make selected music content
available for digital downloading on a non-exclusive basis through
musicmaker.com, once a secure industry-wide standard has been adopted by the
Secure Digital Music Initiative. Beginning in October 1998, musicmaker.com
customers could download selected songs from our existing music library
directly through the Internet. To date over 99% of our revenues have been
generated from the sale of custom CDs and less than 1% of our revenues have
been generated from sales of downloaded music. We expect revenues from
downloaded music sales to increase as digital downloading methods becomes more
popular. To date, musicmaker.com has approximately 23,000 songs available for
digital downloading in the various formats we currently support.
Liquid Audio and Secure-MP3, two secure downloading formats that protect the
copyrights of the record label and the recording artist are available for
digital downloading of music from our website. 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. Our digital downloads also support
Microsoft Corporation's new Windows Media Technologies, MS-Audio 4.0 and
Windows Rights Manager. During a Secure-MP3, Liquid Audio or MS-Audio 4.0
download, an on-screen display notifies the consumers that they are receiving
a copyrighted file and provides the name of the licensing record label. Each
of the formats supported by our digital downloads requires 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 rely upon strategic marketing alliances. We believe that as
a result of our recent content relationship with EMI, we may have
opportunities to pursue strategic marketing programs with EMI, including the
introduction of new online music services. We have existing marketing
alliances with major music clubs, labels, broadcasters and retailers,
including Columbia House, Platinum, Spinner Networks and Trans World. We also
have 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 our marketing alliances
provide us 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.
Sales from Columbia House accounted for 5% of net sales in 1998. In connection
with the signing of the marketing agreement with Columbia House, we issued a
warrant to purchase 478,226 shares of common stock at $1.98 per share to
Columbia House, which expires on
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September 1, 2001. We also issued a warrant to purchase 242,077 shares at
$1.98 per share to a consultant for services rendered in connection with the
signing of the agreement, which expires on April 8, 2003.
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.
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 expenses, including but not limited to, actual expenses incurred under
the contract, royalties and reimbursements, 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 mailed our first
promotional insert to Columbia House members on May 27, 1999. As part of this
marketing alliance, Columbia House received 478,226 warrants for common stock
exercisable at $1.98 per share prior to September 1, 2001.
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. Sales from
Platinum accounted for 18% of net sales in 1998.
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 in MP3 format. We began offering these digital
downloads in the second quarter of 1999 and to date have approximately 10,000
Platinum songs available for downloading in MP3 format.
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 1.5 million audio users and buyers. Under this
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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 its 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.
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 established 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 but terminable by either party upon 60 days notice after the
first year. The term began 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.
Spinner Networks, Inc. Alliance. We have an exclusive marketing alliance
with Spinner Networks, Inc., a leading Internet radio broadcaster reaching
approximately 1.5 million listeners monthly through its Spinner.com website.
Under this alliance, musicmaker.com and Spinner Networks will establish a co-
branded website through which we will sell our custom CDs and digital
downloads through the Spinner.com website. We will also include monthly
promotional sales of our custom CDs and digital downloads through our co-
branded "music store" on the Internet.
Our exclusive marketing alliance with Spinner Networks is for a six month
term and shall automatically renew for an additional six month period provided
that Spinner Networks receives agreed upon minimum revenues during the initial
term. After the first three months of the initial term, Spinner Networks may
request that we remove access from the co-branded website to our digital
downloads.
In connection with this alliance, we have agreed to purchase from Spinner
Networks not less than $37,500 in media placements, including banner ads and
sponsorship opportunities on Spinner.com, promoting our co-branded website. In
June 1999, America Online announced that it had acquired Spinner Networks.
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.
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Merchandising and Consumer Programs
Insider's Club. Our Insider's Club membership program awards members a free
song(s) on custom CDs. 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 these 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.
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. A charge of $4.00 is added to the price of custom CDs personalized
with customer-provided photographs. 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. Using
musicmaker.com's privately developed 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 musicmaker.com's 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.
In April 1999, we entered into an agreement with Trans World Entertainment
Corporation to test market sales of our custom CDs through kiosks placed in
seven Trans World locations in Florida, New Jersey, New York and Virginia. We
expect our in-store kiosk test program to begin in August 1999 and to continue
for approximately five months.
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 storage and high speed CD fabrication system. That system runs
across a high speed fiber local area network managed and is controlled by
software we developed.
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We store and maintain our digital library of music files in uncompressed
format. The files are stored on mulitple hard drive units which are known as
arrays. Each array consists of five 18 gigabyte hard drives that holds
approximately 90 gigabytes of digital information, or approximately 2,250
uncompressed songs. Each array can be expanded up to eight 36 gigabyte hard
drives. Music data is typically received in digital format on pre-recorded CDs
or digital audio tape. Some of the older titles are converted to digital audio
tape from analog format prior to being transferred to the arrays for permanent
digital storage.
The array architecture is expandable and additional arrays can be added to
accommodate an increase in our online music library. Using this method, our
configuration can manage terabytes of musical data (or millions of songs of
storage capability). We believe that the array configuration is a cost-
effective storage method preferable to alternative systems including CD
jukeboxes and optical jukeboxes as it can:
. Expand to store additional data as necessary.
. Provide rapid search and retrieval functions.
. Provide a more reliable search, retrieval and delivery capability.
Moreover, alternative systems do not expand 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 60
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 workstation 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 various servers running a 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 to approximately 1,500 CDs in a 24
hour period. The present capacity of our five fabrication units is
approximately 5,000 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, 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 450 songs per hour.
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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 website's personalization capabilities offer the option of printing a
40-character message on the CD surface itself, on the tray card and on the
spines of the jewel box. Musicmaker.com also provides the capability for the
customer to select an occasion-specific graphic such as a birthday cake, rose,
or diploma 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
uploading of pictures is not part of the automated system.
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 on the Internet is highly competitive and
rapidly changing. Since the Internet's commercialization in the early 1990's,
the number of 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. Our most visible custom compilation competitors include
CustomDisc.com, CDuctive, 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 Amazon.com,
MP3.com and GoodNoise Corporation (recently renamed EMusic.com). Websites
established by recording artists and record labels have also begun to make
digital downloads available. 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. In February 1999, 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. In May 1999, Microsoft Corporation and Sony Corporation
announced an agreement to pursue a number of cooperative activities, and Sony
decided to make its music content available for downloading from the Internet
using Microsoft's Multimedia software. In May 1999, RealNetworks Inc.
announced the introduction of its RealJukebox product, for recording and
storage of CDs and digital downloads and permitting customized playback. In
June 1999, media company Cox Enterprises Inc. announced a joint venture and
investment in MP3.com. In June 1999, Sony announced a partnership with Digital
On-Demand to provide for digital delivery of its music catalog to in-store
kiosks. We expect additional market trials and
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alliances by technology and music industry participants to continue as the
music industry attempts to integrate emerging technology into its existing
distribution methods. We also expect existing distribution technologies to
continue to evolve and advance. See "Risk Factors--Our industry has
encountered and will continue to encounter rapid and significant 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 success in obtaining content under our license agreement with EMI.
. 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.
We believe that our primary competitive advantages in providing custom music
entertainment products and services via the Internet are:
. Expandable, cost-effective
. Relationship with EMI. technology.
. 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
CDs.
. Large online library of music . Technical expertise and
available for custom CDs and experience.
digital downloading.
. Music industry relationships
and experience of management.
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 content and marketing
alliances with music labels, clubs, retailers and broadcasters. Our management
has a strong foundation of technological and music industry expertise. We
believe that our relationship with EMI uniquely positions us to become a
leader in online custom CD compilations. 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--Intense
competition for online music sales and entry by parties with greater resources
could harm our financial performance and industry position."
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.
As of June 1, 1999, we employed 17 full-time employees and 8 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 Trade Secrets
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 privately developed
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 as 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 intellectual property rights, unauthorized
parties may
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attempt to copy or duplicate aspects of our production system or to obtain and
use information that we regard as privately developed or owned by
musicmaker.com. Policing unauthorized use of our intellectual property is
difficult, and there can be no assurance that our efforts to protect our
intellectual property rights and trade secrets 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 intellectual property rights or trade secrets to as great an
extent as do the laws of the United States.
We expect that Internet music content providers including musicmaker.com
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 infringement
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. The additional 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. Patent and Trademark Office for a system for and method of
producing custom CDs, which resulting patent will expire in 2016. The notice
of allowance means that the U.S. Patent and Trademark Office, after
examination of our patent application, has made a determination that we are
entitled to a patent for a new invention. We are currently using our privately
developed technology in the recording, storage, production and delivery of our
custom compilation CD products. We own two U.S. patent applications currently
pending in the U.S. Patent and Trademark Office, that describe variations on
the technology and methods described in the allowed patent application. We may
use these latter variations in our business, or license them to other
companies at a future time. 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. We believe that our patent to
be issued and other patent applications, if issued, will be valuable assets in
the event a competitor or other person seeks to use the technology or systems
protected by our patent filings. In an infringement situation, we may be able
to recover money damages, enjoin the infringing activity or negotiate a
favorable license with an infringer.
Trademarks. We own a number of trademarks based on our use of those marks in
commerce, and have applied to the U.S. Patent and Trademark Office to
federally register those 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. Patent and
Trademark Office. We have also filed two additional trademark applications for
CD KITTM and MUSICMAGICTM based on our intent to use those marks. See "Risk
Factors--We depend upon intellectual property rights and risk having our
rights infringed."
Property
Our Reston, Virginia headquarters occupy approximately 4,500 square feet of
general office space. The monthly rent for this space is approximately $8,000.
Our current headquarters lease is set to expire in June 2005. In March 1999,
we entered into a ten-year lease for 3,712 rentable square feet of general
office space located in New York City. The rent for this space is
approximately $16,400 per month for the first three years with an
approximately 5% escalation in rent after each of the third and sixth
anniversaries of the lease's commencement. 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
threatened claims which, in the aggregate, could have a material adverse
effect on our business, financial condition or results of operations. Some
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 information about 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.......... 45 Vice President of Marketing and Sales
Mark A. Fowler........... 38 Chief Financial Officer and Director of Finance and Administration
Lawrence A. Lieberman.... 38 Vice President of Internet Marketing
Edward J. Mathias........ 57 Director
Jay A. Samit............. 38 Director
Jonathan A.B. Smith...... 36 Director
John A. Skolas........... 46 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 one of the country's first CD music clubs 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 served as 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. 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.
Lawrence A. Lieberman. Mr. Lieberman has served as musicmaker.com's Vice
President of Internet Marketing since May 1999. From September 1996 to May
1999, Mr. Lieberman was Vice President of Strategic Planning and New Business
Development at Comedy Central, a cable television network owned jointly by
Time Warner and Viacom, where he was responsible for business activities
ancillary to its regular cable operations and managed all aspects of the
comedycentral.com site. Mr. Lieberman was the Executive Producer of the multi-
million selling "Chef Aid: The South Park Album," developed the "South Park"
home video line with sales in excess of three million units, and initiated
South Park's worldwide merchandise program including T-shirts, video games,
books and CD-ROMs. From February 1996 to September 1996, Mr. Lieberman was
with Time Inc. New Media developing content for their various Internet sites.
From August 1992 to February 1996, Mr. Lieberman was Vice President of
Marketing and Artist Relations at Warner Music Enterprises, and from April
1989 to August 1992, Mr. Lieberman was Director of Merchandising and Marketing
at MTV. Mr. Lieberman currently serves as an associate overseer at the Leonard
N. Stern School of Business at New York University and as a trustee of the
Hudson Valley Children's Museum. Mr. Lieberman earned a Masters degree in
Business Administration degree from the Leonard N. Stern School of Business at
New York University, and a Bachelors degree in Economics from Union College in
Schenectady, New York.
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.
Jay A. Samit. Mr. Samit has served as a musicmaker.com director since June
1999. Mr. Samit has been the Senior Vice President of Worldwide New Media for
EMI Recorded Music since April 1999, responsible for
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the strategy and implementation of all business development, strategic
alliances, marketing partnerships and creative development of internet, online
and website activities. From October 1996 to March 1999, Mr. Samit was Vice
President of Original Content for Universal Studios New Media Group and also
President of animalhouse.com, a Universal joint venture targeted at the online
college community. Prior to October 1996, Mr. Samit was the President of
Jasmine Multimedia Publishing, a new media publishing company founded by him
in 1981. Mr. Samit graduated magna cum laude from the University of California
at Los Angeles and received the Presidential Fellowship in 1981.
Jonathan A. B. Smith. Mr. Smith has served as a musicmaker.com director
since June 1999. Since January 1999, Mr. Smith has been the Vice President of
Finance and Planning for EMI Recorded Music North America, responsible for
overseeing corporate finance functions for EMI Recorded Music in North
America. From May 1995 to December 1998, Mr. Smith served as the Head of
Business Planning Support for EMI Records (U.K.). Mr. Smith graduated with
honors from The University of Hull, in Hull, United Kingdom, with degrees in
Economics and Politics and he has been a member of the Chartered Institute of
Certified Accountants since 1989.
John A. Skolas. Mr. Skolas has served as a musicmaker.com director since
June 1999. Mr. Skolas recently accepted a position as Chief Financial Officer
of Coelacanth Corporation, responsible for oversight of its financial and
administrative matters. From February 1998 until June 1999, Mr. Skolas served
as Chief Financial Officer and General Counsel of PhytoWorks Inc., responsible
for writing significant portions of the company's business plan, negotiating
transactions, structuring intellectual property licenses and handling a wide
range of financial and administrative matters. From February 1, 1992 until
March 31, 1997, Mr. Skolas served as President/Corporate Officer of the
Americas of EMI Group, Inc., the finance, treasury, tax and administrative
subsidiary of EMI Group plc serving its U.S. subsidiaries. From February 1,
1992 until January 1, 1999, Mr. Skolas also served as President and General
Counsel of EMI Group North America Inc., responsible for overseeing licensing
of semiconductor patents held by EMI Group. Mr. Skolas holds a Masters degree
in Business Administration from Harvard Business School, a Juris Doctor from
the University of Wisconsin Law School and a Bachelor of Arts degree from
Luther College. He holds a Certified Public Accountant certificate from the
Iowa Board of Accountancy and is admitted to practice law in Minnesota and
Wisconsin.
Classified Board of Directors, Stockholders' Agreement 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
seven members), the terms of the Class B directors, Mr. Mathias, Mr. Steinberg
and Mr. Smith, will expire at the 2001 annual meeting of stockholders and the
terms of the Class C directors, Mr. Bernardi, Mr. Puthukarai and Mr. Samit,
will expire at the 2002 annual meeting of stockholders. The term of the Class
A director, Mr. Skolas, will expire at the 2000 annual meeting of
stockholders.
Description of Stockholders' Agreement
Musicmaker.com entered into a stockholders' agreement with Virgin Holdings,
Rho Management Trust I, Messrs. Bernardi, Puthukarai, Steinberg and RHL
Ventures, LLC. The parties to the stockholders' agreement are required to vote
their shares of common stock to ensure that the number of directors on the
Board remains at seven and includes three directors designated by Virgin
Holdings, two directors designated by musicmaker.com and two independent
directors. Each class of directors must include one Virgin Holdings director.
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.
Committees of the Board of Directors and Compensation
The Board of Directors has designated an Audit Committee of the Board of
Directors, which shall consist of Mr. Skolas and Mr. Mathias after the
offering. The Audit Committee is responsible for reviewing, along with
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<PAGE>
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, which shall consist of Mr. Bernardi, Mr. Mathias and Mr.
Samit after the offering. The Compensation Committee shall review the
performance of our management and recommend and approve the compensation of
and the issuance of stock options to executive officers and employees under
our stock option plan.
Musicmaker.com directors currently do not receive a fee for their service on
the Board of Directors or any committee of the board. Directors are eligible
to receive stock options under musicmaker.com's stock option plan. Mr.
Mathias, a non-employee, non-consultant director, received 58,250 common stock
options for his service on the Board. Directors receive reimbursement to cover
their reasonable expenses incurred in attending Board meetings. Under 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 Mr. Samit. 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. 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 -- 302,597
Chairman of the Board of Directors and
Co-Chief Executive Officer
Devarajan S. Puthukarai................ $ 250,000 $ 100,000 302,597
President, Co-Chief Executive Officer
and Chief Operating Officer
</TABLE>
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. 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 of the Securities and
Exchange Commission. Potential realizable value does not represent
musicmaker.com's estimate of future stock price growth.
<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...... 193,662 21.3% $2.27 2003 $ 1,960,000 $ 3,960,000
108,935 12.0% 2.06 2008 1,125,000 2,250,000
Devarajan S.
Puthukarai............. 193,662 21.3% 2.27 2003 1,960,000 3,960,000
108,935 12.0% 2.06 2008 1,125,000 2,250,000
</TABLE>
Option Grants in 1998
44
<PAGE>
The following table sets forth 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........................... 48,417 254,180
Devarajan S. Puthukarai...................... 48,417 254,180
</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 their employment
agreements, Mr. Bernardi receives a base salary of $175,000 per annum and Mr.
Puthukarai receives a base salary of $250,000 per annum. 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 non-compliance by
musicmaker.com with a material provision of the employment agreement, 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 written notice of non-renewal is given by either
party 90 days before expiration of any term. Should musicmaker.com decide not
to renew their respective agreements, Mr. Bernardi and Mr. Puthukarai shall be
entitled to a severance payment equal to one year's salary and benefits, as in
effect prior to termination. Each agreement restricts the ability of Mr.
Bernardi and Mr. Puthukarai to solicit customers or call upon employees of
musicmaker.com for one year after the terms of each of their agreements. The
agreements further restrict ownership in excess of 5% of any U.S. publicly
traded company which is engaged in musicmaker.com's business.
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 key man insurance covering Mr. Bernardi in the amount of
$1 million and naming musicmaker.com as beneficiary.
Stock Option Plan
Musicmaker.com has adopted a stock option plan for the purpose of promoting
our long-term growth and profitability by:
. Providing key people with incentives to improve stockholder value and
contribute to the growth and financial success of musicmaker.com.
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<PAGE>
. 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 under Section 422
of the Internal Revenue Code. The stock option plan also provides for the
award of stock appreciation rights, including free standing, tandem and
limited stock appreciation rights. Under the stock option plan
4,200,000 shares of common stock are reserved for issuance, representing 14.0%
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 1,892,882 shares of common stock were outstanding, at
exercise prices ranging from $0.17 to $3.43 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 the 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.
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. Under these 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 the
director or officer acted in good faith and in a manner the director
reasonably believed to be in, or not opposed to, the best interests of
musicmaker.com. The Charter, Bylaws, and Delaware law further provide that
indemnification is not exclusive of any other rights to which directors and
officers 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 that person in the capacity he served for musicmaker.com or
arising out of his status as such, whether or not musicmaker.com would have
the power to indemnify that person against similar liability under Delaware
law. Musicmaker.com has director and officer insurance coverage. Our directors
and officers are insured against liability of up to $2,000,000 for each loss,
each policy year, and an additional $3,000,000 in the aggregate each policy
year.
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<PAGE>
CERTAIN TRANSACTIONS
In July 1996, we sold 1,286,038 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 1,512,984 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 665,714 and 438,766 shares of our common stock, in that
order.
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 $2.89 per share. Of these investors, Mr. Bernardi and Mr.
Mathias, one of our directors, participated in the offering, purchasing notes
and paying aggregate consideration of $50,000 and $150,000, in that order.
These purchases were on the same terms as those applying to non-affiliated
investors participating in the convertible notes offering.
In connection with a private placement of securities, in June and July 1997
we converted the principal and all accrued interest under the terms of the
outstanding convertible notes at a price of $1.65 per share, rather than $2.89
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
received 32,189 shares of our common stock and Mr. Mathias received 96,569
shares of our common stock. 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 15,130 shares of common stock in the June 1997 private placement at
$1.65 per share.
In October 1997, we issued 453,896 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 $1.65 per
share and expire on October 15, 2007.
In December 1997, musicmaker.com issued and sold 875,384 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
121,038 and 30,259 shares of our Series A outstanding preferred stock, in that
order. The shares were purchased at a price of $1.65 per share. Additionally,
1,667,398, 230,550 and 57,637 Series B outstanding preferred warrants were
issued to Rho, Mr. Bernardi and Mr. Puthukarai, in that order. 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 $1.98 per share. We also issued 438,280, 60,600 and 15,150
Series C outstanding preferred warrants to Rho, Mr. Bernardi and Mr.
Puthukarai, in that order. 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 $2.48 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 849,640 warrants which were converted to Series B outstanding
preferred stock at $1.98 per share. Of the 849,640 warrants exercised, Mr.
Bernardi received 96,061 shares and Mr. Puthukarai received 24,015 shares of
Series B outstanding preferred stock. The shares above were issued in exchange
for the relinquishment of $133,334 of Mr. Bernardi's accrued salary and
$33,333 of Mr. Puthukarai's accrued bonus. Rho received an additional 712,753
shares of Series B outstanding preferred stock, in connection with the
exercise of the warrants.
In January 1998, 169,454 common stock warrants, with an exercise price of
$1.65 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,
47
<PAGE>
2008. In August 1998, musicmaker.com issued 60,516 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 these warrants. The warrants
are convertible by the holders into common stock at an exercise price of $1.98
per share and expire on August 15, 2008.
In September 1998, we issued 605,194 shares of our common stock to Platinum
at a value of $1,650,000. In exchange for shares of our common stock and in
accordance with 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 193,662 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.
To date, accrued salary not yet paid by musicmaker.com is owed to Mr.
Bernardi in an amount of approximately $165,417.
On June 8, 1999, we executed a license agreement with EMI. Under this
agreement, we will make royalty payments in connection with sales of our
custom CDs including music content provided by EMI. In exchange for our rights
under the license agreement, we issued 15,170,860 shares of our common stock
to Virgin Holdings. Virgin Holdings shall receive approximately $40,000,000
from the sale of 3,400,000 shares of its stock in this offering. Jay A. Samit
and Jonathan A.B. Smith, newly appointed directors to the musicmaker.com Board
of Directors, serve as executive officers of EMI Recorded Music.
On June 15, 1999, musicmaker.com signed a commitment letter with Rho
Management Trust I for financing in the principal amount of $1,000,000 in the
form of a subordinated note bearing interest at 12% and maturing on January 1,
2000. The committment letter states that if muscimaker.com has not consummated
this offering by September 30, 1999, the interest payable on the note
increases to 14%.
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. Moreover, we intend that future transactions with affiliates will
be on terms no less favorable to musicmaker.com than could be obtained from
unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding shares of our common
stock beneficially owned as of June 8, 1999, and as adjusted to reflect the
offering, by:
. Each person or group known to musicmaker.com, that beneficially owns
more than five percent of our outstanding common stock.
. Musicmaker.com's directors and Named Executive Officers.
. 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 June 8, 1999, are deemed outstanding with respect to the person holding
those 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. Directors not included in the table below do not
hold musicmaker.com securities. See "Risk Factors--Current management owns a
large percentage of musicmaker.com's voting securities." Shares beneficially
owned prior to the offering are as adjusted to reflect and include the
automatic conversion upon the completion of the offering of:
. All outstanding preferred stock into common stock.
. All outstanding convertible notes into common stock.
. All outstanding preferred warrants into common stock warrants.
<TABLE>
<CAPTION>
Shares Beneficially
Shares Beneficially Owned Owned After the
Name and Address Prior to the Offering Offering
---------------- ----------------------------------------------------------
Number Percent Number Percent
--------------- ------------------------- ----------
<S> <C> <C> <C> <C>
Virgin Holdings, Inc.... 15,170,860 60.8% 11,770,860 39.3%
338 North Foothill Road
Beverly Hills, CA 90210
Rho Management Trust I.. 2,814,321(1) 10.8% 2,814,321 9.0%
767 Fifth Avenue
New York, NY 10053
Robert P. Bernardi...... 2,144,107(2) 8.4% 2,144,107 7.0%
Devarajan S.
Puthukarai............. 1,045,419(3) 4.1% 1,045,419 3.5%
Irwin H. Steinberg...... 351,008(4) 1.3% 351,008(4) 1.2%
Edward J. Mathias....... 156,728 * 156,728 *
All executive officers
and directors as a
group (10 persons)..... 3,901,764(5) 14.8% 3,901,764(5) 12.4%
</TABLE>
- --------
* Less than 1%.
(1) Includes, upon the completion of this offering:
. 875,384 shares of Series A and 712,753 shares of Series B outstanding
preferred stock to be automatically converted into the same number of
shares of common stock, upon completion of the offering.
. 787,904 Series B and 438,280 Series C outstanding preferred warrants to
be automatically converted into the same number of common stock
warrants, upon completion of the 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, under an investment advisory relationship by which Rho Management
Partners L.P. exercises sole voting and investment control over its shares
and warrants.
49
<PAGE>
(2) Includes:
. 121,038 shares of Series A and 96,061 shares of Series B outstanding
preferred stock to be automatically converted into the same number of
shares of common stock, upon the completion of this offering.
. 272,817 Series B and 60,600 Series C outstanding preferred warrants to
be automatically converted into the same number of common stock
warrants, upon the completion of this offering.
. 151,298 vested options for common stock with exercise prices ranging
from $2.06 to $2.27 per share.
(3) Includes:
. 453,896 common stock warrants with an exercise price of $1.65 per share.
. 30,259 shares of Series A and 24,015 shares of Series B outstanding
preferred stock to be automatically converted into the same number of
shares of common stock, upon the completion of this offering.
. 68,204 Series B and 15,150 Series C outstanding preferred warrants to be
automatically converted into the same number of common stock warrants,
upon the completion of this offering.
. 151,298 vested options for common stock with exercise prices ranging
from $2.06 to $2.27 per share.
(4) Includes 229,970 common stock warrants with exercise prices ranging from
$1.65 to $1.98 per share.
(5) Includes:
. 151,297 shares of Series A and 120,076 shares of Series B outstanding
preferred stock, to be automatically converted into the same number of
shares of common stock, upon completion of this offering.
. 341,021 Series B and 75,750 Series C outstanding preferred warrants to
be automatically converted into the same number of common stock
warrants, upon completion of this offering.
. 683,866 outstanding common stock warrants and 386,060 vested options for
common stock.
50
<PAGE>
DESCRIPTION OF SECURITIES
General
In our Charter, musicmaker.com is authorized to issue up to 100,000,000
shares of common stock, par value $.01 and 3,606,662 shares of preferred
stock, par value $.01 per share. Prior to this offering, 22,067,733 shares of
common stock were issued and outstanding and an additional 8,273,892 were
reserved for issuance under the terms of outstanding options, warrants and
conversion features of other securities issued. As of June 8, 1999, there were
approximately 100 holders of our common stock .
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.
Stock Split and Reverse Stock Split
On June 14, 1999, musicmaker.com effected a 2.33-for-one stock split
reclassifying our authorized and outstanding common stock. On April 8, 1999,
musicmaker.com effected a one-for-3.85 reverse stock split reclassifying our
authorized and outstanding common stock. Both the stock split and 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 for that purpose. 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 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 in this offering
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
Under 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 the rights,
preferences, privileges and limitations as the Board of Directors determines
and as permitted by Delaware Law, including:
. The number of shares constituting the series and the distinctive
designation of the series of preferred stock.
. The dividend rate on the preferred stock, the dates of payment and
whether the 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.
Registration Rights
Virgin Holdings, Rho Management Trust I, Columbia House, Messrs. Bernardi,
Puthukarai, Steinberg, and RHL Ventures LLC entered into an agreement
governing their registration rights which replaces and supersedes
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<PAGE>
any registration rights previously granted to those entities and individuals.
Virgin Holdings can require musicmaker.com to effect an initial public
offering and can include in that offering securities up to an amount that
results in Virgin Holdings receiving up to $40 million in proceeds. Under that
agreement, musicmaker.com also granted demand registration rights to Virgin
Holdings, Rho Management Trust I and Columbia House, allowing them to request
registration of all or any of their securities at any time nine months after
an initial public offering, if at least 750,000 shares are requested to be
registered. Each one of these entities may participate in a registration
demanded by any one of the others. Messrs. Bernardi, Puthukarai, Steinberg,
and RHL Ventures LLC may participate in registrations initiated by Virgin
Holdings, Rho Management Trust I or Columbia House. Virgin Holdings can
request up to four demand registrations, Rho Management Trust I three, and
Columbia House two. We are not required to effect a demand registration within
180 days after another demand registration becomes effective. Except in this
offering, if the underwriters determine that the number of securities
requested to be included in a demand registration exceeds the number that can
be sold, then Virgin Holdings, Rho Management Trust I and Columbia House's
securities will be included in the offering pro rata based upon their
percentage ownership of securities included in the offering. If all Virgin
Holdings, Rho Management Trust I and Columbia House's securities are included
in a registration, then Messrs. Bernardi, Puthukarai, Steinberg and RHL
Ventures LLC's securities can be included pro rata based on their percentage
ownership of securities included in the offering.
In addition, each of the holders indicated above, the noteholders,
Christopher T. Linen, Ryan Lee & Company and Boston Financial & Equity
Corporation, an equipment lessor, have "piggyback" registration rights. If
musicmaker.com proposes to register any of its common stock under the
Securities Act, other than in this offering, in connection with the
registration of securities issuable under an employee benefit plan or a
registered exchange offer, then holders of "piggyback" rights may require that
musicmaker.com include all or a portion of their common stock in that
registration. In connection with an underwritten offering, the managing
underwriter shall have the ability to limit the number of securities held by
persons with "piggyback" registration rights to be included in the
registration. All expenses incurred in connection with the registration rights
above, excluding underwriting discounts or commissions, will be borne by
musicmaker.com.
Delaware General Corporation Law and 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 those capacities to the
maximum extent permitted by Delaware law. Our Charter similarly requires
musicmaker.com to advance expenses to our officers and directors entitled to
indemnification to the maximum extent permitted by Delaware law. Advancement
of expenses to directors and officers is conditioned upon receipt of an
undertaking by the director or officer to repay the amount of any advancement
if it shall ultimately be determined that the person is not entitled to be
indemnified by musicmaker.com. The terms and conditions of 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 this type of
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 Delaware law. Section 102(b)(7) of the Delaware General
Corporation Law 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 Delaware General Corporation Law for unlawful
dividends, distributions or unlawful stock repurchases or redemptions.
52
<PAGE>
. For any transaction from which the director derives an improper personal
benefit.
Under our Charter and Delaware law, 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 duties, even where monetary remedies are unavailable. Any
amendment to Delaware law 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 these 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 the holders of common stock, excluding a hostile acquiror.
The effect of these preferred stock grants may be to deter possible takeovers
or acquisitions, making those transactions prohibitively expensive for
potential acquirers. Issuance of 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 provisions in our Charter and Bylaws could deter or
delay possible takeovers."
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 29,944,773 shares
of common stock. Of these shares, the 8,400,000 shares of common stock sold in
this offering 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:
. one percent of the then outstanding shares of common stock of
musicmaker.com, or
. 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 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 June 15, 1999, the one-year holding period had
expired with respect to 4,790,460 shares of common stock. As of June 15, 1999,
the two-year holding period had expired with respect to 4,121,774 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 upon completion of this offering. As a result of this
automatic conversion, 1,908,729 shares of restricted common stock shall be
issued to the former holders of the outstanding preferred stock and 1,697,929
warrants for common stock shall be issued in exchange for the outstanding
preferred warrants. Outstanding convertible notes shall automatically convert
into 968,311 shares of common stock upon completion of this offering.
Stockholders holding approximately 24.6 million shares, or 98.8% percent 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
additional shares of our common stock in an amount equal to up to 10% of the
total number of shares of common stock offered to the public, 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 restricted 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 by our current
stockholders may adversely affect our stock price."
54
<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 the selling stockholder, and we and the selling
stockholder 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........................................................... 8,400,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions, including approval of some
legal matters by their counsel. The nature of the underwriter's obligation is
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 selected securities dealers at the same price less a
concession not in excess of $ per share. The underwriters may allow, and
the selected dealers may re-allow, a concession not in excess of $ per
share to selected 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 and the selling stockholder have granted the underwriters an option
exercisable during the 30-day period after the date of this prospectus, to
purchase additional shares of our common stock in an amount equal to up to 15%
of the total number of shares of common stock offered to the public 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 some conditions, to purchase the 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
additional shares of our common stock in an amount equal to up to 10% of the
total number of shares of common stock offered to the public, including any
over-allotments, 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 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. In addition, we issued a
55
<PAGE>
warrant to GunnAllen for 96,831 shares of common stock, with an exercise price
of $2.06 per share, as partial compensation for their assistance with
musicmaker.com's private placement of $2,000,000 of 8% convertible notes.
GunnAllen has agreed not to offer, pledge, sell, contract to sell or otherwise
transfer or dispose of the warrant or the shares of common stock underlying
the warrant for a period of one year after the date of this prospectus.
GunnAllen will be credited an amount equal to 10% of the selling concession
paid to broker-dealers for the sale of 400,000 shares of our common stock.
We have agreed not to issue, and all of our officers and directors, and
holders of 98.8% of our common stock have agreed 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 registration rights in connection with the issuance of shares of our
common stock or other equity securities of musicmaker.com have agreed 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.
The underwriters have reserved for sale, at the initial public offering
price, 250,000 shares of common stock for some of our directors, officers,
employees, friends and family who have expressed an interest in purchasing
shares of common stock in this offering. These persons are expected to
purchase, in the aggregate, not more than 5% of the common stock offered in
this offering. The number of shares available for sale to the general public
in this offering will be reduced to the extent these persons purchase reserved
shares. Any reserved shares not purchased will be offered by the underwriters
on the same basis as other shares offered in this offering.
We and the selling stockholder have agreed to indemnify the underwriters
against some liabilities including civil liabilities under the Securities Act
of 1933 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 our 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. The 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, some of the 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.
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
56
<PAGE>
any 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 stabilization or
other transactions. These transactions may be effected on the Nasdaq National
Market or otherwise and, if continued, may be discontinued at any time.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.
LEGAL MATTERS
The legality of the securities in this offering has been passed upon for
musicmaker.com by its counsel, Venable, Baetjer and Howard, LLP of McLean,
Virginia. Agreed upon legal matters will be passed upon for the underwriters
by its counsel Katten Muchin & Zavis, Washington, D.C. Agreed upon 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.
Matters dealing with patents and trademarks set forth in "Risk Factors--We
depend upon intellectual property rights and risk having our rights infringed"
and "Business--Intellectual Property and Trade Secrets" 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, as some information is 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. 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.
57
<PAGE>
This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by Jupiter Communications, Forrester Research Inc. 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 that
information. While we believe those industry publications to be reliable, we
have not independently verified the data included in the reports. We also have
not sought, in all instances, the consent of these organizations to refer to
their reports in this prospectus.
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.
58
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, 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 ERNST & YOUNG LLP, 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.
/s/ Ernst & Young LLP
Vienna, Virginia
February 5, 1999, except Note 12,
as to which the date is June 14, 1999
F-2
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------
December 31, Pro Forma
------------------------ Pro Forma As Adjusted
1997 1998 Actual (Note 10) (Note 11)
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 1,401,982 $ 972,954 $1,685,234 $ 1,685,234 $ 1,685,234
Accounts receivable... 12,750 17,510 29,332 29,332 29,332
Related party account
receivable (Note 8).. -- 81,519 81,519 81,519 81,519
Prepaid expenses and
other current
assets............... 17,503 25,395 56,213 56,213 56,213
----------- ----------- ---------- ----------- -----------
Total current
assets............. 1,432,235 1,097,378 1,852,298 1,852,298 1,852,298
Property and equipment,
net (Note 2)........... 297,140 360,709 407,670 407,670 407,670
Investments (Note 1).... -- 750,000 750,000 750,000 750,000
Intangibles, net (Note
3)..................... -- 967,395 1,037,501 47,917,413 47,689,912
Other assets............ -- 58,481 396,846 396,846 396,846
----------- ----------- ---------- ----------- -----------
Total assets........ $ 1,729,375 $ 3,233,963 $4,444,315 $51,324,227 $51,096,726
=========== =========== ========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' (DEFICIT)
EQUITY
Current liabilities:
Accounts payable...... $ 328,450 $ 455,095 $ 795,123 $ 795,123 $ 795,123
Accrued expenses...... 91,369 261,974 119,092 119,092 119,092
Accrued compensation
payable to related
parties (Note 8)..... 761,221 625,219 630,215 630,215 630,215
Current portion of
long-term obligation
(Note 4)............. -- 42,857 42,857 42,857 42,857
Other current
liabilities.......... -- -- 39,453 39,453 39,453
----------- ----------- ---------- ----------- -----------
Total current
liabilities........ 1,181,040 1,385,145 1,626,740 1,626,740 1,626,740
Long-term obligation
(Note 4)............... -- 214,286 214,286 214,286 214,286
Convertible notes
payable (Note 4)....... -- 512,500 2,000,000 2,000,000 --
Commitments (Note 7)
Mandatory redeemable convertible
preferred stock,
$0.01 par value, 3,606,662 shares
authorized (Note 5):
Series A convertible
preferred stock,
1,059,089 shares
designated, issued
and outstanding...... 1,493,568 1,026,682 1,067,788 1,067,788 --
Series B convertible
preferred stock,
2,017,317 shares
designated, 849,640
shares issued and
outstanding.......... -- 1,750,100 1,750,100 1,750,100 --
Series C convertible
preferred stock,
530,256 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,
100,000,000 shares
authorized;
4,790,460, 6,309,493,
6,896,873 shares
issued and
outstanding,
respectively
(22,067,733 pro forma
shares and 24,944,773
pro forma as adjusted
shares).............. 47,905 63,095 68,969 220,678 249,448
Additional paid-in
capital.............. 1,261,084 4,739,658 6,019,768 52,747,971 58,219,301
Warrants.............. 259,522 779,059 779,059 779,059 779,059
Accumulated deficit... (2,463,744) (7,236,562) (9,082,395) (9,082,395) (9,992,108)
----------- ----------- ---------- ----------- -----------
Total stockholders'
(deficit) equity... (895,233) (1,654,750) (2,214,599) 44,665,313 49,255,700
----------- ----------- ---------- ----------- -----------
Total liabilities
and stockholders'
(deficit) equity... $ 1,729,375 $ 3,233,963 $4,444,315 $51,324,227 $51,096,726
=========== =========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Pro Forma
As Adjusted
Pro Forma Three
Period from As Adjusted months
April 23, 1996 Three months ended Year ended ended
(inception) to Year ended December 31, March 31, December 31, March 31,
December 31, ------------------------ ------------------------ 1998 1999
1996 1997 1998 1998 1999 (Note 11) (Note 11)
-------------- ----------- ----------- ----------- ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 8,355 $ 13,432 $ 74,028 $ 22,416 $ 20,160 $ 74,028 $ 20,160
Cost of sales........... (2,590) (450,455) (677,700) (232,800) (463,283) (677,700) (463,283)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 5,765 (437,023) (603,672) (210,384) (443,123) (603,672) (443,123)
Operating expenses:
Sales and marketing... -- 7,780 929,661 397,729 259,852 929,661 259,852
Operating and
development.......... 64,029 244,541 804,811 203,644 253,256 804,811 253,256
General and
administrative....... 306,381 1,360,856 2,334,438 433,731 824,629 2,620,708 1,052,130
--------- ----------- ----------- ----------- ----------- ----------- -----------
370,410 1,613,177 4,068,910 1,035,104 1,337,737 4,355,180 1,565,238
--------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations.... (364,645) (2,050,200) (4,672,582) (1,245,488) (1,780,860) (4,958,852) (2,008,361)
Other income (expense):
Interest income....... -- -- 17,815 5,250 16,539 17,815 16,539
Interest expense...... (2,667) (33,957) -- -- (40,406) -- (40,406)
--------- ----------- ----------- ----------- ----------- ----------- -----------
(2,667) (33,957) 17,815 5,250 (23,867) 17,815 (23,867)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................ (367,312) (2,084,157) (4,654,767) (1,240,238) (1,804,727) (4,941,037) (2,032,228)
Accretion for Series A
preferred stock
warrants............... -- (3,090) (118,051) (12,274) (41,106) (723,318) (723,318)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss available to
common stockholders.... $(367,312) $(2,087,247) $(4,772,818) $(1,252,512) $(1,845,833) $(5,664,355) $(2,755,546)
========= =========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per common share
(Note 9)............... $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27) $ (0.26) $ (0.13)
========= =========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding............ 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561 21,842,134 20,884,288
========= =========== =========== =========== =========== =========== ===========
</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 Warrants Deficit Total
--------- ------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 3,092,540 $30,925 $ -- $ -- $ (9,185) $ 21,740
Net loss............... -- -- -- -- (367,312) (367,312)
--------- ------- ---------- -------- ----------- ------------
Balance at December 31,
1996................... 3,092,540 30,925 -- -- (376,497) (345,572)
Issuance of common
stock.................. 1,221,865 12,219 428,721 -- -- 440,940
Issuance of common
stock and warrants
for services to non-
employees............ 60,518 605 149,895 -- -- 150,500
Conversion of notes
payable................ 415,537 4,156 682,468 -- -- 686,624
Issuance of warrants
with preferred
stock................ -- -- -- 259,522 -- 259,522
Accretion for Series A
preferred stock
warrants............. -- -- -- -- (3,090) (3,090)
Net loss............... -- -- -- -- (2,084,157) (2,084,157)
--------- ------- ---------- -------- ----------- -----------
Balance at December 31,
1997................... 4,790,460 47,905 1,261,084 259,522 (2,463,744) (895,233)
Issuance of common
stock.................. 1,519,033 15,190 2,979,112 -- -- 2,994,302
Issuance of warrants
and options to non-
employees............ -- -- 499,462 -- -- 499,462
Exercise of Series B
preferred stock
warrants............. -- -- -- (65,400) -- (65,400)
Modification of
warrants issued with
preferred stock...... -- -- -- 584,937 -- 584,937
Accretion for Series A
preferred stock
warrants............. -- -- -- -- (118,051) (118,051)
Net loss............... -- -- -- -- (4,654,767) (4,654,767)
--------- ------- ---------- -------- ----------- -----------
Balance at December 31,
1998................... 6,309,493 63,095 4,739,658 779,059 (7,236,562) (1,654,750)
Issuance of common stock
(unaudited)............ 587,380 5,874 1,110,489 -- -- 1,116,363
Issuance of warrants and
options (unaudited).... -- -- 169,621 -- -- 169,621
Accretion for Series A
preferred stock
warrants (unaudited)... -- -- -- -- (41,106) (41,106)
Net loss (unaudited).... -- -- -- -- (1,804,727) (1,804,727)
--------- ------- ---------- -------- ----------- -----------
Balance at March 31,
1999 (unaudited)....... 6,896,873 $68,969 $6,019,768 $779,059 $(9,082,395) $(2,214,599)
========= ======= ========== ======== =========== ===========
</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 Three months ended
(inception) to Year ended December 31, March 31,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss.............. $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727)
Adjustments to
reconcile net loss
to net cash provided
by (used in)
operating
activities:
Depreciation and
amortization........ 7,700 29,887 203,122 23,779 157,769
Conversion of accrued
interest to common
stock............... -- 36,624 -- -- --
Services received in
exchange for stock
and warrants........ -- 150,500 499,462 156,317 169,621
Changes in operating
assets and
liabilities:
Accounts
receivable........ (38,387) 25,637 (4,760) -- (11,822)
Related party
account
receivable........ -- -- (81,519) -- --
Prepaid expenses
and other current
assets............ (8,994) (8,509) (7,892) (23,961) (30,818)
Other assets....... -- -- (58,481) (50,000) (338,365)
Accounts payable... 166,018 162,432 126,645 (10,002) 340,028
Accrued expenses... 46,025 45,344 170,605 13,495 (142,882)
Accrued
compensation
payable to related
parties........... 217,587 543,634 30,665 (193,807) 4,996
Other current
liabilites........ -- -- -- -- 39,453
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) (1,324,417) (1,616,747)
Investing activities
Purchases of property
and equipment......... (34,972) (299,755) (217,961) (137,381) (100,961)
--------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities...... (34,972) (299,755) (217,961) (137,381) (100,961)
Financing activities
Proceeds from issuance
of convertible notes
payable............... 400,000 250,000 512,500 -- 1,487,500
Payment of fees on
convertible notes
payable............... -- -- (116,125) -- (173,875)
Issuance of
convertible preferred
stock................. -- 1,700,000 1,568,033 534,700 --
Issuance of common
stock................. 21,740 440,940 1,344,302 -- 1,116,363
--------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities...... 421,740 2,390,940 3,308,710 534,700 2,429,988
--------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash and
cash equivalents...... 412,072 989,910 (429,028) (927,098) 712,280
Cash and cash
equivalents at
beginning of period... -- 412,072 1,401,982 1,401,982 972,954
--------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 412,072 $ 1,401,982 $ 972,954 $ 474,884 $ 1,685,234
========= =========== =========== =========== ===========
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 $ -- $ --
========= =========== =========== =========== ===========
Issuance and
modification of
warrants (Note 5)..... $ -- $ 259,522 $ 584,937 $ -- $ --
========= =========== =========== =========== ===========
</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 filed a registration statement with the
Securities and Exchange Commission relating to the initial public offering
(the "IPO") of the Company's common stock. If the offering is not consummated,
the Company will have to obtain financing from current investors or other
private and public investors, significantly reduce its development activities,
or generate additional revenues from sales of custom CDs.
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)
Cost of Sales
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.
The Company has included in costs of sales 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 costs of sales 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 assuming realizability of such
advances can be established.
Operating and Development Costs
Operating and development costs relating to the Company's proprietary custom
CD compilation software technology are expensed as incurred. The Company
incurred research and development costs of approximately $64,000, $120,000,
and $550,000 in the period from April 23, 1996 (inception) to December 31,
1996 and the years ended December 31, 1997 and 1998, respectively. Operating
and development costs also include recoupable but not returnable advances and
network and website costs.
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.
Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principals for interim
financial information. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
F-9
<PAGE>
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. The Company is depreciating computer equipment
and software over three years and office furniture and leasehold improvements
over 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.
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 798,856 shares of common stock issued to
Platinum (valued at $1,650,000 or $2.06/share) and Platinum's 111,457 shares
of common stock issued to the Company (valued at $750,000 or $6.73/share). 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 415,537 shares of common stock.
F-10
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 closing of an
initial public offering with gross proceeds of $5,000,000 or more or upon
certain mergers and consolidations of the Company subject to certain
requirements. The conversion price is $2.06 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
1,512,986 shares of common stock for $2,500. In July 1996, 1,512,984 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 6,051 and 60,519 shares of common
stock in October and December of 1996, respectively.
In 1997, 1,221,865 shares of common stock were issued to both outside
investors and the founding stockholders at prices ranging from $0.017 per
share to $1.65 per share. The Company also issued 60,518 shares of common
stock for services to consultants valued at $50,500. Additionally, the Company
issued 60,519 warrants to purchase common stock at an exercise price of $1.65
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 453,896 warrants to
purchase common stock at an exercise price of $1.65 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 720,177 shares of common stock at
$2.06 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 108,960 warrants in 1999 related to the completion of the private
placement (see Note 12). The Company also issued warrants to purchase 121,038
shares of common stock at an exercise price of $2.06 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
F-11
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
issued 302,597 warrants to purchase common stock, subsequently increased to
478,226 warrants to purchase common stock, at an exercise price of $1.98 per
share to Columbia House and recorded an expense of $160,000 for the value of
the warrants. The value of the increased number of warrants was deemed
immaterial. These warrants expire on September 1, 2001.
In January 1998, a stockholder and officer of the Company returned 169,454
stock options to the Company in exchange for warrants to purchase 169,454
shares of common stock with an exercise price of $1.65 per share and valued at
$148,400. These warrants expire on January 15, 2008. This individual is also
the beneficial owner of warrants for 60,516 shares of common stock granted to
members of his family as compensation for his consulting services in August
1998 with an exercise price of $1.98 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 798,856 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 907,792 shares of the Company's Series
A preferred stock at $1.65 per share. Additionally, 151,297 shares of the
Company's Series A preferred stock were purchased by two existing stockholders
at $1.65 per share. The Company did not receive payment for 30,259 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. In
connection with the issuance of the Series A preferred stock, the Company
issued 2,017,314 warrants to purchase Series B preferred stock at a price of
$1.98 per share, and 530,256 warrants to purchase Series C preferred stock at
a price of $2.48 per share. The warrants to purchase Series B preferred stock
were initially exercisable, in whole or in part, at any time commencing on the
date of grant through the first 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. Upon
issuance of the warrants, the Company allocated $259,522 to stockholders'
deficit based upon their relative fair values. In June 1998 the Company
extended the term of the Series B preferred stock warrants from one year to
five years. Upon this modification, the Company allocated the difference
between the fair value of the modified warrants, $766,755, and the fair value
of the original warrants, $181,818, to stockholders' deficit.
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 $1.65
per share, $1.98 per share and $2.48 per share plus a further amount per share
equal to any
F-12
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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, $1.65 per share plus declared
and unpaid dividends on Series A preferred stock, $1.98 per share plus
declared and unpaid dividends on Series B preferred stock and $2.48 per share
plus declared and unpaid dividends on Series C preferred stock.
On March 16, 1998, an investor exercised 208,425 warrants to purchase Series
B preferred stock at a price of $1.98 per share for $413,272 in cash. Two
officers of the Company were required to exercise 36,022 warrants to purchase
Series B preferred stock at the same price.
On June 30, 1998, two investors exercised 521,139 warrants to purchase
Series B preferred stock at a price of $1.98 per share for $1,033,333 in cash.
Two officers of the Company were required to exercise 84,054 warrants to
purchase Series B preferred stock at the same price. The exercise of the
84,054 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 1,815,585 shares (see
Note 12). 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...... 45,387 $0.17 501,639 $1.52
Options granted....................... 456,252 $1.65 907,789 $2.11
Options exercised..................... -- $ -- -- $ --
Options canceled or expired........... -- $ -- (169,453) $1.65
------- ----- --------- -----
Outstanding at end of year............ 501,639 $1.52 1,239,975 $1.93
======= ===== ========= =====
Exercisable at end of year............ 45,387 $0.17 294,304 $1.63
======= ===== ========= =====
</TABLE>
The options outstanding at December 31, 1998 range in price from $0.17 per
share to $2.27 per share and have a weighted average remaining contractual
life of 7.6 years.
F-13
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $369,271, $2,091,960 and
$4,990,504 in 1996, 1997 and 1998, respectively, with a net loss per share of
$0.19, $0.52 and $0.98, 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-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..................... -- 3,061,985
Warrants issued...................................... 3,061,985 829,234
Warrants exercised................................... -- 849,640
----------- -----------
Outstanding at end of year........................... 3,061,985 3,041,579
=========== ===========
</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.
F-14
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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>
F-15
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Of the total fixed royalty commitments, $462,500 relates to four contracts.
Two contracts were signed in April 1997 with Alligator Records and Cakewalk,
LLC with three year terms. Through December 31, 1998 the Company had advanced
$200,000 and $162,500, respectively, to each of these labels in royalty
payments and had remaining commitments of $100,000 and $62,500, respectively.
In June 1997, the Company signed a three year contract with Fantasy Records
under which, as of December 31, 1998, the Company had advanced $200,000 in
royalty payments and had a remaining commitment of $100,000. In October 1997,
the Company signed a three year contract with Rounder Records Corporation
under which, as of December 31, 1998, the Company had advanced $100,000 in
royalty payments and had a remaining commitment of $200,000.
Upon payment of the future fixed royalty commitments, management will assess
whether sufficient revenues will be generated to recover the royalty advances.
It is anticipated that the future fixed royalty commitments will be written
off as costs of sales upon payment of the advances. The write off is due to
management's expectation of minimal revenues during the one year period
following the payment of these advances. If significant revenues are
generated, the Company will amortize the expense to match the revenues.
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.
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
2003.............................................................. 116,258
Thereafter........................................................ 183,360
--------
$887,067
========
</TABLE>
8. Related Party Transactions
Accrued compensation of $761,221 and $625,219 as of December 31, 1997 and
1998, respectively, are amounts due to stockholders for salaries and
consulting services rendered to the Company since inception, including
assistance with obtaining financing, negotiations with record labels and
corporate and technical development. Additionally, in December 1998, the
Company advanced a stockholder and officer $81,519 against his 1999 bonus.
F-16
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
Period from Pro Forma
April 23, 1996 Pro Forma Three
(inception to Year ended Three months ended Year ended months ended
December 31, December 31, March 31, December 31, March 31,
1996 1997 1998 1998 1999 1998 1999
-------------- ----------- ----------- ----------- ----------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $(367,312) $(2,084,157) $(4,654,767) $(1,240,238) $(1,804,727) $(4,941,037) $(2,032,228)
Less: Accretion of
Series A preferred
stock.................. -- (3,090) (118,051) (12,274) (41,106) (723,318) (723,318)
Net loss available to
common
--------- ----------- ----------- ----------- ----------- ----------- -----------
stockholders.......... $(367,312) $(2,087,247) $(4,772,818) $(1,252,512) $(1,845,833) $(5,664,355) $(2,755,546)
========= =========== =========== =========== =========== =========== ===========
Denominator:
Denominator for basic
net loss per share--
weighted average
shares............... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561 21,842,134 20,884,288
Effect of dilutive
securities:
Preferred stock....... -- -- -- -- -- --
Stock options......... -- -- -- -- -- --
Warrants.............. -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- ----------- -----------
Dilutive potential
common shares.......... -- -- -- -- -- --
Denominator for diluted
net loss per share--
adjusted weighted
average shares......... 1,934,078 4,040,985 5,094,518 4,790,460 6,805,561 21,842,134 20,884,288
========= =========== =========== =========== =========== =========== ===========
Basic net loss per
share.................. $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27) $ (0.26) $ (0.13)
========= =========== =========== =========== =========== =========== ===========
Diluted net loss per
share.................. $ (0.19) $ (0.52) $ (0.94) $ (0.26) $ (0.27) $ (0.26) $ (0.13)
========= =========== =========== =========== =========== =========== ===========
</TABLE>
The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:
<TABLE>
<CAPTION>
Pro Forma
As Adjusted
Period from Pro Forma As Three
April 23, 1996 Adjusted Months
(inception) to Year ended Three Months ended Year ended ended
December 31, December 31, March 31, December 31, March 31,
1996 1997 1998 1998 1999 1998 1999
-------------- --------- --------- ----------- ----------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Convertible notes
payable: -- -- 248,129 -- 968,311 -- --
Preferred stock:
Series A.............. -- 1,059,089 1,059,089 1,059,089 1,059,089 -- --
Series B.............. -- -- 849,640 244,447 849,640 -- --
Preferred stock
warrants:
Series B.............. -- 2,017,314 1,167,674 1,772,867 1,167,674 -- --
Series C.............. -- 530,256 530,256 530,256 530,256 -- --
Stock options........... 45,387 501,639 1,239,975 622,677 1,330,752 1,239,975 1,330,752
Warrants................ -- 514,415 1,343,649 683,869 1,563,964 3,041,579 3,261,894
</TABLE>
F-17
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Pro Forma Financial Information (unaudited)
The pro forma financial information as of March 31, 1999 gives effect to (i)
the one-for-3.85 reverse stock split effected April 8, 1999, (ii) the 2.33-
for-one stock split effected June 14, 1999 and (iii) the issuance of
15,170,860 shares of common stock in exchange for licensing rights with Virgin
Holdings, Inc., an affiliate of EMI Recorded Music ("EMI"), valued at
approximately $47 million.
11. Pro Forma As Adjusted Financial Information (unaudited)
The pro forma as adjusted financial information as of March 31, 1999, for
the year ended December 31, 1998 and for the three months ended March 31, 1999
gives effect to (i) the one-for-3.85 reverse stock split effected April 8,
1999, (ii) the automatic conversion, upon the completion of the IPO, of all
outstanding shares of convertible preferred stock into 1,908,729 shares of
common stock, (iii) the automatic conversion upon completion of the IPO, of
all outstanding convertible notes payable into 968,311 shares of common stock
($2,000,000 of convertible notes payable outstanding at March 31, 1999),
(iv) the write-off of all capitalized loan fees related to the convertible
notes payable ($227,501 capitalized at March 31, 1999), (v) the 2.33-for-one
stock split effected June 14, 1999, and (vi) the issuance of 15,170,860 shares
of common stock in exchange for licensing rights with EMI valued at
approximately $47 million.
12. Subsequent Events
In January 1999, the Company completed its private placement of convertible
notes payable to outside investors and received an additional $1,487,500. See
Note 4 for the nature and terms of the convertible notes payable. In
connection with the convertible notes payable issued in January, the Company
recorded loan fees of $173,875 and issued a warrant to purchase 96,831 shares
of common stock at an exercise price of $2.06, which expires on January 11,
2004. The Company recorded an expense of $70,649 for the fair value of this
warrant.
In January 1999, the Company completed its common stock private placement to
outside investors and issued an additional 587,380 shares of common stock at
$2.06 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 108,960 shares of common stock with an exercise
price of $2.06, which expires on January 14, 2004. The Company recorded an
expense of $79,499 related to the issuance of this warrant.
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 14,524 shares
of its common stock at $2.06 per share which expires on January 8, 2009. The
Company recorded an expense of $16,021 related to the issuance of this
warrant.
On February 12, 1999, the Company signed a loan and security agreement 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 automatically
convert to a 24 month term loan. 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.
F-18
<PAGE>
musicmaker.com, Inc.
(formerly The Music Connection Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 1999, the Board of Directors approved a one-for-3.85 reverse
stock split of the Company's common stock, which was effective on April 8,
1999. 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 1,908,729
shares of common stock and all outstanding convertible notes payable will
convert into 968,311 shares of common stock. Upon conversion of the Series A
preferred stock into common stock, the remaining discount on the Series A
preferred stock will be recorded as accretion and is anticipated to have a
material effect on net income (loss) available to common stockholders in the
quarter and year in which this public offering is completed. This accretion
will not affect the Company's cash flows. The Series B and Series C preferred
stock warrants will convert to common stock warrants upon completion of the
IPO.
On April 8, 1999, the Company issued a warrant to purchase 242,077 shares of
common stock at $1.98 per share to a consultant for services rendered. The
Company recorded an expense of $464,415 related to the issuance of this
warrant.
On June 8, 1999, 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 up to 4.2 million. Also on June 8, 1999, the
stockholders authorized the Company's Amended and Restated Certificate of
Incorporation, which increased the total number of authorized shares of common
stock to 100 million shares.
On June 8, 1999, the Company executed a license agreement with EMI whereby
EMI agreed to make certain of its content available to the Company in EMI's
sole discretion in exchange for 50% of the Company's common stock, calculated
on a fully diluted basis on the effective date of the transaction. Under this
agreement, the Company will make royalty payments in connection with the
inclusion of music content provided by EMI in the Company's custom CDs. In
exchange for the Company's rights under the license agreement, the Company
issued 15,170,860 shares of common stock valued at $46,879,912 or estimated
the fair value of the Company's common stock at $3.09 per share. The valuation
of the shares was determined based on the midpoint of the price range of the
Company's common stock, as agreed upon between the Company and the
underwriters, offered in Amendment No. 1 to the Company's Form S-1 filed on
April 12, 1999, less a 10% discount for marketability and resale restrictions.
The measurement date for this valuation was determined to be April 27, 1999,
the date when all material terms and conditions of the transaction had been
specified, negotiated and agreed to by both parties.The Company is amortizing
the intangible asset on a straight-line basis over the five year period of the
license agreement.
On June 8, 1999, the Board of Directors approved a 2.33-for-one stock split
of the Company's common stock, which was effective on June 14, 1999. 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.
F-19
<PAGE>
[At top of the page of the inside back cover, "musicmaker.com" and the slogan,
"Freedom of Choice in Music" appear. Below the "musicmaker.com" and slogan is
a custom CD with two children on the face of the CD and the text "Happy
Father's Day!" Below the Custom CD, appears "Your Custom Personalized CD."]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or any other person is authorized to give any
information or make any representations in connection with this offering other
than those contained in this prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or the underwriter. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered by this prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction
in which such offer or solicitation is not authorized or is unlawful. The
delivery of this prospectus shall not, under any circumstances, create any
implication that the information herein is correct as of any time subsequent
to the date of this prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Dividend Policy.......................................................... 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Management............................................................... 41
Certain Transactions..................................................... 47
Principal and Selling Stockholders....................................... 49
Description of Securities................................................ 51
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 55
Transfer Agent and Registrar............................................. 57
Legal Matters............................................................ 57
Experts.................................................................. 57
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
</TABLE>
Until , 1999, (25 days after the date of this prospectus), all dealers
effecting transactions in the shares of common stock offered hereby, whether
or not participating in the distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
8,400,000 Shares
Common Stock
----------------
PROSPECTUS
----------------
Ferris, Baker Watts
Incorporated
Fahnestock & Co. Inc.
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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....................................... $ 37,597
NASD filing fee............................................ $ 13,524
Nasdaq National Market listing fee......................... $ 95,000
Printing and engraving expenses............................ $ 350,000
Accounting fees and expenses............................... $ 250,000
Legal fees and expenses of the Company and Selling
Stockholder............................................... $ 400,000
Miscellaneous.............................................. $ 153,879
----------
Total................................................ $1,300,000
==========
</TABLE>
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 Delaware General Corporation Law 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 a person by reason of
his being a Corporate Agent, other than a proceeding by or in the right of the
corporation, if that 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, the 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 that 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 a 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 a 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 that
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 the advancement amount if it shall ultimately be
determined that such person is not entitled to indemnification. The terms and
conditions of advancement are to be determined by musicmaker.com's Board of
Directors.
II-1
<PAGE>
The power to indemnify and advance the expenses under Delaware Law does not
exclude other rights to which a Corporate Agent may be entitled to under the
certificate of incorporation, bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.
Under 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 that 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 the 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. Musicmaker.com has director and officer insurance coverage. Our
directors and officers are insured against liability of up to $2,000,000 for
each loss, each policy year, and an additional $3,000,000 in the aggregate
each policy year.
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 1,286,038 and 226,948 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 1,512,984 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 823,057
shares of common stock to various accredited investors for total aggregate
consideration of approximately $13,510. In May 1997, 30,259 shares of common
stock were issued in exchange for, and as compensation for, services rendered
to musicmaker.com.
Between June 1997 and November 1997, musicmaker.com issued and sold 389,729
shares of common stock to twenty-two investors, the only offerees, for total
aggregate consideration of $303,440. In July 1997, 30,259 shares of common
stock were issued to a consultant in exchange for, and as compensation for
services rendered to musicmaker.com.
In June and July 1997, the outstanding notes issued between December 1996
and May 1997 were converted to 415,537 shares of common stock at a conversion
price of $1.65 per share. Also, five note holders including one of our
officers invested $25,000 each and each received 15,130 shares.
In October 1997, musicmaker.com issued 453,896 common stock warrants to Mr.
Puthukarai, musicmaker.com's President, Co-Chief Executive Officer and Chief
Operating Officer and a warrant for 60,519
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 $1.65 per share.
In December 1997, musicmaker.com issued and sold 1,059,089 shares of Series
A preferred stock to Rho, Mr. Bernardi and Mr. Puthukarai, and another
investor at a price of $1.65 per share. Additionally, musicmaker.com issued
2,017,314 Series B and 530,256 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 $1.98 per share and the Series C preferred
warrants are exercisable into Series C preferred stock at an exercise price of
$2.48 per share. Musicmaker.com's outstanding preferred stock and outstanding
preferred warrants shall automatically convert into common stock and common
stock warrants upon completion of the offering.
Effective June 14, 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 4,200,000 shares of common stock. As of June 1,
1999, 1,892,882 options for shares of common stock were granted and
outstanding. No shares of common stock have been issued from the exercise of
options under the stock option plan. The exercise price of the options for
musicmaker.com's common stock ranges from $0.17 to $3.43 per share. The
issuances under the stock option plan were exempt pursuant to (S)3(b) of the
Securities Act.
In January 1998, 169,454 common stock warrants, with an exercise price of
$1.65 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 60,516
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 $1.98 per share and
expire on August 15, 2008.
In June 1998, musicmaker.com issued a warrant for 478,226 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 $1.98 per share.
In September 1998, musicmaker.com issued 605,194 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 193,662 shares of common stock were issued under
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 38 accredited investors at $2.06 per
share. Approximately 100 offers were made to accredited investors and no
general advertising or solicitation was used. 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 108,960 shares
of our common stock exercisable at $2.06 per share as compensation for their
assistance in the private placement. Musicmaker.com received consideration of
approximately $2,500,000 in connection with this private placement of
approximately 1,307,557 shares. 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 64 accredited investors.
Approximately 100 offers were made to accredited investors and no general
advertising or solicitation was used. The convertible notes were issued at a
cost of $25,000 per note and each note is convertible into 12,103 shares of
musicmaker.com's common stock at $2.06 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 96,831 warrants for our
common stock with an exercise price of $2.06 per share. The offering of
convertible notes above closed on January 11, 1999.
On April 8, 1999, musicmaker.com issued 242,077 common stock warrants with a
four year term to an individual who assisted in arranging the Columbia House
alliance. The warrant is exercisable at a price of $1.98 per share.
II-3
<PAGE>
On June 8, 1999, musicmaker.com issued 15,170,860 shares to Virgin Holdings,
Inc., pursuant to the terms of an Agreement between musicmaker.com and Virgin
Holdings, Inc. dated June 8, 1999.
Unless otherwise noted, all the above transactions were exempt from
registration under Section 4(2) 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 dated December 8, 1997,
amended on February 12, 1999.#
10.2 Amended and Restated Employment Agreement between the
Company and Devarajan S. Puthukarai dated December 8,
1997, amended on February 12, 1999 and on May 19, 1999.+
10.3 Consulting Agreement dated January 23, 1997, between the
Company and Irwin H. Steinberg, amended on January 1,
1998, and amended 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.+
10.10.1 Loan and Security Agreement between the Company and
Imperial Bank dated March 12, 1999.+
10.10.2 Standby Letter of Credit and Security Agreement dated
March 9, 1999, and Addendum thereto dated March 5, 1999.+
10.11 Master Equipment Lease dated January 8, 1999 between the
Company and Boston Financial & Equity Corporation.+
10.12 Agreement of Lease between 570 Lexington Company, L.P.
and the Company dated February 26, 1999.+
10.13 License Agreement between the Company and Virgin
Holdings, Inc. dated June 8, 1999.++
10.14 Agreement between the Company and Virgin Holdings, Inc.
dated June 8, 1999.+
10.15 Stockholders' Agreement between the Company, Virgin
Holdings, Inc. and the other Stockholders listed on
Schedule I dated June 8, 1999.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Page
Exhibit No. Description No.
----------- ----------- ----
<C> <S> <C>
10.16 Registration Rights Agreement between the Company, Virgin
Holdings, Inc., Rho Management Trust I, The Columbia
House Company and the other Stockholders listed on
Schedules I and II dated June 8, 1999+
10.17 Co-Branding and Media Purchase Agreement between the
Company and Spinner Networks, Inc. dated March 26, 1999.+
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.
+ Filed herewith.
# Previously filed.
++ Filed herewith and confidential treatment requested for portions of this
document.
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) 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
II-5
<PAGE>
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-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in Reston, Virginia,
on the 14th day of June 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.
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 June 14, 1999
______________________________________ Executive Officer
Robert P. Bernardi (Principal Executive
Officer)
/s/ Mark A. Fowler Director of Finance and June 14, 1999
______________________________________ Administration and Chief
Mark A. Fowler Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Irwin H. Steinberg Vice Chairman June 14, 1999
______________________________________
Irwin H. Steinberg
/s/ Devarajan S. Puthukarai Co-Chief Executive June 14, 1999
______________________________________ Officer, President, Chief
Devarajan S. Puthukarai Operating Officer and
Director
/s/ Edward J. Mathias Director February 17, 1999
______________________________________
Edward J. Mathias
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jay A. Samit Director June 14, 1999
______________________________________
Jay A. Samit
/s/ Jonathan A.B. Smith Director June 11, 1999
______________________________________
Jonathan A.B. Smith
/s/ John A. Skolas Director June 11, 1999
______________________________________
John A. Skolas
</TABLE>
II-8
<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 dated December 8, 1997,
amended on February 12, 1999.#
10.2 Amended and Restated Employment Agreement between the
Company and Devarajan S. Puthukarai dated December 8,
1997, amended on February 12, 1999 and on May 19, 1999.+
10.3 Consulting Agreement dated January 23, 1997, between the
Company and Irwin H. Steinberg, amended on January 1,
1998, and amended 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.+
10.10.1 Loan and Security Agreement between the Company and
Imperial Bank dated March 12, 1999.+
10.10.2 Standby Letter of Credit and Security Agreement dated
March 9, 1999, and Addendum thereto dated March 5, 1999.+
10.11 Master Equipment Lease dated January 8, 1999 between the
Company and Boston Financial & Equity Corporation.+
10.12 Agreement of Lease between 570 Lexington Company, L.P.
and the Company dated February 26, 1999.+
10.13 License Agreement between the Company and Virgin
Holdings, Inc. dated June 8, 1999.++
10.14 Agreement between the Company and Virgin Holdings, Inc.
dated June 8, 1999.+
10.15 Stockholders' Agreement between the Company, Virgin
Holdings, Inc. and the other Stockholders listed on
Schedule I dated June 8, 1999.+
10.16 Registration Rights Agreement between the Company, Virgin
Holdings, Inc., Rho Management Trust I, The Columbia
House Company and the other Stockholders listed on
Schedules I and II dated June 8, 1999+
10.17 Co-Branding and Media Purchase Agreement between the
Company and Spinner Networks, Inc. dated March 26, 1999.+
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.
+ Filed herewith.
# Previously filed.
++ Filed herewith and confidential treatment requested for portions of this
document.
<PAGE>
Exhibit 3.2
AMENDED BYLAWS
OF
musicmaker.com, Inc.
A Delaware Corporation
as of February 17, 1999
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the Corporation
-----------
shall be at 1300 Delaware Trust Building, 902 Market Street, in the City of
Wilmington, County of New Castle, State of Delaware. The registered agent of
the corporation at such address is The Delaware Corporation Agency, Inc.
Section 2. Other Offices. The Corporation may also have offices, including
-------------
its principal office, at such other places both within and without the State of
Delaware as the board of directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. All meetings of the stockholders shall be
-----------------
held at such places either within or without the State of Delaware, as shall be
designated from time to time by the board of directors or the President and
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual Meetings. The annual meeting of stockholders for the
---------------
election of directors and the transaction of other business shall be held, in
each year, commencing with the year 1996, at such date and time as shall be
designated from time to time by the board of directors and stated in the notice
of the meeting.
Section 3. Notice of Annual Meetings. Written notice of the annual
-------------------------
meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such
<PAGE>
meeting, either personally or by mail, not less than ten nor more than sixty
days before the date of the meeting. If mailed, such notice shall be deemed to
have been given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation.
Section 4. List of Stockholders. The officer who has charge of the stock
--------------------
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
The list shall be arranged by voting group and within each voting group by class
or series of shares. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present at such meeting.
Section 5. Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the president, the chairman of
the board of directors, the secretary or by a majority of the board of
directors. Special meetings of the stockholders shall be called by the
President if the stockholders owning eighty percent of all votes entitled to be
cast on any issue proposed to be considered at the special meeting sign, date
and deliver to the Secretary one or more written demands for the meeting
describing the purpose or purposes for which it is to be held; provided,
however, that at any time that there are thirty-five or fewer stockholders or
record of the Corporation, special meetings of the stockholders shall be called
by the President if the holders of at least twenty percent of all votes entitled
to be cast on any issue proposed to be considered at the special meeting sign,
date and deliver to the Secretary one or more written demands for the meeting
describing the purpose or purposes for which it is to be held.
-2-
<PAGE>
Section 6. Notice of Special Meetings. Written notice of a special
--------------------------
meeting stating the place, date and hour of the meeting, and the purpose or
purposes for which the meeting is called, shall be given not less than ten nor
more than sixty days before the date of the meeting, to each stockholder
entitled to vote at such meeting.
Section 7. Business of Special Meetings. Business transacted at any
----------------------------
special meeting of stockholders shall be limited to the purposes stated in the
notice.
Section 8. Quorum. The holders of at least a majority of the stock issued
------
and outstanding and entitled to vote at any meeting of the stockholders, present
in person or represented by proxy, shall constitute a quorum at all meetings of
the stockholders for the transaction of business except as otherwise provided by
statute or by the certificate of incorporation. Once a share is represented for
any purpose at a meeting, it is deemed present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is or shall be set for that adjourned meeting. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting of the time and place of the
adjourned meeting, until a quorum shall be present or represented. At such
adjourned meeting, at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. Vote Required for Action. When a quorum is present at any
------------------------
meeting:
(1) In all matters other than the election of directors, the
affirmative vote of the majority of shares present in person or represented by
proxy at the meeting and entitled to vote on the subject matter shall be the act
of the stockholders;
-3-
<PAGE>
(2) Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors; and
(3) Where a separate vote by a class or classes is required by law or
the certificate of incorporation, a majority of the outstanding shares of such
class or classes, present in person or represented by proxy, shall constitute a
quorum entitled to take action with respect to that vote on that matter and the
affirmative vote of the majority of shares of such class or classes present in
person or represented by proxy at the meeting shall be the act of such class.
Section 10. Voting Rights. Unless otherwise provided in the certificate
-------------
of incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of stock having voting
power held by such stockholder, but no proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period.
Section 11. Action Without Meeting.
----------------------
(a) Unless otherwise restricted by the certificate of incorporation,
any action required or permitted to be taken at any meeting of the stockholders
may be taken without a meeting and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be (i) signed by the holders
of outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and (ii) delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested.
(b) Following the taking of corporate action without a meeting,
prompt notice shall be given to all stockholders who did not consent in writing
to such action.
-4-
<PAGE>
ARTICLE III
DIRECTORS
---------
Section 1. Number Constituting Entire Board; Election. The number of
------------------------------------------
directors which shall constitute the whole board shall be not less than one (1)
nor more than seven (7), as determined from time to time by the board of
directors. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 3 of this Article and except that
the initial directors of the Corporation were elected by the incorporator of the
Corporation, and each director elected shall hold office until his successor is
elected and qualified or until his earlier resignation or removal. Directors
need not be stockholders.
Section 2. Resignation and Removal. Any director may resign at any time
-----------------------
upon written notice to the Corporation. Any director may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors. If pursuant to the certificate of incorporation a
director is elected by a voting group of stockholders, only the stockholders of
the voting group may participate in the vote to remove him.
Section 3. Filling of Vacancies. Vacancies and newly created
--------------------
directorships resulting from any increases in the authorized number of directors
elected by all of the stockholders having the right to vote as a single class
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and shall qualify, or until their earlier resignation or removal. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
Section 4. Management by Directors. The business and affairs of the
-----------------------
Corporation shall be managed by its board of directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
Section 5. Place of Meetings. The board of directors of the Corporation
-----------------
may hold meetings, both regular and special, either within or outside the State
of Delaware.
Section 6. Annual Meeting. The first meeting of each newly elected board
--------------
of directors shall be held immediately after the annual meeting of stockholders
and at the same place, and no
-5-
<PAGE>
notice of such meeting shall be necessary to the newly elected directors in
order legally to constitute the meeting, provided a quorum shall be present. In
the event such meeting is not held at that time and place, the meeting may be
held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors, or as shall
be specified in a written waiver. signed by all of the directors.
Section 7. Regular Meetings. Regular meetings of the board of directors
----------------
may be held without other notice at such time and at such place as shall from
time to time be determined by the board.
Section 8. Special Meetings. Special meetings of the board may be called
----------------
by the president or any director on one day's notice to each director, either
personally or by mail, telephone, telegram, facsimile or express courier. Notice
shall be communicated to each director at his business or residence address. The
notice need not describe the purpose of the special meeting.
Section 9. Quorum; Vote Required for Action. At all meetings of the
--------------------------------
board, a majority of the total number of directors shall constitute a quorum for
the transaction of business and the act of a majority of the directors present
at any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation. If a quorum shall not be present at any meeting
of the board of directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting of the
time and place of the adjourned meeting, until a quorum shall be present.
Section 10. Participation By Conference Telephone. Members of the Board
-------------------------------------
of Directors, or any committee thereof, may participate in a meeting of such
board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this subsection shall
constitute presence in person at such meeting.
Section 11. Action Without Meeting. Unless otherwise restricted by the
----------------------
certificate of incorporation, any action required or permitted to be taken at
any meeting of the board of
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<PAGE>
directors or of any committee thereof may be taken without a meeting, if all
members of the board or such committee consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the board or
such committee.
Section 12. Compensation. By resolution of the board of directors, the
------------
directors may be paid their expenses, if any, of attendance at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of standing or special
committees may be allowed like compensation for attending committee meetings.
Section 13. Committees. The board of directors may, by resolution passed
----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. Any such committee, to the extent provided in the resolution, and
subject to any restrictions imposed by statute, shall have and may exercise the
powers of the board of directors in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; provided, however, that a committee may not:
. Approve or recommend to stockholders action that the Delaware General
Corporation Law requires to be approved by stockholders;
. Fill vacancies on the Board of Directors or on any of its committees;
. Amend the Certificate of Incorporation;
. Adopt, amend, or repeal the Bylaws;
. Approve a plan of merger not requiring stockholder approval;
. Authorize or approve a distribution, except according to a general
formula or method prescribed by the Board of Directors; or
-7-
<PAGE>
. Authorize or approve the issuance or sale or contract for sale of
shares, or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except that the Board of
Directors may authorize a committee, or a senior executive officer of
the corporation, to do so within limits specifically prescribed by the
Board of Directors,
Section 14. Minutes of Committee Meetings. Each committee shall keep
-----------------------------
regular minutes of its meetings and report the same to the board of directors
when required.
Section 15. Presumption of Assent. A director of the corporation who is
---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action unless (i) he
objects at the beginning of the meeting, or promptly upon his arrival, to
holding the meeting or transacting specified business at the meeting; or (ii) he
votes against, or abstains from the action taken.
ARTICLE IV
NOTICES
-------
Section 1. Manner of Giving Notice. Whenever, under the provisions of the
-----------------------
statutes or of the certificate of incorporation or of these bylaws, notice is
required to be given to any director or stockholder, it shall not be construed
to require personal notice, but such notice may be given in writing, by mail,
addressed to such director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Written notice may also be given by telegram or by express
courier.
Section 2. Waiver of Notice. Whenever any notice is required to be given
----------------
under the provisions of the statutes or of the certificate of incorporation or
of these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a person at a meeting of
stockholders, directors, or members of a committee of directors, shall
constitute a waiver of notice of such meeting, except when the stockholder,
director or committee member attends a meeting for
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<PAGE>
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the certificate of incorporation or these bylaws.
ARTICLE V
OFFICERS
--------
Section 1. Required Officers. The officers of the Corporation shall be
-----------------
chosen by the board of directors and shall include a chairman, a president, a
treasurer, and a secretary. Any number of offices may be held by the same
person unless the certificate of incorporation or these bylaws otherwise
provide.
Section 2. Additional Officers. The board of directors may appoint one or
-------------------
more vice chairmen, vice presidents and such other officers and agents as it
shall deem necessary, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the board.
Section 3. Election of Officers. The board of directors at its first
--------------------
meeting after each annual meeting of stockholders shall choose the officers of
the Corporation, except that the first officers of the Corporation shall be
chosen by the board of directors at the organizational meeting of the board of
directors following incorporation.
Section 4. Compensation. The salaries of all officers and agents of the
------------
Corporation shall be fixed by or in the manner prescribed by the board of
directors.
Section 5. Tenure. Each officer of the Corporation shall hold office until
------
his successor is elected and qualified or until his earlier resignation or
removal. Any officer elected or appointed by the board of directors may be
removed at any time, with or without cause, by the affirmative vote of a
majority of the total number of directors and any officer or assistant officer,
if appointed by another officer, may likewise be removed by such officer. Any
officer may resign
-9-
<PAGE>
at any time upon written notice to the Corporation. Any vacancy occurring in any
office of the Corporation shall be filled by or in the manner prescribed by the
board of directors.
Section 6. Chairman. The Chairman shall have the power to call special
--------
meetings of stockholders, to call special meetings of the board of directors
and, if present, to preside at all meetings of stockholders and all meetings of
the board of directors. The chairman shall perform all duties incident to the
office of chairman of the board and all duties as may from time to time be
assigned to him by the board or these bylaws.
Section 7. President. The president shall be the chief operating officer
---------
of the Corporation and, subject to the control of the board of directors, shall
have general and active supervision and management of the business of the
Corporation. He shall, when the chairman is not present, preside at all
meetings of the stockholders and of the board of directors. The president may
sign, on behalf of the Corporation, certificates for shares of the Corporation,
any deeds, mortgages, bonds, contracts or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the board of directors or by
these bylaws to some other officer or agent of the Corporation, or shall be
required by law to be otherwise signed or executed, and, in general, shall
perform all duties incident to the office of president and such other duties as
may be prescribed by the board of directors from time to time.
Section 8. Vice President. In the absence of the president, or in the event
--------------
of his death, inability or refusal to act the vice president, if any, or in the
event there be more than one vice president, the vice presidents in the order
designated, or in the absence of any designation, then in the order of their
election, shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice president shall generally assist the president and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
Section 9. Secretary. The secretary shall attend all meetings of the board
---------
of directors and all meetings of the
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<PAGE>
stockholders and shall record all the proceedings of the meetings of the
stockholders and of the board of directors in a book to be kept for that
purpose, and shall perform like duties for the standing committees when
requested by such committees. The secretary shall give, or cause to be given,
required notice of all meetings of the stockholders and the board of directors,
and shall perform such other duties as may be prescribed by the board of
directors or assigned by the president. The secretary shall have custody of the
stock certificate books and stockholder records and such other books and records
as the board of directors may direct. The secretary shall have custody of the
corporate seal of the Corporation and shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
secretary's signature. The board of directors may give general authority to any
other officer to affix the seal of the Corporation and to attest the affixing
thereof by his signature.
Section 10. Assistant Secretary. Any assistant secretary elected by the
-------------------
board of directors shall have the same duties as prescribed for the secretary
and shall perform such duties at the direction of the secretary to assist the
secretary, and in the absence of the secretary at the direction of the president
or any vice president, and otherwise as directed, from time to time, by the
president or board of directors.
Section 11. Treasurer. The treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the board of
directors and shall disburse the funds of the Corporation as may be ordered by
the board of directors, taking proper vouchers for such disbursements, and shall
render to the chairman and the board of directors, at its regular meetings, or
when the board of directors so requires, an account of all his transactions as
treasurer and of the financial condition of the Corporation and shall perform
such other duties and have such other powers as the board of directors or
president may from time to time prescribe.
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<PAGE>
ARTICLE VI
CERTIFICATES OF STOCK; STOCK TRANSFERS; RECORD-DATE
---------------------------------------------------
Section 1. Certificates. Every holder of stock in the Corporation shall be
------------
entitled to have a certificate, signed by, or in the name of, the Corporation by
the chairman, the president or the vice president and by the treasurer or the
secretary certifying the number, class and series of shares owned by him in the
Corporation. If the Corporation is authorized to issue direct classes of shares
or different series within a class, the designations, relative rights,
preferences, and limitations applicable to each class and the variations in
rights, preferences, and limitations determined for each series (and the
authority of the board of directors to determine variations for future series)
shall be summarized on the front or back of each certificate of shares of such
class or series. Alternatively, each certificate may state conspicuously on its
front or back that the corporation will furnish the stockholder this information
on request in writing and without charge. All certificates for shares shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
corporation. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation as if he were such officer, transfer
agent or registrar at the date of issue.
Section 2. Lost Certificates. The board of directors may direct a new stock
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the owner
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as
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<PAGE>
it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 3. Transfers of Stock. Upon surrender to he Corporation or the
------------------
transfer agent of the Corporation of a certificate for shares accompanied by
proper evidence of authority to transfer, the Corporation shall issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 4. Fixing Record Date.
------------------
(a) In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the board of directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the board of directors, and which record date shall not be more than sixty
nor less than ten days before the date of such meeting. If no record is fixed
by the board of directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the next
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of directors may
fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the board of
directors. If no record date has been fixed by the board of directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the board of directors is
required by the General Corporation Law of Delaware, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the
-13-
<PAGE>
Corporation by delivery to its registered office in Delaware, its principal
place of business or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the board of directors and prior action by the board of directors is required by
the General Corporation Law of Delaware, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the board of
directors adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the board of directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the board of directors adopts the resolution relating thereto.
Section 5. Registered Stockholders. The Corporation shall be entitled to
-----------------------
treat the record holder of any shares of stock of the Corporation as the owner
thereof for all purposes, including all rights deriving from such shares, and
except as required by law shall not be bound to recognize any equitable or other
claim to, or interest in, such shares or rights deriving from such shares, on
the part of any other person, including, but without limiting the generality
thereof, a purchaser, assignee or transferee of such shares or rights deriving
from such shares, unless and until such purchaser, assignee, transferee or other
person becomes the record holder of such shares, whether or not the Corporation
shall have either actual or constructive notice of the interest of such
purchaser, assignee, transferee or other person, Any such purchaser, assignee,
transferee or other person shall not be entitled to receive notice of the
meetings of stockholders, to vote at such meetings, to examine a complete list
of the stockholders entitled to vote at meetings, or to own,
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<PAGE>
enjoy, and exercise any other property or rights deriving from such shares
against the Corporation, until such purchaser, assignee, transferee or other
person has become the record holder of such shares.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
-----------
January 1 to December 31. The board of directors shall have the power to change
the fiscal year of the Corporation from time to time.
Section 2. Execution of Instruments. Contracts, deeds, documents and
------------------------
instruments shall be executed by the president, or any vice president, unless
the board of directors shall, in a particular situation or as a general
direction, designate another procedure for their execution.
Section 3. Checks and Drafts. The Corporation shall establish a bank
-----------------
account for deposit of the funds of the Corporation and the drawing of checks or
drafts thereon. All checks or drafts drawn on such account shall require the
signature of at least one officer of the Corporation. The appointment of
additional signatories of the bank account and the opening of additional bank
accounts shall require the approval of the board of directors.
Section 4. Corporate Seal. The corporate seal, if the directors shall adopt
--------------
one, shall have inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, Delaware." The seal may be used by
causing it or a facsimile thereof to be impressed, affixed, or reproduced in any
other manner.
Section 5. Indemnification. The Corporation 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 the
Corporation, to the extent permitted, and in the manner provided by, Section 145
of the Delaware General Corporation Law, as amended, or any successor
provisions, and shall have power to make any other or further indemnity
permitted under the laws of the State of Delaware.
-15-
<PAGE>
Section 6. Voting Shares in Other Corporations. In the absence of other
-----------------------------------
arrangements by the board of directors, shares of stock issued by any other
corporation and owned or controlled by this Corporation may be voted at any
shareholders' meeting of the other corporation by the president of this
Corporation or, if he is not present at the meeting, by the chairman or any vice
president of this Corporation, and in the event neither the president nor the
chairman nor any vice president is to be present at a meeting, the shares may be
voted by such person as the president and secretary of this Corporation shall by
duly executed proxy designate to represent this Corporation.
Section 7. Loans. No loans shall be contracted on behalf of the Corporation
-----
and no evidence of indebtedness shall be issued in its name unless authorized by
a resolution of the board of directors. Such authority may be general or
confined to specific instances.
ARTICLE VIII
AMENDMENTS
----------
Section 1. Power of Stockholders. New bylaws may be adopted or these bylaws
---------------------
may be amended or repealed by the vote of stockholders entitled to exercise a
majority of the voting power of the Corporation or by the written consent of
such stockholders, except as otherwise provided by law or by the certificate of
incorporation.
Section 2. Power of Directors. Except as otherwise specified in the
------------------
Corporation's certificate of incorporation or these bylaws, the board of
directors shall have the power to amend, add to, alter or repeal these bylaws or
to adopt new bylaws by the vote of a majority of the total number of directors
or by the written consent of all of the directors.
<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 19th day of May 1999, by
and between musicmaker.com, Inc., 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 as amended on February 12,
1999 (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 delete the
---------
second sentence in Section 1, titled Employment, so that Section 1 shall read in
its entirety:
"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."
The Employment Agreement is further amended so as to delete the
introductory clause in Section 2, titled Term, which language reads: "Subject to
the second sentence of Section 1," so that Section 2 shall read in its entirety:
"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."
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.
<PAGE>
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.
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.
MUSICMAKER.COM, INC.
By: /s/ Robert P. Bernardi
----------------------
Robert P. Bernardi
Chairman and Co-Chief Executive Officer
EMPLOYEE
By: /s/ Devarajan Puthukarai
------------------------
Devarajan Puthukarai
2
<PAGE>
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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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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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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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.
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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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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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EXHIBIT 10.5
musicmaker.com, Inc.
AMENDED STOCK OPTION PLAN
1. Establishment, Purpose and Types of Awards
Muscimaker.com, Inc. (the "Corporation") hereby establishes THE
musicmaker.com, Inc. AMENDED STOCK OPTION PLAN (the "Plan"), as an amendment
and restatement of The Music Connection Corporation Stock Option Plan
previously adopted by the Corporation (the "Original Plan"). The purpose of the
Plan is to promote the long-term growth and profitability of the Corporation by
(i) providing key people with incentives to improve stockholder value and to
contribute to the growth and financial success of the Corporation, and (ii)
enabling the Corporation to attract, retain and reward the best available
persons for positions of substantial responsibility.
The Plan permits the granting of stock options (including nonqualified stock
options and incentive stock options qualifying under Section 422 of the Code)
and stock appreciation rights (including free-standing, tandem and limited stock
appreciation rights) or any combination of the foregoing (collectively,
"Awards").
The Plan is a compensatory benefit plan within the meaning of Rule 701 under
the Securities Act of 1933 (the "Securities Act"). Except to the extent any
other exemption from the Securities Act is expressly relied upon in connection
with any agreement entered into pursuant to the Plan or the securities issuable
hereunder are registered under the Securities Act, the issuance of Common Stock
pursuant to the Plan is intended to qualify for the exemption from registration
under the Securities Act provided by Rule 701. To the extent that an exemption
from registration under the Securities Act provided by Rule 701 is unavailable,
all unregistered offers and sales of Awards and shares of Common Stock issuable
upon exercise of an Award are intended to be exempt from registration under the
Securities Act in reliance upon the private offering exemption contained in
Section 4(2) of the Securities Act, or other available exemption, and the Plan
shall be so administered.
2. Definitions
Under this Plan, except where the context otherwise indicates, the following
definitions apply:
(a) "Award" shall mean any stock option or stock appreciation right issued
hereunder.
(b) "Board" shall mean the Board of Directors of the Corporation.
(c) "Change in Control" shall mean (i) any sale, exchange or other
disposition of substantially all of the Corporation's assets; or (ii) any
merger, share
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exchange, consolidation or other reorganization or business combination in which
the Corporation is not the surviving or continuing corporation, or in which the
Corporation's stockholders become entitled to receive cash, securities of the
Corporation other than voting common stock, or securities of another issuer.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any
regulations issued thereunder.
(e) "Committee" shall mean the Board or committee of Board members appointed
pursuant to Section 3 of the Plan to administer the Plan.
(f) "Common Stock" shall mean shares of the Corporation's voting and
nonvoting classes of common stock.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" of a share of the Corporation's Common Stock for any
purpose on a particular date shall be determined in a manner such as the
Committee shall in good faith determine to be appropriate.
(i) "Grant Agreement" shall mean a written agreement between the Corporation
and a grantee memorializing the terms and conditions of an Award granted
pursuant to the Plan.
(j) "Grant Date" shall mean the date on which the Committee formally acts to
grant an Award to a grantee or such other date as the Committee shall so
designate at the time of taking such formal action.
(k) "Parent" shall mean a corporation, whether now or hereafter existing,
within the meaning of the definition of "parent corporation" provided in Section
424(e) of the Code, or any successor thereto of similar import.
(l) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the Exchange Act
on the effective date of the Plan, or any successor provision prescribing
conditions necessary to exempt the issuance of securities under the Plan (and
further transactions in such securities) from Section 16(b) of the Exchange Act.
(m) "Subsidiary" and "subsidiaries" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto of similar import.
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3. Administration
(a) Procedure. The Plan shall be administered by the Board. In the
alternative, the Board may appoint a Committee consisting of not less than two
(2) members of the Board to administer the Plan on behalf of the Board, subject
to such terms and conditions as the Board may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board. From
time to time, the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and, thereafter, directly administer the Plan. In
the event that the Board is the administrator of the Plan in lieu of a
Committee, the term "Committee" as used herein shall be deemed to mean the
Board.
Members of the Board or Committee who are either eligible for Awards or
have been granted Awards may vote on any matters affecting the administration of
the Plan or the grant of Awards pursuant to the Plan, except that no such member
shall act upon the granting of an Award to himself or herself, but any such
member may be counted in determining the existence of a quorum at any meeting of
the Board or the Committee during which action is taken with respect to the
granting of an Award to him or her.
The Committee shall meet at such times and places and upon such notice
as it may determine. A majority of the Committee shall constitute a quorum.
Any acts by the Committee may be taken at any meeting at which a quorum is
present and shall be by majority vote of those members entitled to vote.
Additionally, any acts reduced to writing or approved in writing by all of the
members of the Committee shall be valid acts of the Committee.
(b) Procedure After Registration of Common Stock. Notwithstanding the
provisions of subsection (a) above, in the event that the Common Stock or any
other capital stock of the Corporation becomes registered under Section 12 of
the Exchange Act, the members of the Committee shall be both "disinterested
persons" within the meaning of Rule 16b-3, and "outside directors" within the
meaning of Section 162(m) of the Code. Upon and after the point in time that
the Common Stock or any other capital stock of the Corporation becomes
registered under Section 12 of the Exchange Act, the Board shall take all action
necessary to cause the Plan to be administered in accordance with the then
effective provisions of Rule 16b-3, provided that any amendment to the Plan
required for compliance with such provisions shall be made in accordance with
Section 11 of the Plan.
(c) Powers of the Committee. The Committee shall have all the powers
vested in it by the terms of the Plan, such powers to include authority, in its
sole and absolute discretion, to grant Awards under the Plan, prescribe Grant
Agreements evidencing such Awards and establish programs for granting Awards.
The Committee shall have full power and authority to take all other actions
necessary to carry out the purpose and intent of the Plan, including, but not
limited to, the authority to:
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(i) determine the eligible persons to whom, and the time or times at
which Awards shall be granted,
(ii) determine the types of Awards to be granted,
(iii) determine the number of shares to be covered by or used for
reference purposes for each Award,
(iv) impose such terms, limitations, restrictions and conditions
upon any such Award as the Committee shall deem appropriate,
(v) modify, extend or renew outstanding Awards, accept the
surrender of outstanding Awards and substitute new Awards, provided that no
such action shall be taken with respect to any outstanding Award which
would adversely affect the grantee without the grantee's consent, and
(vi) accelerate or otherwise change the time in which an Award
may be exercised or becomes payable and to waive or accelerate the lapse,
in whole or in part, of any restriction or condition with respect to such
Award, including, but not limited to, any restriction or condition with
respect to the vesting or exercisability of an Award following termination
of any grantee's employment.
The Committee shall have full power and authority to administer and interpret
the Plan and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Plan and for the conduct of its
business as the Committee deems necessary or advisable and to interpret same,
all within the Committee's sole and absolute discretion.
(d) Limited Liability. To the maximum extent permitted by law, no member of
the Board or Committee shall be liable for any action taken or decision made in
good faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law, the members of
the Board and Committee shall be indemnified by the Corporation in respect of
all their activities under the Plan.
(f) Effect of Committee's Decision. All actions taken and decisions and
determinations made by the Committee on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Committee's sole
and absolute discretion and shall be conclusive and binding on all parties
concerned, including the Corporation, its stockholders, any participants in the
Plan and any other employee of the Corporation, and their respective successors
in interest.
4. Shares Available for the Plan; Maximum Awards
Subject to adjustments as provided in Section 10 of the Plan, the shares of
stock that may be delivered or purchased or used for reference purposes (with
respect to stock
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appreciation rights) with respect to Awards granted under the Plan, together
with Awards granted under the Original Plan, including with respect to incentive
stock options intended to qualify under Section 422 of the Code, shall not
exceed an aggregate of 4,200,000 shares of Voting Common Stock of the
Corporation. The Corporation shall reserve said number of shares for Awards
under the Plan, subject to adjustments as provided in Section 10 of the Plan. If
any Award, or portion of an Award, under the Plan, or the Original Plan, expires
or terminates unexercised, becomes unexercisable or is forfeited or otherwise
terminated, surrendered or canceled as to any shares without the delivery of
shares of Common Stock or other consideration, the shares subject to such Award
shall thereafter be shares with respect to which further Awards may be granted
under the Plan.
To the extent required by Section 162(m) of the Code, the maximum number of
shares of Common Stock subject to Awards of any combination that may be granted
during any one calendar year to any one individual shall be limited to 500,000,
subject to adjustments as provided in Section 10 of the Plan. To the extent
required by Section 162(m) of the Code and so long as Section 162(m) of the Code
is applicable to persons eligible to participate in the Plan, shares of Common
Stock subject to the foregoing limit with respect to which the related Award is
terminated, surrendered or canceled shall not again be available for grant under
this limit.
5. Participation
Participation in the Plan shall be open to all employees, officers,
directors and consultants of the Corporation, or of any Parent or Subsidiary of
the Corporation, as may be selected by the Committee from time to time.
Notwithstanding the foregoing, participation in the Plan with respect to Awards
of incentive stock options shall be limited to employees of the Corporation, or
of any Parent or Subsidiary of the Corporation. To the extent necessary to
comply with Rule 16b-3 or to constitute an "outside director" within the meaning
of Section 162(m) of the Code, and only in the event that Rule 16b-3 or Section
162(m) of the Code is applicable to the Plan or an Award made thereunder,
Committee members shall not be eligible to participate in the Plan while members
of the Committee.
Awards may be granted to such eligible persons and for or with respect to
such number of shares of Common Stock as the Committee shall determine, subject
to the limitations in Section 4 of the Plan. A grant of any type of Award made
in any one year to an eligible person shall neither guarantee nor preclude a
further grant of that or any other type of Award to such person in that year or
subsequent years.
6. Stock Options
Subject to the other applicable provisions of the Plan, the Committee may
from time to time grant to eligible participants nonqualified stock options or
incentive stock options as that term is defined in Section 422 of the Code. The
stock options granted shall be subject to the following terms and conditions.
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(a) Grant of Option. The grant of a stock option shall be evidenced
by a Grant Agreement, executed by the Corporation and the grantee, stating the
number of shares of Common Stock subject to the stock option evidenced thereby
and the terms and conditions of such stock option, in such form as the Committee
may from time to time determine.
(b) Price. The price per share payable upon the exercise of each stock
option ("exercise price") shall be determined by the Committee; provided,
however, that in the case of incentive stock options, the exercise price shall
not be less than 100% of the Fair Market Value of the shares on the date the
stock option is granted.
(c) Payment. Stock options may be exercised in whole or in part by
payment of the exercise price of the shares to be acquired in accordance with
the provisions of the Grant Agreement, and/or such rules and regulations as the
Committee may have prescribed, and/or such determinations, orders, or decisions
as the Committee may have made. Payment may be made in cash (or cash
equivalents acceptable to the Committee) or, unless otherwise determined by the
Committee, in shares of Common Stock or a combination of cash and shares of
Common Stock, or by such other means as the Committee may prescribe. The Fair
Market Value of shares of Common Stock delivered on exercise of stock options
shall be determined as of the date of exercise. Shares of Common Stock
delivered in payment of the exercise price may be previously owned shares or, if
approved by the Committee, shares acquired upon exercise of the stock option.
Any fractional share will be paid in cash. The Corporation may make or
guarantee loans to grantees to assist grantees in exercising stock options.
If the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Committee, subject to such limitations as it may determine,
may authorize payment of the exercise price, in whole or in part, by delivery of
a properly executed exercise notice, together with irrevocable instructions, to:
(i) a brokerage firm designated by the Corporation to deliver promptly to the
Corporation the aggregate amount of sale or loan proceeds to pay the exercise
price and any withholding tax obligations that may arise in connection with the
exercise, and (ii) the Corporation to deliver the certificates for such
purchased shares directly to such brokerage firm.
(d) Terms of Options. The term during which each stock option may be
exercised shall be determined by the Committee. In no event shall a stock
option be exercisable more than ten years from the date it is granted. Prior to
the exercise of the stock option and delivery of the shares certificates
represented thereby, the grantee shall have none of the rights of a stockholder
with respect to any shares represented by an outstanding stock option.
(e) Restrictions on Incentive Stock Options. Incentive Stock Options
granted under Code Section 422 shall meet the following additional requirements.
(i) Grant Date. An incentive stock option must be granted within
10 years of the earlier of the Original Plan's adoption by the Board of
Directors or approval by the Corporation's shareholders.
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(ii) Exercise Price and Term. The exercise price of an incentive
stock option shall not be less than 100% of the Fair Market Value of the
shares on the date the stock option is granted. Also, the exercise price
of any incentive stock option granted to a grantee who owns (within the
meaning of Section 422(b)(6) of the Code, after the application of the
attribution rules in Section 424(d) of the Code) more than 10% of the total
combined voting power of all classes of shares of the Corporation or its
Parent or Subsidiary corporations (within the meaning of Sections 422 and
424 of the Code) shall be not less than 110% of the Fair Market Value of
the Common Stock on the grant date and the term of such stock option shall
not exceed five years.
(iii) Maximum Grant. The aggregate Fair Market Value (determined as of
the Grant Date) of shares of Common Stock with respect to which all
incentive stock options first become exercisable by any grantee in any
calendar year under this or any other plan of the Corporation and its
Parent and Subsidiary corporations may not exceed $100,000 or such other
amount as may be permitted from time to time under Section 422 of the Code.
To the extent that such aggregate Fair Market Value shall exceed $100,000,
or other applicable amount, such stock options shall be treated as
nonqualified stock options. In such case, the Corporation may designate the
shares of Common Stock that are to be treated as stock acquired pursuant to
the exercise of an incentive stock option by issuing a separate certificate
for such shares and identifying the certificate as incentive stock option
shares in the stock transfer records of the Corporation.
(iv) Grantee. Incentive stock options shall only be issued to employees
of the Corporation, or of a Parent or Subsidiary of the Corporation.
(v) Designation. No stock option shall be an incentive stock option
unless so designated by the Committee at the time of grant or in the Grant
Agreement evidencing such stock option.
(f) Other Terms and Conditions. Stock options may contain such other
provisions, not inconsistent with the provisions of the Plan, as the Committee
shall determine appropriate from time to time.
7. Stock Appreciation Rights
(a) Award of Stock Appreciation Rights. Subject to the other applicable
provisions of the Plan, the Committee may at any time and from time to time
grant stock appreciation rights ("SARs") to eligible participants, either on a
free-standing basis (without regard to or in addition to the grant of a stock
option) or on a tandem basis (related to the grant of an underlying stock
option), as it determines. SARs granted in tandem with or in addition to a stock
option may be granted either at the same time as the stock option or at a later
time; provided, however, that a tandem SAR shall not be granted with respect to
any outstanding incentive stock option Award without the consent of the grantee.
SARs shall be evidenced by Grant Agreements, executed by the Corporation and the
grantee, stating the number of shares of Common Stock subject to the SAR
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evidenced thereby and the terms and conditions of such SAR, in such form as the
Committee may from time to time determine. The term during which each SAR may be
exercised shall be determined by the Committee. In no event shall an SAR be
exercisable more than ten years from the date it is granted. The grantee shall
have none of the rights of a stockholder with respect to any shares of Common
Stock represented by an SAR.
(b) Restrictions of Tandem SARs. No incentive stock option may be
surrendered in connection with the exercise of a tandem SAR unless the Fair
Market Value of the Common Stock subject to the incentive stock option is
greater than the exercise price for such incentive stock option. SARs granted
in tandem with stock options shall be exercisable only to the same extent and
subject to the same conditions as the stock options related thereto are
exercisable. The Committee may, in its discretion, prescribe additional
conditions to the exercise of any such tandem SAR.
(c) Amount of Payment Upon Exercise of SARs. An SAR shall entitle the
grantee to receive, subject to the provisions of the Plan and the Grant
Agreement, a payment having an aggregate value equal to the product of (i) the
excess of (A) the Fair Market Value on the exercise date of one share of Common
Stock over (B) the base price per share specified in the Grant Agreement, times
(ii) the number of shares specified by the SAR, or portion thereof, which is
exercised. In the case of exercise of a tandem SAR, such payment shall be made
in exchange for the surrender of the unexercised related stock option (or any
portion or portions thereof which the grantee from time to time determines to
surrender for this purpose).
(d) Form of Payment Upon Exercise of SARs. Payment by the Corporation
of the amount receivable upon any exercise of an SAR may be made by the delivery
of Common Stock or cash, or any combination of Common Stock and cash, as
determined in the sole discretion of the Committee from time to time. If upon
settlement of the exercise of an SAR a grantee is to receive a portion of such
payment in shares of Common Stock, the number of shares shall be determined by
dividing such portion by the Fair Market Value of a share of Common Stock on the
exercise date. No fractional shares shall be used for such payment and the
Committee shall determine whether cash shall be given in lieu of such fractional
shares or whether such fractional shares shall be eliminated.
8. Withholding of Taxes
The Corporation may require, as a condition to the grant of any Award
under the Plan or exercise pursuant to such Award or to the delivery of
certificates for shares issued or payments of cash to a grantee pursuant to the
Plan or a Grant Agreement (hereinafter collectively referred to as a "taxable
event"), that the grantee pay to the Corporation, in cash or, unless otherwise
determined by the Corporation, in shares of Common Stock, including shares
acquired upon grant of the Award or exercise of the Award, valued at Fair Market
Value on the date as of which the withholding tax liability is determined, any
federal, state or local taxes of any kind required by law to be withheld with
respect to any taxable event under the Plan. The withholding tax obligation
that may be paid by the withholding or delivery of shares may not exceed the
statutory minimum required withholding amount with respect to the grantee's
federal, state and local income tax
-8-
<PAGE>
obligations in connection with a taxable event. The Corporation, to the extent
permitted or required by law, shall have the right to deduct from any payment of
any kind (including salary or bonus) otherwise due to a grantee any federal,
state or local taxes of any kind required by law to be withheld with respect to
any taxable event under the Plan, or to retain or sell without notice a
sufficient number of the shares to be issued to such grantee to cover any such
taxes.
9. Transferability
To the extent required to comply with Rule 16b-3, if applicable, and
in any event in the case of an incentive stock option or a stock appreciation
right granted with respect to an incentive stock option, no Award granted under
the Plan shall be transferable by a grantee otherwise than by will or the laws
of descent and distribution. Unless otherwise determined by the Committee in
accord with the provisions of the immediately preceding sentence, an Award may
be exercised during the lifetime of the grantee, only by the grantee or, during
the period the grantee is under a legal disability, by the grantee's guardian or
legal representative.
10. Adjustments; Business Combinations
In the event of a reclassification, recapitalization, stock split, stock
dividend, combination of shares, or other similar event, the maximum number and
kind of shares reserved for issuance or with respect to which Awards may be
granted under the Plan as provided in Section 4 shall be adjusted to reflect
such event, and the Committee shall make such adjustments as it deems
appropriate and equitable in the number, kind and price of shares covered by
outstanding Awards made under the Plan, and in any other matters which relate to
Awards and which are affected by the changes in the Common Stock referred to
above.
In the event of any proposed Change in Control, the Committee shall take
such action as it deems appropriate and equitable to effectuate the purposes of
this Plan and to protect the grantees of Awards, which action may include, but
without limitation, any one or more of the following: (i) acceleration or change
of the exercise dates of any Award; (ii) arrangements with grantees for the
payment of appropriate consideration to them for the cancellation and surrender
of any Award; and (iii) in any case where equity securities other than Common
Stock of the Corporation are proposed to be delivered in exchange for or with
respect to Common Stock of the Corporation, arrangements providing that any
Award shall become one or more Awards with respect to such other equity
securities.
The Committee is authorized to make adjustments in the terms and conditions
of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in the
preceding two paragraphs of this Section 10) affecting the Corporation, or the
financial statements of the Corporation or any Subsidiary, or of changes in
applicable laws, regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.
-9-
<PAGE>
In the event the Corporation dissolves and liquidates (other than pursuant
to a plan of merger or reorganization), then notwithstanding any restrictions on
exercise set forth in this Plan or any Grant Agreement, or other agreement
evidencing a stock option or stock appreciation right: (i) each grantee shall
have the right to exercise his stock option or stock appreciation right at any
time up to ten (10) days prior to the effective date of such liquidation and
dissolution; and (ii) the Committee may make arrangements with the grantees for
the payment of appropriate consideration to them for the cancellation and
surrender of any stock option or stock appreciation right that is so canceled or
surrendered at any time up to ten (10) days prior to the effective date of such
liquidation and dissolution. The Committee may establish a different period (and
different conditions) for such exercise, delivery, cancellation, or surrender to
avoid subjecting the grantee to liability under Section 16(b) of the Exchange
Act. Any stock option or stock appreciation right not so exercised, canceled, or
surrendered shall terminate on the last day for exercise prior to such effective
date.
11. Termination and Modification of the Plan
The Board, without further approval of the stockholders, may modify or
terminate the Plan or any portion thereof at any time, except that no
modification shall become effective without prior approval of the stockholders
of the Corporation if stockholder approval is necessary to comply with any tax
or regulatory requirement or rule of any exchange or Nasdaq System upon which
the Common Stock is listed or quoted; including for this purpose stockholder
approval that is required for continued compliance with Rule 16b-3 or
stockholder approval that is required to enable the Committee to grant incentive
stock options pursuant to the Plan.
The Committee shall be authorized to make minor or administrative
modifications to the Plan as well as modifications to the Plan that may be
dictated by requirements of federal or state laws applicable to the Corporation
or that may be authorized or made desirable by such laws. The Committee may
amend or modify the grant of any outstanding Award in any manner to the extent
that the Committee would have had the authority to make such Award as so
modified or amended.
12. Non-Guarantee of Employment
Nothing in the Plan or in any Grant Agreement thereunder shall confer
any right on an employee to continue in the employ of the Corporation or shall
interfere in any way with the right of the Corporation to terminate an employee
at any time.
13. Transfer of Employee
For purposes of maintaining a grantee's continuous status as an employee
and accrual of rights under any Award, transfer of an employee among the
Corporation and the Corporation's Parent or Subsidiaries shall not be considered
a termination of employment. Nor shall it be considered a termination of
employment for such purposes if an employee is placed on military or sick leave
or such other leave of absence which is considered as continuing intact the
employment relationship; in such a case, the
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<PAGE>
employment relationship shall be continued until the date when an employee's
right to reemployment shall no longer be guaranteed either by law or contract.
14. Written Agreement
Each Grant Agreement entered into between the Corporation and a grantee
with respect to an Award granted under the Plan shall incorporate the terms of
this Plan and shall contain such provisions, consistent with the provisions of
the Plan, as may be established by the Committee.
15. Non-Uniform Determinations
The Committee's determinations under the Plan (including without limitation
determinations of the persons to receive Awards, the form, amount and timing of
such Awards, the terms and provisions of such Awards and the agreements
evidencing same) need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, Awards under the Plan, whether
or not such persons are similarly situated.
16. Listing and Registration
If the Corporation determines that the listing, registration or
qualification upon any securities exchange or upon any listing or quotation
system established by the National Association of Securities Dealers, Inc.
("Nasdaq System") or under any law, of shares subject to any Award is necessary
or desirable as a condition of, or in connection with, the granting of same or
the issue or purchase of shares thereunder, no such Award may be exercised in
whole or in part and no restrictions on such Award shall lapse, unless such
listing, registration or qualification is effected free of any conditions not
acceptable to the Corporation.
17. Compliance with Securities Law
The Corporation may require that a grantee, as a condition to exercise
of an Award, and as a condition to the delivery of any share certificate,
provide to the Corporation, at the time of each such exercise and each such
delivery, a written representation that the shares of Common Stock being
acquired shall be acquired by the grantee solely for investment and will not be
sold or transferred without registration or the availability of an exemption
from registration under the Securities Act and applicable state securities laws.
The Corporation may also require that a grantee submit other written
representations which will permit the Corporation to comply with federal and
applicable state securities laws in connection with the issuance of the Common
Stock, including representations as to the knowledge and experience in financial
and business matters of the grantee and the grantee's ability to bear the
economic risk of the grantee's investment. The Corporation may require that the
grantee obtain a "purchaser representative" as that term is defined in
applicable federal and state securities laws. The stock certificates for any
shares of Common Stock issued pursuant to this Plan may bear a legend
restricting transferability of the shares of Common Stock unless such shares are
registered or an exemption from registration is available under the Securities
Act and
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<PAGE>
applicable state securities laws. The Corporation may notify its transfer agent
to stop any transfer of shares of Common Stock not made in compliance with these
restrictions. Common Stock shall not be issued with respect to an Award granted
under the Plan unless the exercise of such Award and the issuance and delivery
of share certificates for such Common Stock pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any national securities exchange or Nasdaq System upon which the
Common Stock may then be listed or quoted, and shall be further subject to the
approval of counsel for the Corporation with respect to such compliance to the
extent such approval is sought by the Committee.
18. No Limit on Other Compensation Arrangements
Nothing contained in the Plan shall prevent the Corporation or its Parent
or Subsidiary corporations from adopting or continuing in effect other
compensation arrangements (whether such arrangements be generally applicable or
applicable only in specific cases) as the Committee in its discretion determines
desirable, including without limitation the granting of stock options or stock
appreciation rights otherwise than under the Plan.
19. No Trust or Fund Created
Neither the Plan nor any Award shall create or be construed to create
a trust or separate fund of any kind or a fiduciary relationship between the
Corporation and a grantee or any other person. To the extent that any grantee
or other person acquires a right to receive payments from the Corporation
pursuant to an Award, such right shall be no greater than the right of any
unsecured general creditor of the Corporation.
20. Governing Law
The validity, construction and effect of the Plan, of Grant Agreements
entered into pursuant to the Plan, and of any rules, regulations, determinations
or decisions made by the Board or Committee relating to the Plan or such Grant
Agreements, and the rights of any and all persons having or claiming to have any
interest therein or thereunder, shall be determined exclusively in accordance
with applicable federal laws and the laws of the State of Delaware without
regard to its conflict of laws rules and principles.
21. Plan Subject to Charter and Bylaws
This Plan is subject to the Charter and Bylaws of the Corporation, as they
may be amended from time to time.
22. Effective Date; Termination Date
The Plan is effective as of the date on which the Plan was adopted by the
Board, subject to approval of the stockholders within twelve months before or
after such date. No Award shall be granted under the Plan after the close of
business on the day immediately preceding the tenth anniversary of the effective
date of the Original Plan,
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<PAGE>
which was July 2, 1996, the earlier of the date of its adoption by the Board and
the approval by the shareholders. Subject to other applicable provisions of the
Plan, all Awards made under the Plan prior to such termination of the Plan shall
remain in effect until such Awards have been satisfied or terminated in
accordance with the Plan and the terms of such Awards.
Date Approved by the Board: June 8, 1999
------------
Date Approved by the Shareholders: June 14, 1999
-------------
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<PAGE>
Exhibit 10.9
musicmaker.com, Inc.
1831 Wiehle Avenue
Suite 128
Reston, Virginia 20190
Phone (703) 904-4110 Fax (703) 904-4117
[DATE]
Ferris, Baker Watts, Incorporated
100 Light Street
8th Floor
Baltimore, Maryland 21202
Fahnestock & Co. Inc.
125 Broad Street
New York, New York 10004
Dear Sirs:
The undersigned understands that Ferris, Baker Watts, Incorporated and
Fahnestock & Co. Inc., as Representatives of the several underwriters (the
"Underwriters"), propose to enter into an Underwriting Agreement with
musicmaker.com, Inc., a Delaware corporation (the "Company"), providing for the
public offering (the "Public Offering") of common stock, par value $0.01 per
share (the "Common Stock") of the Company.
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned,
during the period commencing on the date of execution of the Underwriting
Agreement and ending 180 days after the Closing Date of the Underwriting
Agreement:
(i) agrees not to (x) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent position within
the meaning of Section 16 of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder or otherwise transfer or
dispose of, directly or indirectly, any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for any shares
of capital stock of the Company or (y) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any shares of capital stock of the Company, or publicly announce an
intention to effect any such transaction (regardless of whether any of the
transactions described in clause (x) or (y) is to be settled by the delivery of
Common Stock, or
<PAGE>
Page 2
such other securities, in cash or otherwise), without the prior written consent
of Ferris, Baker Watts, Incorporated;
(ii) agrees 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, without the prior written consent
of Ferris, Baker Watts, Incorporated and Fahnestock & Co. Inc.; and
(iii) authorizes the Company to cause the transfer agent to decline to
transfer and/or to note stop transfer restrictions on the transfer books and
records of the Company with respect to any shares of Common Stock and any
securities convertible into or exercisable or exchangeable for Common Stock for
which the undersigned is the record holder and, in the case of any such shares
or securities for which the undersigned is the beneficial but not the record
holder, agrees to cause the record holder to cause the transfer agent to decline
to transfer and/or to note stop transfer restrictions on such books and records
with respect to such shares or securities.
Notwithstanding the foregoing, the undersigned may transfer any or all of
the shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for any shares of capital stock of the Company
(collectively, "Company Securities"), either during the undersigned's lifetime
or on the undersigned's death, by gift, will or intestate succession to the
undersigned's immediate family or to a trust the beneficiaries of which are
exclusively the undersigned's and/or a member or members of the undersigned's
immediate family; provided, however, that in any such case it shall be a
condition to the transfer that the transferee execute an agreement stating that
the transferee is receiving and holding the Company Securities subject to the
provision of this letter agreement, and there shall be no further transfer of
such Company Securities except in accordance with this letter agreement. For
purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, stepchildren, father, mother, brother or sister of the transferor.
In addition, notwithstanding the foregoing: (a) if the undersigned is a
partnership, the partnership may transfer any Company Securities to a partner of
such partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner, and any
partner who is an individual may transfer Company Securities by gift, will or
intestate succession to his or her immediate family or to a trust the
beneficiaries of which are exclusively a member or members of his or her
immediate family; (b) if the undersigned is a limited liability company, the
limited liability company or to the estate of any such member, and any member
who is an individual may transfer Company Securities by gift will or intestate
succession to his or her immediate family or to a trust the beneficiaries of
which are exclusively a member or members of his or her immediate family; and
(c) if the undersigned is a corporation and any stockholder who is an individual
may transfer Company Securities to any stockholder of such corporation and any
stockholder who is an individual may transfer Company Securities by gift, will
or intestate succession to his or immediate family or to a trust the
beneficiaries of which are exclusively a member or members of his or her
immediate family; provided, however, that in any such case, it shall be a
condition to the transfer that the transferee execute an agreement
<PAGE>
Page 3
stating that the transferee is receiving and holding the Company Securities
subject to the provisions of this letter agreement, and there shall be no
further transfer of such Company Securities except in accordance with this
letter agreement.
Further, if the undersigned transfers any or all of the Company Securities
prior to the execution of the Underwriting Agreement, it shall be a condition to
the transfer that the transferee is receiving and holding the Company
Securities subject to the provisions of this letter agreement, and there shall
be no further transfer of such Company Securities except in accordance with this
letter agreement.
The undersigned hereby represents and warrants that all of the shares of
capital stock held by such person are listed on the attached Annex 1 and that
the undersigned has full power and authority to enter into the agreements set
forth herein, and that, upon request, the undersigned will execute any
additional documents necessary to implement the foregoing. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of the
undersigned and any obligations of the undersigned shall be binding upon the
heirs, personal representatives, successors, and assigns of the undersigned.
Very truly yours,
----------------------------------------
- --------------------------------
(Name--Please Type)
- --------------------------------
- --------------------------------
- --------------------------------
- --------------------------------
(Address and Phone)
- --------------------------------
(Social Security or Taxpayer Identification No.)
Annex 1
Number (and type) of shares of capital stock owned:
------------------------
Certificate Numbers:
------------------------
------------------------
------------------------
------------------------
<PAGE>
EXHIBIT 10.10.1
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MUSICMAKER.COM, INC.
LOAN AND SECURITY AGREEMENT
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<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of March 12, 1999, by
and between IMPERIAL BANK ("Bank") and musicmaker.com, Inc. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means any cash advance made or letter
of credit issued under this Agreement.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents (including fees and expenses of appeal), incurred before, during and
after an Insolvency Proceeding, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California or Virginia are
authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A
attached hereto.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed,
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co-made or discounted or sold with recourse by that Person, or in respect of
which that Person is otherwise directly or indirectly liable; (ii) any
obligations with respect to undrawn letters of credit issued for the account of
that Person; and (iii) all obligations arising under any interest rate, currency
or commodity swap agreement, interest rate cap agreement, interest rate collar
agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term "Contingent Obligation" shall not
include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Credit Extension" means each Equipment Advance Letter of
Credit, or any other extension of credit by Bank for the benefit of Borrower
hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement or any other agreement by and between Bank and
Borrower, including all Indebtedness that is payable upon demand or within one
year from the date of determination thereof unless such Indebtedness is
renewable or extendible at the option of Borrower or any Subsidiary to a date
more than one year from the date of determination, less deferred maintenance
revenue.
"Daily Balance" means the amount of the Obligations owed at
the end of a given day.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section
2.1.2.
"Equipment Line" means a credit extension of up to Two Hundred
Fifty Thousand Dollars ($250,000).
"Equipment Maturity Date" means six (6) months from the
Closing Date.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or
2
<PAGE>
insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Inventory" means all present and fixture inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Letter of Credit" means a letter of credit.
"Letter of Credit Facility" means letters of credit issued by
Bank in an aggregate outstanding amount not to exceed $110,000.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"New Equity" means the receipt of equity by Borrower
subsequent to the Closing Date in the form of cash proceeds from the sale of its
capital stock or Subordinated Debt, other than in a refinancing transaction to
employees, officers, directors and consultants of Borrower.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
3
<PAGE>
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Indebtedness secured by a lien described in clause
(c) of the defined term "Permitted Liens," provided such Indebtedness does not
exceed the lesser of the cost or fair market value of the equipment financed
with such Indebtedness; and
(d) Subordinated Debt.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed
in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and (iv) Bank's money market accounts.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed
in the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held
by Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
4
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"Quick Assets" means, at any date as of which the amount
thereof shall be determined, the unrestricted cash and cash-equivalents,
accounts receivable and investments with maturities not to exceed 90 days, of
Borrower determined in accordance with GAAP.
"Responsible Office" means each of the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer and the
Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto,
if any.
"Subordinated Debt" means any debt incurred by Borrower that
is subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, is owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the sum of the capital stock and additional paid-in
capital plus retained earnings (or minus accumulated deficit) of Borrower and
its Subsidiaries minus intangible assets, plus Subordinated Debt, on a
consolidated basis determined in accordance with GAAP.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness.
1.2 Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions.
Borrower promises to pay to the order of Bank, in lawful money
of the United States of America, the aggregate unpaid principal amount of all
Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at rates in
accordance with the terms hereof.
2.1.1 Equipment Advances.
(a) Subject to and upon the terms and conditions of this
Agreement, at any time from the date hereof through the Equipment Maturity Date,
Bank agrees to make advances (each an "Equipment Advance" and, collectively, the
"Equipment Advances") to Borrower in an aggregate outstanding amount not to
exceed the Equipment Line. Each Equipment Advance shall not exceed one hundred
percent (100%) of the invoice amount of equipment and software purchases (which
Borrower shall, in any case, have purchased within 90 days of the Closing Date),
excluding taxes, shipping, warranty charges, freight discounts and installation
expense. Any amounts under the Equipment Line that Borrower has not used for
equipment or software purposes may be used for corporate purposes approved by
Bank from time to time.
(b) Interest shall accrue from the date of each
Equipment Advance at the rate specified in Section 2.3, and shall be payable
monthly on the last day of each month through September, 1999. Thereafter, all
outstanding principal and accrued interest under the Equipment Line and any
other Obligations under
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this Agreement shall be due and payable on the Equipment Maturity Date.
Notwithstanding the foregoing, if prior to the Equipment Maturity Date, Borrower
has received at least Five Million Dollars ($5,000,000) in New Equity, then any
Equipment Advances that are outstanding on September 11, 1999 shall be payable
in twenty-four (24) equal monthly installments of principal, plus all accrued
interest, beginning on September 11, 1999, and continuing on the same day of
each month thereafter through September 11, 2001, at which time all amounts due
under this Section 2.1.1 and any other amounts due under (his Agreement shall be
immediately due and payable. As of September 11, 1999, Equipment Advances, once
repaid, may not be reborrowed. Borrower may prepay any Equipment Advances
without penalty or premium.
(c) When Borrower desires to obtain an Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
facsimile transmission to be received no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of Exhibit. The notice shall be
signed by a Responsible Officer or its designee and include a copy of the
invoice for any Equipment to be financed.
2.1.2 Letter of Credit Facility.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the
account of Borrower in an aggregate outstanding face amount not to exceed (i)
the Letter of Credit Facility, minus (ii) the face amount of outstanding Letters
of Credit. All Letters of Credit shall be, in form and substance, acceptable to
Bank in its sole discretion and shall be subject to the terms and conditions of
Bank's form of standard Application and Letter of Credit Agreement.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or In connection with any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States dollars. If a demand for
payment is made under any such Letter of Credit, Bank shall treat such demand as
an Advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(d) Upon the issuance of any Letter of Credit payable in
a currency other than United States Dollars, Bank shall create a reserve under
the Committed Revolving Line for Letters of Credit against fluctuations in
currency exchange rates, in an amount equal to ten percent (10%) of the face
amount of such Letter of Credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Revolving Line shall be reduced by the
amount of such reserve for so long as such Letter of Credit remains outstanding.
2.2 Overadvances. If any Advances hereunder exceed the Equipment
Line, Borrower shall immediately pay to Bank, in cash, the amount of such
excess.
2.3 Interest Rates, Payments, and Calculations.
(i) Equipment Advances. Except as set forth in
Section 2.3(b), the Equipment Advances shall bear interest, on the outstanding
daily balance thereof, at a rate equal to two percent (2.0%) above the Prime
Rate.
(b) Late Fee; Default Rate. If any payment is not made
within ten (10) days after the date such payment is due, Borrower shall pay Bank
a late fee equal to the lesser of (i) five percent
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(5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to
be charged under applicable law. All Obligations shall bear interest, from and
after the occurrence and during the continuance of an Event of Default, at a
rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and
payable on the last calendar day of each month during the term hereof. Bank
shall, at its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Revolving Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder. Bank shall
deliver to Borrower statements of account in the ordinary course of business
reflecting charges made hereunder.
(d) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon Pacific time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. On the Closing Date, a Facility Fee
equal to $2,500, which shall be nonrefundable;
(b) Bank Expenses. On the Closing Date, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses and, after the Closing Date, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.6 Term. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Equipment Maturity Date. Notwithstanding the foregoing, Bank shall
have the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The obligation
of Bank to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
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(b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(c) a warrant;
(d) a financing statement (Form UCC-1); and
(e) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form
as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would result from such Credit
Extension (provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date). The making of each Credit Extension shall be
deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2(b).
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired alter the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Requirement for Cash Collateral. If Bank issues or causes to be
issued Letters of Credit under Section 2.1.2, then Borrower shall pledge a
certificate of deposit to Bank in an amount equal to the aggregate amount of all
Letters of Credit issued, and outstanding.
4.4 Right to Inspect. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours but no more than once a year (unless an
Event of Default has occurred and is continuing), to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
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5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
is a corporation duly existing under the laws of its state of incorporation and
qualified and licensed to do business in any state in which the conduct of its
business or its ownership of property requires that it be so qualified.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Accounts. The Account are bona fide existing
obligations. The property giving rise to such Eligible Accounts has been
delivered to the account debtor or to the account debtor's agent for immediate
shipment to and unconditional acceptance by the account debtor.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects, except
for Inventory for which adequate reserves have been made.
5.6 Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral.
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
are delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency, Payment of Debts. Borrower is solvent and able to pay
its debts (including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary have met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations T and U of the Board of Governors of the Federal Reserve
System). Borrower has complied with all the provisions of the Federal Fair Labor
Standards Act.
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Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.11 Environmental Condition. Except as disclosed in the Schedule,
none of Borrower's or any Subsidiary's properties or assets has ever been used
by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by
previous owners or operators, in the disposal of, or to produce, store, handle,
treat, release, or transport, any hazardous waste or hazardous substance other
than in accordance with applicable law; to the best of Borrower's knowledge,
none of Borrower's properties or assets has ever been designated or identified
in any manner pursuant to any environmental protection statute as a hazardous
waste or hazardous substance disposal site, or a candidate for closure pursuant
to any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted, the
failure to obtain which could have a Material Adverse Effect.
5.15 Year 2000. Borrower and its Subsidiaries have reviewed the
areas within their operations and business which could be adversely affected by,
and have developed or are developing a program to address on a timely basis, the
Year 2000 Problem and have made related appropriate inquiry of material
suppliers and vendors, and based on such review and program, the Year 2000
Problem will not have a Material Adverse Effect upon its financial condition,
operations or business as now conducted. "Year 2000 Problem" means the
possibility that any computer applications or equipment used by Borrower may be
unable to recognize and properly perform date sensitive functions involving
certain dates prior to and any dates on or after December 31, 1999.
5.16 Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet the minimum funding requirements of ERISA with respect to any
employee benefit plans subject to ERISA. Borrower shall comply, and shall cause
each Subsidiary to comply, with all statutes, laws, ordinances and
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government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each calendar month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during such period, in a form acceptable to Bank and certified by a Responsible
Officer; (b) beginning with the fiscal year ending December 31, 1998, as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) promptly upon receipt of notice thereof, a
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of Fifty Thousand Dollars ($50,000) or more; and (d) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time generally prepared by Borrower in the
ordinary course of business.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit C hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts and appraise Collateral at Borrower's expense, provided that such
audits will be conducted no more often than every twelve (12) months unless an
Event of Default has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects except for Inventory
for which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement. Borrower shall promptly
notify Bank of all returns and recoveries and of all disputes and claims, where
the return, recovery, dispute or claim involves more than Fifty Thousand Dollars
($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon
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Bank's request, Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Year 2000 Compliance. Borrower shall perform all acts reasonably
necessary to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive review
and assessment of all Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems. As
used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any
entity, that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial condition of
such entity, will properly perform date sensitive functions before, during and
after the year 2000. Borrower shall immediately upon request, provide to Bank
such certifications or other evidence of Borrower's compliance with the terms of
this paragraph as Bank may from time to time require.
6.8 Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.9 Quick Ratio. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.30
to 1.00, increasing to 1.50 to 1.00 upon the receipt of New Equity.
6.10 Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Credit Extensions,
Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of surplus, worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto). Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
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7.6 Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except that Borrower may repurchase the stock of former employees
pursuant to stock repurchase agreements as long as an Event of Default does not
exist prior to such repurchase or would not exist after giving effect to such
repurchase.
7.7 Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory; provided, however, that Borrower may deposit software
code in escrow for customers in the ordinary course of business. Except for
Inventory sold in the ordinary course of business and except for such other
locations as Bank may approve in writing, Borrower shall keep the Inventory only
at the location set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" or be controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
under Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Loan Documents, or in any other present or future agreement
between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives notice thereof or
any officer of Borrower becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) day period or cannot
after diligent attempts by Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then Borrower
shall have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Credit Extensions will be required to be made
during such cure period);
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8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Credit Extensions will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Fifty Thousand Dollars
($50,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
8.10 [Guaranty. Any guaranty of all or a portion of the Obligations
ceases for any reason to be in full force and effect, or any guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty of
all or a portion of the Obligations or in any certificate delivered to Bank in
connection with such guaranty.]
9. BANK'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an
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<PAGE>
Event of Default described in Section 8.5 all Obligations shall become
immediately due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Make such payments and do such acts as Bank
considers necessary or reasonable to protect its security interest in the
Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and
to make the Collateral available to Bank as Bank may designate. Borrower
authorizes Bank to enter the premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) Set off and apply to the Obligations any and all (i)
balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Liquidate any certificate of deposit in which Bank
has a security interest and apply such proceeds to any outstanding Obligations;
(i) Bank may credit bid and purchase at any public sale;
and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims
under and decisions with respect to Borrower's policies of insurance; and (f)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the
15
<PAGE>
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time during the term of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following
after reasonable notice to Borrower: (a) make payment of the same or any part
thereof; (b) set up such reserves under the Revolving Facility as Bank deems
necessary to protect Bank from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type discussed in Section 6.6 of
this Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
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If to Borrower: MUSICMAKER.COM, INC.
1831 Wiehle Avenue
Suite 128
Reston, VA 20190
Attn: Robert P. Bernardi, Chairman and CEO
Fax: (703) 904-4117
If to Bank: Imperial Bank
226 Airport Parkway
San Jose, CA 95110-1024
Attn: Corporate Banking Center
FAX: (408) 451-8523
with a copy to: Imperial Bank
11921 Freedom Drive, Suite 920
Reston, VA 20190
Attn: April L. Young/Bradley H. Steele
FAX: (703) 467-9308
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the
nonexclusive jurisdiction of the state and Federal courts located in the County
of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS.
12.1 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
pant participation in all or any pan of, or any interest in, Bank's obligations,
rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
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12.3 Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
13. JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all
matters in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court of Santa Clara County (the "Court"). The referee
shall be a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after the Claim
Date, the referee shall be promptly selected by the Presiding Judge of the Court
(or his representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of the Court (or any subsequently enacted
Rule). Each party shall have one peremptory challenge pursuant to CCP ss.170.6.
The referee shall (a) be requested to set the matter for hearing with in sixty
(60) days after the date of selection of the referee and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall be entered pursuant to
CCP ss.644 in any court in the State of California having jurisdiction. Any
party may apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy, dispute or
claim, by filing a petition for a hearing and/or trial. All discovery permitted
by this Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents which cannot be resolved by the parties shall be
submitted to the referee as provided herein. The Superior Court is empowered to
issue temporary and/or provisions remedies, as appropriate.
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(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all
issues in accordance with existing case law and the statutory laws of the State
of California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The referee
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provisions.
(d) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, ss.1280 through ss.1294.2 of
the CCP as amended from time to time. The limitations with respect to discovery
as set forth hereinabove shall apply to any such arbitration proceeding.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MUSICMAKER.COM, INC.
By /s/ Robert P. Bernardi
---------------------------------------
Title: Robert P. Bernardi
CO-CEO & Chairman
IMPERIAL BANK
By:
---------------------------------------
Title:
------------------------------------
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EXHIBIT 10.10.2
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STANDBY LETTER OF CREDIT AND SECURITY AGREEMENT
The undersigned ("Customer") applies to Imperial Bank ("Bank") for a loan (the
"Loan") in the principal amount of One Hundred Nine Thousand, Five Hundred and
00/100 DOLLARS ($109.500.00) subject to the following terms and conditions: (If
the standby letter of credit is issued in a foreign currency, the principal of
the Loan will be the U.S. Dollar equivalent of the foreign currency amount,
converted at the rate of exchange on the date of drawing.)
1. The Loan shall be disbursed only by means of drawings under the Letter
of Credit, for which application appears on the reverse hereof.
2. If Customer has not executed and delivered a promissory note to Bank
for said Loan, each advance which is disbursed as provided in Paragraph 1 shall
be payable on demand and bear interest payable monthly at a rate per year (based
on a three hundred sixty (360) day year and actual days elapsed) zero percent
(0%) in excess of the rate that Bank has announced to be its prime rate ("Prime
Rate") and shall vary concurrently with any change in the Prime Rate.
3. Customer shall pay to Bank its commission, payable in advance, computed
from the date hereof at the rate of One percent (1.0%) per year (based on a
three hundred sixty (360) day year and actual days elapsed) for the entire life
of the Letter of Credit. There shall be no refund of any portion of the
commission in the event the Letter of Credit commitment expires, is reduced,
terminated or otherwise modified.
4. Customer agrees to pay to Bank, on demand, its commissions and fees in
such amounts as Bank determines to be proper and all charges and expenses paid
or incurred by Bank in connection with the Letter of Credit or the Loan, and
interest at the rate set forth herein or, if no rate is set forth, 5% over
Bank's Prime Rate as it may vary from time to time.
5. Bank is hereby granted a security interest in (a) all property
including, without limitation, deposit accounts (i) delivered to Bank by
Customer, (ii) which shall be in Bank's possession or control in any matter or
for any purpose, (iii) now owned or hereafter acquired by Customer of the type
or class described in any financing statement filed by Bank and executed by or
on behalf of Customer; (b) the proceeds, increase, and products of such
property, all accessions thereto, and all property which Customer may receive on
account of such collateral which Customer will immediately deliver to Bank, to
secure the performance of all of Customer's present or future debts or
obllgatibns to Bank, whether absolute or contingent. Unless otherwise defined,
words used herein have the meanings given them in the California Uniform
Commercial Code.
6. Upon default, at Bank's option without formal demand or notice, all or
any part of the Loan shall immediately become due. Bank shall have all rights
given by law, and may sell, in one or more sales, collateral in any county where
Bank has an office (or any place Bank deems appropriate). Bank may purchase at
such sale, Sales for cash or on credit to a wholesaler, retailer, or user of the
collateral, or at public or private auction, are all to be considered
commercially reasonable. Bank may require Customer to assemble the collateral
and make it available to Bank at the entrance to the location of the collateral,
or a place designated by Bank. Defaults shall include: (a) Customer's failure to
pay or perform this or any agreement with Bank or breach of any warranty herein,
or Customer's failure to pay or perform any agreement with Bank; (b) Any change
in Customer's financial condition which in Bank's judgment impairs the prospect
of payment or performance; (c) Any actual or reasonable anticipated
deterioration of the collateral or in the market price thereof which causes it
in Bank's judgment to become unsatisfactory as security; (d) Any levy or seizure
against Customer or any of the collateral; (e) Death, termination of business,
assignment for creditors, insolvency, appointment of receiver or the filing of
any petition under bankruptcy or debtor's relief laws of, by or against Customer
or any of the collateral; and (f) Any warranty or representation is false or is
believed in good faith by Bank to be false. If at the time of any such event
there remains any portion of the Loan undisbursed (that is, if the Letter of
Credit is still in effect and has not been completely drawn against) Customer
shall, upon Bank's demand, pay to Bank for application to drawings under the
Letter of Credit the entire principal amount which has not been drawn. Any
amount so paid which has not been drawn on the expiry date of the Letter of
Credit shall be repaid to Customer without interest.
7. Neither Bank nor its correspondents shall be in any way responsible for
performance by any beneficiary of its obigatlons to Customer, nor for the form,
sufficiency, correctness, genuineness, authority of person signing,
falsification or legal effect of any documents called for under the Letter of
Credit if such documents on their face appear to be in order.
8. Subject to the law and customs and practice of the trade, existing in
the area where the beneficiary is located, said Letter of Credit shall be
subject to, and performance by Bank, its correspondent and the beneficiary
thereunder shall be governed by the "Uniform Customs and Practice for
Documentary Credits" fixed by The International Chamber of Commerce, in effect
on the date of issuance of the Letter of Credit.
9. It is agreed that all directions and correspondence relating to said
Letter of Credit are to be sent at Customer's risk and that Bank does not assume
any responsibility for any inaccuracy, interruption, error or delay in
transmission or delivery by post, telegraph or cable, or for any inaccuracy of
translation.
10. If this Agreement is signed by two or more parties, it shall be the
joint and several agreement of such parties.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INTERNATIONAL USE ONLY
- --------------------------------------------------------------------------------
Approved By Date
X /s/ [ILLEGIBLE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANKING OFFICE USE ONLY
- --------------------------------------------------------------------------------
Banking Office/Department Name Number
Mid-Atlantic - EGD 3905
- --------------------------------------------------------------------------------
Lending Officer Date
X [ILLEGIBLE] 3-9-99
- --------------------------------------------------------------------------------
<PAGE>
ADDENDUM TO STANDBY LETTER OF CREDIT AND SECURITY AGREEMENT ("AGREEMENT").
This Addendum is made and entered into on March 5, 1999 between musicmaker.com,
Inc. ("Customer") and Imperial Bank ("Bank"). This Addendum amends and
supplements the Agreement. In the event of any inconsistency between the terms
herein and the terms of the Agreement, the terms herein shall in all cases
govern and control. All capitalized terms herein, unless otherwise defined
herein, shall have the meaning set forth in the Agreement.
A. The following is hereby added as Paragraph 11 of the Agreement.
11. YEAR 2000 COMPLIANCE
Customer affirmatively covenants that it will perform all acts reasonably
necessary to ensure that (a) Customer and any business in which Customer holds a
substantial interest, and (b) all customers, suppliers and vendors that are
material to Customer's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive review
and assessment of all Customer's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems. As
used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any
entity, that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial condition of
such entity, will properly perform date sensitive functions before, during and
after the year 2000. Customer shall, immediately upon request, provide to Bank
such certifications or other evidence of Customer's compliance with the terms of
this paragraph as Bank may from time to time require.
B. The following is hereby added as Paragraph 12 of the Agreement
12. REPRESENTATION REGARDING YEAR 2000 COMPLIANCE
Customer and its subsidiaries, as applicable, represent and warrant that they
have reviewed the areas within their operations and business which could be
adversely affected by, and have developed or are developing a program to address
on a timely basis, the Year 2000 Problem and have made related appropriate
inquiry of material suppliers and vendors, and based on such review and program,
the Year 2000 Problem will not have a material adverse effect upon their
financial condition, operations or business as now conducted. "Year 2000
Problem" means the possibility that any computer applications or equipment used
by Customer may be unable to recognize and properly perform date sensitive
functions involving certain dates prior to and any dates on or after December
31, 1999.
<PAGE>
Customer:
musicmaker.com, Inc.
By: /s/ Mark Fowler
-----------------------------------
Mark Folwer
Title CFO
-----------------------------------
By
-----------------------------------
Title
-----------------------------------
Imperial Bank
By [ILLEGIBLE]
-----------------------------------
Title AVP
-----------------------------------
<PAGE>
EXHIBIT 10.11
MASTER EQUIPMENT LEASE
THIS LEASE, made this 8th day of January 1999 between BOSTON FINANCIAL & EQUITY
CORPORATION, (herein called "Lessor"), a Massachusetts corporation with its
principal place of business at 20 Overland St., Boston, Massachusetts
02215-0002, and THE MUSIC CONNECTION CORPORATION (herein called "Lessee"), a
Delaware corporation, with its principal place of business at 1831 Wiehle
Avenue, Suite 128, Reston, VA 20190.
WITNESSETH
In consideration of the premises, the parties covenant and agree as follows:
1. Definitions. As herein used:
1.1 "Equipment" means the equipment manufactured or sold by the
Manufacturers or Distributors described in the Schedule of Leased
Equipment ("Schedule") annexed hereto and made a part hereof,
together with any replacements or substitution of parts,
improvements or additions thereto, and such other equipment which,
by agreement, may from time to time be hereafter described on any
supplemental schedule of leased equipment ("Schedule") which may be
annexed hereto and made a part hereof (the equipment on all such
schedules being collectively herein referred to as "Equipment"). The
term "Equipment" also includes all software and other intellectual
property described on the Schedule as well as operating software and
application software used or usable in connection with any item set
forth on any Schedule whether or not such software or other
intellectual property is specifically identified on the Schedule,
and also includes all tangible representations of all such software.
1.2 "Commencement Date" means the first day of the calendar quarter
following the date of the Lessee's written acceptance of the
delivery of all of the Equipment.
1.3 "Monthly Rent" means the amount of rent payable by Lessee each month
pursuant to Paragraph 3 of the Schedule as well as all maintenance
charges payable, if any, if, according to the Schedule, Lessor is
furnishing maintenance as indicated on the Schedule.
1.4 "Net Proceeds of Sale" means the net amount received by Lessor after
deducting from the gross proceeds of sale of the Equipment or in the
event of a subsequent lease by the Lessor, the net present value of
rent due under such subsequent lease, all expenses incurred in the
termination of this lease and any amounts for which, if not paid,
Lessor would be liable or which, if not paid, would constitute a
lien on the Equipment.
1.5 "Lessor's Depreciated Book Value" means the original cost of the
Equipment less the straight line depreciation for five year
property, all as reflected on Lessor's books of account.
1.6 "Lease Term" means the period specified in Section 2 of the
applicable Schedule thereof.
1.7 "Addendum" means any amendment to this Master Equipment Lease which
is specifically identified as such, and when so identified shall be
a part hereof.
2. Lessor does hereby lease to the Lessee, and Lessee hereby leases and hires
from the Lessor the Equipment subject to the terms, provisions, conditions
and agreements in this Lease set forth.
3. Delivery. Lessee hereby acknowledges: (a) the Equipment is of the
manufacture, design and capacity selected by Lessee; (b) the Equipment is
suitable for Lessee's purposes, and (c) Lessor has made no representation
or warranty, expressed or implied, with respect to the Equipment or any of
the foregoing matters. Lessor will assign or otherwise make available to
Lessee all of Lessor's rights (if any and if assignable) under the
manufacturer's warranty on the Equipment and maintenance agreement
relating thereto, all costs and charges thereof and therefore to be borne
by Lessee.
At the termination of the applicable Schedule, Lessee shall, at its
expense, return the Equipment subject thereto to Lessor at the location
designated by Lessor within the continental United States by surface
transportation, only if not shipped directly to a successor Lessee. The
Equipment returned to Lessor shall, at the time it is disconnected from
its then location in Lessee's premises, be in the same condition and
working order as when delivered to Lessee, reasonable wear and tear and
casualty loss excepted, and shall be at the then current engineering
change level recommended by the Equipment Manufacturer (if required in the
Schedule).
4. In addition to the Monthly Rent, Lessee shall pay, promptly when due, all
costs, expenses, fees, charges and taxes incurred in connection with the
use and operation of the Equipment. Such items shall include, but not be
limited to:
4.1.1 all costs of operating the Equipment.
4.1.2 all federal, state, county, municipal or other taxes whatsoever,
without proration, and any penalties and interest thereon ("Taxes")
(including any Taxes with an assessment date which occurred during
the Lease Term or any extension thereof). If the payment due date or
reimbursement date for a Tax should occur after the expiration or
termination of the Lease Term or any extension thereof, Lessee's
liability for such Tax shall survive such expiration or termination.
4.1.3 all shipping, installation, and transportation charges from the
manufacturer or vendor to the installation site.
4.1.4 all de-installation, shipping and transportation charges from the
installation site to a location designated by the Lessor at the
conclusion of the Lease or any extension thereof.
4.2 If Lessee should fail to pay any of the costs, expenses, fees,
charges and taxes (including attorney's fees) for which Lessee is
liable hereunder. Lessor may, but shall not be required to, pay the
same for the account
- 1 -
<PAGE>
of Lessee. Lessee shall reimburse Lessor, upon demand, for the full
amount of any such costs, expenses, fees, charges and taxes paid by
Lessor.
4.3 If, at the termination of the applicable Schedule, Lessee falls to
return to Lessor the Equipment subject thereto in accordance with
the provisions of the second paragraph of Section 3, Lessee shall,
until such Equipment is so returned: pay to Lessor on account of
damages a monthly amount equal to the amount shown in Section 5 of
such Schedule, and perform or observe all other of its agreements
and covenants under this Lease; but such payment, performance, and
observance shall not limit or impair Lessor's right to recover the
Equipment or any other of Lessor's rights under this Lease, nor
shall it represent an extension of the term provided in the
applicable Schedule, nor shall it represent a consent by the Lessor
to such failure by Lessee to return, and, in all events
notwithstanding such payment, performance and observance, Lessee's
obligation so to return shall remain in full force and effect.
5. Use of Equipment. Lessee shall use the Equipment only for lawful purposes
in the regular course of its business or the business of any subsidiary or
affiliate of Lessee within the United States or its possessions. Lessee
shall, concurrently with the execution of this Lease, notify Lessor in
writing where all Equipment is principally located, and upon any change in
such principal location of any Equipment, notify Lessor in writing within
ten (10) days thereafter of the new principal location of such Equipment.
Lessee shall use every reasonable precaution to prevent loss or damage to
Equipment from fire and other hazards. Lessee's servants and agents shall
cooperate fully with Lessor in the investigation of any claims and suits
relating to the Equipment. Lessee shall keep the Equipment free from all
liens and encumbrances. This Lease and the interest of Lessee hereunder
shall not be assigned, alienated, pledged or hypothecated voluntarily by
Lessee or by operation of law, nor shall Lessee permit the Equipment to
come into the possession of any third person except a subsidiary or
affiliate of Lessee, provided, however, that Lessee shall remain obligated
to Lessor hereunder with respect to any such Equipment.
6. Lessee will enter into a Master Maintenance Agreement with Lessor. Except
to the extent of the Lessor's obligation to provide maintenance (as
provided in the aforesaid Master Maintenance Agreement) Lessee shall, at
its own expense, keep the Equipment in first-class condition and repair
and in good and efficient working order (including the replacement or
substitution of parts, improvements or additions to the Equipment). Lessee
shall not, without Lessor's prior written consent, make any substitution
of any part(s) of the Equipment, whether or not such part(s) are
specifically identified by manufacturer or serial number. Without the
prior written consent of Lessor, Lessee will not, through the installation
of accessory devices or any other method, impair the originally intended
function of any Equipment. Any replacement or substitution of parts,
improvements or additions to the Equipment made by Lessee shall become and
remain the property or Lessor.
7. Insurance. Lessee shall, at its expense, procure and maintain, at all
times, in a responsible insurance company acceptable to Lessor, insurance
in an amount not less than the estimated market value of all of the
Equipment, protecting Lessor and Lessee, as their interests may appear,
against loss and/or damage to the Equipment arising out of any risk
covered by fire and extended coverage and by employee theft and
dishonesty. All such insurance shall cover the period from delivery of the
Equipment to Lessee to the date of termination of the Lease with respect
thereto, and shall provide for ten (10) days' prior written notice to
Lessor of any cancellation or reduction in coverage. Lessee shall deliver
to Lessor, within ten (10) days after the Commencement Date, the insurance
policy, and a Certificate of Insurance satisfactory to Lessor. Lessor
shall have no duty to examine such policies or certificates, or to advise
Lessee of any noncompliance of such insurance with this Lease. If Lessee
fails to provide the aforesaid insurance, Lessor may, at its own option,
provide such insurance and add the amount of the premiums to the next
rental installment, together with interest thereon at the rate of Twenty
Four Per Cent (24%) per annum, or the rate permitted by law (whichever is
less), from the date of payment thereof, until paid in full. The proceeds
of such insurance, whether resulting from loss, damage, return premium or
otherwise, shall be payable to Lessor and Lessee, as their interests may
appear. If Lessee should be in default under Section 10 hereof, Lessee
hereby appoints Lessor as Lessee's attorney-in-fact to make claim for,
receive payment of and execute or endorse all documents, checks or drafts
for loss, damage, return premium or otherwise under any insurance policy
issued on Equipment.
8. Indemnity. Lessee shall indemnify and hold Lessor and its officers,
directors, shareholders, and agents, harmless against any and all claims,
demands, liabilities, losses, damages and injuries of whatsoever kind and
nature, direct or consequential, and all fees, costs and expenses relating
to or in any way arising out of the possession, maintenance, use,
operation, control, loss, damage, destruction, return, surrender, sale or
other disposition of the Equipment. The foregoing indemnity shall not be
affected by any termination of the Lease.
9. Termination of Lease of Equipment Through Loss or Destruction. Lessee
shall bear all risks of loss, damage or destruction of the Equipment
during the Lease Term or any extension thereof. In the event the Equipment
is damaged beyond repair, the Lessee shall be liable to the Lessor for an
amount equal to the cost of purchasing similar Equipment less the amount
of any insurance or other recoveries received by the Lessor in connection
therewith.
10. Events of Default. The following events of default by Lessee shall give
rise to rights on the part of Lessor described in Section 11:
10.1 (a) Default In the payment of Monthly Rent
- 2 -
<PAGE>
hereunder, and such default not having been remedied in three (3)
days from due date. (b) Default in the payment or performance of any
other liability, obligation or covenant of Lessee under this Lease
and the continuance of such default for fifteen (15) days after
written notice thereof to Lessee sent by certified mail or via fax;
or
10.2 Breach of any representation or warranty, or default in the
performance of any agreement, of Lessee contained in this Lease; or
10.3 The Making of a general assignment for the benefit of creditors by
Lessee, the suspension of business or the commission by Lessee of
any act amounting to a business failure, any change in, or
termination of, Lessee's corporate existence (except a merger,
consolidation or reorganization in which the obligations of Lessee
are assumed by the surviving corporation), or the levy of an
attachment or filing of a tax lien (other than a Federal Tax lien)
against Lessee affecting Equipment, and the failure of Lessee to
cause such attachment or tax lien to be discharged within thirty
(30) days thereafter, or the filing of a Federal Tax lien against
Lessee, the Equipment or any of Lessee's property; or
10.4 The institution of bankruptcy, reorganization, liquidation or
receivership proceedings by or against Lessee and, if instituted
against Lessee, its consent thereto or the failure to cause such
proceedings to be discharged within thirty (30) days thereafter.
11. Rights of Lessor Upon Default of Lessee. Upon occurrence of any of the
Events of Default described in Section 10, Lessor may, at its discretion,
do one or more of the following:
11.1 Terminate this Lease upon five (5) days' written notice to Lessee
sent by certified mail or via fax;
11.2 Whether or not this Lease be terminated, take immediate possession
of any or all of the Equipment, including substituted parts,
accessories or equipment, wherever situated, and for such purpose,
enter upon any premises without liability for so doing. Lessor shall
hold the Equipment so repossessed free and clear of this Lease and
of any of the rights of Lessee hereunder;
11.3 Whether or not any action has been taken under Section 11.1 or 11.2
above, sell, dispose of, hold, use or lease any Equipment as Lessor
at its sole discretion, may decide, without any duty to account to
Lessee with respect to such action or any proceeds thereof, and free
of any interest of Lessee therein.
If, after default, Lessee should deliver the Equipment to Lessor, or if
Lessor should repossess the Equipment or if Lessor should terminate this
Lease, and in addition to all rights of Lessor set forth above, Lessee
shall be liable for, and Lessor may recover from Lessee, as liquidated
damages for the breach of this Lease: (i) all unpaid rent to the date of
such delivery, repossession or termination, (ii) all rent due to Lessor
between the date of such delivery, repossession or termination and the end
of the present Lease Term, or any extension thereof, (iii) in the event of
a sale pursuant to Section 11.3, the amount of any deficiency existing
between the Net Proceeds of Sale of the Equipment and the Lessor's
Depreciated Book Value of the Equipment at the time of such repossession,
(iv) all such sums payable by Lessee pursuant to the provisions hereof,
(v) all other losses and damages sustained by reason of the default, and
(vi) all costs and expenses, including but not limited to costs associated
with repossession, deinstallation, transportation charges and necessary
repair expenses, incurred by Lessor by reason of the default. If, for any
reason, Lessor should be unable to effect repossession of the Equipment,
Lessor may recover, as liquidated damages, the amounts aforesaid, except
that instead of item (iii), Lessee shall be liable to Lessor in an amount
equal to the replacement cost of the Equipment as determined by the
Lessor.
12. In addition to all other sums payable by Lessee hereunder, Lessee shall
pay to Lessor all expenses incurred by Lessor, including, without
limitation, reasonable attorneys' fees and court expenses of enforcing any
rights of Lessor hereunder, whether against Lessee or any other party
primarily or secondarily liable with respect to the Lessee's obligations
or against the Equipment.
13. Equipment to Be and Remain Personal Property. It is the intention and
understanding of both Lessor and Lessee that all Equipment shall be and at
all times remain personal property.
14. Rentals to be Paid Directly to Lessor. Lessee shall make payment of all
rent and other payments due hereunder directly to Lessor at the following
mailing address: BOSTON FINANCIAL & EQUITY CORPORATION, Post Office Box
15071, Boston, Massachusetts 02215, or to such other address as Lessor
shall instruct.
15. Miscellaneous
15.1 Time is of the essence hereof.
15.2 This agreement is and is intended to be a True Lease. Lessee does
not acquire hereby any right, title or interest in or to the
Equipment, except the right to use the same under the terms hereof.
Lessor and Lessee agree that for tax purposes this lease will be
treated as a finance lease by the Lessee.
15.3 The relationship between Lessor and Lessee shall always and only be
that of Lessor and Lessee. Lessee shall never at any time during the
term of this Lease for any purpose whatsoever be or become the agent
of the Lessor, and Lessor shall not be responsible for the acts or
omissions of Lessee, or its agents.
15.4 Lessor shall have the right to inspect any Equipment at any
reasonable time; provided however, that such right shall be limited
to the extent required by any applicable United States Government
security regulations.
15.5 Should the Lessee not pay the monthly rental payment when due and
owing under the provisions of this Lease, the Lessee agrees to pay
to the Lessor five per cent (5%) of the monthly payment as a
delinquency charge, or the maximum permitted by law, (whichever is
less).
15.6 Lessor's rights and remedies with respect to any of
- 3 -
<PAGE>
the terms and conditions of this Lease shall be cumulative and not
exclusive, and shall be in addition to all other rights and remedies
in its favor.
15.7 No party hereto shall, by act, delay, omission or otherwise, be
deemed to have waived any of its rights or remedies hereunder, or
under any other instrument executed in connection herewith, unless
such waiver is in writing. A waiver on any one occasion shall not be
construed as a waiver on any future occasion.
15.8 The invalidity of any portion of this Lease shall not affect the
force and effect of the remaining valid portions thereof.
15.9 All notices shall be binding upon the parties hereto if sent to the
address set forth herein (unless a subsequent address has been
furnished) by certified mail, by one party to the other.
15.10 Lessee will provide Lessor with copies of Annual Financial Reports
prepared by Lessee's independent accounting firm within fourteen
(14) days of the issuance of said Report. In addition, Lessee will
provide Lessor with copies of interim, year-to-date or monthly
financial reports which reports shall be prepared at least every
three (3) months. Lessee will make every effort to prepare and
deliver to Lessor all financial reports in a timely fashion upon
request by the Lessor. Lessee also agrees to make available
financial books and records for review by Lessor during regular
business hours, as well as other contracts, agreements, or materials
the Lessor may deem appropriate.
15.11 No representations, warranties, promises, guaranties or agreements,
oral or written, expressed or implied, have been made by either
party hereto with respect to this Lease or the Equipment, except as
expressly provided herein.
15.12 This Lease shall be construed in accordance with the laws of the
Commonwealth of Massachusetts without regard to the choice of law
rules thereof. Lessee hereby irrevocably submits to the jurisdiction
of the courts of said Commonwealth or any federal court sitting
within said Commonwealth, over any suit, action, or proceeding
arising out of or relating to this Lease or the Equipment and agrees
that any suit, action, or proceeding brought by the Lessee against
or involving the Lessor shall be brought only in said courts. Lessee
further consents to process being served in the manner described for
notices under Section 15.9 above.
This Lease constitutes the entire agreement between the parties hereto
with respect to the leasing of the Equipment. Any change or modification
of this Lease must be in writing and signed by the parties hereto.
15.13 Lessor and Lessee, each having had opportunity of review by counsel,
each irrevocably waive all right to trial by jury in any proceeding
hereinafter instituted by or against either of them in respect of
this Lease or arising out of any document executed in connection
herewith or in connection with the Equipment.
16. Lessor may assign its rights under this Lease and (1) If Lessor does
assign this Lease, the assignee shall be entitled, upon notifying the
Lessee, to performance of all of Lessee's obligations and agreements under
this Lease and to all of the rights and remedies of the Lessor, and (2)
Lessee will assert no claim or defenses it may have against the Lessor
against the assignee.
17. Lease is conditional upon approval of Lessor, and is neither consummated
nor binding on Lessor until accepted by an authorized officer of Lessor.
Such acceptance will be rendered only after submission of all necessary
information to the Lessor and an evaluation by the Lessor of the
acceptability of the Lessee for the Equipment Lease herein described.
Signature of this Lease by the Lessor shall constitute acceptance and all
aforementioned terms and conditions shall be effective upon endorsement by
the Lessor.
18. Supplemental Equipment Schedules may from time to time be included under
this Master Equipment Lease. The addition of supplemental Schedules is
conditional upon approval by Lessor and is neither consummated nor binding
on Lessor until accepted by an authorized officer of Lessor. Such
acceptance will be rendered only after submission of all necessary
information to the Lessor and an evaluation by the Lessor.
19. The terms and conditions of the Master Equipment Lease and any other
documents associated herewith are confidential and proprietary. Lessee
agrees not to disclose the same to any other party without prior written
consent of Lessor.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Lease as of the
day and year first above written.
LESSEE: THE MUSIC CONNECTION CORPORATION LESSOR: BOSTON FINANCIAL & EQUITY
CORPORATION
Signature: /s/ Robert P. Bernardi Signature: /s/ [ILLEGIBLE]
----------------------------- ------------------------
Name: Robert P. Bernardi Name: James L. [ILLEGIBLE]
---------------------------------- -----------------------------
Title: CEO Title: EVP
--------------------------------- ----------------------------
Date: 1/8/99 Date: 1/25/99
---------------------------------- -----------------------------
Attest: /s/ [ILLEGIBLE] Attest:
-------------------------------- ---------------------------
- 4 -
<PAGE>
EXHIBIT 10.12
================================================================================
AGREEMENT OF LEASE
between
570 LEXINGTON COMPANY, L.P.,
Landlord
and
THE MUSIC CONNECTION CORPORATION
Tenant
570 Lexington Avenue
New York, New York
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE 1
DEMISE, PREMISES, TERM, RENT............................... 9
ARTICLE 2
USE AND OCCUPANCY.......................................... 10
ARTICLE 3
ALTERATIONS................................................ 11
ARTICLE 4
REPAIRS-FLOOR LOAD......................................... 16
ARTICLE 5
WINDOW CLEANING............................................ 18
ARTICLE 6
REQUIREMENTS OF LAW........................................ 18
ARTICLE 7
SUBORDINATION.............................................. 20
ARTICLE 8
RULES AND REGULATIONS...................................... 23
ARTICLE 9
INSURANCE, PROPERTY LOSS OR DAMAGE; REIMBURSEMENT.......... 24
ARTICLE 10
DESTRUCTION-FIRE OR OTHER CAUSE............................ 26
ARTICLE 11
EMINENT DOMAIN............................................. 30
ARTICLE 12
ASSIGNMENT, SUBLETTING, MORTGAGE, ETC...................... 32
ARTICLE 13
ELECTRICITY................................................ 45
ARTICLE 14
ACCESS TO PREMISES......................................... 49
ARTICLE 15
CERTIFICATE OF OCCUPANCY................................... 51
ARTICLE 16
DEFAULT.................................................... 51
ARTICLE 17
REMEDIES AND DAMAGES....................................... 55
ARTICLE 18
LANDLORD FEES AND EXPENSES................................. 57
ARTICLE 19
NO REPRESENTATIONS BY LANDLORD............................. 57
ARTICLE 20
END OF TERM................................................ 60
ARTICLE 21
QUIET ENJOYMENT............................................ 61
ARTICLE 22
FAILURE TO GIVE POSSESSION................................. 61
ARTICLE 23
NO WAIVER.................................................. 61
ARTICLE 24
WAIVER OF TRIAL BY JURY.................................... 63
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE 25
INABILITY TO PERFORM........................... 63
ARTICLE 26
BILLS AND NOTICES.............................. 63
ARTICLE 27
ESCALATION..................................... 64
ARTICLE 28
SERVICES....................................... 72
ARTICLE 29
PARTNERSHIP TENANT............................. 75
ARTICLE 30
VAULT SPACE.................................... 76
ARTICLE 31
SECURITY....................................... 77
ARTICLE 32
CAPTIONS....................................... 78
ARTICLE 33
PARTIES BOUND.................................. 78
ARTICLE 34
BROKER......................................... 78
ARTICLE 35
INDEMNITY...................................... 79
ARTICLE 36
ADJACENT EXCAVATION-SHORING.................... 80
ARTICLE 37
MISCELLANEOUS.................................. 80
ARTICLE 38
RENT CONTROL................................... 83
</TABLE>
Schedule A - Rules and Regulations
Schedule B - Cleaning Specifications
EXHIBIT "A" - Floor Plan
EXHIBIT "B" - Tenant's Final Plans
EXHIBIT "C" - Approved Contractors in connection with Alterations
performed as of the date on which this Lease shall be
Unconditionally Executed and Delivered by Landlord and
Tenant
<PAGE>
AGREEMENT OF LEASE, made as of the 26th day of February, 1999, between
Landlord and Tenant.
W I T N E S S E T H:
-------------------
The parties hereto, for themselves, their legal representatives, successors
and assigns, hereby covenant as follows.
DEFINITIONS
-----------
"Affiliate" shall mean a Person which shall (1) Control, (2) be under the
---------
Control of, or (3) be under common Control with the Person in question.
"Alteration Fee" shall have the meaning set forth in Section 3.2 hereof.
--------------
"Alterations" shall mean alterations, installations, improvements,
-----------
additions or other physical changes (other than decorations) in or about the
Premises.
"Applicable Rate" shall mean the lesser of (x) two (2) percentage points
---------------
above the then current Base Rate, and (y) the maximum rate permitted by
applicable law.
"Assessed Valuation" shall have the meaning set forth in Section 27.1
------------------
hereof.
"Assignment Proceeds" shall have the meaning set forth in Section 12.8
-------------------
hereof.
"Assignment Statement" shall have the meaning set forth in Section 12.8
--------------------
hereof.
"Bankruptcy Code" shall mean 11 U.S.C. Section 101 et seq., or any statute
--------------- ------
of similar nature and purpose.
"Base Electricity Inclusion Factor" shall have the meaning set forth in
---------------------------------
Section 13.2 hereof.
"Base Operating Expenses" shall have the meaning set forth in Section 27.1
-----------------------
hereof.
"Base Operating Year" shall have the meaning set forth in Section 27.1
-------------------
hereof.
"Base Rate" shall mean the rate of interest publicly announced from time to
---------
time by The Chase Manhattan Bank, N.A., or its successor, as its "prime lending
rate" (or such other term as may be used by The Chase Manhattan Bank, N.A., from
time to time, for the rate presently referred to as its "prime lending rate"),
which rate was 7.75% on December 16, 1998.
1
<PAGE>
"Base Taxes" shall have the meaning set forth in Section 27.1 hereof.
----------
"Broker" shall have the meaning set forth in Article 34 hereof.
------
"Building" shall mean all the buildings, equipment and other improvements
--------
and appurtenances of every kind and description now located or hereafter
erected, constructed or placed upon the land and any and all alterations, and
replacements thereof, additions thereto and substitutions therefor, known by the
address of 570 Lexington Avenue, New York, New York.
"Building Systems" shall mean the mechanical, gas, electrical, sanitary,
----------------
heating, air conditioning, ventilating, elevator, plumbing, life-safety and
other service systems of the Building.
"Business Days" shall mean all days, excluding Saturdays, Sundays and all
-------------
days observed by either the State of New York or the Federal Government and by
the labor unions servicing the Building as legal holidays.
"Commencement Date" shall have the meaning set forth in Section 1.1
-----------------
hereof.
"Consumer Price Index" shall mean the Consumer Price Index for All Urban
--------------------
Consumers published by the Bureau of Labor Statistics of the United States
Department of Labor, New York, N.Y. - Northeastern N.J. Area, All Items (1982-84
= 100), or any successor index thereto, appropriately adjusted. In the event
that the Consumer Price Index is converted to a different standard reference
base or otherwise revised, the determination of adjustments provided for herein
shall be made with the use of such conversion factor, formula or table for
converting the Consumer Price Index as may be published by the Bureau of Labor
Statistics or, if said Bureau shall not publish the same, then with the use of
such conversion factor, formula or table as may be published by Prentice-Hall,
Inc., or any other nationally recognized publisher of similar statistical
information. If the Consumer Price Index ceases to be published, and there is
no successor thereto, such other index as Landlord and Tenant shall agree upon
in writing shall be substituted for the Consumer Price Index. If Landlord and
Tenant are unable to agree as to such substituted index, such matter shall be
submitted to the American Arbitration Association or any successor organization
for determination in accordance with the regulations and procedures thereof then
obtaining for commercial arbitration.
"Control" or "control" shall mean direct or indirect ownership of more than
------- -------
fifty percent (50%) of the outstanding voting stock of a corporation or other
majority equity and control interest if not a corporation and the possession,
directly or indirectly of power to direct or cause the direction of the
management and policy of such corporation or other entity, whether through the
ownership of voting securities, by statute or according to the provisions of a
contract.
"Deficiency" shall have the meaning set forth in Section 17.2 hereof.
----------
"Electric Rate" shall have the meaning set forth in Section 13.2 hereof.
-------------
2
<PAGE>
"Electricity Additional Rent" shall have the meaning set forth in Section
---------------------------
13.3 hereof.
"Electricity Inclusion Charge" shall have the meaning set forth in Section
----------------------------
13.2 hereof.
"Electricity Statement" shall have the meaning set forth in Section 13.3
---------------------
hereof.
"Electric Rate" shall have the meaning set forth in Section 13.2 hereof.
-------------
"Escalation Rent" shall mean, individually or collectively, the Tax Payment
---------------
and the Operating Payment.
"Estimate" shall have the meaning set forth in Section 10.3(A) hereof.
--------
"Event of Default" shall have the meaning set forth in Section 16.1 hereof.
----------------
"Expiration Date" shall mean the Fixed Expiration Date or such earlier date
---------------
on which the Term shall sooner end pursuant to any of the terms, conditions or
covenants of this Lease or pursuant to law.
"1st Rental Period" shall have the meaning set forth in Section 1.1 hereof.
-----------------
"First Security Period" shall mean the period commencing on the
---------------------
Commencement Date and ending on the day immediately preceding the fifth (5/th/)
anniversary of the Rent Commencement Date.
"Fixed Expiration Date" shall have the meaning set forth in Section 1.1
---------------------
hereof.
"Fixed Rent" shall have the meaning set forth in Section 1.1 hereof.
----------
"Fourth Security Period" shall mean the period commencing on the day next
----------------------
succeeding the end of the Third Security Period and ending on the Fixed
Expiration Date.
"Governmental Authority (Authorities)" shall mean the United States of
------------------------------------
America, the State of New York, the City of New York, any political subdivision
thereof and any agency, department, commission, board, bureau or instrumentality
of any of the foregoing, or any quasi-governmental authority, now existing or
hereafter created, having jurisdiction over the Real Property or any portion
thereof.
"HVAC" shall mean heat, ventilation and air conditioning.
----
"HVAC Systems" shall mean the Building Systems providing HVAC.
------------
3
<PAGE>
"Indemnitees" shall mean Landlord, the members or partners comprising
-----------
Landlord and its and their members, partners, shareholders, officers, directors,
employees, agents and contractors, Lessors and Mortgagees.
"Initial Alterations" shall mean the Alterations to be made by Tenant to
-------------------
initially prepare the Premises for Tenant's occupancy.
"Landlord", on the date as of which this Lease is made, shall mean 570
--------
Lexington Company, L.P., a New York limited partnership having an office c/o
Mendik Management Company Inc., at 330 Madison Avenue, New York, New York, but
thereafter, "Landlord" shall mean only the fee owner of the Real Property or if
there shall exist a Superior Lease, the tenant thereunder.
"Landlord's Amount" shall have the meaning set forth in Section 19.2.
-----------------
"Landlord's Engineer" shall have the meaning set forth in Section 13.2
-------------------
hereof.
"Landlord's Work" shall have the meaning set forth in Section 19.2 hereof.
---------------
"Lessor(s)" shall mean a lessor under a Superior Lease.
---------
"Letter of Credit" shall have the meaning set forth in Article 31 hereof.
----------------
"Long Lead Work" shall mean any item which is not a stock item and must be
--------------
specially manufactured, fabricated or installed or is of such an unusual,
delicate or fragile nature that there is a substantial risk that
(i) there will be a delay in its manufacture, fabrication, delivery
or installation, or
(ii) after delivery, such item will need to be reshipped or
redelivered or repaired
so that in Landlord's reasonable judgment the item in question cannot be
completed when the standard items are completed even though the item of Long
Lead Work in question is (1) ordered together with the other items required and
(2) installed or performed (after the manufacture or fabrication thereof) in the
order and sequence that such Long Lead Work and other items are normally
installed or performed in accordance with good construction practice. In
addition, "Long Lead Work" shall include any standard item which in accordance
with good construction practice should be completed after the completion of any
item of work in the nature of the items described in the immediately preceding
sentence.
"Mortgage(s)" shall mean any trust indenture or mortgage which may now or
-----------
hereafter affect the Real Property, the Building or any Superior Lease and the
leasehold interest created thereby, and all renewals, extensions, supplements,
amendments, modifications, consolidations and replacements thereof or thereto,
substitutions therefor, and advances made thereunder.
4
<PAGE>
"Mortgagee(s)" shall mean any trustee, mortgagee or holder of a Mortgage.
------------
"Nondisturbance Agreement" shall have the meaning set forth in Section 7.7
------------------------
hereof.
"Operating Expenses" shall have the meaning set forth in Section 27.1
------------------
hereof.
"Operating Payment" shall have the meaning set forth in Section 27.4
-----------------
hereof.
"Operating Statement" shall have the meaning set forth in Section 27.1
-------------------
hereof.
"Operating Year" shall have the meaning set forth in Section 27.1 hereof.
--------------
"Operation of the Property" shall mean the maintenance, repair and
-------------------------
management of the Real Property and the curbs, sidewalks and areas adjacent
thereto.
"Overtime Periods" shall have the meaning set forth in Section 28.3 hereof.
----------------
"Parties" shall have the meaning set forth in Section 37.2 hereof.
-------
"Partner" or "partner" shall mean any partner of Tenant, any employee of a
------- -------
professional corporation which is a partner comprising Tenant, and any
shareholder of Tenant if Tenant shall become a professional corporation.
"Partnership Tenant" shall have the meaning set forth in Article 29 hereof.
------------------
"Person(s) or person(s)" shall mean any natural person or persons, a
----------------------
partnership, a corporation and any other form of business or legal association
or entity.
"Possession Date" shall mean the date on which Landlord's Work shall be
---------------
Substantially Completed; provided, however if Landlord shall be delayed in
Substantially Completing Landlord's Work by reason of a Tenant's Delay, the
Possession Date shall mean the date on which Landlord's Work would have been
Substantially Completed but for such Tenant's Delay.
"Premises" shall mean, subject to the provisions of Section 14.4 hereof,
--------
the entire rentable area of the forty-second (42/nd/) floor of the Building as
set forth on the floor plan attached hereto and made a part hereof as Exhibit
-------
"A".
- ---
"Real Property" shall mean the Building, together with the plot of land
-------------
upon which it stands.
"Recapture Space" shall have the meaning set forth in Section 12.6 hereof.
---------------
"Recapture Sublease" shall have the meaning set forth in Section 12.6
------------------
hereof.
"Related Entity" shall have the meaning set forth in Section 12.4 hereof.
--------------
5
<PAGE>
"Rental" shall mean and be deemed to include Fixed Rent, Escalation Rent,
------
all additional rent and any other sums payable by Tenant hereunder.
"Rent Commencement Date" shall mean the Possession Date.
----------------------
"Requirements" shall mean all present and future laws, rules, orders,
------------
ordinances, regulations, statutes, requirements, codes and executive orders,
extraordinary as well as ordinary, of all Governmental Authorities now existing
or hereafter created, and of any and all of their departments and bureaus, and
of any applicable fire rating bureau, or other body exercising similar
functions, affecting the Real Property or any portion thereof, or any street,
avenue or sidewalk comprising a part of or in front thereof or any vault in or
under the same, or requiring removal of any encroachment, or affecting the
maintenance, use or occupation of the Real Property or any portion thereof.
"Rules and Regulations" shall mean the rules and regulations annexed hereto
---------------------
and made a part hereof as Schedule A, and such other and further rules and
----------
regulations as Landlord or Landlord's agents may from time to time adopt on such
notice to be given as Landlord may elect, subject to Tenant's right to dispute
the reasonableness thereof as provided in Article 8 hereof.
"2nd Rental Period" shall have the meaning set forth in Section 1.1 hereof.
-----------------
"Second Security Period" shall mean the period commencing on the day next
----------------------
succeeding the end of the First Security Period and ending on the day
immediately preceding the sixth (6/th/) anniversary of the Rent Commencement
Date.
"Security Amount" shall mean:
---------------
(i) during the First Security Period, One Hundred Nine Thousand Five
Hundred Dollars ($109,500.00);
(ii) during the Second Security Period, Ninety-One Thousand Two
Hundred Fifty Dollars ($91,250.00);
(iii) during the Third Security Period, Seventy-Three Thousand
Dollars ($73.000.00); and
(iv) during the Fourth Security Period, Fifty-Four Thousand Seven
Hundred Fifty Dollars ($54,750.00).
"Security Period" shall mean any of the periods described as First through
---------------
Fourth Security Periods, as applicable.
"Space Factor" shall mean Three Thousand Seven Hundred Twelve (3,712) as
------------
the same may be increased or decreased pursuant to the terms hereof.
"Specialty Alterations" shall mean Alterations consisting of kitchens (but
---------------------
not dwyer units), executive bathrooms, raised computer floors, computer
installations, vaults, libraries, internal staircases, dumbwaiters, pneumatic
tubes, vertical and horizontal transportation systems, and other Alterations of
a similar character.
6
<PAGE>
"Sublease Expenses" shall have the meaning set forth in Section 12.7
-----------------
hereof.
"Sublease Profit" shall have the meaning set forth in Section 12.7 hereof.
---------------
"Sublease Rent" shall have the meaning set forth in Section 12.7 hereof.
-------------
"Substantial Completion" or Substantially Completed" or words of similar
---------------------- -----------------------
import shall mean that Landlord's Work has been substantially completed, it
being agreed that Landlord's Work shall be deemed substantially complete
notwithstanding the fact that (a) minor or insubstantial details of construction
or demolition and/or mechanical adjustment and/or decorative items remain to be
performed, and (b) any Long Lead Work remains to be performed, any of which does
not materially interfere with Tenant's conduct of Tenant's business in the
Premises.
"Superior Lease(s)" shall mean all ground or underlying leases of the Real
-----------------
Property or the Building and all renewals, extensions, supplements, amendments
and modifications thereof.
"Taxes" shall have the meaning set forth in Section 27.1 hereof.
-----
"Tax Payment" shall have the meaning set forth in Section 27.2 hereof.
-----------
"Tax Statement" shall have the meaning set forth in Section 27.1 hereof.
-------------
"Tax Year" shall have the meaning set forth in Section 27.1 hereof.
--------
"Tenant" on the date as of which this Lease is made, shall mean The Music
------
Connection Corporation, a Virginia corporation, having an office at 250 Exchange
Place, Suite A, Herdon, Virginia 20170, but thereafter "Tenant" shall mean only
the tenant under this Lease at the time in question; provided, however, that the
originally named tenant and any assignee of this Lease shall not be released
from liability hereunder in the event of any assignment of this Lease.
"Tenant Statement" shall have the meaning set forth in Section 12.6 hereof.
----------------
"Tenant's Amount" shall have the meaning set forth in Section 19.2 hereof.
---------------
"Tenant's Delay" shall have the meaning set forth in Section 19.2 hereof.
--------------
"Tenant's Engineer" shall have the meaning set forth in Section 13.2
-----------------
hereof.
"Tenant's Final Plans" shall have the meaning set forth in Section 19.2
--------------------
hereof.
"Tenant's Property" shall mean Tenant's movable fixtures and movable
-----------------
partitions, telephone and other equipment, furniture, furnishings, decorations
and other items of personal property.
7
<PAGE>
"Tenant's Share" shall mean Eight Thousand Two Hundred Forty-Nine ten
--------------
thousandths percent (0.8249%) as the same may be increased or decreased pursuant
to the terms hereof. Landlord and Tenant have agreed that solely for purposes of
calculating Tenant's Share, the rentable area of the Building is conclusively
deemed to be Four Hundred Fifty Thousand (450,000) rentable square feet and the
rentable area of the Premises is conclusively deemed to be Three Thousand Seven
Hundred Twelve (3,712) rentable square feet.
"Tentative Monthly Escalation Charge" shall have the meaning set forth in
-----------------------------------
Section 27.4 hereof.
"Term" shall mean a term which shall commence on the Commencement Date and
----
shall expire on the Expiration Date.
"Third Engineer" shall have the meaning set forth in Section 13.2 hereof.
--------------
"Third Security Period" shall mean the period commencing on the day next
---------------------
succeeding the end of the Second Security Period and ending on the day
immediately preceding the seventh (7/th/) anniversary of the Rent Commencement
Date.
"Total Cost" shall have the meaning set forth in Section 19.2 hereof.
----------
"Unavoidable Delays" shall mean any delays resulting from strikes or labor
------------------
troubles or by accident, or by any cause whatsoever beyond Landlord's or
Tenant's control (as the case may be), including, but not limited to, laws,
governmental preemption in connection with a national emergency or by reason of
any Requirements of any Governmental Authority or by reason of failure of the
HVAC, electrical, plumbing or other Building Systems in the Building, or by
reason of the conditions of supply and demand which have been or are affected by
war or other emergency.
ARTICLE 1
DEMISE, PREMISES, TERM, RENT
----------------------------
Section 1.1. Landlord hereby leases to Tenant and Tenant hereby hires from
------------
Landlord the Premises for the Term to commence on the date hereof (the
"Commencement Date") and to end on the date (the "Fixed Expiration Date") that
- ------------------ ---------------------
shall be the last day of the month in which the day immediately preceding the
tenth (10th) anniversary of the Rent Commencement Date shall occur, at an annual
rent (the "Fixed Rent") of:
----------
(1) One Hundred Ninety-Six Thousand Seven Hundred Thirty-Six
Dollars ($196,736.00) per annum for the period (the "1st Rental Period")
--- ----- -----------------
commencing on the Rent Commencement Date and ending on the day immediately
preceding the third (3rd) anniversary of the Rent Commencement Date, or if the
Rent Commencement Date shall occur other than on
8
<PAGE>
the first day of the month, ending on the last day of the month in which the
third (3rd) anniversary of the Rent Commencement Date occurs payable in equal
monthly installments, in advance, of Sixteen Thousand Three Hundred Ninety-Four
and 67/100 Dollars ($16,394.67); and
(2) Two Hundred Seven Thousand Eight Hundred Seventy-Two
Dollars ($207,872.00) per annum for the period (the "2nd Rental Period")
--- ----- -----------------
commencing on the day next succeeding the end of the 1st Rental Period and
ending on the day immediately preceding the sixth (6th) anniversary of the Rent
Commencement Date, or if the Rent Commencement Date shall occur other than on
the first day of the month, ending on the last day of the month in which the
sixth (6th) anniversary of the Rent Commencement Date occurs payable in equal
monthly installments, in advance of Seventeen Thousand Three Hundred Twenty-Two
and 67/100 Dollars ($17,322.67); and
(3) Two Hundred Nineteen Thousand Eight Dollars ($219,008.00)
per annum for the period commencing on the day next succeeding the end of the
- --- -----
2nd Rental Period and ending on the Fixed Expiration Date payable in equal
monthly installments, in advance, of Eighteen Thousand Two Hundred Fifty and
67/100 Dollars ($18,250.67),
(which Fixed Rent amounts include, if Landlord shall be supplying electricity
pursuant to Section 13.2 hereof, the Base Electricity Inclusion Factor) which
Tenant agrees to pay in lawful money of the United States which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, in advance, on the first (1st) day of each calendar month during the
Term commencing on the Rent Commencement Date, at the office of Landlord or such
other place as Landlord may designate, without any set-off, offset, abatement or
deduction whatsoever, except that Tenant shall pay the first full monthly
installment on the execution hereof. At the request of Landlord, Fixed Rent
shall be payable when due by wire transfer of funds to an account designated
from time to time by Landlord.
Section 1.2. Tenant shall pay to Landlord, as additional rent, on account
------------
of electricity consumed at the Premises the sum of Nine Hundred Twenty-Eight
Dollars ($928.00) per month during the period commencing on the Commencement
Date and ending on the day immediately preceding the Rent Commencement Date;
such payments to be made on the Commencement Date and on the first (1st) day of
each calendar month thereafter during such period. If such period shall
commence on a date other than the first (1st) day of a calendar month or end on
a day other than on the last day of a calendar month, as the case may be, such
monthly amount on account of electricity shall be appropriately adjusted.
Section 1.3. Notwithstanding anything herein to the contrary,
------------
(a) provided no Event of Default shall have occurred and be
continuing on the first day of the eighteenth (18/th/) month after the Rent
Commencement Date, Tenant shall be entitled to a credit against Fixed Rent due
on such date in the amount of Fifteen Thousand Four Hundred Sixty-Six and 67/100
Dollars ($15,466.67);
9
<PAGE>
(b) provided no Event of Default shall have occurred and be
continuing on the first day of the nineteenth (19/th/) month after the Rent
Commencement Date, Tenant shall be entitled to a credit against Fixed Rent due
on such date in the amount of Fifteen Thousand Four Hundred Sixty-Six and 67/100
Dollars ($15,466.67);
(c) provided no Event of Default shall have occurred and be
continuing on the first day of the twentieth (20/th/) month after the Rent
Commencement Date, Tenant shall be entitled to a credit against Fixed Rent due
on such date in the amount of Fifteen Thousand Four Hundred Sixty-Six and 67/100
Dollars ($15,466.67);
(d) provided no Event of Default shall have occurred and be
continuing on the first day of the sixtieth (60/th/) month after the Rent
Commencement Date, Tenant shall be entitled to a credit against Fixed Rent due
on such date in the amount of Sixteen Thousand Three Hundred Ninety-Four and
67/100 Dollars ($16,394.67); and
(e) provided no Event of Default shall have occurred and be
continuing on the first day of the sixty-first (61/st/) month after the Rent
Commencement Date, Tenant shall be entitled to a credit against Fixed Rent due
on such date in the amount of Sixteen Thousand Three Hundred Ninety-Four and
67/100 Dollars ($16,394.67).
ARTICLE 2
USE AND OCCUPANCY
-----------------
Section 2.1. Tenant shall use and occupy the Premises as general and
------------
executive offices, uses incidental thereto and for no other purpose.
Section 2.2. (A) Tenant shall not use the Premises or any part thereof,
------------
or permit the Premises or any part thereof to be used, (1) for the business of
photographic, multilith or multigraph reproductions or offset printing, except
in connection with, either directly or indirectly, Tenant's own business and/or
activities, (2) for a banking, trust company, depository, guarantee or safe
deposit business, which is open primarily to the general public for off-the-
street transactions, (3) as a savings bank, a savings and loan association, or
as a loan company, which is open primarily to the general public for off-the-
street transactions, (4) for the sale of travelers checks, money orders, drafts,
foreign exchange or letters of credit or for the receipt of money for
transmission, which is open primarily to the general public for off-the-street
transactions, (5) as a stockbroker's or dealer's office or for the underwriting
or sale of securities, which is open primarily to the general public for off-
the-street transactions, (6) by the United States government, the City or State
of New York, any foreign government, the United Nations or any agency or
department of any of the foregoing or any other Person having sovereign or
diplomatic immunity, (7) as a restaurant or bar or for the sale of
confectionery, soda or other beverages, sandwiches, ice cream or baked goods or
for the preparation, dispensing or consumption of food or beverages in any
manner whatsoever, except for consumption by Tenant's officers, employees and
business guests, (8) as an employment agency (other than as an executive search
firm), labor
10
<PAGE>
union, school, or vocational training center (except for the training of
employees of Tenant intended to be employed at the Premises), or (9) as a barber
shop or beauty salon.
(B) In connection with, and incidental to, Tenant's use of the
Premises for general and executive offices as provided in this Article 2,
Tenant, at its sole cost and expense and upon compliance with all applicable
Requirements, may install a "dwyer" or similar unit in the Premises for the
purpose of warming food for the officers, employees and business guests of
Tenant (but not for use as a public restaurant), provided that Tenant shall
obtain all permits required by any Governmental Authorities for the operation
thereof and such installation shall comply with the provisions of this Lease,
including, without limitation, Article 3 hereof. Tenant may also install, at
its sole cost and expense and subject to and in compliance with the provisions
of Articles 3 and 4 hereof, vending machines for the exclusive use of the
officers, employees and business guests of Tenant, each of which vending
machines (if it dispenses any beverages or other liquids or refrigerates) shall
have a waterproof pan located thereunder, connected to a drain.
ARTICLE 3
ALTERATIONS
-----------
Section 3.1. (A) Except as provided in Section 3.4 hereof, Tenant shall
-----------
not make any Alterations without Landlord's prior consent. Landlord shall not
unreasonably withhold, condition or delay its consent to any proposed
nonstructural Alterations, provided that such Alterations (i) are not visible
from the outside of the Building, (ii) do not affect any part of the Building
other than the Premises or require any alterations, installations, improvements,
additions or other physical changes to be performed in or made to any portion of
the Building or the Real Property other than the Premises, (iii) do not
adversely affect any service required to be furnished by Landlord to Tenant or
to any other tenant or occupant of the Building, (iv) do not affect the proper
functioning of any Building System, and (v) do not affect the certificate of
occupancy for the Building or the Premises. Landlord shall not be deemed to be
unreasonable with respect to withholding its consent to any proposed
nonstructural Alteration which meets the criteria set forth in this Section
3.1(A) if the Lessor or Mortgagee, as the case may be, shall withhold its
consent.
(B) (1) Prior to making any Alterations, including, without
limitation, the Initial Alterations, Tenant shall (i) submit to Landlord
detailed plans and specifications (including layout, architectural, mechanical
and structural drawings) for each proposed Alteration and shall not commence any
such Alteration without first obtaining Landlord's approval of such plans and
specifications (except with respect to any nonstructural Alterations referred to
in Section 3.4 hereof for which Landlord's approval is not required or with
respect to any Alterations of such a scope that plans and specifications are not
required by any Requirement and would not be customarily required in accordance
with good construction practice), which, in the case of nonstructural
Alterations which meet the criteria set forth in Section 3.1(A) above, shall not
be unreasonably withheld, conditioned or delayed, (ii) at Tenant's expense,
obtain all permits, approvals and certificates required by any Governmental
Authorities, it being agreed that all filings with Governmental Authorities to
obtain such permits, approvals and certificates shall be
11
<PAGE>
made, at Tenant's expense, by a Person designated by Landlord, and (iii) furnish
to Landlord duplicate original policies or certificates thereof of worker's
compensation (covering all persons to be employed by Tenant, and Tenant's
contractors and subcontractors in connection with such Alteration) and
comprehensive public liability (including property damage coverage) insurance in
such form, with such companies, for such periods and in such amounts as Landlord
may reasonably approve, naming Landlord and its agents, any Lessor and any
Mortgagee, as additional insureds. Upon completion of such Alteration, Tenant,
at Tenant's expense, shall obtain certificates of final approval of such
Alteration required by any Governmental Authority and shall furnish Landlord
with copies thereof, together with the "as-built" plans and specifications for
such Alterations, it being agreed that all filings with Governmental Authorities
to obtain such permits, approvals and certificates shall be made, at Tenant's
expense, by a Person designated by Landlord. All Alterations shall be made and
performed substantially in accordance with the plans and specifications therefor
as approved by Landlord (to the extent such plans and specifications are
required to be delivered to Landlord for approval as provided herein), all
Requirements, the Rules and Regulations, and all rules and regulations relating
to Alterations promulgated by Landlord in its reasonable judgment. All materials
and equipment to be incorporated in the Premises as a result of any Alterations
or a part thereof shall be first quality and no such materials or equipment
(other than Tenant's Property) shall be subject to any lien, encumbrance,
chattel mortgage or title retention or security agreement. In addition, no
Alteration shall be undertaken prior to Tenant's delivering to Landlord either
(i) a performance bond and labor and materials payment bond (issued by a surety
company and in form reasonably satisfactory to Landlord), each in an amount
equal to 120% of the cost of such Alteration (as reasonably estimated by
Landlord's architect, engineer, or contractor), or (ii) such other security as
shall be reasonably satisfactory to Landlord or required by any Mortgagee or
Lessor. If, as a result of any Alterations performed by Tenant, including,
without limitation, the Initial Alterations, any alterations, installations,
improvements, additions or other physical changes are required to be performed
or made to any portion of the Building or the Real Property other than the
Premises in order to comply with any Requirement(s), which alterations,
installations, improvements, additions or other physical changes would not
otherwise have had to be performed or made pursuant to applicable Requirement(s)
at such time, Landlord, at Tenant's sole cost and expense, may perform or make
such alterations, installations, improvements, additions or other physical
changes and take such actions as Landlord shall deem reasonably necessary and
Tenant, within ten (10) days after demand therefor by Landlord, shall provide
Landlord with such security as Landlord shall reasonably require, in an amount
equal to 120% of the cost of such alterations, installations, improvements,
additions or other physical changes, as reasonably estimated by Landlord's
architect, engineer or contractor. All Alteration(s) requiring the consent of
Landlord shall be performed only under the supervision of an independent
licensed architect approved by Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed.
(2) Landlord reserves the right to disapprove any plans and
specifications in part, to reserve approval of items shown thereon pending its
review and approval of other plans and specifications, and to condition its
approval upon Tenant making revisions to the plans and specifications or
supplying additional information. Any review or approval by Landlord of any
plans and/or specifications or any preparation or design of any plans by
Landlord's architect
12
<PAGE>
or engineer (or any architect or engineer designated by Landlord) with respect
to any Alteration is solely for Landlord's benefit, and without any
representation or warranty whatsoever to Tenant or any other Person with respect
to the compliance thereof with any Requirements, the adequacy, correctness or
efficiency thereof or otherwise.
(C) Tenant shall be permitted to perform Alterations during the hours
of 8:00 A.M. to 6:00 P.M. on Business Days, provided that such work shall not
unreasonably interfere with or interrupt the operation and maintenance of the
Building or unreasonably interfere with or interrupt the use and occupancy of
the Building by other tenants in the Building. Otherwise, Alterations shall be
performed at such times and in such manner as Landlord may from time to time
reasonably designate. All Tenant's Property installed by Tenant and all
Alterations in and to the Premises which may be made by Tenant at its own cost
and expense prior to and during the Term, shall remain the property of Tenant.
Upon the Expiration Date, Tenant shall remove Tenant's Property from the
Premises and, at Tenant's option, Tenant also may remove, at Tenant's cost and
expense, all Alterations made by Tenant to the Premises, provided, however, in
any case, that Tenant shall repair in a good and workerlike manner to good
condition any damage to the Premises or the Building caused by such removal.
Notwithstanding the foregoing, however, provided that Tenant submits to Landlord
together with Tenant's submission of plans and specifications for Alterations
(including, without limitation, the Initial Alterations) for Landlord's review a
statement directing Landlord's attention to the provisions of this Section
3.1(C) with respect to Landlord's obligation to notify Tenant which Alterations
(including, without limitation, the Initial Alterations) constitute Specialty
Alterations and whether Landlord will require Tenant to remove any such
Specialty Alterations, and in the event Landlord requires such removal, Tenant
shall remove such Specialty Alterations on or prior to the Expiration Date, and,
in each case, repair in a good and workerlike manner to good condition any
damage to the Premises or the Building caused by such removal.
(D) (1) All Alterations shall be performed, at Tenant's sole cost and
expense, by Landlord's contractor(s) or by contractors, subcontractors or
mechanics approved by Landlord. Prior to making an Alteration, at Tenant's
request, Landlord shall furnish Tenant with a list of contractors who may
perform Alterations to the Premises on behalf of Tenant (it being agreed that
the list of contractors approved by Landlord with respect to Alterations
performed as of the date on which this Lease shall be unconditionally executed
and delivered by Landlord and Tenant is attached hereto and made a part hereof
as Exhibit "C". If Tenant engages any contractor set forth on the list, Tenant
----------
shall not be required to obtain Landlord's consent for such contractor unless,
prior to the earlier of (a) entering into a contract with such contractor, and
(b) the commencement of work by such contractor, Landlord shall notify Tenant
that such contractor has been removed from the list.
(2) Notwithstanding the foregoing, with respect to any
Alteration affecting any Building System, (i) Tenant shall select a contractor
from a list of approved contractors furnished by Landlord to Tenant (containing
at least three (3) contractors) and (ii) the Alteration shall, at Tenant's cost
and expense, be designed by Landlord's engineer for the relevant Building
System.
13
<PAGE>
(E) Any mechanic's lien filed against the Premises or the Real
Property for work claimed to have been done for, or materials claimed to have
been furnished to, Tenant shall be discharged by Tenant within thirty (30) days
after Tenant shall have received notice thereof (or such shorter period if
required by the terms of any Superior Lease or Mortgage), at Tenant's expense,
by payment or filing the bond required by law. Tenant shall not, at any time
prior to or during the Term, directly or indirectly employ, or permit the
employment of, any contractor, mechanic or laborer in the Premises, whether in
connection with any Alteration or otherwise, if such employment would interfere
or cause any conflict with other contractors, mechanics or laborers engaged in
the construction, maintenance or operation of the Building by Landlord, Tenant
or others, or of any adjacent property owned by Landlord. In the event of any
such interference or conflict, Tenant, upon demand of Landlord, shall cause all
contractors, mechanics or laborers causing such interference or conflict to
leave the Building immediately.
(F) Tenant expressly acknowledges that the Real Property has been
designated a landmark site, that the Premises are subject to the jurisdiction of
the Landmark Preservation Commission and, in accordance with Section 25-322b of
the Chapter 3 (Landmarks Preservation and Historic Districts) of the
Administrative Code of New York, as amended (the "Chapter"), Tenant further
-------
expressly acknowledges and agrees to obtain a permit from the Commission (as
such term is defined in the Chapter) in accordance with Sections 25-305, 25-306,
25-309 and 25-310 of the Chapter and the rules set forth in Title 63 of the
Rules of the City of New York, before commencing any demolition, construction,
reconstruction, alterations or minor work on the Building or the Real Property
as described in such Sections and Rules. Tenant hereby acknowledges and agrees
that such demolition, construction, reconstruction, alterations or minor work
includes, but is not limited to (i) work to the exterior of the Premises
involving windows, signs, awnings, flagpoles, banners and storefront alterations
and (ii) interior work to the Premises that (a) requires a permit from the
Department of Buildings, or (b) changes, destroys or affects an interior
architectural feature of an interior landmark or an exterior architectural
feature of an improvement that is a landmark or located on a landmark site or in
a historic district. Notwithstanding anything contained in this Lease to the
contrary, (a) prior to making any Alterations, including, without limitation,
the Initial Alterations, Tenant shall (i) at its sole cost and expense, obtain
or cause to be obtained all permits, consents and approvals from the Commission,
as required pursuant to the Chapter, in connection with the making of such
Alterations, and (ii) furnish Landlord with copies thereof and (b) Tenant hereby
indemnifies and saves harmless Landlord and Landlord's agents against and from
any and all claims, penalties, fines, loss, cost, damage, liability or expense
(including, without limitation, attorneys' fees and disbursements) resulting
from or arising out of any failure by Tenant to comply with the requirements of
the Chapter.
Section 3.2. Tenant shall pay to Landlord or to Landlord's agent, as
------------
additional rent, all actual, third party out-of pocket costs and expenses
incurred by Landlord or Landlord's agent in connection with any Alterations,
excluding the Initial Alterations (the "Alteration Fee"). The Alteration Fee
--------------
shall be paid by Tenant within ten (10) Business Days after demand therefor.
Tenant also shall pay any fee charged by any Lessor or Mortgagee in reviewing
the plans and specifications for such Alterations or inspecting the progress of
completion of the same.
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Section 3.3. Upon the request of Tenant, Landlord, at Tenant's cost and
------------
expense, shall join in any applications for any permits, approvals or
certificates required to be obtained by Tenant in connection with any permitted
Alteration (provided that the provisions of the applicable Requirement shall
require that Landlord join in such application) and shall otherwise cooperate
with Tenant in connection therewith, provided that Landlord shall not be
obligated to incur any cost or expense, including, without limitation,
attorneys' fees and disbursements, or suffer any liability in connection
therewith.
Section 3.4. Anything contained in this Lease to the contrary
------------
notwithstanding, Landlord's consent shall not be required with respect to any
nonstructural Alteration, provided that (a) consent for such Alteration is not
required under the terms of any Superior Lease or Mortgage, and (b) such
Alteration (i) is not visible from the outside of the Building, (ii) does not
affect any part of the Building other than the Premises or require any
alterations, installations, improvements, additions or other physical changes to
be performed in or made to any portion of the Building or the Real Property
other than the Premises, (iii) does not adversely affect any service required to
be furnished by Landlord to any other tenant or occupant of the Building, (iv)
does not affect the proper functioning of any Building System, (v) does not
affect or violate the provisions of the certificate of occupancy for the
Building or the Premises, and (vi) the estimated cost of the labor and materials
for which shall not exceed Twenty-Five Thousand Dollars ($25,000), which amount
shall be increased on the third (3rd) anniversary of the Commencement Date and
annually thereafter by the annual percentage increase, if any, in the Consumer
Price Index from that in effect on the date immediately preceding the
Commencement Date, either individually or in the aggregate with other
nonstructural Alterations constructed within any twelve (12) month period;
provided, however, that at least ten (10) days prior to making any such
nonstructural Alteration, Tenant shall submit to Landlord for informational
purposes only the detailed plans and specifications for such Alteration, as
required by Section 3.1(B)(1)(i) hereof, and any such Alteration shall
otherwise be performed in compliance with the provisions of this Article 3.
ARTICLE 4
REPAIRS-FLOOR LOAD
------------------
Section 4.1. Landlord shall operate, maintain and make all necessary
------------
repairs (both structural and nonstructural) to the part of Building Systems
which provide service to the Premises (but not to the distribution portions of
such Building Systems located within the Premises with respect to which Tenant
shall have performed an Alteration or repair which shall have affected such
Building Systems) and the public portions of the Building, both exterior and
interior, in conformance with standards applicable to non-institutional first
class office buildings in Manhattan. Tenant, at Tenant's sole cost and expense,
shall take good care of the Premises and the fixtures, equipment and
appurtenances therein and the distribution systems with respect to which Tenant
shall have performed an Alteration or repair which shall have affected such
Building Systems and shall make all nonstructural repairs thereto as and when
needed to preserve them in good working order and condition, except for
reasonable wear and tear, obsolescence and damage for which Tenant is not
responsible pursuant to the provisions of Article 10 hereof and damage caused by
Landlord, Landlord's agents, employees or contractors. Landlord shall
15
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repair, at Landlord's sole cost and expense, all damage to the Premises caused
by or resulting from the negligence of Landlord or Landlord's agents, employees
or contractors. Notwithstanding the foregoing, but subject to Section 10.5
hereof, all damage or injury to the Premises or to any other part of the
Building and Building Systems, or to its fixtures, equipment and appurtenances,
whether requiring structural or nonstructural repairs, caused by or resulting
from omission (where this Lease or applicable law imposes a duty to act),
negligence or improper conduct of, or Alterations made by, Tenant, Tenant's
agents, employees, invitees or licensees, shall be repaired at Tenant's sole
cost and expense, by Tenant to the reasonable satisfaction of Landlord (if the
required repairs are nonstructural in nature and do not affect any Building
System), or by Landlord (if the required repairs are structural in nature or
affect any Building System). All of the aforesaid repairs shall be of first
quality and of a class consistent with non-institutional first class office
building work or construction and shall be made in accordance with the
provisions of Article 3 hereof. If Tenant fails after ten (10) days' notice (or
such shorter period as Landlord may be permitted pursuant to any Superior Lease
or Mortgage or such shorter period as may be required due to an emergency) to
proceed with due diligence to make repairs required to be made by Tenant, the
same may be made by Landlord at the expense of Tenant, and the expenses thereof
incurred by Landlord, with interest thereon at the Applicable Rate, shall be
forthwith paid to Landlord as additional rent after rendition of a bill or
statement therefor. Tenant shall give Landlord prompt notice of any defective
condition in the Premises, or in any Building System, located in, servicing or
passing through the Premises.
Section 4.2. Tenant shall not place a load upon any floor of the Premises
------------
exceeding sixty (60) pounds per square foot "live load". Tenant shall not move
any safe, heavy machinery, heavy equipment, business machines, freight, bulky
matter or fixtures into or out of the Building without Landlord's prior consent,
which consent shall not be unreasonably withheld, and shall make payment to
Landlord of Landlord's costs in connection therewith. If such safe, machinery,
equipment, freight, bulky matter or fixtures requires special handling, Tenant
shall employ only persons holding a Master Rigger's license to do said work.
All work in connection therewith shall comply with all Requirements and the
Rules and Regulations, and shall be done during such hours as Landlord may
reasonably designate. Business machines and mechanical equipment shall be
placed and maintained by Tenant at Tenant's expense in settings sufficient in
Landlord's reasonable judgment to absorb and prevent vibration, noise and
annoyance. Except as expressly provided in this Lease, there shall be no
allowance to Tenant for a diminution of rental value and no liability on the
part of Landlord by reason of inconvenience, annoyance or injury to business
arising from Landlord, Tenant or others making, or failing to make, any repairs,
alterations, additions or improvements in or to any portion of the Building or
the Premises, or in or to fixtures, appurtenances or equipment thereof.
Section 4.3. Landlord shall use its reasonable efforts to minimize
------------
interference with Tenant's use and occupancy of the Premises in making any
repairs, alterations, additions or improvements; provided, however, that
Landlord shall have no obligation to employ contractors or labor at so-called
overtime or other premium pay rates or to incur any other overtime costs or
expenses whatsoever, except that Landlord, at its expense but subject to
recoupment pursuant to Article 27 hereof, shall employ contractors or labor at
so-called overtime or other premium pay rates if necessary to make any repair
required to be made by it hereunder to remedy any
16
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condition that either (i) results in a denial of access to the Premises, (ii)
threatens the health or safety of any occupant of the Premises, or (iii) except
in the case of a fire or other casualty, materially interferes with Tenant's
ability to conduct its business in the Premises. In all other cases, at Tenant's
request, Landlord shall employ contractors or labor at so-called overtime or
other premium pay rates and incur any other overtime costs or expenses in making
any repairs, alterations, additions or improvements, and Tenant shall pay to
Landlord, as additional rent, within ten (10) Business Days after demand, an
amount equal to the difference between the overtime or other premium pay rates
and the regular pay rates for such labor and any other overtime costs or
expenses so incurred.
Section 4.4. Both the design and decoration of the elevator areas of each
------------
entire floor of the Premises and the public corridors of any floor of the
Premises occupied by more than one (1) occupant (as a result of a subletting or
occupancy arrangement, if any, in accordance with Article 12 hereof) shall be
subject to Landlord's approval, which approval shall not be unreasonably
withheld, conditioned or delayed and such elevator areas and public corridors
shall be maintained and kept clean by Tenant to Landlord's reasonable
satisfaction. Nothing contained in the foregoing sentence, however, shall
vitiate Landlord's obligation to clean the Premises as provided in Section 28.4
hereof.
ARTICLE 5
WINDOW CLEANING
---------------
Tenant shall not clean, nor require, permit, suffer or allow any window in
the Premises to be cleaned from the outside in violation of Section 202 of the
Labor Law, or any other Requirement, or of the rules of the Board of Standards
and Appeals, or of any other board or body having or asserting jurisdiction.
ARTICLE 6
REQUIREMENTS OF LAW
-------------------
Section 6.1. (A) Tenant, at its sole cost and expense, shall comply with
------------
all Requirements applicable to the use and occupancy of the Premises, including,
without limitation, those applicable to the making of any Alterations therein or
the result of the making thereof and those applicable by reason of the nature or
type of business operated by Tenant in the Premises except that (other than with
respect to the making of Alterations or the result of the making thereof) Tenant
shall not be under any obligation to make any Alteration in order to comply with
any Requirement applicable to the mere general "office" use (as opposed to
Tenant's particular manner of use) of the Premises, unless otherwise expressly
required herein. Tenant shall not do or permit to be done any act or thing upon
the Premises which will invalidate or be in conflict with a standard "all-risk"
insurance policy; and shall not do, or permit anything to be done in or upon the
Premises, or bring or keep anything therein, except as now or hereafter
permitted by the New York City Fire Department, New York Board of Fire
Underwriters, the Insurance Services Office or other authority having
jurisdiction and then only in such quantity and manner of
17
<PAGE>
storage as not to increase the rate for fire insurance applicable to the
Building, or use the Premises in a manner (as opposed to mere use as general
"offices") which shall increase the rate of fire insurance on the Building or on
property located therein, over that in similar type buildings or in effect on
the Commencement Date. If by reason of Tenant's failure to comply with the
provisions of this Article, the fire insurance rate shall be higher than it
otherwise would be, then Tenant shall desist from doing or permitting to be done
any such act or thing and shall reimburse Landlord, as additional rent
hereunder, for that part of all fire insurance premiums thereafter paid by
Landlord which shall have been charged because of such failure by Tenant, and
shall make such reimbursement upon demand by Landlord. In any action or
proceeding wherein Landlord and Tenant are parties, a schedule or "make up" of
rates for the Building or the Premises issued by the Insurance Services Office,
or other body fixing such fire insurance rates, shall be conclusive evidence of
the facts therein stated and of the several items and charges in the fire
insurance rates then applicable to the Building.
(B) Landlord, at its sole cost and expense (but subject to recoupment
as provided in Article 27 hereof), shall comply with all Requirements applicable
to the Premises and the Building which affect Tenant's use or occupancy of the
Premises other than those Requirements with respect to which Tenant or other
tenants or occupants of the Building shall be required to comply, subject to
Landlord's right to contest the applicability or legality thereof.
Section 6.2. Tenant, at its sole cost and expense and after notice to
------------
Landlord, may contest by appropriate proceedings prosecuted diligently and in
good faith, the legality or applicability of any Requirement affecting the
Premises, provided that (a) Landlord (or any Indemnitee) shall not be subject to
imprisonment or to prosecution for a crime, nor shall the Real Property or any
part thereof be subject to being condemned or vacated, nor shall the certificate
of occupancy for the Premises or the Building be suspended or threatened to be
suspended by reason of non-compliance or by reason of such contest; (b) before
the commencement of such contest, if Landlord or any Indemnitee may be subject
to any civil fines or penalties or other criminal penalties or if Landlord may
be liable to any independent third party as a result of such noncompliance,
Tenant shall furnish to Landlord either (i) a bond of a surety company
satisfactory to Landlord, in form and substance reasonably satisfactory to
Landlord, and in an amount equal to one hundred twenty percent (120%) of the sum
of (A) the cost of such compliance, (B) the criminal or civil penalties or fines
that may accrue by reason of such non-compliance (as reasonably estimated by
Landlord), and (C) the amount of such liability to independent third parties (as
reasonably estimated by Landlord), and shall indemnify Landlord (and any
Indemnitee) against the cost of such compliance and liability resulting from or
incurred in connection with such contest or non-compliance (except that Tenant
shall not be required to furnish such bond to Landlord if it has otherwise
furnished any similar bond required by law to the appropriate Governmental
Authority and has named Landlord as a beneficiary thereunder) or (ii) other
security reasonably satisfactory in all respects to Landlord; (c) such non-
compliance or contest shall not constitute or result in a violation (either with
the giving of notice or the passage of time or both) of the terms of any
Mortgage or Superior Lease, or if such Superior Lease or Mortgage shall
condition such non-compliance or contest upon the taking of action or furnishing
of security by Landlord, such action shall be taken or such security shall be
furnished at the expense of Tenant; and (d) Tenant shall keep Landlord regularly
advised as to the status of such
18
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proceedings. Without limiting the applicability of the foregoing, Landlord (or
any Indemnitee) shall be deemed subject to prosecution for a crime if Landlord
(or any Indemnitee), a Lessor, a Mortgagee or any of their officers, directors,
partners, shareholders, agents or employees is charged with a crime of any kind
whatsoever, unless such charges are withdrawn ten (10) days before Landlord (or
any Indemnitee), such Lessor or such Mortgagee or such officer, director,
partner, shareholder, agent or employee, as the case may be, is required to
plead or answer thereto.
ARTICLE 7
SUBORDINATION
-------------
Section 7.1. This Lease shall be subject and subordinate to each and every
------------
Superior Lease and to each and every Mortgage. This clause shall be self-
operative and no further instrument of subordination shall be required from
Tenant to make the interest of any Lessor or Mortgagee superior to the interest
of Tenant hereunder; however, Tenant shall execute and deliver promptly any
instrument, in recordable form, that Landlord, any Mortgagee or Lessor may
request to evidence and confirm such subordination. If the date of expiration
of any Superior Lease shall be the same day as the Expiration Date, the Term
shall end and expire twelve (12) hours prior to the expiration of the Superior
Lease. Tenant shall not do anything that would constitute a default under any
Superior Lease or Mortgage, or omit to do anything that Tenant is obligated to
do under the terms of this Lease so as to cause Landlord to be in default
thereunder. If, in connection with the financing of the Real Property, the
Building or the interest of the lessee under any Superior Lease, or if in
connection with the entering into of a Superior Lease, any lending institution
or Lessor shall request reasonable modifications of this Lease that do not
increase Tenant's monetary obligations under this Lease, or adversely affect or
diminish the rights (other than to a de minimus extent), or increase the other
obligations of Tenant under this Lease, Tenant shall make such modifications
(other than to a de minimus extent).
Section 7.2. If at any time prior to the expiration of the Term, any
------------
Superior Lease shall terminate or be terminated for any reason or any Mortgagee
comes into possession of the Real Property or the Building or the estate created
by any Superior Lease by receiver or otherwise, Tenant agrees, at the election
and upon demand of any owner of the Real Property or the Building, or of the
Lessor, or of any Mortgagee in possession of the Real Property or the Building,
to attorn, from time to time, to any such owner, Lessor or Mortgagee or any
person acquiring the interest of Landlord as a result of any such termination,
or as a result of a foreclosure of the Mortgage or the granting of a deed in
lieu of foreclosure, upon the then executory terms and conditions of this Lease,
subject to the provisions of Section 7.1 hereof and this Section 7.2, for the
remainder of the Term, provided that such owner, Lessor or Mortgagee, or
receiver caused to be appointed by any of the foregoing, as the case may be,
shall then be entitled to possession of the Premises and provided further that
such owner, Lessor or Mortgagee, as the case may be, or anyone claiming by,
through or under such owner, Lessor or Mortgagee, as the case may be, including
a purchaser at a foreclosure sale, shall not be:
19
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(1) liable for any act or omission of any prior landlord (including,
without limitation, the then defaulting landlord), except to the extent that
such act or omission constitutes a default which continues after such party
succeeds to the interest of the defaulting landlord; or
(2) subject to any defense or offsets which Tenant may have against
any prior landlord (including, without limitation, the then defaulting
landlord), or
(3) bound by any payment of Rental which Tenant may have made to any
prior landlord (including, without limitation, the then defaulting landlord)
more than thirty (30) days in advance of the date upon which such payment was
due, or
(4) bound by any obligation to make any payment to or on behalf
of Tenant, or
(5) bound by any obligation to perform any work or to make
improvements to the Premises, except for (i) repairs and maintenance pursuant to
the provisions of Article 4, the need for which repairs and maintenance first
arises or continues after the date upon which such owner, Lessor, or Mortgagee
shall be entitled to possession of the Premises, (ii) repairs to the Premises or
any part thereof as a result of damage by fire or other casualty pursuant to
Article 10 hereof, but only to the extent that such repairs can be reasonably
made from the net proceeds of any insurance actually made available to such
owner, Lessor or Mortgagee, and (iii) repairs to the Premises as a result of a
partial condemnation pursuant to Article 11 hereof, but only to the extent that
such repairs can be reasonably made from the net proceeds of any award made
available to such owner, Lessor or Mortgagee, or
(6) bound by any amendment or modification of this Lease made
without its consent, or
(7) bound to return Tenant's security deposit, if any, until such
deposit has come into its actual possession and Tenant would be entitled to such
security deposit pursuant to the terms of this Lease.
The provisions of this Section 7.2 shall enure to the benefit of any such owner,
Lessor or Mortgagee, shall apply notwithstanding that, as a matter of law, this
Lease may terminate upon the termination of any Superior Lease, shall be self-
operative upon any such demand, and no further instrument shall be required to
give effect to said provisions. Tenant, however, upon demand of any such owner,
Lessor or Mortgagee, shall execute, at Tenant's expense, from time to time,
instruments, in recordable form, in confirmation of the foregoing provisions of
this Section 7.2, satisfactory to any such owner, Lessor or Mortgagee,
acknowledging such attornment and setting forth the terms and conditions of its
tenancy. Nothing contained in this Section 7.2 shall be construed to impair any
right otherwise exercisable by any such owner, Lessor or Mortgagee.
Notwithstanding the provisions of this Section 7.2, this Lease shall not
terminate by reason of the termination of any Superior Lease without the prior
written consent of the Mortgagee of the Mortgage which is a first mortgage on
Landlord's interest in the Real Property or the leasehold estate created by such
Superior Lease.
20
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Section 7.3. From time to time, within seven (7) days next following
------------
request by Landlord, any Mortgagee or any Lessor, Tenant shall deliver to
Landlord, such Mortgagee or such Lessor a written statement executed by Tenant,
in form satisfactory to Landlord, such Mortgagee or such Lessor, (1) stating
that this Lease is then in full force and effect and has not been modified (or
if modified, setting forth all modifications), (2) setting forth the date to
which the Fixed Rent, Escalation Rent and other items of Rental have been paid,
(3) stating whether or not, to the best knowledge of Tenant, Landlord is in
default under this Lease, and, if Landlord is in default, setting forth the
specific nature of all such defaults, and (4) as to any other matters reasonably
requested by Landlord, such Mortgagee or such Lessor. Tenant acknowledges that
any statement delivered pursuant to this Section 7.3 may be relied upon by any
purchaser or owner of the Real Property or the Building, or Landlord's interest
in the Real Property or the Building or any Superior Lease, or by any Mortgagee,
or by an assignee of any Mortgagee, or by any Lessor.
Section 7.4. From time to time, within seven (7) days next following
------------
request by Tenant, Landlord shall deliver to Tenant a written statement executed
by Landlord (i) stating that this Lease is then in full force and effect and has
not been modified (or if modified, setting forth all modifications), (ii)
setting forth the date to which the Fixed Rent, Escalation Rent and any other
items of Rental have been paid, (iii) stating whether or not, to the best
knowledge of Landlord (but without having made any investigation), Tenant is in
default under this Lease, and, if Tenant is in default, setting forth the
specific nature of all such defaults, and (iv) as to any other matters
reasonably requested by Tenant and related to this Lease.
Section 7.5. As long as any Superior Lease or Mortgage shall exist, Tenant
------------
shall not seek to terminate this Lease by reason of any act or omission of
Landlord until Tenant shall have given written notice of such act or omission to
all Lessors and Mortgagees at such addresses as shall have been furnished to
Tenant in writing by such Lessors and Mortgagees and, if any such Lessor or
Mortgagee, as the case may be, shall have notified Tenant within ten (10)
Business Days following receipt of such notice of its intention to remedy such
act or omission, until a reasonable period of time shall have elapsed following
the giving of such notice, during which period such Lessors and Mortgagees shall
have the right, but not the obligation, to remedy such act or omission.
Section 7.6. Tenant hereby irrevocably waives any and all right(s) it may
------------
have in connection with any zoning lot merger or transfer of development rights
with respect to the Real Property including, without limitation, any rights it
may have to be a party to, to contest, or to execute, any Declaration of
Restrictions (as such term is used in Section 12-10 of the Zoning Resolution of
The City of New York effective December 15, 1961, as amended) with respect to
the Real Property, which would cause the Premises to be merged with or unmerged
from any other zoning lot pursuant to such Zoning Resolution or to any document
of a similar nature and purpose, and Tenant agrees that this Lease shall be
subject and subordinate to any Declaration of Restrictions or any other document
of similar nature and purpose now or hereafter affecting the Real Property. In
confirmation of such subordination and waiver, Tenant shall execute and deliver
promptly any certificate or instrument that Landlord reasonably may request.
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Section 7.7. (A) Landlord shall use its reasonable efforts to obtain (a)
------------
from each Mortgagee, an agreement in form and substance satisfactory to such
Mortgagee to the effect that, if there shall be a foreclosure of its Mortgage,
such Mortgagee will not make Tenant a party defendant to such foreclosure, evict
Tenant, disturb Tenant's possession under this Lease, or terminate or disturb
Tenant's leasehold estate or rights hereunder, and will recognize Tenant as the
direct tenant of such Mortgagee on the same terms and conditions as are
contained in this Lease (subject to the provisions of Section 7.2 hereof)
provided no Event of Default shall have occurred and be continuing hereunder,
and (b) from each Lessor, an agreement in form and substance satisfactory to
such Lessor to the effect that if its Superior Lease shall terminate or be
terminated for any reason, Lessor will not evict Tenant, disturb Tenant's
possession under this Lease, or terminate or disturb Tenant's leasehold estate
or rights hereunder, and will recognize Tenant as the direct tenant of such
Lessor on the same terms and conditions as are contained in this Lease (subject
to the provisions of Section 7.2 hereof) and Lessor shall not make Tenant a
party in any action to terminate such Superior Lease or to remove or evict
Tenant from the Premises provided no Event of Default shall have occurred and be
continuing (any such agreement, or any agreement of similar import, from a
Mortgagee or a Lessor, as the case may be, being hereinafter referred to as a
"Nondisturbance Agreement").
- -------------------------
(B) Landlord shall have no liability to Tenant for its failure to
obtain any Nondisturbance Agreement. Landlord's agreement to use reasonable
efforts hereunder shall not impose any obligation upon Landlord (i) to incur any
cost or expense (other than reasonable attorneys' fees and disbursements) or
(ii) to institute any legal or other proceeding in connection with obtaining
such Nondisturbance Agreement.
(C) If required by the Mortgagee or the Lessor, within seven (7) days
after notice thereof, Tenant shall join in any Nondisturbance Agreement to
indicate its concurrence with the provisions thereof to attorn to such Mortgagee
or Lessor, as the case may be, as Tenant's landlord hereunder on the terms and
conditions set forth in such Nondisturbance Agreement.
Section 7.8. Landlord represents that, on the date on which this Lease is
------------
unconditionally executed and delivered by Landlord and Tenant there is no
Superior Lease and the Mortgagee is Union Bank of Switzerland.
ARTICLE 8
RULES AND REGULATIONS
---------------------
Tenant and Tenant's contractors, employees, agents, visitors, invitees and
licensees shall comply with the Rules and Regulations. Tenant shall have the
right to dispute the reasonableness of any additional Rule or Regulation
hereafter adopted by Landlord. If Tenant disputes the reasonableness of any
additional Rule or Regulation hereafter adopted by Landlord, the dispute shall
be determined by arbitration in the City of New York in accordance with the
rules and regulations then obtaining of the American Arbitration Association or
its successor. Any such determination shall be final and conclusive upon the
parties hereto. The right to dispute the reasonableness of any additional Rule
or Regulation upon Tenant's part shall be
22
<PAGE>
deemed waived unless the same shall be asserted by service of a notice upon
Landlord within thirty (30) days after receipt by Tenant of notice of the
adoption of any such additional Rule or Regulation. Nothing in this Lease
contained shall be construed to impose upon Landlord any duty or obligation to
enforce the Rules and Regulations or terms, covenants or conditions in any other
lease against any other tenant, and Landlord shall not be liable to Tenant for
violation of the same by any other tenant, its employees, agents, visitors or
licensees, except that Landlord shall not enforce any Rule or Regulation against
Tenant which Landlord shall not then be enforcing against all other office
tenants in the Building (other than Landlord or its Affiliates).
ARTICLE 9
INSURANCE, PROPERTY LOSS OR DAMAGE; REIMBURSEMENT
-------------------------------------------------
Section 9.1. (A) Any Building employee to whom any property shall be
------------
entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's
agent with respect to such property and neither Landlord nor its agents shall be
liable for any damage to property of Tenant or of others entrusted to employees
of the Building, nor for the loss of or damage to any property of Tenant by
theft or otherwise. Neither Landlord nor its agents shall be liable for any
injury (or death) to persons or damage to property, or interruption of Tenant's
business, resulting from fire or other casualty; nor shall Landlord or its
agents be liable for any such injury (or death) to persons or damage caused by
other tenants or persons in the Building or caused by construction of any
private, public or quasi-public work; nor shall Landlord be liable for any
injury (or death) to persons or damage to property or improvements, or
interruption of Tenant's business, resulting from any latent defect in the
Premises or in the Building (provided that the foregoing shall not relieve
Landlord from its obligations, if any, to repair such latent defect pursuant to
the provisions of Article 4 hereof). Anything in this Article 9 to the contrary
notwithstanding, except as set forth in Articles 4, 10, 13, 28 and 35 of this
Lease and otherwise as expressly provided herein, Landlord shall not be relieved
from responsibility directly to Tenant for any loss or damage caused directly to
Tenant wholly or in part by the negligent acts or omissions of Landlord.
Nothing in the foregoing sentence shall affect any right of Landlord to the
indemnity from Tenant to which Landlord may be entitled under Article 35 hereof
in order to recoup for payments made to compensate for losses of third parties.
(B) If at any time any windows of the Premises are temporarily
closed, darkened or bricked-up due to any Requirement or by reason of repairs,
maintenance, alterations, or improvements to the Building, or any of such
windows are permanently closed, darkened or bricked-up due to any Requirement,
Landlord shall not be liable for any damage Tenant may sustain thereby and
Tenant shall not be entitled to any compensation therefor, nor abatement or
diminution of Fixed Rent or any other item of Rental, nor shall the same release
Tenant from its obligations hereunder, nor constitute an actual or constructive
eviction, in whole or in part, by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business, or otherwise, nor
impose any liability upon Landlord or its agents. If at any time the windows of
the Premises are temporarily closed, darkened or
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bricked-up, as aforesaid, then, unless Tenant is required pursuant to the Lease
to perform the repairs, maintenance, alterations, or improvements, or to comply
with the Requirements, which resulted in such windows being closed, darkened or
bricked-up, Landlord shall perform such repairs, maintenance, alterations or
improvements and comply with the applicable Requirements with reasonable
diligence and otherwise take such action as may be reasonably necessary to
minimize the period during which such windows are temporarily closed, darkened,
or bricked-up.
(C) Tenant shall immediately notify Landlord of any fire or accident
in the Premises.
Section 9.2. Tenant shall obtain and keep in full force and effect (i) an
------------
"all risk" insurance policy for Tenant's Specialty Alterations and Tenant's
Property at the Premises in an amount equal to one hundred percent (100%) of the
replacement value thereof, and (ii) a policy of commercial general liability and
property damage insurance on an occurrence basis, with a broad form contractual
liability endorsement. Such policies shall provide that Tenant is named as the
insured. Landlord, Landlord's managing agent, Landlord's agents and any Lessors
and any Mortgagees (whose names shall have been furnished to Tenant) shall be
added as additional insureds, as their respective interests may appear, with
respect to the insurance required to be carried pursuant to clauses (i) and (ii)
above. Such policy with respect to clause (ii) above shall include a provision
under which the insurer agrees to indemnify, defend and hold Landlord,
Landlord's managing agent, Landlord's agents and such Lessors and Mortgagees
harmless from and against, subject to the limits of liability set forth in this
Section 9.2, all cost, expense and liability arising out of, or based upon, any
and all claims, accidents, injuries and damages mentioned in Article 35. In
addition, the policy required to be carried pursuant to clause (ii) above shall
contain a provision that (a) no act or omission of Tenant shall affect or limit
the obligation of the insurer to pay the amount of any loss sustained and (b)
the policy shall be non-cancellable with respect to Landlord, Landlord's
managing agent, Landlord's agents and such Lessors and Mortgagees (whose names
and addresses shall have been furnished to Tenant) unless thirty (30) days'
prior written notice shall have been given to Landlord by certified mail, return
receipt requested, which notice shall contain the policy number and the names of
the insured and additional insureds. In addition, upon receipt by Tenant of any
notice of cancellation or any other notice from the insurance carrier which may
adversely affect the coverage of the insureds under such policy of insurance,
Tenant shall immediately deliver to Landlord and any other additional insured
hereunder a copy of such notice. The minimum amounts of liability under the
policy of insurance required to be carried pursuant to clause (ii) above shall
be a combined single limit with respect to each occurrence in an amount of
$5,000,000 for injury (or death) to persons and damage to property, which amount
shall be increased from time to time to that amount of insurance which in
Landlord's reasonable judgment is then being customarily required by prudent
landlords of non-institutional first class buildings in New York City. All
insurance required to be carried by Tenant pursuant to the terms of this Lease
shall be effected under valid and enforceable policies issued by reputable and
independent insurers permitted to do business in the State of New York, and
rated in Best's Insurance Guide, or any successor thereto (or if there be none,
an organization having a national reputation) as having a general policyholder
rating of "A" and a financial rating of at least "XIII".
- ----
Section 9.3. Landlord shall obtain and keep in full force and effect (a)
------------
insurance against loss or damage by fire and other casualty to the Building,
including Tenant's Alterations
24
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(exclusive of Specialty Alterations), as may be insurable under then available
standard forms of "all-risk" insurance policies, in an amount equal to one
hundred percent (100%) of the replacement value thereof or in such lesser amount
as will avoid co-insurance (including an "agreed amount" endorsement), and (b)
commercial general liability insurance in such amounts as shall be consistent,
in Landlord's reasonable judgment, with amounts carried by prudent owners of
institutional first-class buildings in midtown Manhattan. Notwithstanding the
foregoing, Landlord shall not be liable to Tenant for any failure to insure,
replace or restore any Alterations unless Tenant shall have notified Landlord of
the completion of such Alterations and of the cost thereof, and shall have
maintained adequate records with respect to such Alterations to facilitate the
adjustment of any insurance claims with respect thereto. Tenant shall cooperate
with Landlord and Landlord's insurance companies in the adjustment of any claims
for any damage to the Building or such Alterations.
Section 9.4. On or prior to the Commencement Date, each party shall
------------
deliver to the other party appropriate certificates of insurance, including
evidence of waivers of subrogation required pursuant to Section 10.5 hereof,
required to be carried by each party pursuant to this Article 9. Evidence of
each renewal or replacement of a policy shall be delivered by each party to the
other party at least twenty (20) days prior to the expiration of such policy.
Section 9.5. Tenant acknowledges that Landlord shall not carry insurance
------------
on, and shall not be responsible for damage to, Tenant's Property or Specialty
Alterations, and that Landlord shall not carry insurance against, or be
responsible for any loss suffered by Tenant due to, interruption of Tenant's
business.
Section 9.6. If notwithstanding the recovery of insurance proceeds by
------------
Tenant for loss, damage or destruction of its property (or rental value or
business interruptions) Landlord is liable to Tenant with respect thereto or is
obligated under this Lease to make replacement, repair or restoration, then, at
Landlord's option, either (i) the amount of the net proceeds of Tenant's
insurance against such loss, damage or destruction shall be offset against
Landlord's liability to Tenant therefor, or (ii) shall be made available to
Landlord to pay for replacement, repair or restoration.
ARTICLE 10
DESTRUCTION-FIRE OR OTHER CAUSE
-------------------------------
Section 10.1. (A) If the Premises (including Alterations other than
-------------
Specialty Alterations) shall be damaged by fire or other casualty, Tenant shall
give prompt notice thereof to Landlord. The damage, with such modifications as
shall be required in order to comply with Requirements, shall be diligently
repaired by and at the expense of Landlord to substantially the condition prior
to the damage, and until such repairs which are required to be performed by
Landlord (excluding Long Lead Work) shall be substantially completed (of which
substantial completion Landlord shall promptly notify Tenant) the Fixed Rent,
Escalation Rent and Space Factor shall be reduced in the proportion which the
area of the part of the Premises which is not usable by Tenant and is actually
not used by Tenant, bears to the total area of the Premises immediately prior to
such
25
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casualty. Upon the substantial completion of such repairs (excluding Long Lead
Work), Landlord shall diligently prosecute to completion any items of Long Lead
Work remaining to be completed. Landlord shall have no obligation to repair any
damage to, or to replace, any Specialty Alterations or Tenant's Property, which
Tenant shall complete promptly after substantial completion of Landlord's repair
obligations under this Article 10. In addition, Landlord shall not be obligated
to repair any damage to, or to replace, any Alterations unless Tenant shall have
notified Landlord of the completion of such Alterations and the cost thereof,
and shall have maintained adequate records with respect to such Alterations.
Tenant shall make all necessary repairs to the Specialty Alterations and same
shall be completed promptly after substantial completion of Landlord's repair
obligations under this Article 10. Landlord shall use its reasonable efforts to
minimize interference with Tenant's use and occupancy in making any repairs
pursuant to this Section.
(B) Prior to the substantial completion of Landlord's repair
obligations set forth in Section 10.1 (A) hereof, Landlord shall provide Tenant
and Tenant's contractor, subcontractors and materialmen access to the Premises
to perform Specialty Alterations (or Alterations, if Landlord is not obligated
to repair same pursuant to the provisions hereof), on the following terms and
conditions (but not to occupy the same for the conduct of business):
(1) Tenant shall not commence work in any portion of the Premises
until the date specified in a notice from Landlord to Tenant stating that the
repairs required to be made by Landlord have been or will be completed to the
extent reasonably necessary, in Landlord's discretion, to permit the
commencement of the Specialty Alterations (or Alterations, if Landlord is not
obligated to repair same pursuant to the provisions hereof) then prudent to be
performed in accordance with good construction practice in the portion of the
Premises in question without interference with, and consistent with the
performance of, the repairs remaining to be performed.
(2) Such access by Tenant shall be deemed to be subject to all of
the applicable provisions of this Lease, including, without limitation, Tenant's
obligation to pay to Landlord fifty percent (50%) of the Electricity Additional
Rent, the Electricity Fee or the Electricity Inclusion Charge, as the case may
be, except that there shall be no obligation on the part of Tenant solely
because of such access to pay any Fixed Rent or Escalation Rent with respect to
the affected portion of the Premises for any period prior to substantial
completion of the repairs.
(3) It is expressly understood that if Landlord shall be delayed
from substantially completing the repairs due to any acts of Tenant, its agents,
servants, employees or contractors, including, without limitation, by reason of
the performance of any Specialty Alteration (or Alteration, if Landlord is not
obligated to repair same pursuant to the provisions hereof), by reason of
Tenant's failure or refusal to comply or to cause its architects, engineers,
designers and contractors to comply with any of Tenant's obligations described
or referred to in this Lease, or if such repairs are not completed because under
good construction scheduling practice such repairs should be performed after
completion of any Specialty Alteration (or Alteration, if Landlord is not
obligated to repair same pursuant to the provisions hereof), then such repairs
shall be deemed substantially complete on the date when the repairs would have
26
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been substantially complete but for such delay and the expiration of the
abatement of the Tenant's obligations hereunder shall not be postponed by reason
of such delay. Any additional costs to Landlord to complete any repairs
occasioned by such delay shall be paid by Tenant to Landlord within ten (10)
days after demand, as additional rent.
Section 10.2. Anything contained in Section 10.1 hereof to the contrary
-------------
notwithstanding, if the Building shall be so damaged by fire or other casualty
that, in Landlord's opinion, substantial alteration, demolition, or
reconstruction of the Building shall be required (whether or not the Premises
shall have been damaged or rendered untenantable), then Landlord, at Landlord's
option, may, not later than ninety (90) days following the damage, give Tenant a
notice in writing terminating this Lease, provided that if the Premises are not
substantially damaged or rendered substantially untenantable, Landlord may not
terminate this Lease unless it shall elect to terminate leases (including this
Lease), affecting at least fifty percent (50%) of the rentable area of the
Building (excluding any rentable area occupied by Landlord or its Affiliates).
If Landlord elects to terminate this Lease, the Term shall expire upon a date
set by Landlord, but not sooner than the tenth (10th) day after such notice is
given, and Tenant shall vacate the Premises and surrender the same to Landlord
in accordance with the provisions of Article 20 hereof. Upon the termination of
this Lease under the conditions provided for in this Section 10.2, the Fixed
Rent and Escalation Rent shall be apportioned and any prepaid portion of Fixed
Rent and Escalation Rent for any period after such date shall be refunded by
Landlord to Tenant.
Section 10.3. (A) (i) Within forty-five (45) days after notice to
-------------
Landlord of any damage described in Section 10.1 hereof, Landlord shall deliver
to Tenant a statement prepared by a reputable contractor setting forth such
contractor's estimate (the "Estimate") as to the time required to repair such
--------
damage, exclusive of time required to repair any Specialty Alterations (which
are Tenant's obligation to repair) or to perform Long Lead Work. If the
estimated time period exceeds nine (9) months from the date of such statement,
Tenant may elect to terminate this Lease by notice to Landlord not later than
thirty (30) days following receipt of such statement. If Tenant makes such
election, the Term shall expire upon the thirtieth (30th) day after notice of
such election is given by Tenant, and Tenant shall vacate the Premises and
surrender the same to Landlord in accordance with the provisions of Article 20
hereof. If Tenant shall not have elected to terminate this Lease pursuant to
this Article 10 (or is not entitled to terminate this Lease pursuant to this
Article 10), the damages shall be diligently repaired by and at the expense of
Landlord as set forth in Section 10.1 hereof.
(ii) Notwithstanding anything to the contrary contained
herein, if (a) either Tenant shall not have elected to terminate this Lease
pursuant to the provisions of Section 10.3(A)(i) hereof, or Tenant shall not
have had the right to terminate this Lease pursuant to the provisions of Section
10.3(A)(i) hereof because the estimated time period set forth in the Estimate
did not exceed nine (9) months, and (b) Landlord shall have failed to make such
repairs on or before the date which is three (3) months after the estimated time
period set forth in the Estimate other than by reason of Unavoidable Delays,
then Tenant may elect to terminate this Lease by notice given to Landlord within
ten (10) days after the expiration of such three (3) month period, time being of
the essence with respect to Tenant's giving of such notice. If Tenant makes such
election pursuant to this subsection 10.3(A)(ii), the Term shall expire on the
tenth
27
<PAGE>
(10th) day after notice of such election is given by Tenant, and Tenant shall
vacate the Premises and surrender the same to Landlord in accordance with the
provisions of Article 20 hereof.
(B) Notwithstanding the foregoing, if the Premises shall be
substantially damaged during the last year of the Term, Landlord or Tenant may
elect by notice, given within thirty (30) days after the occurrence of such
damage, to terminate this Lease and if either party makes such election, the
Term shall expire upon the thirtieth (30th) day after notice of such election is
given by such party and Tenant shall vacate the Premises and surrender the same
to Landlord in accordance with the provisions of Article 20 hereof.
(C) Except as expressly set forth in this Section 10.3, Tenant shall
have no other options to cancel this Lease under this Article 10.
Section 10.4. This Article 10 constitutes an express agreement governing
-------------
any case of damage or destruction of the Premises or the Building by fire or
other casualty, and Section 227 of the Real Property Law of the State of New
York, which provides for such contingency in the absence of an express
agreement, and any other law of like nature and purpose now or hereafter in
force shall have no application in any such case.
Section 10.5. The parties hereto shall procure an appropriate clause in,
-------------
or endorsement on, any fire or extended coverage insurance covering the
Premises, the Building and personal property, fixtures and equipment located
thereon or therein, pursuant to which the insurance companies waive subrogation
or consent to a waiver of right of recovery and having obtained such clauses or
endorsements of waiver of subrogation or consent to a waiver of right of
recovery, will not make any claim against or seek to recover from the other for
any loss or damage to its property or the property of others resulting from fire
or other hazards covered by such fire and extended coverage insurance, provided,
however, that the release, discharge, exoneration and covenant not to sue herein
contained shall be limited by and be coextensive with the terms and provisions
of the waiver of subrogation clause or endorsements or clauses or endorsements
consenting to a waiver of right of recovery. If the payment of an additional
premium is required for the inclusion of such waiver of subrogation provision,
each party shall advise the other of the amount of any such additional premiums
and the other party at its own election may, but shall not be obligated to, pay
the same. If such other party shall not elect to pay such additional premium,
the first party shall not be required to obtain such waiver of subrogation
provision. If either party shall be unable to obtain the inclusion of such
clause even with the payment of an additional premium, then such party shall
attempt to name the other party as an additional insured (but not a loss payee)
under the policy. If the payment of an additional premium is required for
naming the other party as an additional insured (but not a loss payee), each
party shall advise the other of the amount of any such additional premium and
the other party at its own election may, but shall not be obligated to, pay the
same. If such other party shall not elect to pay such additional premium or if
it shall not be possible to have the other party named as an additional insured
(but not loss payee), even with the payment of an additional premium, then (in
either event) such party shall so notify the first party and the first party
shall not have the obligation to name the other party as an additional insured.
Tenant acknowledges that Landlord shall not carry insurance on and shall not be
responsible for damage to, Tenant's
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Property or Specialty Alterations or any other Alteration prior to the
completion of the Initial Alterations, and that Landlord shall not carry
insurance against, or be responsible for any loss suffered by Tenant due to,
interruption of Tenant's business.
ARTICLE 11
EMINENT DOMAIN
--------------
Section 11.1. If the whole of the Real Property, the Building or the
-------------
Premises shall be acquired or condemned for any public or quasi-public use or
purpose, this Lease and the Term shall end as of the date of the vesting of
title with the same effect as if said date were the Expiration Date. If only a
part of the Real Property and not the entire Premises shall be so acquired or
condemned then, (1) except as hereinafter provided in this Section 11.1, this
Lease and the Term shall continue in force and effect, but, if a part of the
Premises is included in the part of the Real Property so acquired or condemned,
from and after the date of the vesting of title, the Fixed Rent and the Space
Factor shall be reduced in the proportion which the area of the part of the
Premises so acquired or condemned bears to the total area of the Premises
immediately prior to such acquisition or condemnation and Tenant's Share shall
be redetermined based upon the proportion in which the ratio between the
rentable area of the Premises remaining after such acquisition or condemnation
bears to the rentable area of the Building remaining after such acquisition or
condemnation; (2) whether or not the Premises shall be affected thereby,
Landlord, at Landlord's option, may give to Tenant, within sixty (60) days next
following the date upon which Landlord shall have received notice of vesting of
title, a thirty (30) days' notice of termination of this Lease if Landlord shall
elect to terminate leases (including this Lease), affecting at least fifty
percent (50%) of the rentable area of the Building (excluding any rentable area
leased by Landlord or its Affiliates); and (3) if the part of the Real Property
so acquired or condemned shall contain more than fifteen percent (15%) of the
total area of the Premises immediately prior to such acquisition or
condemnation, or if, by reason of such acquisition or condemnation, Tenant no
longer has reasonable means of access to the Premises, Tenant, at Tenant's
option, may give to Landlord, within sixty (60) days next following the date
upon which Tenant shall have received notice of vesting of title, a thirty (30)
days' notice of termination of this Lease. If any such thirty (30) days' notice
of termination is given by Landlord or Tenant, this Lease and the Term shall
come to an end and expire upon the expiration of said thirty (30) days with the
same effect as if the date of expiration of said thirty (30) days were the
Expiration Date. If a part of the Premises shall be so acquired or condemned
and this Lease and the Term shall not be terminated pursuant to the foregoing
provisions of this Section 11.1, Landlord, at Landlord's expense, shall restore
that part of the Premises not so acquired or condemned to a self-contained
rental unit inclusive of Tenant's Alterations (other than Specialty
Alterations), except that if such acquisition or condemnation occurs prior to
completion of the Initial Alterations, Landlord shall only be required to
restore that part of the Premises not so acquired or condemned to a self-
contained rental unit exclusive of Tenant's Alterations. Upon the termination
of this Lease and the Term pursuant to the provisions of this Section 11.1, the
Fixed Rent and Escalation Rent shall be apportioned and any prepaid portion of
Fixed Rent and Escalation Rent for any period after such date shall be refunded
by Landlord to Tenant.
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Section 11.2. In the event of any such acquisition or condemnation of all
-------------
or any part of the Real Property, Landlord shall be entitled to receive the
entire award for any such acquisition or condemnation, Tenant shall have no
claim against Landlord or the condemning authority for the value of any
unexpired portion of the Term and Tenant hereby expressly assigns to Landlord
all of its right in and to any such award. Nothing contained in this Section
11.2 shall be deemed to prevent Tenant from making a separate claim in any
condemnation proceedings for the then value of any Tenant's Property included in
such taking, and for any moving expenses.
Section 11.3. If the whole or any part of the Premises shall be acquired
-------------
or condemned temporarily during the Term for any public or quasi-public use or
purpose, Tenant shall give prompt notice thereof to Landlord and the Term shall
not be reduced or affected in any way and Tenant shall continue to pay in full
all items of Rental payable by Tenant hereunder without reduction or abatement,
and Tenant shall be entitled to receive for itself any award or payments for
such use, provided, however, that:
(i) if the acquisition or condemnation is for a period not extending
beyond the Term and if such award or payment is made less frequently
than in monthly installments, the same shall be paid to and held by
Landlord as a fund which Landlord shall apply from time to time to the
Rental payable by Tenant hereunder, except that, if by reason of such
acquisition or condemnation changes or alterations are required to be
made to the Premises which would necessitate an expenditure to restore
the Premises, then a portion of such award or payment considered by
Landlord as appropriate to cover the expenses of the restoration shall
be retained by Landlord, without application as aforesaid, and applied
toward the restoration of the Premises as provided in Section 11.1
hereof; or
(ii) if the acquisition or condemnation is for a period extending
beyond the Term, such award or payment shall be apportioned between
Landlord and Tenant as of the Expiration Date; Tenant's share thereof,
if paid less frequently than in monthly installments, shall be paid to
Landlord and applied in accordance with the provisions of clause (i)
above, provided, however, that the amount of any award or payment
allowed or retained for restoration of the Premises shall remain the
property of Landlord if this Lease shall expire prior to the
restoration of the Premises.
ARTICLE 12
ASSIGNMENT, SUBLETTING, MORTGAGE, ETC.
--------------------------------------
Section 12.1. (A) Except as expressly permitted herein, Tenant, without
-------------
the prior consent of Landlord in each instance, shall not (a) assign its rights
or delegate its duties under this Lease (whether by operation of law, transfers
of interests in Tenant or otherwise), mortgage or encumber its interest in this
Lease, in whole or in part, (b) sublet, or permit the subletting of, the
Premises or any part thereof, or (c) permit the Premises or any part thereof to
be occupied or used for desk space, mailing privileges or otherwise, by any
Person other than Tenant.
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(B) If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, any and all monies or other consideration
payable or otherwise to be delivered in connection with such assignment shall be
paid or delivered to Landlord, shall be and remain the exclusive property of
Landlord and shall not constitute property of Tenant or of the estate of Tenant
within the meaning of the Bankruptcy Code. Any and all monies or other
consideration constituting Landlord's property under the preceding sentence not
paid or delivered to Landlord shall be held in trust for the benefit of Landlord
and shall be promptly paid to or turned over to Landlord.
Section 12.2. (A) If Tenant's interest in this Lease is assigned in
-------------
violation of the provisions of this Article 12, such assignment shall be void
and of no force and effect against Landlord; provided, however, that Landlord
may collect an amount equal to the then Fixed Rent plus any other item of Rental
from the assignee as a fee for its use and occupancy, and shall apply the net
amount collected to the Fixed Rent and other items of Rental reserved in this
Lease. If the Premises or any part thereof are sublet to, or occupied by, or
used by, any Person other than Tenant, whether or not in violation of this
Article 12, Landlord, after default by Tenant under this Lease, including,
without limitation, a subletting or occupancy in violation of this Article 12,
may collect any item of Rental or other sums paid by the subtenant, user or
occupant as a fee for its use and occupancy, and shall apply the net amount
collected to the Fixed Rent and other items of Rental reserved in this Lease.
No such assignment, subletting, occupancy or use, whether with or without
Landlord's prior consent, nor any such collection or application of Rental or
fee for use and occupancy, shall be deemed a waiver by Landlord of any term,
covenant or condition of this Lease or the acceptance by Landlord of such
assignee, subtenant, occupant or user as tenant hereunder. The consent by
Landlord to any assignment, subletting, occupancy or use shall not relieve
Tenant from its obligation to obtain the express prior consent of Landlord to
any further assignment, subletting, occupancy or use.
(B) Tenant shall reimburse Landlord on demand for any actual third
party out-of-pocket costs that may be incurred by Landlord in connection with
any proposed assignment of Tenant's interest in this Lease or any proposed
subletting of the Premises or any part thereof, including, without limitation,
any reasonable processing fee, reasonable attorneys' fees and disbursements and
the reasonable costs of making investigations as to the acceptability of the
proposed subtenant or the proposed assignee.
(C) Neither any assignment of Tenant's interest in this Lease nor any
subletting, occupancy or use of the Premises or any part thereof by any Person
other than Tenant, nor any collection of Rental by Landlord from any Person
other than Tenant as provided in this Section 12.2, nor any application of any
such Rental as provided in this Section 12.2 shall, in any circumstances,
relieve Tenant of its obligations under this Lease on Tenant's part to be
observed and performed.
(D) Any Person to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code shall be deemed without further act or deed to
have assumed all of the obligations arising under this Lease on and after the
date of such assignment. Any such assignee shall execute and deliver to
Landlord upon demand an instrument confirming such assumption.
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No assignment of this Lease shall relieve Tenant of its obligations hereunder
and, subsequent to any assignment, Tenant's liability hereunder shall continue
notwithstanding any subsequent modification or amendment hereof or the release
of any subsequent tenant hereunder from any liability, to all of which Tenant
hereby consents in advance .
Section 12.3. (A) If Tenant assumes this Lease and proposes to assign
-------------
the same pursuant to the provisions of the Bankruptcy Code to any Person who
shall have made a bona fide offer to accept an assignment of this Lease on terms
---------
acceptable to Tenant, then notice of such proposed assignment shall be given to
Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but
in any event no later than ten (10) days prior to the date that Tenant shall
make application to a court of competent jurisdiction for authority and approval
to enter into such assignment and assumption. Such notice shall set forth (a)
the name and address of such Person, (b) all of the terms and conditions of such
offer, and (c) adequate assurance of future performance by such Person under the
Lease as set forth in Paragraph (B) below, including, without limitation, the
assurance referred to in Section 365(b)(3) of the Bankruptcy Code. Landlord
shall have the prior right and option, to be exercised by notice to Tenant given
at any time prior to the effective date of such proposed assignment, to accept
an assignment of this Lease upon the same terms and conditions and for the same
consideration, if any, as the bona fide offer made by such Person, less any
---------
brokerage commissions which would otherwise be payable by Tenant out of the
consideration to be paid by such Person in connection with the assignment of
this Lease.
(B) The term "adequate assurance of future performance" as used in
this Lease shall mean that any proposed assignee shall, among other things, (a)
deposit with Landlord on the assumption of this Lease the sum of the then Fixed
Rent as security for the faithful performance and observance by such assignee of
the terms and obligations of this Lease, which sum shall be held by Landlord in
accordance with the provisions of Article 31 hereof, (b) furnish Landlord with
financial statements of such assignee for the prior three (3) fiscal years, as
finally determined after an audit and certified as correct by a certified public
accountant, which financial statements shall show a net worth of at least six
(6) times the then Fixed Rent for each of such three (3) years, (c) grant to
Landlord a security interest in such property of the proposed assignee as
Landlord shall deem necessary to secure such assignee's future performance under
this Lease, and (d) provide such other information or take such action as
Landlord, in its reasonable judgment shall determine is necessary to provide
adequate assurance of the performance by such assignee of its obligations under
the Lease.
Section 12.4. (A) As long as The Music Connection Corporation or a
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Related Entity of The Music Connection Corporation is Tenant, Tenant shall have
the privilege, subject to the terms and conditions hereinafter set forth,
without the consent of Landlord but subject to Tenant's satisfaction of
conditions set forth in clauses (1), (4) and (5) of Section 12.8(A) hereof, and
without Landlord having the right granted in Section 12.8(B) hereof to
recapture, to assign its interest in this Lease (i) to any corporation which is
a successor to Tenant either by merger or consolidation, (ii) to a purchaser of
all or substantially all of (a) Tenant's assets, or (b) shares of Tenant's stock
(if Tenant is a corporation or trust), or (c) the interests in Tenant (if Tenant
is a partnership or other entity) (provided that in any case, such purchaser
shall have also assumed
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substantially all of Tenant's liabilities) or (iii) to a Person which shall (1)
Control, (2) be under the Control of, or (3) be under common Control with Tenant
(any such Person referred to in this clause (iii) being a "Related Entity"). As
---------------
long as The Music Connection Corporation or a Related Entity of The Music
Connection Corporation is Tenant, Tenant also shall have the privilege, subject
to the terms and conditions hereinafter set forth, without the consent of
Landlord but subject to Tenant's satisfaction of conditions set forth in clauses
(3), (6) through (8) and (10) of Section 12.6(A) and without Landlord having the
right granted in Section 12.6(B) hereof to recapture, to sublease all or any
portion of the Premises to a Related Entity. Any assignment or subletting
described above may only be made upon the condition that (a) any such assignee
or subtenant shall continue to use the Premises in accordance with all of the
provisions of this Lease, (b) the principal purpose of such assignment or
sublease is not the acquisition of Tenant's interest in this Lease or to
circumvent the provisions of Section 12.1 of this Article (except if such
assignment or sublease is made to a Related Entity and is made for a valid
intracorporate business purpose and is not made to circumvent the provisions of
Section 12.1 of this Article), and (c) in the case of an assignment, any such
assignee shall have a net worth and annual income and cash flow, determined in
accordance with generally accepted accounting principles, consistently applied,
after giving effect to such assignment, equal to the greater of Tenant's net
worth and annual income and cash flow, as so determined, on (i) the date
immediately preceding the date of such assignment, and (ii) the Commencement
Date. Tenant shall, within ten (10) Business Days after execution thereof,
deliver to Landlord either (x) a duplicate original instrument of assignment in
form and substance reasonably satisfactory to Landlord, duly executed by Tenant,
together with an instrument in form and substance reasonably satisfactory to
Landlord, duly executed by the assignee, in which such assignee shall assume
observance and performance of, and agree to be personally bound by, all of the
terms, covenants and conditions of this Lease on Tenant's part to be observed
and performed from and after the date of assignment, or (y) a duplicate original
sublease in form and substance reasonably satisfactory to Landlord, duly
executed by Tenant and the subtenant.
(B) If Tenant is a partnership, the admission of new Partners, the
withdrawal, retirement, death, incompetency or bankruptcy of any Partner, or the
reallocation of partnership interests among the Partners shall not constitute an
assignment of this Lease, provided the principal purpose of any of the foregoing
is not to circumvent the restrictions on assignment set forth in the provisions
of this Article 12. The reorganization of Tenant from a professional corporation
into a partnership or the reorganization of a Tenant from a partnership into a
professional corporation, shall not constitute an assignment of this Lease,
provided that immediately following such reorganization the Partners of Tenant
shall be the same as the shareholders of Tenant existing immediately prior to
such reorganization, or the shareholders of Tenant shall be the same as the
Partners of Tenant existing immediately prior to such reorganization, as the
case may be. If Tenant shall become a professional corporation, each individual
shareholder in Tenant and each employee of a professional corporation which is a
shareholder in Tenant shall have the same personal liability as such individual
or employee would have under this Lease if Tenant were a partnership and such
individual or employee were a Partner in Tenant. If any individual Partner in
Tenant is or becomes an employee of a professional corporation, such individual
shall have the same personal liability under this Lease
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as such individual would have if he and not the professional corporation were a
Partner of Tenant.
(C) Except as set forth above, either a transfer (including the
issuance of treasury stock or the creation and issuance of new stock or a new
class of stock) of a controlling interest in the shares of Tenant or of any
entity which has an interest in Tenant through one or more intermediaries (if
Tenant or such entity is a corporation or trust) or a transfer of a majority of
the total interest in Tenant or of any entity which has an interest in Tenant
through one or more intermediaries (if Tenant or such entity is a partnership or
other entity) at any one time or over a period of time through a series of
transfers, shall be deemed an assignment of this Lease and shall be subject to
all of the provisions of this Article 12, including, without limitation, the
requirement that Tenant obtain Landlord's prior consent thereto. The transfer
of shares of Tenant or of any entity which has an interest in Tenant through one
or more intermediaries (if Tenant or such entity is a corporation or trust) for
purposes of this Section 12.4 shall not include the sale of shares by persons
other than those deemed "insiders" within the meaning of the Securities Exchange
Act of 1934, as amended, which sale is effected through the "over-the-counter
market" or through any recognized stock exchange.
Section 12.5. If, at any time after the originally named Tenant herein may
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have assigned Tenant's interest in this Lease, this Lease shall be disaffirmed
or rejected in any proceeding of the types described in paragraph (E) of Section
16.1 hereof, or in any similar proceeding, or in the event of termination of
this Lease by reason of any such proceeding or by reason of lapse of time
following notice of termination given pursuant to said Article 16 based upon any
of the Events of Default set forth in such paragraph, any prior Tenant,
including, without limitation, the originally named Tenant, upon request of
Landlord given within thirty (30) days next following any such disaffirmance,
rejection or termination (and actual notice thereof to Landlord in the event of
a disaffirmance or rejection or in the event of termination other than by act of
Landlord), shall (1) pay to Landlord all Fixed Rent, Escalation Rent and other
items of Rental due and owing by the assignee to Landlord under this Lease to
and including the date of such disaffirmance, rejection or termination, and (2)
as "tenant", enter into a new lease with Landlord of the Premises for a term
commencing on the effective date of such disaffirmance, rejection or termination
and ending on the Expiration Date, unless sooner terminated as in such lease
provided, at the same Fixed Rent and upon the then executory terms, covenants
and conditions as are contained in this Lease, except that (a) Tenant's rights
under the new lease shall be subject to the possessory rights of the assignee
under this Lease and the possessory rights of any person claiming through or
under such assignee or by virtue of any statute or of any order of any court,
(b) such new lease shall require all defaults existing under this Lease to be
cured by Tenant with due diligence, and (c) such new lease shall require Tenant
to pay all Escalation Rent reserved in this Lease which, had this Lease not been
so disaffirmed, rejected or terminated, would have accrued under the provisions
of Article 27 hereof after the date of such disaffirmance, rejection or
termination with respect to any period prior thereto. If any such prior Tenant
shall default in its obligation to enter into said new lease for a period of ten
(10) days next following Landlord's request therefor, then, in addition to all
other rights and remedies by reason of such default, either at law or in equity,
Landlord shall have the same rights and remedies against such Tenant as if such
Tenant had
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entered into such new lease and such new lease had thereafter been terminated as
of the commencement date thereof by reason of such Tenant's default thereunder.
Section 12.6. (A) Notwithstanding the provisions of Section 12.1 hereof,
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if Landlord shall not exercise its rights pursuant to paragraph (B) of this
Section 12.6, Landlord shall not unreasonably withhold, condition or delay its
consent to any subletting of the Premises, provided that:
(1) the Premises shall not, without Landlord's prior consent,
have been listed or otherwise publicly advertised for subletting at a rental
rate less than the greater of (i) the Rent Per Square Foot with respect to the
portion of the Premises proposed to be sublet hereunder and (ii) the prevailing
rental rate set by Landlord for comparable space in the Building or if there is
no comparable space the prevailing rental rate reasonably determined by
Landlord;
(2) Intentionally Omitted Prior to Execution;
(3) no Event of Default shall have occurred and be
continuing;
(4) upon the date Tenant delivers the Tenant Statement to
Landlord and upon the date immediately preceding the commencement date of any
sublease approved by Landlord, the proposed subtenant shall have a financial
standing (taking into consideration the obligations of the proposed subtenant
under the sublease) reasonably satisfactory to Landlord, be of a character, be
engaged in a business, and propose to use the Premises in a manner in keeping
with the standards in such respects of the other tenancies in the Building;
(5) the proposed subtenant (or any Person who directly or
indirectly, Controls, is Controlled by or is under common Control with the
proposed subtenant) shall not be a tenant or subtenant of any space in the
Building, nor shall the proposed subtenant (or any Person who directly or
indirectly, Controls, is Controlled by or is under common Control with the
proposed subtenant) be a Person with whom Landlord is negotiating or discussing
to lease space in the Building; if Tenant shall propose to sublease space and is
about to commence negotiations with a tenant, subtenant or prospective
subtenant, Tenant shall advise Landlord of the identity of such prospective
subtenant and Landlord shall promptly advise Tenant if the execution of a
sublease with such tenant, subtenant or prospective subtenant would violate the
provisions of this clause (5);
(6) the character of the business to be conducted or the
proposed use of the Premises by the proposed subtenant shall not (a) be likely
to increase Landlord's operating expenses beyond that which would be incurred
for use by Tenant or for use in accordance with the standards of use of other
tenancies in the Building; (b) increase the burden on existing cleaning services
or elevators over the burden prior to such proposed subletting; (c) violate any
provision or restrictions herein relating to the use or occupancy of the
Premises; (d) require any alterations, installations, improvements, additions or
other physical changes to be performed in or made to any portion of the Building
or the Real Property other than the Premises; or (e) violate any provision or
restrictions in any other lease for space in the Building or in any
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Superior Lease or Mortgage; if Landlord shall have consented to a sublease and,
as a result of the use and occupancy of the subleased portion of the Premises by
the subtenant, operating expenses are increased by more than a de minimus
amount, then Tenant shall pay to Landlord, within ten (10) days after demand, as
additional rent, all resulting increases in operating expenses;
(7) the subletting shall be expressly subject to all of the
terms, covenants, conditions and obligations on Tenant's part to be observed and
performed under this Lease and the further condition and restriction that the
sublease shall not be modified without the prior written consent of Landlord,
which consent shall not be unreasonably withheld, conditioned or delayed or
assigned (by operation of law or otherwise; for purposes of this clause (7), the
transfer of a majority of the issued and outstanding capital stock of any
corporate subtenant or the transfer of a majority of the total interest in a
subtenant (if a partnership or other entity), however accomplished, whether in a
single transaction or in a series of related or unrelated transactions, shall be
deemed an assignment of the sublease, except that the transfer of the
outstanding capital stock of a corporate subtenant shall be deemed not to
include the sale of such stock by persons other than those deemed "insiders"
within the meaning of the Securities Exchange Act of 1934, as amended, which
sale is effected through the "over-the-counter market" or through any recognized
stock exchange) encumbered or otherwise transferred or the subleased premises
further sublet by the subtenant in whole or in part, or any part thereof
suffered or permitted by the subtenant to be used or occupied by others, without
the prior written consent of Landlord in each instance;
(8) the subletting shall end no later than one (1) day
before the Expiration Date and shall not be for a term of less than eighteen
(18) months unless it commences less than eighteen (18) months before the
Expiration Date;
(9) no subletting shall be for less than the One Thousand
Five Hundred (1,500) contiguous rentable square feet and at no time shall there
be more than two (2) occupants, including Tenant, in the Premises; and
(10) such sublease shall expressly provide that in the event
of termination, re-entry or dispossess of Tenant by Landlord under this Lease,
Landlord may, at its option, take over all of the right, title and interest of
Tenant, as sublessor under such sublease, and such subtenant, at Landlord's
option, shall attorn to Landlord pursuant to the then executory provisions of
such sublease, except that Landlord shall not be:
(i) liable for any act or omission of Tenant under such
sublease, or
(ii) subject to any defense or offsets which such subtenant
may have against Tenant, or
(iii) bound by any previous payment which such subtenant may
have made to Tenant more than thirty (30) days in advance of the date upon which
such payment was due, unless previously approved by Landlord, or
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(iv) bound by any obligation to make any payment to or on
behalf of such subtenant, or
(v) bound by any obligation to perform any work or to make
improvements to the Premises, or portion thereof demised by such sublease, or
(vi) bound by any amendment or modification of such sublease
made without its consent, or
(vii) bound to return such subtenant's security deposit, if
any, until such deposit has come into its actual possession and such subtenant
would be entitled to such security deposit pursuant to the terms of such
sublease.
If Tenant proposes to sublet a portion of the Premises then, unless the context
otherwise requires, references in this Section 12.6 to the Premises shall be
deemed to refer to the portion of the Premises proposed to be sublet by Tenant.
(B) At least fifteen (15) Business Days prior to any proposed
subletting of the Premises, Tenant shall submit a statement to Landlord (a
"Tenant Statement") containing the following information: (a) the name and
- -----------------
address of the proposed subtenant, (b) a description of the portion of the
Premises to be sublet, (c) the terms and conditions of the proposed subletting,
including, without limitation, the rent payable and the value (including cost,
overhead and supervision) of any improvements (including any demolition to be
performed) to the Premises for occupancy by such subtenant, (d) the nature and
character of the business of the proposed subtenant, and (e) any other
information that Landlord may reasonably request, together with a statement
specifically directing Landlord's attention to the provisions of this Section
12.6(B) requiring Landlord to respond to Tenant's request within fifteen (15)
Business Days after Landlord's receipt of the Tenant Statement. Landlord shall
have the right, exercisable by notice to Tenant within fifteen (15) Business
Days after Landlord's receipt of the Tenant Statement, to sublet (in its own
name or that of its designee) such portion of the Premises ("Recapture Space")
---------------
from Tenant on the terms and conditions set forth in the Tenant Statement,
subject to the further provisions of paragraph (C) of this Section 12.6. If
Landlord shall fail to notify Tenant within said fifteen (15) Business Day
period of Landlord's intention to exercise its rights pursuant to this Section
12.6(B) hereof or of Landlord's consent to or disapproval of the proposed
subletting pursuant to the Tenant Statement as contemplated by Section 12.6(A)
hereof, or if Landlord shall have consented to such subletting as provided in
Section 12.6(A) hereof, Tenant shall have the right to sublease that portion of
the Premises to such proposed subtenant on the same terms and conditions set
forth in the Tenant Statement, subject to the terms and conditions of this
Lease, including, without limitation, paragraph (A) of this Section 12.6. If
Tenant shall not enter into such sublease within sixty (60) days after the
delivery of the Tenant Statement to Landlord, then the provisions of Section
12.1 hereof and this Section 12.6 shall again be applicable to any other
proposed subletting. If Tenant shall enter into such sublease within sixty (60)
days as aforesaid, Tenant shall deliver a true, complete and fully executed
counterpart of such sublease to Landlord within five (5) days after execution
thereof.
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(C) If Landlord exercises its option to sublet the Recapture Space,
such sublease to Landlord or its designee as subtenant (each, a "Recapture
---------
Sublease") shall:
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(1) be at a rental equal to the lesser of (x) the sum of
the Fixed Rent and Escalation Rent then payable hereunder and (y) the sublease
rent set forth in the Tenant Statement and otherwise, be upon the same terms and
conditions as those contained in this Lease (as modified by the Tenant
Statement, except such as are irrelevant or inapplicable and except as otherwise
expressly set forth to the contrary in this paragraph (C);
(2) give the subtenant the unqualified and unrestricted
right, without Tenant's permission, to assign such sublease and to further
sublet the Recapture Space or any part thereof and to make any and all changes,
alterations, and improvements in the Recapture Space;
(3) provide in substance that any such changes,
alterations, and improvements made in the Recapture Space may be removed, in
whole or in part, prior to or upon the expiration or other termination of the
Recapture Sublease provided that any material damage and injury caused thereby
shall be repaired;
(4) provide that (i) the parties to such Sublease expressly
negate any intention that any estate created under such Sublease be merged with
any other estate held by either of said parties, (ii) prior to the commencement
of the term of the Recapture Sublease, Landlord, at its sole cost and expense
(to the extent the Tenant Statement so provides), shall make such alterations as
may be required or reasonably deemed necessary by the subtenant to physically
separate the Recapture Space, if such Recapture Space constitutes a portion of
the Premises, from the balance of the Premises, and to provide appropriate means
of ingress to and egress thereto and to the public portions of the balance of
the floor such as toilets, janitor's closets, telephone and electrical closets,
fire stairs, elevator lobbies, etc. (iii) at the expiration of the term of such
Recapture Sublease, Tenant shall accept the Recapture Space in its then existing
condition, broom clean; and
(5) provide that the subtenant or occupant may use and
occupy the Recapture Space for any lawful purpose (without regard to any
limitation set forth in the Tenant Statement).
(D) Performance by Landlord, or its designee, under a Recapture
Sublease or a sub-subtenant or assignee of Landlord or its designee as subtenant
shall be deemed performance by Tenant of any similar obligation under this Lease
and Tenant shall not be liable for any default under this Lease or deemed to be
in default hereunder if such default is occasioned by or arises from any act or
omission of Landlord or its designee as the subtenant under the Recapture
Sublease or is occasioned by or arises from any act or omission of any occupant
under the Recapture Sublease.
(E) If Landlord is unable to give Tenant possession of the
Recapture Space at the expiration of the term of the Recapture Sublease by
reason of the holding over or retention
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of possession of any tenant or other occupant, then (w) Landlord shall continue
to pay all charges previously payable, and comply with all other obligations,
under the Recapture Sublease until the date upon which Landlord shall give
Tenant possession of the Recapture Space free of occupancies, (x) neither the
Expiration Date nor the validity of this Lease shall be affected, (y) Tenant
waives any rights under Section 223-a of the Real Property Law of New York, or
any successor statute of similar import, to rescind this Lease and further
waives the right to recover any damages from Landlord which may result from the
failure of Landlord to deliver possession of the Recapture Space at the end of
the term of the Recapture Sublease, and (z) Landlord, at Landlord's expense,
shall use its reasonable efforts to deliver possession of the Recapture Space to
Tenant and in connection therewith, if necessary, shall institute and diligently
and in good faith prosecute holdover and any other appropriate proceedings
against the occupant of such Space; if Landlord fails to prosecute such
proceedings in such manner and such failure continues after reasonable notice
thereof by Tenant, Tenant may prosecute such proceedings in Landlord's name and
at Landlord's expense.
(F) The failure by Landlord to exercise its option under
Section 12.6(B) with respect to any subletting shall not be deemed a waiver of
such option with respect to any extension of such subletting or any subsequent
subletting of the Premises affected thereby.
Section 12.7. (A) In connection with any subletting of all or any portion
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of the Premises Tenant shall pay to Landlord an amount equal to fifty percent
(50%) of any Sublease Profit derived therefrom. Anything contained herein to
the contrary notwithstanding Tenant shall not be entitled to any proceeds
derived from or relating to (directly or indirectly) any subletting of the
Recapture Space by Landlord or its designee to a subtenant. All sums payable
hereunder by Tenant shall be calculated on an annualized basis, but shall be
paid to Landlord, as additional rent, within ten (10) days after receipt thereof
by Tenant.
(B) For purposes of this Lease:
(1) "Sublease Profit" shall mean the excess of (i) the
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Sublease Rent over (ii) the then Fixed Rent, Escalation Rent and, if applicable,
the Electricity Additional Rent.
(2) "Sublease Rent" shall mean any rent or other
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consideration paid Tenant directly or indirectly by any subtenant or any other
amount received by Tenant from or in connection with any subletting (including,
but not limited to, sums paid for the sale or rental, or consideration received
on account of any contribution, of Tenant's Property or sums paid in connection
with the supply of electricity or HVAC) less the Sublease Expenses.
(3) "Sublease Expenses" shall mean: (i) in the event of a
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sale of Tenant's Property, the then unamortized or undepreciated cost thereof
determined on the basis of Tenant's federal income tax returns, (ii) the
reasonable out-of-pocket costs and expenses of Tenant in making such sublease,
such as brokers' fees, attorneys' fees, and advertising fees paid to unrelated
third parties, (iii) any sums paid to Landlord pursuant to Section 12.2(B)
hereof, (iv) the cost of improvements or alterations made by Tenant expressly
and solely for the purpose of preparing that portion of the Premises for such
subtenancy if not used by Tenant subsequent to
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the expiration of the term of the sublease, and (v) the unamortized or
undepreciated cost of any Tenant's Property leased to and used by such
subtenant. In determining Sublease Rent, the costs set forth in clauses (ii),
(iii) and (iv) shall be amortized on a straight-line basis over the term of such
sublease and the costs set forth in clause (v) shall be amortized on a straight
line basis over the greater of the longest useful life of such improvements,
alterations or Property (as permitted pursuant to the Internal Revenue Code of
1986, as amended) and the term of such sublease.
(4) Sublease Profit shall be recalculated from time to time
to reflect any corrections in the prior calculation thereof due to (i)
subsequent payments received or made by Tenant, (ii) the final adjustment of
payments to be made by or to Tenant, and (iii) mistake. Promptly after receipt
or final adjustment of any such payments or discovery of any such mistake,
Tenant shall submit to Landlord a recalculation of the Sublease Profit, and an
adjustment shall be made between Landlord and Tenant, on account of prior
payments made or credits received pursuant to this Section 12.7. In addition, if
Sublease Expenses utilized for the purpose of calculating Sublease Profit
included an amount attributable to the cost of the improvements made by Tenant
expressly and solely for the purpose of preparing the Premises for the occupancy
of the subtenant and subsequent to the expiration of the sublease such
improvements and/or alterations were not demolished and/or removed, Sublease
Profits shall be recalculated as if the cost of such improvements and/or
alterations were not incurred by Tenant and Tenant promptly shall pay to
Landlord fifty percent (50%) of the additional amount of such Sublease Profit
resulting from such recalculation.
Section 12.8. (A) Notwithstanding the provisions of Section 12.1 hereof,
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if Landlord shall not exercise its rights pursuant to paragraph (B)(2) of this
Section 12.8, Landlord shall not unreasonably withhold, condition or delay its
consent to an assignment of this Lease in its entirety provided that:
(1) no Event of Default shall have occurred and be
continuing;
(2) upon the date Tenant delivers the Assignment Statement
to Landlord and upon the date immediately preceding the date of any assignment
approved by Landlord, the proposed assignee shall have a financial standing
(taking into consideration the obligations of the proposed assignee under this
Lease) reasonably satisfactory to Landlord, be of a character, be engaged in a
business, and propose to use the Premises in a manner in keeping with the
standards in such respects of the other tenancies in the Building;
(3) the proposed assignee (or any Person who directly or
indirectly, Controls, is Controlled by or is under common Control with the
proposed assignee) shall not be a person or entity with whom Landlord is
negotiating to lease space in the Building at the time of receipt of an
Assignment Statement;
(4) the character of the business to be conducted or the
proposed use of the Premises by the proposed assignee shall not (a) be likely to
increase Landlord's operating expenses beyond that which would be incurred for
use by Tenant or for use in accordance with the standards of use of other
tenancies in the Building; (b) increase the burden on existing
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cleaning services or elevators over the burden prior to such proposed
assignment; (c) violate any provision or restrictions herein relating to the use
or occupancy of the Premises; (d) require any alterations, installations,
improvements, additions or other physical changes to be performed in or made to
any portion of the Building or the Real Property other than the Premises; or (e)
violate any provision or restrictions in any other lease for space in the
Building or in any Superior Lease or Mortgage; if Landlord shall have consented
to an assignment and, as a result of the use and occupancy of the Premises by
Tenant/assignee, operating expenses are increased by more than a de minimus
amount, then Tenant shall pay to Landlord, within ten (10) days after demand, as
additional rent, all resulting increases in operating expenses; and
(5) the assignee shall agree to assume all of the obligations of
Tenant under this Lease from and after the date of the assignment.
(B) (1) At least fifteen (15) Business Days prior to any proposed
assignment, Tenant shall submit a statement to Landlord (the "Assignment
----------
Statement") containing the following information: (i) the name and address of
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the proposed assignee, (ii) the essential terms and conditions of the proposed
assignment, including, without limitation, the consideration payable for such
assignment and the value (including cost, overhead and supervision) of any
improvements (including any demolition to be performed) to the Premises proposed
to be made by Tenant to prepare the Premises for occupancy by such assignee,
(iii) the nature and character of the business of the proposed assignee, and
(iv) any other information that Landlord may reasonably request, together with a
statement specifically directing Landlord's attention to the provisions of this
Section 12.8(B) requiring Landlord to respond to Tenant's request within fifteen
(15) Business Days after Landlord's receipt of the Assignment Statement. The
Assignment Statement shall be executed by Tenant and the proposed assignee and
shall indicate both parties' intent (but not necessarily binding obligation) to
enter into an assignment agreement conforming to the terms and conditions of the
Assignment Statement and on such other terms and conditions to which the parties
may agree which are not inconsistent with the essential terms set forth in the
Assignment Statement.
(2) Landlord shall have the right, exercisable within fifteen (15)
Business Days after Landlord's receipt of the Assignment Statement, to take an
assignment of this Lease (in its own name or that of its designee) for the same
consideration payable to Tenant pursuant to the terms of the Assignment
Statement (less the amount of any brokerage commission which would have been
payable on account of the assignment pursuant to the Assignment Statement),
provided Landlord shall take possession of the Premises "as is" in its condition
as of the date of such assignment and shall be entitled to a credit against the
consideration otherwise payable in the amount, if any, of the value of any
improvements, work or demolition proposed to be provided or performed by Tenant
pursuant to the Assignment Statement. If Landlord shall exercise its rights
pursuant to this Section 12.8(B)(2), then from and after the date of such
assignment to Landlord or its designee, Tenant and any guarantors of Tenant's
obligations hereunder shall have no further rights or obligations pursuant to
this Lease (except for those obligations which shall survive the expiration of
the Term).
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(3) If Landlord shall fail to notify Tenant within said fifteen (15)
Business Day period of Landlord's intention to exercise its rights pursuant to
paragraph (B)(2) of this Section 12.8 or of Landlord's consent to or
disapproval of the proposed assignment pursuant to the Assignment Statement, or
if Landlord shall have consented to such assignment as provided in Section
12.8(A) hereof, Tenant shall be free to assign the Premises to such proposed
assignee on the same terms and conditions set forth in the Assignment Statement.
If Tenant shall not enter into such assignment within sixty (60) days after the
delivery of the Assignment Statement to Landlord, then the provisions of this
Section 12.8 shall again be applicable in their entirety to any proposed
assignment.
(4) If Tenant shall propose to assign this Lease and is about to
commence negotiations with a prospective assignee, Tenant shall advise Landlord
of the identity of such prospective assignee and Landlord shall, within five (5)
Business Days, advise Tenant if the execution of an assignment agreement with
such prospective assignee would violate the provisions of paragraph (A)(3) of
this Section 12.8.
(C) If Tenant shall assign this Lease, Tenant shall deliver to
Landlord, within ten (10) days after execution thereof, (x) a duplicate original
instrument of assignment in form and substance reasonably satisfactory to
Landlord, duly executed by Tenant, and (y) an instrument in form and substance
reasonably satisfactory to Landlord, duly executed by the assignee, in which
such assignee shall assume observance and performance of, and agree to be
personally bound by, all of the terms, covenants and conditions of this Lease on
Tenant's part to be observed and performed.
(D) Tenant shall pay to Landlord, upon receipt thereof, an amount
equal to fifty percent (50%) of all Assignment Proceeds. For purposes of this
paragraph (D), "Assignment Proceeds" shall mean all consideration payable to
-------------------
Tenant, directly or indirectly, by any assignee, including Landlord pursuant to
paragraph (B) of this Section 12.8, or any other amount received by Tenant from
or in connection with any assignment (including, but not limited to, sums paid
for the sale or rental, or consideration received on account of any
contribution, of Tenant's Property) after deducting therefrom: (i) in the event
of a sale (or contribution) of Tenant's Property, the then unamortized or
undepreciated cost thereof determined on the basis of Tenant's federal income
tax returns, (ii) the reasonable out-of-pocket costs and expenses of Tenant in
making such assignment, such as brokers' fees, attorneys' fees, and advertising
fees paid to unrelated third parties, (iii) any payments required to be made by
Tenant in connection with the assignment of its interest in this Lease pursuant
to Article 31-B of the Tax law of the State of New York or any real property
transfer tax of the United States or the City or State of New York (other than
any income tax), (iv) any sums paid by Tenant to Landlord pursuant to Section
12.2(B) hereof, (v) the cost of improvements or alterations made by Tenant
expressly and solely for the purpose of preparing the Premises for such
assignment, as determined by Tenant's federal income tax returns, (vi) the
unamortized or undepreciated cost of any Tenant's Property leased to and used by
such assignee, and (vii) the then unamortized or undepreciated cost of the
Alterations determined on the basis of Tenant's federal income tax returns less
the Tenant Fund. If the consideration paid to Tenant for any assignment shall be
paid in installments, then the expenses specified in this paragraph (D) shall be
amortized over the period during which such
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installments shall be payable. If Landlord exercises its right to take an
assignment of this Lease pursuant to the provisions of Section 12.8(B) hereof,
in no event shall Tenant be entitled to any proceeds derived from or relating to
(directly or indirectly) any lease or sublease of the Premises by Landlord or
further assignment of the Lease.
Section 12.9. Notwithstanding any other provision of this Lease, neither
------------
Tenant nor any direct or indirect assignee or subtenant of Tenant may enter into
any lease, sublease, license, concession or other agreement for use, occupancy
or utilization of space in the Premises which provides for a rental or other
payment for such use, occupancy or utilization based in whole or in part on the
net income or profits derived by any person from the property leased, occupied
or utilized, or which would require the payment of any consideration which would
not fall within the definition of "rents from real property", as that term is
defined in Section 856(d) of the Internal Revenue Code of 1986, as amended.
ARTICLE 13
ELECTRICITY
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Section 13.1. Tenant shall at all times comply with the rules,
------------
regulations, terms and conditions applicable to service, equipment, wiring and
requirements of the public utility supplying electricity to the Building. The
risers serving the Premises shall be capable of supplying six (6) watts of
electricity per rentable square foot of the Premises (exclusive of base building
HVAC) and Tenant shall not use any electrical equipment which, in Landlord's
reasonable judgment, would exceed such capacity or interfere with the electrical
service to other tenants of the Building. In the event that, in Landlord's sole
judgment, Tenant's electrical requirements necessitate installation of an
additional riser, risers or other proper and necessary equipment, Landlord shall
so notify Tenant of same. Within five (5) Business Days after receipt of such
notice, Tenant shall either cease such use of such additional electricity or
shall request that additional electrical capacity (specifying the amount
requested) be made available to Tenant. Landlord, in Landlord's sole judgment
shall determine whether to make available such additional electrical capacity to
Tenant and the amount of such additional electrical capacity to be made
available. If Landlord shall agree to make available additional electrical
capacity and the same necessitates installation of an additional riser, risers
or other proper and necessary equipment, including, without limitation, any
switchgear, the same shall be installed by Landlord. Any such installation shall
be made at Tenant's sole cost and expense, and shall be chargeable and
collectible as additional rent and paid within ten (10) days after the rendition
of a bill to Tenant therefor. Landlord shall not be liable in any way to Tenant
for any failure or defect in the supply or character of electric service
furnished to the Premises by reason of any requirement, act or omission of the
utility serving the Building or for any other reason not attributable to the
negligence of Landlord, whether electricity is provided by public or private
utility or by any electricity generation system owned and operated by Landlord.
Section 13.2. (A) Unless Landlord elects to supply electricity to the
------------
Premises pursuant to Section 13.3 or Landlord is required by Requirements or the
public utility serving the Premises to have Tenant obtain electricity from the
public utility furnishing electricity to the Building
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pursuant to the provisions of Section 13.4 hereof, Landlord shall furnish
electric current to the Premises for the use of Tenant for the operation of the
lighting fixtures and the electrical receptacles for ordinary office equipment
in the Premises on a "rent inclusion" basis, that is, there shall be no separate
charge to Tenant for such electric current by way of measuring such electricity
service on any meter. The Fixed Rent set forth in this Lease includes an annual
charge for electricity service of Eleven Thousand One Hundred Thirty-Six Dollars
($11,136.00) (the "Base Electricity Inclusion Factor", such amount, as it may be
---------------------------------
increased pursuant to the provisions of this Lease, being referred to as the
"Electricity Inclusion Factor"). The parties agree that although the charge for
----------------------------
furnishing electrical energy is included in the Fixed Rent on a so-called "rent
inclusion" basis, the value to Tenant of such service may not be fully reflected
in the Fixed Rent. Accordingly, Tenant agrees that Landlord, at Landlord's
option and at Landlord's sole cost and expense, may cause a reputable and
independent electrical engineer or electrical consulting firm, selected by
Landlord (such engineer or consulting firm being hereinafter referred to as
"Landlord's Engineer"), to make a determination, following the commencement of
-------------------
Tenant's normal business activities in the Premises, of the Full Value of such
service to Tenant. As used herein, the "Full Value" to Tenant of such service
----------
shall mean the product obtained by multiplying the demand and consumption of
electric energy at the Premises by the Electric Rate. Landlord's Engineer shall
certify such determination in writing to Landlord and Tenant. If the Full Value
to Tenant is in excess of the Electricity Inclusion Factor, the Electricity
Inclusion Factor and the Fixed Rent shall be increased by such excess. However,
if it shall be so determined that the Full Value to Tenant of such service does
not exceed the Electricity Inclusion Factor, the Electricity Inclusion Factor
shall be decreased by any excess of the Electricity Inclusion Factor over the
Full Value, provided, however, that in no event shall the Electricity Inclusion
Factor be decreased to an amount less than the Base Electricity Inclusion
Factor.
(B) If during the Term the Electric Rate shall increase over the Base
Electric Rate, the Electricity Inclusion Factor (and therefore the Fixed Rent)
shall be proportionately increased or decreased, as the case may be, provided
that in no event shall the Electricity Inclusion Factor be reduced below the
Base Electricity Inclusion Factor.
(C) (i) Landlord, from time to time during the Term, may cause
Landlord's Engineer to survey the demand and consumption of electrical energy at
the Premises (it being agreed that off-peak and on-peak use shall be considered
by the Engineer, to the extent relevant, in making the determination of the Full
Value). If the then Full Value shall exceed the then Electricity Inclusion
Factor, the Electricity Inclusion Factor (and therefore the Fixed Rent), shall
be proportionately increased or decreased, as the case may be, based on the
increased demand and consumption and the then prevailing Electric Rate, provided
that in no event shall the Electricity Inclusion Factor be reduced below the
Base Electricity Inclusion Factor.
(ii) Landlord shall furnish to Tenant a written statement (an
"Electricity Statement") setting forth Landlord's determination of any increase
- ----------------------
or decrease (subject to the terms of this Section 13.2) which has occurred in
the Full Value and the Electricity Inclusion Factor (and therefore the Fixed
Rent) pursuant to the provisions of either Sections 13.2(A), (B), or (C)(i).
Any such increase in the Electricity Inclusion Factor and the
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Fixed Rent shall be effective as of the date of such increase in the Electric
Rate or the consumption and demand of electric energy by Tenant and shall be
retroactive to such dates if necessary. Any retroactive increase shall be paid
by Tenant within ten (10) days after demand and such amount shall be collectible
by Landlord as Fixed Rent hereunder.
(iii) Each such Electricity Statement given by Landlord pursuant
to Section 13.2(C)(ii) above, shall be conclusive and binding upon Tenant,
unless within sixty (60) days after the receipt of such Electricity Statement,
Tenant shall notify Landlord that it disputes the correctness of the Electricity
Statement. If such dispute is based on Tenant's demand and consumption of
electric current, Tenant shall submit a survey and determination of such
adjustment, made at its sole cost and expense, by a reputable and independent
electrical engineer or electrical consulting firm ("Tenant's Engineer"), within
-----------------
sixty (60) days after receipt of such Electricity Statement. If Landlord and
Tenant are unable to resolve the dispute differences between them within thirty
(30) days after receipt by Landlord of a copy of the determination of Tenant's
Engineer, the dispute shall be decided by a third reputable and independent
electrical engineer or electrical consulting firm ("Third Engineer"). If the
--------------
parties shall fail to agree upon the designation of the Third Engineer within
forty (40) days after the receipt by Landlord of the determination of Tenant's
Engineer, then either party may apply to the American Arbitration Association or
any successor thereto for the designation of the Third Engineer. The Third
Engineer shall conduct such hearings as he deems appropriate. The Third
Engineer, within thirty (30) days after his designation, shall select the
determination of either Landlord's Engineer or Tenant's Engineer and such
determination shall be conclusive and binding upon the parties whether or not a
judgment shall be entered in any court. The fees of the Third Engineer and the
costs of arbitration shall be paid equally by the parties, except that each
party shall pay its own counsel fees and expenses, if any, in connection with
the arbitration. Pending the resolution of such dispute by agreement or
arbitration as aforesaid, Tenant shall pay the increase in the Electricity
Inclusion Factor in accordance with the Electricity Statement, without prejudice
to Tenant's position, as herein provided. If the dispute shall be resolved in
Tenant's favor, Landlord, at its option, shall either credit the amount of such
overpayment against subsequent monthly installments of Fixed Rent hereunder or
pay to Tenant the amount of such overpayment.
(D) Landlord's failure during the Term to prepare and deliver any
Electricity Statement, or bills, or Landlord's failure to make a demand, under
this Article or any other provisions of this Lease, shall not in any way be
deemed to be a waiver of, or cause Landlord to forfeit or surrender, its rights
to collect any portion of the increase in the Electricity Inclusion Factor (and
therefore the Fixed Rent) which may have become due pursuant to this Article 13
during the Term. Tenant's liability for the amounts due under this Article 13
shall survive the expiration or sooner termination of this Lease and Landlord's
obligation, if any, to refund any payments by Tenant in excess of the amounts
required to be paid by Tenant to Landlord pursuant to this Article 13 shall
survive the expiration or sooner termination of this Lease. The preceding
sentence shall not, however, be construed as limiting or restricting, in any
manner whatsoever, Landlord's right pursuant to this Lease or pursuant to law to
offset any such overpayments by Tenant against any amounts which may be due and
payable as provided in this Lease.
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(E) In no event shall any adjustment of the payments made or to be
made hereunder result in a decrease in Fixed Rent or additional rent payable
pursuant to any other provision of this Lease, or in the amount paid for
electricity for the prior year.
(F) The Electricity Inclusion Factor shall be collectible by Landlord
in the same manner as Fixed Rent.
(G) For the purposes of this Section 13.2, Landlord and Tenant agree
that the term "Electric Rate" (including all applicable surcharges, demand
-------------
charges, energy charges, fuel adjustment charges, time of day charges, taxes and
other sums payable in respect thereof) shall mean the service classification
pursuant to which Landlord purchases electricity from the utility company
servicing the Building.
(H) If Landlord discontinues furnishing electricity to Tenant
pursuant to this Section 13.2, the Fixed Rent shall be decreased by the
Electricity Inclusion Factor effective as of the date Landlord discontinues the
provision of electricity in such manner.
Section 13.3. (A) If Landlord shall no longer elect to have electricity
-------------
furnished to the Premises pursuant to Section 13.2 hereof then, unless Landlord
is required by Requirements or the public utility serving the Premises to have
Tenant obtain electricity from the public utility company furnishing electricity
to the Building pursuant to the provisions of Section 13.4 hereof, electricity
shall be furnished by Landlord to the Premises and Tenant shall pay to Landlord,
as additional rent for such service, during the Term, an amount (the
"Electricity Additional Rent") equal to (i) the amount Landlord actually pays to
- ----------------------------
the utility company to provide electricity to the Premises, including all
applicable surcharges, demand charges, time-of-day charges, energy charges, fuel
adjustment charges, rate adjustment charges, taxes and other sums payable in
respect thereof and net of any rebates or credits actually received by Landlord
in respect of such electricity supplied to the Premises, based on Tenant's
demand and/or consumption of electricity (and/or any other method of quantifying
Tenant's use of or demand for electricity as set forth in the utility company's
tariff) as registered on a meter or submeter (installed by Landlord at
Landlord's sole cost and expense) for purposes of measuring such demand,
consumption and/or other method of quantifying Tenant's use of or demand for
electricity (it being agreed that such meter or submeter shall measure demand
and consumption, and off-peak and on-peak use, in either case to the extent such
factors are relevant in making the determination of Landlord's cost) plus (ii)
an amount equal to the actual out-of-pocket costs and expenses incurred by
Landlord in connection with reading such meters and preparing bills therefor.
Tenant, from time to time, shall have the right to review Landlord's meter
readings, and Landlord's calculation of the Electricity Additional Rent, at
reasonable times and on reasonable prior notice, by giving notice thereof to
Landlord on or prior to the ninetieth (90th) day after the date when Landlord
gives Tenant a bill or statement for the Electricity Additional Rent.
(B) Where more than one meter measures the electricity supplied to
Tenant, the electricity rendered through each meter shall be computed and billed
in the aggregate as if one (1) meter measured the electricity supplied in
accordance with the provisions hereinabove set forth. Bills for the Electricity
Additional Rent shall be rendered to Tenant at such time as
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<PAGE>
Landlord may elect, but not more frequently than once per month, and Tenant
shall pay the amount shown thereon to Landlord within ten (10) days after
receipt of such bill. Tenant expressly acknowledges that in connection with the
installation of the meters or submeters, the electricity being supplied to the
Premises shall be temporarily interrupted. Landlord shall use reasonable efforts
to minimize interference with the conduct of Tenant's business in connection
with such installation; provided, however, that Landlord shall have no
obligation to employ contractors or labor at so-called overtime or other premium
pay rates or to incur any other overtime costs or expenses whatsoever.
Section 13.4. If Landlord shall be required by Requirements or the public
------------
utility serving the Premises to discontinue furnishing electricity to Tenant
this Lease shall continue in full force and effect and shall be unaffected
thereby, except only that from and after the effective date of such
discontinuance, Landlord shall not be obligated to furnish electricity to Tenant
and Tenant shall not be obligated to pay the Electricity Additional Rent or the
Electricity Inclusion Charge, as the case may be. If Landlord so discontinues
furnishing electricity to Tenant, Tenant shall use diligent efforts to obtain
electric energy directly from the public utility furnishing electric service to
the Building. The costs of such service shall be paid by Tenant directly to such
public utility. Such electricity may be furnished to Tenant by means of the
existing electrical facilities serving the Premises, at no charge, to the extent
the same are available, suitable and safe for such purposes as determined by
Landlord. All meters and all additional panel boards, feeders, risers, wiring
and other conductors and equipment which may be required to obtain electricity
shall be installed by Landlord at Tenant's expense. Provided Tenant shall use
and continue to use diligent efforts to obtain electric energy directly from the
public utility, Landlord, to the extent permitted by applicable Requirements,
shall not discontinue furnishing electricity to the Premises until such
installations have been made and Tenant shall be able to obtain electricity
directly from the public utility.
ARTICLE 14
ACCESS TO PREMISES
------------------
Section 14.1. (A) Tenant shall permit Landlord, Landlord's agents,
------------
representatives, contractors and employees and public utilities servicing the
Building to erect, use and maintain, concealed ducts, pipes and conduits in and
through the Premises. Landlord, Landlord's agents, representatives,
contractors, and employees and the agents, representatives, contractors, and
employees of public utilities servicing the Building shall have the right to
enter the Premises at all reasonable times upon reasonable prior notice (except
in the case of an emergency in which event Landlord and Landlord's agents,
representatives, contractors, and employees may enter without prior notice to
Tenant), which notice may be oral, to examine the same, to show them to
prospective purchasers, or prospective or existing Mortgagees or Lessors, and to
make such repairs, alterations, improvements, additions or restorations (i) as
Landlord may deem necessary or desirable to the Premises or to any other portion
of the Building, or (ii) which Landlord may elect to perform following ten (10)
days after notice, except in the case of an emergency (in which event Landlord
and Landlord's agents, representatives, contractors, and employees may enter
without prior notice to Tenant), following Tenant's failure to make repairs or
perform any
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work which Tenant is obligated to make or perform under this Lease, or (iii) for
the purpose of complying with any Requirements, a Superior Lease or a Mortgage,
and Landlord shall be allowed to take all material into and upon the Premises
that may be required therefor without the same constituting an eviction or
constructive eviction of Tenant in whole or in part and the Fixed Rent (and any
other item of Rental) shall in no wise abate while said repairs, alterations,
improvements, additions or restorations are being made, by reason of loss or
interruption of business of Tenant, or otherwise.
(B) Any work performed or installations made pursuant to this Article
14 shall be made with reasonable diligence and Landlord shall use its reasonable
efforts to minimize interference with Tenant's access to and use and occupancy
of the Premises in making any repairs, alterations, additions or improvements,
as provided in the provisions of Section 4.3 hereof. Landlord shall cause any
debris or refuse to be removed from the work area in the Premises at the end of
each day, and upon completion of any such work, Landlord shall repair any damage
to the Premises caused by or resulting from such work or activity.
(C) Except as hereinafter provided, any pipes, ducts, or conduits
installed in or through the Premises pursuant to this Article 14 shall be
concealed behind, beneath or within partitioning, columns, ceilings or floors
located or to be located in the Premises. Notwithstanding the foregoing, any
such pipes, ducts, or conduits may be furred at points immediately adjacent to
partitioning columns or ceilings located or to be located in the Premises,
provided that the same are completely furred and that the installation of such
pipes, ducts, or conduits, when completed, shall not reduce the usable area of
the Premises beyond a de minimis amount.
----------
Section 14.2. During the twelve (12) month period prior to the Expiration
------------
Date, Landlord may exhibit the Premises to prospective tenants thereof upon
reasonable prior notice (which may be oral) and at reasonable times.
Section 14.3. If Tenant shall not be present when for any reason entry
------------
into the Premises shall be necessary or permissible, Landlord or Landlord's
agents, representatives, contractors or employees may enter the same without
rendering Landlord or such agents liable therefor if during such entry Landlord
or Landlord's agents shall accord reasonable care under the circumstances to
Tenant's Property, and without in any manner affecting this Lease. Nothing
herein contained, however, shall be deemed or construed to impose upon Landlord
any obligation, responsibility or liability whatsoever, for the care,
supervision or repair of the Building or any part thereof, other than as herein
provided.
Section 14.4. Landlord also shall have the right at any time, without the
------------
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement or location of entrances
or passageways, doors and doorways, and corridors, elevators, stairs, toilets,
or other public parts of the Building and to change the name, number or
designation by which the Building is commonly known, provided any such change
does not (a) unreasonably reduce, interfere with or deprive Tenant of access to
the Building or the Premises or (b) reduce the rentable area (except by a de
--
minimis amount) of
- -------
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the Premises. All parts (except surfaces facing the interior of the Premises) of
all walls, windows and doors bounding the Premises (including exterior Building
walls, exterior core corridor walls, exterior doors and entrances), all
balconies, terraces and roofs adjacent to the Premises, all space in or adjacent
to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits,
ducts, fan rooms, heating, air cooling, plumbing and other mechanical
facilities, service closets and other Building facilities are not part of the
Premises, and Landlord shall have the use thereof, as well as access thereto
through the Premises for the purposes of operation, maintenance, alteration and
repair.
ARTICLE 15
CERTIFICATE OF OCCUPANCY
------------------------
Tenant shall not at any time use or occupy the Premises in violation of the
certificate of occupancy at such time issued for the Premises or for the
Building and in the event that any department of the City or State of New York
shall hereafter contend or declare by notice, violation, order or in any other
manner whatsoever that the Premises are used for a purpose which is a violation
of such certificate of occupancy, Tenant, upon written notice from Landlord or
any Governmental Authority, shall immediately discontinue such use of the
Premises. On the Commencement Date a temporary or permanent certificate of
occupancy covering the Premises will be in force permitting the Premises to be
used as offices, provided, however, neither such certificate, nor any provision
of this Lease, nor any act or omission of Landlord, shall be deemed to
constitute a representation or warranty that the Premises, or any part thereof,
lawfully may be used or occupied for any particular purpose or in any particular
manner, in contradistinction to mere "office" use.
ARTICLE 16
DEFAULT
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Section 16.1. Each of the following events shall be an "Event of Default"
------------ ----------------
hereunder:
(A) If Tenant shall default in the payment when due of any
installment of Fixed Rent and such default shall continue for three (3) Business
Days after notice of such default is given to Tenant, or in the payment when due
of any other item of Rental and such default shall continue for three (3)
Business Days after notice of such default is given to Tenant, except that if
Landlord shall have given two (2) such notices in any twelve (12) month period,
Tenant shall not be entitled to any further notice of its delinquency in the
payment of Rental until such time as twelve (12) consecutive months shall have
elapsed without Tenant having defaulted in any such payment, or
(B) if Tenant shall default in the observance or performance of any
term, covenant or condition on Tenant's part to be observed or performed under
any other lease with Landlord or Landlord's predecessor in interest of space in
the Building and such default shall
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continue beyond any grace period set forth in such other lease for the remedying
of such default; or,
(C) if the Premises shall become deserted or abandoned; or
(D) if Tenant's interest or any portion thereof in this Lease shall
devolve upon or pass to any person, whether by operation of law or otherwise,
except as expressly permitted under Article 12 hereof; or
(E) (1) if Tenant shall generally not, or shall be unable to, or
shall admit in writing its inability to, pay its debts as they become due; or
(2) if Tenant shall commence or institute any case, proceeding or
other action (A) seeking relief on its behalf as debtor, or to adjudicate it a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
property; or
(3) if Tenant shall make a general assignment for the benefit of
creditors; or
(4) if any case, proceeding or other action shall be commenced or
instituted against Tenant (A) seeking to have an order for relief entered
against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts under any existing
or future law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its property, which in either of such cases (i) results in
any such entry of an order for relief, adjudication of bankruptcy or insolvency
or such an appointment or the issuance or entry of any other order having a
similar effect or (ii) remains undismissed for a period of sixty (60) days; or
(5) if any case, proceeding or other action shall be commenced or
instituted against Tenant seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its property which results in the entry of an order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending appeal
within sixty (60) days from the entry thereof; or
(6) if Tenant shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clauses (2), (3), (4) or (5) above; or
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(7) if a trustee, receiver or other custodian is appointed for any
substantial part of the assets of Tenant which appointment is not vacated or
stayed within seven (7) Business Days; or
(F) if Tenant shall fail more than five (5) times during any twelve
(12) month period to pay any installment of Fixed Rent or any item of Rental
when due after receipt of the notice and the expiration of the applicable grace
period pursuant to the provisions of paragraph (A) above, if such notice and
grace period are then required; or
(G) if Tenant shall fail to pay any installments of Fixed Rent or
items of Rental when due as required by this Lease, and Landlord shall bring
more than three (3) summary dispossess proceedings during any twelve (12) month
period; or
(H) if this Lease is assigned (or all or a portion of the Premises
are subleased) to a Related Entity and such Related Entity shall no longer (i)
Control, (ii) be under common Control with, or (iii) be under the Control of
Tenant (or any permitted successor by merger, consolidation or purchase as
provided herein); or
(I) if Landlord shall present the Letter of Credit to the bank which
issued the same in accordance with the provisions of Article 31 hereof, and the
bank shall fail to honor the Letter of Credit and pay the proceeds thereof to
Landlord for any reason whatsoever; or
(J) if Tenant shall default in the observance or performance of any
other term, covenant or condition of this Lease on Tenant's part to be observed
or performed and Tenant shall fail to remedy such default within thirty (30)
days after notice by Landlord to Tenant of such default, or if such default is
of such a nature that it cannot with due diligence be completely remedied within
said period of thirty (30) days and Tenant shall not commence within said period
of thirty (30) days, or shall not thereafter diligently prosecute to completion,
all steps necessary to remedy such default.
Section 16.2. (A) If an Event of Default (i) described in Section 16.1(E)
-------------
hereof shall occur, or (ii) described in Sections 16.1(A), (B), (C), (D), (F),
(G), (H), (I) or (J) shall occur and Landlord, at any time thereafter, at its
option gives written notice to Tenant stating that this Lease and the Term shall
expire and terminate on the date Landlord shall give Tenant such notice, then
this Lease and the Term and all rights of Tenant under this Lease shall expire
and terminate as if the date on which the Event of Default described in clause
(i) above occurred or the date of such notice, pursuant to clause (ii) above,
as the case may be, were the Fixed Expiration Date and Tenant immediately shall
quit and surrender the Premises, but Tenant shall nonetheless be liable for all
of its obligations hereunder, as provided for in Articles 17 and 18 hereof.
Anything contained herein to the contrary notwithstanding, if such termination
shall be stayed by order of any court having jurisdiction over any proceeding
described in Section 16.1(E) hereof, or by federal or state statute, then,
following the expiration of any such stay, or if the trustee appointed in any
such proceeding, Tenant or Tenant as debtor-in-possession shall fail to assume
Tenant's obligations under this Lease within the period prescribed therefor by
law or within one hundred twenty (120) days after entry of the order for relief
or as may be allowed by
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the court, or if said trustee, Tenant or Tenant as debtor-in-possession shall
fail to provide adequate protection of Landlord's right, title and interest in
and to the Premises or adequate assurance of the complete and continuous future
performance of Tenant's obligations under this Lease as provided in Section
12.3(B), Landlord, to the extent permitted by law or by leave of the court
having jurisdiction over such proceeding, shall have the right, at its election,
to terminate this Lease on five (5) days' notice to Tenant, Tenant as debtor-in-
possession or said trustee and upon the expiration of said five (5) day period
this Lease shall cease and expire as aforesaid and Tenant, Tenant as debtor-in-
possession or said trustee shall immediately quit and surrender the Premises as
aforesaid.
(B) If an Event of Default described in Section 16.1(A) hereof shall
occur, or this Lease shall be terminated as provided in Section 16.2(A) hereof,
Landlord, without notice, may reenter and repossess the Premises using such
force for that purpose as may be necessary without being liable to indictment,
prosecution or damages therefor and may dispossess Tenant by summary proceedings
or otherwise.
Section 16.3. If at any time, (i) Tenant shall be comprised of two (2) or
-------------
more persons, or (ii) Tenant's obligations under this Lease shall have been
guaranteed by any person other than Tenant, or (iii) Tenant's interest in this
Lease shall have been assigned, the word "Tenant", as used in Section 16.1(E),
shall be deemed to mean any one or more of the persons primarily or secondarily
liable for Tenant's obligations under this Lease. Any monies received by
Landlord from or on behalf of Tenant during the pendency of any proceeding of
the types referred to in Section 16.1(E) shall be deemed paid as compensation
for the use and occupation of the Premises and the acceptance of any such
compensation by Landlord shall not be deemed an acceptance of Rental or a waiver
on the part of Landlord of any rights under Section 16.2.
ARTICLE 17
REMEDIES AND DAMAGES
--------------------
Section 17.1. (A) If there shall occur any Event of Default, and this
-------------
Lease and the Term shall expire and come to an end as provided in Article 16
hereof:
(1) Tenant shall quit and peacefully surrender the Premises to
Landlord, and Landlord and its agents may immediately, or at any time after such
default or after the date upon which this Lease and the Term shall expire and
come to an end, re-enter the Premises or any part thereof, without notice,
either by summary proceedings, or by any other applicable action or proceeding,
in accordance with applicable law (without being liable to indictment,
prosecution or damages therefor), and may repossess the Premises and dispossess
Tenant and any other persons from the Premises and remove any and all of their
property and effects from the Premises; and
(2) Landlord, at Landlord's option, may relet the whole or any
portion or portions of the Premises from time to time, either in the name of
Landlord or otherwise, to such tenant or tenants, for such term or terms ending
before, on or after the Expiration Date, at
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such rental or rentals and upon such other conditions, which may include
concessions and free rent periods, as Landlord, in its sole discretion, may
determine; provided, however, that Landlord shall have no obligation to relet
the Premises or any part thereof and shall in no event be liable for refusal or
failure to relet the Premises or any part thereof, or, in the event of any such
reletting, for refusal or failure to collect any rent due upon any such
reletting, and no such refusal or failure shall operate to relieve Tenant of any
liability under this Lease or otherwise affect any such liability, and Landlord,
at Landlord's option, may make such repairs, replacements, alterations,
additions, improvements, decorations and other physical changes in and to the
Premises as Landlord, in its sole discretion, considers advisable or necessary
in connection with any such reletting or proposed reletting, without relieving
Tenant of any liability under this Lease or otherwise affecting any such
liability.
(B) Tenant hereby waives the service of any notice of intention to
re-enter or to institute legal proceedings to that end which may otherwise be
required to be given under any present or future law. Tenant, on its own behalf
and on behalf of all persons claiming through or under Tenant, including all
creditors, does further hereby waive any and all rights which Tenant and all
such persons might otherwise have under any present or future law to redeem the
Premises, or to re-enter or repossess the Premises, or to restore the operation
of this Lease, after (a) Tenant shall have been dispossessed by a judgment or by
warrant of any court or judge, or (b) any re-entry by Landlord, or (c) any
expiration or termination of this Lease and the Term, whether such dispossess,
re-entry, expiration or termination shall be by operation of law or pursuant to
the provisions of this Lease. The words "re-enter," "re-entry" and "re-entered"
as used in this Lease shall not be deemed to be restricted to their technical
legal meanings. In the event of a breach or threatened breach by Tenant, or any
persons claiming through or under Tenant, of any term, covenant or condition of
this Lease, Landlord shall have the right to seek to enjoin such breach and the
right to seek to invoke any other remedy allowed by law or in equity as if re-
entry, summary proceedings and other special remedies were not provided in this
Lease for such breach. The right to invoke the remedies hereinbefore set forth
are cumulative and shall not preclude Landlord from invoking any other remedy
allowed at law or in equity.
Section 17.2. (A) If this Lease and the Term shall expire and come to an
-------------
end as provided in Article 16 hereof, or by or under any summary proceeding or
any other action or proceeding, or if Landlord shall re-enter the Premises as
provided in Section 17.1, or by or under any summary proceeding or any other
action or proceeding, then, in any of said events:
(1) Tenant shall pay to Landlord all Fixed Rent, Escalation
Rent and other items of Rental payable under this Lease by Tenant to Landlord to
the date upon which this Lease and the Term shall have expired and come to an
end or to the date of re-entry upon the Premises by Landlord, as the case may
be;
(2) Tenant also shall be liable for and shall pay to
Landlord, as damages, any deficiency (referred to as "Deficiency") between the
----------
Rental for the period which otherwise would have constituted the unexpired
portion of the Term and the net amount, if any, of rents collected under any
reletting effected pursuant to the provisions of clause (2) of Section 17.1 (A)
for any part of such period (first deducting from the rents collected under any
such
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reletting all of Landlord's expenses in connection with the termination of this
Lease, Landlord's re-entry upon the Premises and with such reletting, including,
but not limited to, all repossession costs, brokerage commissions, legal
expenses, attorneys' fees and disbursements, alteration costs, contribution to
work and other expenses of preparing the Premises for such reletting); any such
Deficiency shall be paid in monthly installments by Tenant on the days specified
in this Lease for payment of installments of Fixed Rent; Landlord shall be
entitled to recover from Tenant each monthly Deficiency as the same shall arise,
and no suit to collect the amount of the Deficiency for any month shall
prejudice Landlord's right to collect the Deficiency for any subsequent month by
a similar proceeding; and
(3) whether or not Landlord shall have collected any monthly
Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and
Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as
and for liquidated and agreed final damages, a sum equal to the amount by which
the Rental for the period which otherwise would have constituted the unexpired
portion of the Term (commencing on the date immediately succeeding the last date
with respect to which a Deficiency, if any, was collected) exceeds the then fair
and reasonable rental value of the Premises for the same period, both discounted
to present worth at the Base Rate; if, before presentation of proof of such
liquidated damages to any court, commission or tribunal, the Premises, or any
part thereof, shall have been relet by Landlord for the period which otherwise
would have constituted the unexpired portion of the Term, or any part thereof,
the amount of rent reserved upon such reletting shall be deemed, prima facie, to
-----------
be the fair and reasonable rental value for the part or the whole of the
Premises so relet during the term of the reletting.
(B) If the Premises, or any part thereof, shall be relet together
with other space in the Building, the rents collected or reserved under any such
reletting and the expenses of any such reletting shall be equitably apportioned
for the purposes of this Section 17.2. Tenant shall in no event be entitled to
any rents collected or payable under any reletting, whether or not such rents
shall exceed the Fixed Rent reserved in this Lease. Solely for the purposes of
this Article 17, the term "Escalation Rent" as used in Section 17.2(A) shall
mean the Escalation Rent in effect immediately prior to the Expiration Date, or
the date of re-entry upon the Premises by Landlord, as the case may be, adjusted
to reflect any increase pursuant to the provisions of Article 27 hereof for the
Operating Year immediately preceding such event. Nothing contained in Article 16
hereof or this Article 17 shall be deemed to limit or preclude the recovery by
Landlord from Tenant of the maximum amount allowed to be obtained as damages by
any statute or rule of law, or of any sums or damages to which Landlord may be
entitled in addition to the damages set forth in this Section 17.2.
ARTICLE 18
LANDLORD FEES AND EXPENSES
--------------------------
Section 18.1. If an Event of Default shall have occurred and be
-------------
continuing, or if Tenant shall do or permit to be done any act or thing upon the
Premises which would cause Landlord to be in default under any Superior Lease or
Mortgage, Landlord may (1) as provided in Section
54
<PAGE>
14.1 hereof, perform the same for the account of Tenant, or (2) make any
expenditure or incur any obligation for the payment of money, including, without
limitation, reasonable attorneys' fees and disbursements in instituting,
prosecuting or defending any action or proceeding, and the cost thereof, with
interest thereon at the Applicable Rate, shall be deemed to be additional rent
hereunder and shall be paid by Tenant to Landlord within ten (10) Business Days
of rendition of any bill or statement to Tenant therefor and if the term of this
Lease shall have expired at the time of making of such expenditures or incurring
of such obligations, such sums shall be recoverable by Landlord as damages.
Section 18.2. If Tenant shall fail to pay any installment of Fixed Rent,
-------------
Escalation Rent or any other item of Rental when due, Tenant shall pay to
Landlord, in addition to such installment of Fixed Rent, Escalation Rent or
other item of Rental, as the case may be, as a late charge and as additional
rent, a sum equal to interest at the Applicable Rate on the amount unpaid,
computed from the date such payment was due to and including the date of
payment.
ARTICLE 19
NO REPRESENTATIONS BY LANDLORD
------------------------------
Section 19.1. Landlord and Landlord's agents and representatives have made
-------------
no representations or promises with respect to the Building, the Real Property
or the Premises except as herein expressly set forth, and no rights, easements
or licenses are acquired by Tenant by implication or otherwise except as
expressly set forth herein. Tenant shall accept possession of the Premises in
the condition which shall exist on the Commencement Date "as is" (subject to the
provisions of Section 4.1 hereof), and Landlord shall have no obligation to
perform any work or make any installations in order to prepare the Premises for
Tenant's occupancy except for Landlord's Work (hereinafter defined).
Section 19.2. (A) Subject to the provisions of this Section 19.2,
-------------
Landlord, at its sole cost and expense, shall perform the work set forth on
Tenant's Final Plans (hereinafter defined) to prepare the Premises for Tenant's
occupancy ("Landlord's Work") and such work shall be effected in a prompt and
---------------
expeditious fashion, in a good and workmanlike manner and in accordance with all
applicable laws, rules and regulations. In the event that Tenant shall request
any changes to Tenant's Final Plans and the total cost of Landlord's Work (the
"Total Cost") shall increase as a result of such change over the cost (the
- -----------
"Landlord's Amount") of Landlord's Work absent any changes by Tenant, then the
- ------------------
amount of such excess ("Tenant's Amount") shall be borne solely by Tenant. From
---------------
and after the date upon which Landlord estimates in good faith that the Total
Cost shall exceed Landlord's Amount (x) Landlord shall pay that portion of the
cost of Landlord's Work then due and payable in an amount equal to the product
of (i) the portion of the cost of Landlord's Work then due and payable, and (ii)
a fraction, the numerator of which is any portion of Landlord's Amount not
theretofore paid by Landlord and the denominator of which is the portion of such
estimated Total Cost not theretofore paid by Landlord or Tenant, and (y) Tenant
shall fund the balance of the portion of Total Cost then due and payable, on a
pari passu basis as costs are actually incurred, upon rendition by Landlord of a
- ---- -----
statement therefor. At Landlord's option, in lieu of the foregoing, Landlord
shall bill Tenant from time to time for all or
55
<PAGE>
any portion of Tenant's Amount, if any, after Landlord shall have incurred an
amount equal to Landlord's Amount. Tenant's Amount shall constitute additional
rent and to the extent that the same is not paid as aforesaid, Landlord shall
have all of the remedies available to it for the nonpayment of rent and Landlord
shall have no obligation to perform any remaining Landlord's Work.
(B) Attached hereto as Exhibit "B" are the final detailed plans and
-----------
specifications for Alterations in the Premises ("Tenant's Final Plans").
--------------------
(C) To the extent required by any Requirements, Landlord shall cause
Tenant's Final Plans to be filed with such appropriate Governmental Authority.
If such Governmental Authority shall reject all or any portion of Tenant's Final
Plans, Tenant within three (3) Business Days, shall make the changes to Tenant's
Final Plans that shall be required for such approval (subject to Landlord's
approval).
(D) No approval by Landlord of Tenant's Final Plans shall in any way
be deemed to be an agreement by Landlord that the work contemplated thereby
complies with Requirements or the requirements of any insurance bodies or that
Tenant's Final Plans will be approved by the Department of Buildings of the City
of New York or any other governmental authority having jurisdiction thereover.
In performing Landlord's Work, Landlord shall be entitled to rely upon Tenant's
Final Plans and shall not be responsible for any errors or omissions in Tenant's
Final Plans.
(E) For purposes of this Lease, a "Tenant's Delay" shall mean any
--------------
delay as a result of any of the following: (i) any request by Tenant that
Landlord delay in proceeding with any segment or part of Landlord's Work; (ii)
any changes or requests for changes by, or on behalf of, Tenant, to Tenant's
Final Plans; (iii) any errors or omissions in Tenant's Final Plans; (iv) any
delay in the selection of materials to be made by Tenant; (v) any act or
omission of Tenant, or its officers, agents, servants or contractors; (vi) any
failure by Tenant to make any payment as described in this Section 19.2; or
(vii) any failure by Tenant to deliver Tenant's Plans to Landlord within the
time frames set forth in this Section 19.2. If a delay in the Substantial
Completion of Landlord's Work or any portion of such delay is the result of a
strike or other labor trouble, fire or other casualty, governmental preemption
of priorities or other controls in connection with a national or other public
emergency or shortages of fuel, supplies or labor resulting therefrom, or any
other cause beyond Landlord's reasonable control, and such delay would not have
occurred but for a delay described in the immediately preceding sentence, such
delay shall be deemed to be a Tenant's Delay for the purposes hereof.
(F) If and when Tenant shall take actual possession of the Premises,
it shall be conclusively presumed that the same were in satisfactory condition
(except for latent defects or "punchlist items") as of the date of such taking
of possession, unless within thirty (30) days after the Possession Date, Tenant
shall give Landlord notice specifying the respects in which Landlord's Work was
not in satisfactory condition. Landlord shall promptly complete any "punchlist
items" and repair any items which were not in a satisfactory condition.
Landlord shall have the right to enter the Premises subsequent to the Possession
Date, to complete Landlord's
56
<PAGE>
Work, to complete any "punchlist items" and any Long Lead Work, and to repair
any items which were not in a satisfactory condition and the payment of Fixed
Rent and Escalation Rent shall not be affected thereby. Landlord agrees to use
reasonable efforts to minimize interference with Tenant's business at the
Premises during the completion of Landlord's Work, the performance of such
"punchlist items" and any Long Lead Work, and the performance of such repairs of
items which were not in satisfactory condition provided the foregoing shall not
increase the cost to Landlord of completing such Landlord's Work, such
"punchlist items", Long Lead Work and making of any such repairs or cause
Landlord to incur additional costs at overtime or premium rates.
Section 19.3. (A) Landlord has made and makes no representation as to the
-------------
date on which it will complete Landlord's Work. No delay in completing
Landlord's Work shall in any way affect the validity of this Lease or the
obligations of Tenant hereunder or give rise to a claim for damages by Tenant or
a claim for rescission of this Lease, nor shall the same be construed in any
wise to extend the Term hereof. Landlord agrees that, subject to Unavoidable
Delay, each item of Landlord's Work shall be prosecuted with due diligence;
provided, however, that nothing contained in this Article 19 shall be deemed to
impose upon Landlord any obligations to employ contractors or labor at so-called
overtime or other premium pay rates or to incur any other overtime costs or
expenses whatsoever. Landlord shall have the right to enter the Premises
subsequent to the Commencement Date to complete Landlord's Work and the payment
of Fixed Rent and Escalation Rent shall not be affected thereby.
(B) Notwithstanding anything to the contrary contained
herein (including without limitation, Section 19.3(A) hereof), if Landlord shall
fail to Substantially Complete Landlord's Work on or before the date that shall
be one hundred eighty (180) days after the date on which this Lease shall be
unconditionally executed and delivered by Landlord and Tenant (subject to
extension by reason of Unavoidable Delays), then, provided Landlord's failure to
Substantially Complete such Landlord's Work did not result from any delays
caused by Tenant, Tenant's agents, employees, invitees, contractors or
licensees, the Rent Commencement Date shall be delayed beyond the date referred
to in the definition of "Rent Commencement Date" two (2) days (without
duplication) for each day after the date which is one hundred eighty (180) days
after the date on which this Lease shall be unconditionally executed and
delivered by Landlord and Tenant, if any, that Landlord's Work is not
substantially completed.
ARTICLE 20
END OF TERM
-----------
Upon the expiration or other termination of this Lease, Tenant shall quit
and surrender to Landlord the Premises, vacant, broom clean, in good order and
condition, ordinary wear and tear and damage for which Tenant is not responsible
under the terms of this Lease excepted, and otherwise in compliance with the
provisions of Article 3 hereof. If the last day of the Term or any renewal
thereof falls on Saturday or Sunday, this Lease shall expire on the Business Day
immediately preceding. Tenant expressly waives, for itself and for any person
claiming through or under Tenant, any rights which Tenant or any such person may
have under the provisions of Section 2201 of the New York Civil Practice Law and
Rules and of any successor law of like
57
<PAGE>
import then in force in connection with any holdover summary proceedings which
Landlord may institute to enforce the foregoing provisions of this Article 20.
Tenant acknowledges that possession of the Premises must be surrendered to
Landlord on the Expiration Date. The parties recognize and agree that the damage
to Landlord resulting from any failure by Tenant to timely surrender possession
of the Premises as aforesaid will be extremely substantial, will exceed the
amount of the monthly installments of the Fixed Rent and Rental theretofore
payable hereunder, and will be impossible to accurately measure. Tenant
therefore agrees that if possession of the Premises is not surrendered to
Landlord within twenty-four (24) hours after the Expiration Date, in addition to
any other rights or remedies Landlord may have hereunder or at law, and without
in any manner limiting Landlord's right to demonstrate and collect any damages
suffered by Landlord and arising from Tenant's failure to surrender the Premises
as provided herein, Tenant shall pay to Landlord on account of use and occupancy
of the Premises for each month and for each portion of any month during which
Tenant holds over in the Premises after the Expiration Date, a sum equal to the
greater of (i) two (2) times the aggregate of that portion of the Fixed Rent,
Escalation Rent and Rental which was payable under this Lease during the last
month of the Term, and (ii) the then fair market rental value for the Premises.
Nothing herein contained shall be deemed to permit Tenant to retain possession
of the Premises after the Expiration Date or to limit in any manner Landlord's
right to regain possession of the Premises through summary proceedings, or
otherwise, and no acceptance by Landlord of payments from Tenant after the
Expiration Date shall be deemed to be other than on account of the amount to be
paid by Tenant in accordance with the provisions of this Article 20. The
provisions of this Article 20 shall survive the Expiration Date.
ARTICLE 21
QUIET ENJOYMENT
---------------
Provided no Event of Default has occurred and is continuing, Tenant may
peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and
conditions of this Lease.
ARTICLE 22
FAILURE TO GIVE POSSESSION
--------------------------
Tenant waives any right to rescind this Lease under Section 223-a of the
New York Real Property Law or any successor statute of similar nature and
purpose then in force and further waives the right to recover any damages which
may result from Landlord's failure for any reason to deliver possession of the
Premises on the Possession Date. The provisions of this Article are intended to
constitute an "express provision to the contrary" within the meaning of Section
223-a of the New York Real Property Law. No such failure to give possession on
the date set forth in Section 1.1 hereof for the commencement of the Term shall
in any wise affect the validity of this Lease or the obligations of Tenant
hereunder or give rise to any claim for damages by Tenant or claim for
rescission of this Lease, nor shall the same be construed in any wise to extend
the Term.
58
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ARTICLE 23
NO WAIVER
---------
Section 23.1. No act or thing done by Landlord or Landlord's agents during
-------------
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys of the Premises prior to the termination of this Lease. The
delivery of keys to any employee of Landlord or of Landlord's agents shall not
operate as a termination of this Lease or a surrender of the Premises. In the
event Tenant at any time desires to have Landlord sublet the Premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive said
keys for such purpose without releasing Tenant from any of the obligations under
this Lease, and Tenant hereby relieves Landlord of any liability for loss of or
damage to any of Tenant's effects in connection with such subletting.
Section 23.2. The failure of Landlord to seek redress for violation of, or
-------------
to insist upon the strict performance of, any covenant or condition of this
Lease, or any of the Rules and Regulations set forth or hereafter adopted by
Landlord, shall not prevent a subsequent act, which would have originally
constituted a violation of the provisions of this Lease, from having all of the
force and effect of an original violation of the provisions of this Lease. The
receipt by Landlord of Fixed Rent, Escalation Rent or any other item of Rental
with knowledge of the breach of any covenant of this Lease shall not be deemed a
waiver of such breach. The failure of Landlord to enforce any of the Rules and
Regulations set forth, or hereafter adopted, against Tenant or any other tenant
in the Building shall not be deemed a waiver of any such Rules and Regulations.
No provision of this Lease shall be deemed to have been waived by Landlord,
unless such waiver be in writing signed by Landlord. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly Fixed Rent or other item
of Rental herein stipulated shall be deemed to be other than on account of the
earliest stipulated Fixed Rent or other item of Rental, or as Landlord may elect
to apply same, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Fixed Rent or other item of Rental be
deemed an accord and satisfaction, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Fixed Rent
or other item of Rental or to pursue any other remedy provided in this Lease.
This Lease contains the entire agreement between the parties and all prior
negotiations and agreements are merged herein. Any executory agreement
hereafter made shall be ineffective to change, modify, discharge or effect an
abandonment of this Lease in whole or in part unless such executory agreement is
in writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
Section 23.3. The failure of Tenant to seek redress for violation of, or
-------------
to insist upon the strict performance of, any covenant or condition of this
Lease on Landlord's part to be performed, shall not be deemed a waiver of such
breach or prevent a subsequent act which would have originally constituted a
violation of the provisions of this Lease from having all of the force and
effect of an original violation of the provisions of this Lease. No provisions
of this
59
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Lease shall be deemed to have been waived by Tenant unless such waiver be in
writing and signed by Tenant. The payment by Tenant of Fixed Rent, Escalation
Rent or any other item of Rental or performance of any obligation of Tenant
hereunder with knowledge of any breach of any covenant of this Lease shall not
be deemed a waiver of such breach, and payment of the same by Tenant shall be
without prejudice to Tenant's right to pursue any remedy against Landlord in
this Lease provided.
ARTICLE 24
WAIVER OF TRIAL BY JURY
-----------------------
The respective parties hereto shall and they hereby do waive trial by jury
in any action, proceeding or counterclaim brought by either of the parties
hereto against the other (except for personal injury or property damage) on any
matters whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises,
or for the enforcement of any remedy under any statute, emergency or otherwise.
If Landlord commences any summary proceeding against Tenant, Tenant will not
interpose any counterclaim of whatever nature or description in any such
proceeding (unless failure to impose such counterclaim would preclude Tenant
from asserting in a separate action the claim which is the subject of such
counterclaim), and will not seek to consolidate such proceeding with any other
action which may have been or will be brought in any other court by Tenant.
ARTICLE 25
INABILITY TO PERFORM
--------------------
Section 25.1. Except as otherwise expressly provided herein, this Lease
-------------
and the obligation of Tenant to pay Rental hereunder and perform all of the
other covenants and agreements hereunder on the part of Tenant to be performed
shall in no wise be affected, impaired or excused because Landlord is unable to
fulfill any of its obligations under this Lease expressly or impliedly to be
performed by Landlord or because Landlord is unable to make, or is delayed in
making any repairs, additions, alterations, improvements or decorations or is
unable to supply or is delayed in supplying any equipment or fixtures, if
Landlord is prevented or delayed from so doing by reason of Unavoidable Delays
(except that Landlord's insolvency or financial inability to perform shall not
be considered an Unavoidable Delay).
Section 25.2. This Lease and the obligations, covenants and agreements of
-------------
Landlord hereunder shall in no wise be affected, impaired or excused because
Tenant is unable to fulfill any of its obligations under this Lease expressly or
impliedly to be performed by Tenant, other than the obligation to pay when due
Fixed Rent, Escalation Rent and any other item of Rental, by reason of
Unavoidable Delays (except that Tenant's insolvency or financial inability to
perform shall not be considered an Unavoidable Delay).
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ARTICLE 26
BILLS AND NOTICES
-----------------
Except as otherwise expressly provided in this Lease, any bills,
statements, consents, notices, demands, requests or other communications given
or required to be given under this Lease shall be in writing and shall be deemed
sufficiently given or rendered if delivered by hand (against a signed receipt)
or if sent by registered or certified mail (return receipt requested) addressed
if to Tenant (a) at Tenant's address set forth in this Lease, Attn.:
Business Manager, if mailed prior to Tenant's taking possession of the
Premises, or (b) at the Building, Attn.: Business Manager, if mailed
subsequent to Tenant's taking possession of the Premises, or (c) at
any place where Tenant or any agent or employee of Tenant may be found
if mailed subsequent to Tenant's vacating, deserting, abandoning or
surrendering the Premises, in each case with a copy to Goldberg,
Weprin & Ustin LLP, 1501 Broadway, New York, New York 10036, Attn.:
David J. Bleckner, Esq., or
if to Landlord at Landlord's address set forth in this Lease, Attn.:
Mr. Kevin R. Wang, and with copies to (y) Proskauer Rose LLP, 1585
Broadway, New York, New York 10036, Attn.: Lawrence J. Lipson, Esq.,
and (z) each Mortgagee and Lessor which shall have requested same, by
notice given in accordance with the provisions of this Article 26 at
the address designated by such Mortgagee or Lessor, or
to such other address(es) as Landlord, Tenant or any Mortgagee or Lessor may
designate as its new address(es) for such purpose by notice given to the other
in accordance with the provisions of this Article 26. Any such bill, statement,
consent, notice, demand, request or other communication shall be deemed to have
been rendered or given on the date when it shall have been hand delivered or
three (3) Business Days from when it shall have been mailed as provided in this
Article 26. Anything contained herein to the contrary notwithstanding, any
Operating Statement, Tax Statement or any other bill, statement, consent,
notice, demand, request or other communication from Landlord to Tenant with
respect to any item of Rental (other than any "default notice" if required
hereunder) may be sent to Tenant by regular United States mail.
ARTICLE 27
ESCALATION
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Section 27.1. For the purposes of this Article 27, the following terms
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shall have the meanings set forth below.
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(A) "Assessed Valuation" shall mean the amount for which the Real
------------------
Property is assessed pursuant to applicable provisions of the New York City
Charter and of the Administrative Code of the City of New York for the purpose
of calculating all or any portion of the Taxes payable with respect to the Real
Property.
(B) "Base Operating Expenses" shall mean the Operating Expenses for
-----------------------
the Base Operating Year.
(C) "Base Operating Year" shall mean the calendar year ending
-------------------
December 31, 1999.
(D) "Base Taxes" shall mean the Taxes payable for the Tax Year
----------
commencing July 1, 1998 and ending June 30, 1999.
(E) (1) "Operating Expenses" shall mean the aggregate of those costs
------------------
and expenses (and taxes, if any, thereon, including without limitation, sales
and value added taxes) paid or incurred by or on behalf of Landlord (whether
directly or through independent contractors) in respect of the Operation of the
Property which, are properly chargeable to the Operation of the Property
together with and including (without limitation) the costs of gas, oil, steam,
water, sewer rental, electricity (for the portions of the Real Property not
leased to and occupied by tenants or available for occupancy), HVAC and other
utilities furnished to the Building and utility taxes, and the expenses incurred
in connection with the Operation of the Property such as insurance premiums,
attorneys' fees and disbursements, auditing and other professional fees and
expenses, and all expenses (including attorneys' fees and disbursements,
experts' and other witnesses' fees) incurred in contesting the validity or
amount of any Taxes or in obtaining a refund of any Taxes, but specifically
excluding:
(i) Taxes,
(ii) franchise or income taxes imposed upon Landlord,
(iii) debt service on Mortgages,
(iv) leasing commissions,
(v) capital improvements (except as otherwise provided
herein),
(vi) the cost of electrical energy furnished directly
to Tenant and other tenants of the Building,
(vii) the cost of tenant installations incurred in
connection with preparing space for a new tenant,
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(viii) salaries of personnel above the grade of building
manager and such building manager's supervisor,
(ix) rent paid under Superior Leases (other than in the
nature of Rent consisting of Taxes or Operating Expenses),
(x) any expense for which Landlord is otherwise
compensated through the proceeds of insurance or would have been so compensated
had Landlord carried the insurance coverage required by Section 9.3 hereof is
otherwise compensated by any tenant (including Tenant) of the Building for
services in excess of the services Landlord is obligated to furnish to Tenant
hereunder,
(xi) legal fees incurred in connection with any
negotiation of, or disputes arising out of, any space lease in the Building,
(xii) depreciation, except as provided herein, and
(xiii) Landlord's advertising and promotional costs for
the Building,
except, however, that if Landlord is not furnishing any particular work or
service (the cost of which if performed by Landlord would constitute an
Operating Expense which was included or deemed to be included in Base Operating
Expenses) to a tenant who has undertaken to perform such work or service in lieu
of the performance thereof by Landlord, Operating Expenses shall be deemed to be
increased by an amount equal to the additional Operating Expenses which
reasonably would have been incurred during such period by Landlord if it had at
its own expense furnished such work or services to such tenant. Any insurance
proceeds received with respect to any item previously included as an Operating
Expense shall be deducted from Operating Expenses for the Operating Year in
which such proceeds are received; provided, however, to the extent any insurance
proceeds are received by Landlord in any Operating Year with respect to any item
which was included in Operating Expenses during the Base Operating Year, the
amount of insurance proceeds so received shall be deducted from Base Operating
Expenses and (x) the Base Operating Expenses shall be retroactively adjusted to
reflect such deduction and (y) all retroactive Operating Payments resulting from
such retroactive adjustment shall be due and payable when billed by Landlord.
Until such time as the electricity supplied to each floor of the Building and
the common and public areas of the Building (including, without limitation, the
Building Systems) shall be separately metered or submetered, Operating Expenses
shall include an amount equal to (x) (i) Landlord's cost (utilizing the
electrical rates applicable to the Building including energy charges, demand
charges, time-of-day charges, fuel adjustment charges, rate adjustment charges,
sales tax and any other factors used by the public utility in computing its
charges to Landlord) of furnishing electric current to the entire Building,
multiplied by (ii) the number of kilowatt hours of electric current furnished to
the public and common areas of the Building (including, without limitation, the
Building Systems) and other areas not available for occupancy as determined by a
survey prepared by an independent, reputable electrical engineer
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selected by Landlord, plus (y) an amount equal to Landlord's actual third party
out-of-pocket costs in connection with the same.
(2) In determining the amount of Operating Expenses for any
Operating Year (including the Base Operating Year), if less than all of the
Building rentable area shall have been occupied by tenant(s) at any time during
any such Operating Year, Operating Expenses shall be determined for such
Operating Year to be an amount equal to the like expenses which would normally
be expected to be incurred had all such areas been occupied throughout such
Operating Year.
(3) (a) If any capital improvement is made during any Operating
Year in compliance with a Requirement, whether or not such Requirement is valid
or mandatory, or in lieu of a repair, then the cost of such improvement shall be
included in Operating Expenses for the Operating Year in which such improvement
was made; provided, however, to the extent the cost of such improvement is
required to be capitalized for federal income tax purposes, such cost shall be
amortized over the useful economic life of such improvement determined in
accordance with generally accepted accounting principles, consistently applied,
and the annual amortization, together with interest thereon at the then Base
Rate, of such improvement shall be deemed an Operating Expense in each of the
Operating Years during which such cost of the improvement is amortized.
(b) If any capital improvement is made during any
Operating Year either for the purpose of saving or reducing Operating Expenses
(as, for example, a labor-saving improvement), then the cost of such improvement
shall be included in Operating Expenses for the Operating Year in which such
improvement was made; provided, however, such cost shall be amortized over such
period of time as Landlord reasonably estimates such savings or reduction in
Operating Expenses will equal the cost of such improvement and the annual
amortization, together with interest thereon at the then Base Rate, of such
improvement shall be deemed an Operating Expense in each of the Operating Years
during which such cost of the improvement is amortized; provided, further,
however, the amortized cost of such improvement included in any Operating Year
shall not exceed the amount which Tenant would have paid had such improvement
not been made. Any portion of the amortized cost of any such capital improvement
which may not be included in Operating Expenses in an Operating Year by reason
of the foregoing limitation may be included in Operating Expenses subsequent
Operating Years (subject to such limitation).
(F) "Operating Statement" shall mean a statement in reasonable detail
-------------------
setting forth a comparison of the Operating Expenses for an Operating Year with
the Base Operating Expenses and the Escalation Rent for the preceding Operating
Year pursuant to the provisions of this Article 27.
(G) "Operating Year" shall mean the calendar year within which the
--------------
Commencement Date occurs and each subsequent calendar year for any part or all
of which Escalation Rent shall be payable pursuant to this Article 27.
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(H) "Taxes" shall mean the aggregate amount of real estate taxes and
-----
any general or special assessments (exclusive of penalties and interest thereon)
imposed upon the Real Property (including, without limitation, (i) assessments
made upon or with respect to any "air" and "development" rights now or hereafter
appurtenant to or affecting the Real Property, (ii) any fee, tax or charge
imposed by any Governmental Authority for any vaults, vault space or other space
within or outside the boundaries of the Real Property, and (iii) any taxes or
assessments levied after the date of this Lease in whole or in part for public
benefits to the Real Property or the Building, including, without limitation,
any Business Improvement District taxes and assessments) without taking into
account any discount that Landlord may receive by virtue of any early payment of
Taxes; provided, that if because of any change in the taxation of real estate,
any other tax or assessment, however denominated (including, without limitation,
any franchise, income, profit, sales, use, occupancy, gross receipts or rental
tax) is imposed upon Landlord or the owner of the Real Property or the Building,
or the occupancy, rents or income therefrom, in substitution for any of the
foregoing Taxes, such other tax or assessment shall be deemed part of Taxes
computed as if Landlord's sole asset were the Real Property. Anything contained
herein to the contrary notwithstanding, Taxes shall not be deemed to include (u)
sales, gift, excise, corporate, utility or occupancy taxes, (v) any mortgage
recording, gains or transfer taxes payable in connection with the financing,
sale or conveyance of the Building or the Real Property or any interest therein,
(w) any taxes on Landlord's income, (x) franchise taxes, (y) estate or
inheritance taxes or (z) any similar taxes imposed on Landlord, unless such
taxes are levied, assessed or imposed in lieu of or as a substitute for the
whole or any part of the taxes, assessments, levies, impositions which now
constitute Taxes.
(I) "Tax Statement" shall mean a statement in reasonable detail
-------------
setting forth a comparison of the Taxes for a Tax Year with the Base Taxes.
(J) "Tax Year" shall mean the period July 1 through June 30 (or such
--------
other period as hereinafter may be duly adopted by the Governmental Authority
then imposing taxes as its fiscal year for real estate tax purposes), any
portion of which occurs during the Term.
Section 27.2. (A) If the Taxes payable for any Tax Year (any part or all
-------------
of which falls within the Term) shall represent an increase above the Base
Taxes, then Tenant shall pay as additional rent for such Tax Year and continuing
thereafter until a new Tax Statement is rendered to Tenant, Tenant's Share of
such increase (the "Tax Payment") as shown on the Tax Statement with respect to
-----------
such Tax Year. Tenant shall be obliged to pay the Tax Payment regardless of
whether Tenant is exempt in whole or part, from the payment of any Taxes by
reason of Tenant's diplomatic status or for any other reason whatsoever. The
Taxes shall be computed initially on the basis of the Assessed Valuation in
effect at the time the Tax Statement is rendered (as the Taxes may have been
settled or finally adjudicated prior to such time) regardless of any then
pending application, proceeding or appeal respecting the reduction of any such
Assessed Valuation, but shall be subject to subsequent adjustment as provided in
Section 27.3 hereof.
(B) At any time during or after the Term, Landlord may render to
Tenant a Tax Statement or Statements showing (i) a comparison of the Taxes for
the Tax Year with the Base Taxes and (ii) the amount of the Tax Payment
resulting from such comparison. On the first
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<PAGE>
day of the month following the furnishing to Tenant of a Tax Statement, Tenant
shall pay to Landlord a sum equal to 1/12th of the Tax Payment shown thereon to
be due for such Tax Year multiplied by the number of months of the Term then
elapsed since the commencement of such Tax Year. Tenant shall continue to pay to
Landlord a sum equal to one-twelfth (1/12th) of the Tax Payment shown on such
Tax Statement on the first day of each succeeding month until the first day of
the month following the month in which Landlord shall deliver to Tenant a new
Tax Statement. If Landlord furnishes a Tax Statement for a new Tax Year
subsequent to the commencement thereof, promptly after the new Tax Statement is
furnished to Tenant, Landlord shall give notice to Tenant stating whether the
amount previously paid by Tenant to Landlord for the current Tax Year was
greater or less than the installments of the Tax Payment for the current tax
year in accordance with the Tax Statement, and (a) if there shall be a
deficiency, Tenant shall pay the amount thereof within ten (10) Business Days
after demand therefor, or (b) if there shall have been an overpayment, Landlord
shall credit the amount thereof against the next monthly installments of the
Fixed Rent payable under this Lease. Tax Payments shall be collectible by
Landlord in the same manner as Fixed Rent. Landlord's failure to render a Tax
Statement shall not prejudice Landlord's right to render a Tax Statement during
or with respect to any subsequent Tax Year, and shall not eliminate or reduce
Tenant's obligation to make Tax Payments for such Tax Year.
Section 27.3. (A) Only Landlord shall be eligible to institute tax
-------------
reduction or other proceedings to reduce the Assessed Valuation. In the event
that, after a Tax Statement has been sent to Tenant, an Assessed Valuation which
had been utilized in computing the Taxes for a Tax Year is reduced (as a result
of settlement, final determination of legal proceedings or otherwise), and as a
result thereof a refund of Taxes is actually received by or on behalf of
Landlord, then, promptly after receipt of such refund, Landlord shall send
Tenant a Tax Statement adjusting the Taxes for such Tax Year and setting forth
Tenant's Share of such refund and Tenant shall be entitled to receive such
Share, at Landlord's option, either by way of a credit against the Fixed Rent
next becoming due after the sending of such Tax Statement or by a refund to the
extent no further Fixed Rent is due; provided, however, that Tenant's Share of
such refund shall be limited to the portion of the Tax Payment, if any, which
Tenant had theretofore paid to Landlord attributable to increases in Taxes for
the Tax Year to which the refund is applicable on the basis of the Assessed
Valuation before it had been reduced.
(B) In the event that, after a Tax Statement has been sent to Tenant,
the Assessed Valuation which had been utilized in computing the Base Taxes is
reduced (as a result of settlement, final determination of legal proceedings or
otherwise) then, and in such event: (i) the Base Taxes shall be retroactively
adjusted to reflect such reduction, and (ii) all retroactive Tax Payments
resulting from such retroactive adjustment shall be due and payable when billed
by Landlord. Landlord promptly shall send to Tenant a statement setting forth
the basis for such retroactive adjustment and Tax Payments.
Section 27.4. (A) If the Operating Expenses for any Operating Year (any
-------------
part or all of which falls within the Term) shall be greater than the Base
Operating Expenses, then Tenant shall pay as additional rent for such Operating
Year and continuing thereafter until a new
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<PAGE>
Operating Statement is rendered to Tenant, Tenant's Share of such increase (the
"Operating Payment") as hereinafter provided.
-----------------
(B) At any time during or after the Term Landlord may render to
Tenant an Operating Statement or Statements showing (i) a comparison of the
Operating Expenses for the Operating Year in question with the Base Operating
Expenses, and (ii) the amount of the Operating Payment resulting from such
comparison. Landlord's failure to render an Operating Statement during or with
respect to any Operating Year in question shall not prejudice Landlord's right
to render an Operating Statement during or with respect to any subsequent
Operating Year, and shall not eliminate or reduce Tenant's obligation to make
payments of the Operating Payment pursuant to this Article 27 for such Operating
Year.
(C) On the first day of the month following the furnishing to Tenant
of an Operating Statement, Tenant shall pay to Landlord a sum equal to 1/12th of
the Operating Payment shown thereon to be due for the preceding Operating Year
multiplied by the number of months (and any fraction thereof) of the Term then
elapsed since the commencement of such Operating Year in which such Operating
Statement is delivered, less Operating Payments theretofore made by Tenant for
such Operating Year and thereafter, commencing with the then current monthly
installment of Fixed Rent and continuing monthly thereafter until rendition of
the next succeeding Operating Statement, Tenant shall pay on account of the
Operating Payment for such Year an amount equal to 1/12th of the Operating
Payment shown thereon to be due for the preceding Operating Year. Any Operating
Payment shall be collectible by Landlord in the same manner as Fixed Rent.
(D) (1) As used in this Section 27.4, (i) "Tentative Monthly
-----------------
Escalation Charge" shall mean a sum equal to 1/12th of the product of (a)
- -----------------
Tenant's Share, and (b) the difference between (x) the Base Operating Expenses
and (y) Landlord's good faith estimate of Operating Expenses for the Current
Year, and (ii) "Current Year" shall mean the Operating Year in which a demand is
------------
made upon Tenant for payment of a Tentative Monthly Escalation Charge.
(2) At any time in any Operating Year, Landlord, at its
option, in lieu of the payments required under Section 27.4(C) hereof, may
demand and collect from Tenant, as additional rent, a sum equal to the Tentative
Monthly Escalation Charge multiplied by the number of months in said Operating
Year preceding the demand and reduced by the sum of all payments theretofore
made under Section 27.4(C) with respect to said Operating Year, and thereafter,
commencing with the month in which the demand is made and continuing thereafter
for each month remaining in said Operating Year, the monthly installments of
Fixed Rent shall be deemed increased by the Tentative Monthly Escalation Charge.
Any amount due to Landlord under this Section 27.4(D) may be included by
Landlord in any Operating Statement rendered to Tenant as provided in Section
27.4(B) hereof.
(E) (1) After the end of the Current Year and at any time that
Landlord renders an Operating Statement or Statements to Tenant as provided in
Section 27.4(B) hereof with respect to the comparison of the Operating Expenses
for said Operating Year or Current Year, with the Base Operating Expenses, as
the case may be, the amounts, if any, collected by Landlord from
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Tenant under Section 27.4(C) or (D) on account of the Operating Payment or the
Tentative Monthly Escalation Charge, as the case may be, shall be adjusted, and,
if the amount so collected is less than or exceeds the amount actually due under
said Operating Statement for the Operating Year, a reconciliation shall be made
as follows: Tenant shall be debited with any Operating Payment shown on such
Operating Statement and credited with the amounts, if any, paid by Tenant on
account in accordance with the provisions of subsection (C) and subsection
(D)(2) of this Section 27.4 for the Operating Year in question. Tenant shall pay
any net debit balance to Landlord within fifteen (15) days next following
rendition by Landlord of an invoice for such net debit balance; any net credit
balance shall be applied against the next accruing monthly installments of Fixed
Rent.
(2) If the sum of the Tentative Monthly Escalation Charges and
payments made by Tenant in accordance with subsection (C) of this Section 27.4
for any Operating Year shall have exceeded the Operating Payment for such
Operating Year by more than ten percent (10%), interest at the Applicable Rate
on the portion of the overpayment that exceeds the applicable Operating Payment
by more than ten percent (10%) determined as of the respective dates of such
payments by Tenant and calculated from such respective dates to the dates on
which such amounts are credited against the monthly installments of Fixed Rent,
shall be so credited. Any amount owing to Tenant subsequent to the Term shall be
paid to Tenant within ten (10) Business Days after a final determination has
been made of the amount due to Tenant.
Section 27.5. Any Operating Statement sent to Tenant shall be conclusively
-------------
binding upon Tenant unless, within one hundred eighty (180) days after such
Statement is sent, Tenant shall send a written notice to Landlord objecting to
such Statement. If such notice is sent, Tenant (together with its independent
certified public accountants, provided they are one of the so-called "big-five"
accounting firms or if at such time there is no group of accounting firms
commonly referred to as "big-five", then a nationally recognized firm of at
least one hundred fifty (150) partners or principals who are certified public
accountants) may examine Landlord's books and records relating to the Operation
of the Property to determine the accuracy of the Operating Statement. Tenant
recognizes the confidential nature of such books and records and agrees to
maintain the information obtained from such examination in strict confidence. If
after such examination, Tenant still disputes such Operating Statement, either
party may refer the decision of the issues raised to a reputable independent
firm of certified public accountants, selected by Landlord and approved by
Tenant, which approval shall not be unreasonably withheld or delayed as long as
such firm of certified public accountants is one of the so-called "big-five"
public accounting firms or if at such time there is no group of accounting firms
commonly referred to as "big-five", then a nationally recognized firm of at
least one hundred fifty (150) partners or principals who are certified public
accountants, and the decision of such accountants shall be conclusively binding
upon the parties. The fees and expenses involved in such decision shall be borne
by the unsuccessful party (and if both parties are partially successful, such
fees and expenses shall be apportioned between Landlord and Tenant in inverse
proportion to the amount by which such decision is favorable to each party).
Notwithstanding the giving of such notice by Tenant, and pending the resolution
of any such dispute, Tenant shall pay to Landlord when due the amount shown on
any such Operating Statement, as provided in Section 27.4 hereof.
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Section 27.6. The expiration or termination of this Lease during any
-------------
Operating Year or Tax Year shall not affect the rights or obligations of the
parties hereto respecting any payments of Operating Payments for such Operating
Year and any payments of Tax Payments for such Tax Year, and any Operating
Statement relating to such Operating Payment and any Tax Statement relating to
such Tax Payment, may be sent to Tenant subsequent to, and all such rights and
obligations shall survive, any such expiration or termination. In determining
the amount of the Operating Payment for the Operating Year or the Tax Payment
for the Tax Year in which the Term shall expire, the payment of the Operating
Payment for such Operating Year or the Tax Payment for the Tax Year shall be
prorated based on the number of days of the Term which fall within such
Operating Year or Tax Year, as the case may be. Any payments due under such
Operating Statement or Tax Statement shall be payable within thirty (30) days
after such Statement is sent to Tenant.
ARTICLE 28
SERVICES
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Section 28.1. (A) Landlord shall provide passenger elevator service to the
-------------
Premises on Business Days from 8:00 A.M. to 6:00 P.M. and have an elevator
subject to call at all other times.
(B) There shall be one (1) freight elevator serving the Premises and
the entire Building on call on a "first come, first served" basis on Business
Days from 8:00 A.M. to 12:00 P.M. and from 1:00 P.M. to 5:00 P.M., and on a
reservation, "first come, first served" basis from 12:00 P.M. to 1:00 P.M. and
from 5:00 P.M. to 8:00 A.M. on Business Days and at any time on days other than
Business Days. If Tenant shall use the freight elevators serving the Premises
between 12:00 P.M. and 1:00 P.M. and between 5:00 P.M. and 8:00 A.M. on Business
Days or at any time on any other days, Tenant shall pay Landlord, as additional
rent for such use, the standard rates then fixed by Landlord for the Building,
or if no such rates are then fixed, at reasonable rates. Notwithstanding the
foregoing to the contrary, Landlord shall provide Tenant, at no cost to Tenant,
with free freight elevator service during Tenant's initial move into the
Premises.
(C) Landlord shall not be required to furnish any freight elevator
services during the hours from 12:00 P.M. to 1:00 P.M. and from 5:00 P.M. to
8:00 A.M. on Business Days and at any time on days other than Business Days
unless Landlord has received advance notice from Tenant requesting such services
prior to 2:00 P.M. of the day upon which such service is requested or by 2:00
P.M. of the last preceding Business Day if such periods are to occur on a day
other than a Business Day.
Section 28.2. Landlord, at Landlord's expense (but subject to recoupment
-------------
pursuant to Article 27 hereof), shall furnish chilled water to the Building
standard chilled water air-handler unit serving the Premises, when required for
the comfortable occupancy of the Premises, on a year round basis from 8:30 A.M.
to 6:00 P.M. on Business Days and 8:30 A.M. to 1:00 P.M. on Saturdays. In
addition, Landlord shall provide perimeter heating through the existing
radiators
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when required for the comfortable occupancy of the Premises from 8:30 A.M. to
6:00 P.M. on Business Days. Landlord, throughout the Term, shall have free
access to any and all mechanical installations of Landlord, including, but not
limited to, air-cooling, fan, ventilating and machine rooms and electrical
closets; Tenant shall not construct partitions or other obstructions which may
interfere with Landlord's free access thereto, or interfere with the moving of
Landlord's equipment to and from the enclosures containing said installations.
Neither Tenant, nor its agents, employees or contractors shall at any time enter
the said enclosures or tamper with, adjust or touch or otherwise in any manner
affect said mechanical installations. Tenant shall use good faith efforts to
draw and close the draperies or blinds for the windows of the Premises whenever
the HVAC System is in operation and the position of the sun so requires and
shall at all times cooperate fully with Landlord and abide by all of the
regulations and requirements which Landlord may prescribe for the proper
functioning and protection of the HVAC System. If Tenant shall fail to draw and
close the draperies or blinds for the windows of the Premises, Landlord shall
not be responsible for the proper functioning of the HVAC System to the extent
improper functioning on the HVAC System results from such failure.
Section 28.3. The Fixed Rent does not reflect or include any charge to
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Tenant for the furnishing of any chilled water to the Building standard chilled
water air-handler serving the Premises or perimeter heating to the Premises
during periods other than the hours and days set forth above ("Overtime
--------
Periods"). Accordingly, if Landlord shall furnish such electricity to provide
- -------
air conditioning to the air-cooled Building standard air conditioning units
serving the Premises or perimeter heating to the Premises at the request of
Tenant during Overtime Periods, Tenant shall pay Landlord additional rent for
such services at the standard rates then fixed by Landlord for the Building, or
if no such rates are then fixed, at reasonable rates. Landlord shall not be
required to furnish any such services during any Overtime Periods unless
Landlord has received advance notice from Tenant requesting such services prior
to 2:00 P.M. of the day upon which such services are requested or by 2:00 P.M.
of the last preceding Business Day if such Overtime Periods are to occur on a
day other than a Business Day. If Tenant fails to give Landlord such advance
notice, then, failure by Landlord to furnish or distribute any such services
during such Overtime Periods shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of Rental, or relieve Tenant from any of its obligations under this Lease, or
impose any liability upon Landlord or its agents by reason of inconvenience or
annoyance to Tenant, or injury to or interruption of Tenant's business or
otherwise. If more than one tenant utilizing the same system as Tenant requests
the same Overtime Periods for the same services as Tenant, the charge to Tenant
shall be adjusted pro rata.
Section 28.4. Provided Tenant shall keep the Premises in order, Landlord,
-------------
at Landlord's expense, subject to recoupment pursuant to Article 27 hereof,
shall cause the Premises, excluding any portions thereof used for the storage,
preparation, service or consumption of food or beverages, to be cleaned,
substantially in accordance with the standards set forth in Schedule B annexed
----------
hereto and made a part hereof. Tenant shall pay to Landlord the cost of removal
of any of Tenant's refuse and rubbish from the Premises and the Building to the
extent that the same exceeds the refuse and rubbish usually attendant upon the
use of such Premises as offices. Bills for the same shall be rendered by
Landlord to Tenant at such time as Landlord may elect and shall be due and
payable when rendered as additional rent. Tenant, at Tenant's sole cost and
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expense, shall cause all portions of the Premises used for the storage,
preparation, service or consumption of food or beverages to be cleaned daily in
a manner satisfactory to Landlord, and to be exterminated against infestation by
vermin, rodents or roaches regularly and, in addition, whenever there shall be
evidence of any infestation. Any such exterminating shall be done at Tenant's
sole cost and expense, in a manner satisfactory to Landlord, and by Persons
approved by Landlord. If Tenant shall perform any cleaning services in addition
to the services provided by Landlord as aforesaid, Tenant shall employ the
cleaning contractor providing cleaning services to the Building on behalf of
Landlord or such other cleaning contractor as shall be approved by Landlord.
Tenant shall comply with any recycling program and/or refuse disposal program
(including, without limitation, any program related to the recycling, separation
or other disposal of paper, glass or metals) which Landlord shall impose or
which shall be required pursuant to any Requirements.
Section 28.5. If the New York Board of Fire Underwriters or the Insurance
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Services Office or any Governmental Authority, department or official of the
state or city government shall require or recommend that any changes,
modifications, alterations or additional sprinkler heads or other equipment be
made or supplied by reason of Tenant's particular business, or the location of
the partitions, trade fixtures, or other contents of the Premises, Landlord, at
Tenant's cost and expense, shall promptly make and supply such changes,
modifications, alterations, additional sprinkler heads or other equipment.
Section 28.6. Landlord shall provide to the core of the Premises hot and
-------------
cold water for ordinary drinking, cleaning and lavatory purposes. If Tenant
requires, uses or consumes water for any purpose in addition to ordinary
drinking, cleaning or lavatory purposes, Landlord may install a water meter and
thereby measure Tenant's water consumption. In such event (1) Tenant shall pay
Landlord for the cost of the meter and the cost of the installation thereof and
through the duration of Tenant's occupancy Tenant shall keep said meter and
equipment in good working order and repair at Tenant's own cost and expense; (2)
Tenant shall pay for water consumed as shown on said meter, as additional rent,
and on default in making such payment Landlord may pay such charges and collect
the same from Tenant; and (3) Tenant shall pay the sewer rent, charge or any
other tax, rent, levy or charge which now or hereafter is assessed, imposed or
shall become a lien upon the Premises or the Real Property of which they are a
part pursuant to any Requirement made or issued in connection with any such
metered use, consumption, maintenance or supply of water, water system, or
sewage or sewage connection or system. The bill rendered by Landlord for the
above shall be based upon Tenant's consumption and shall be payable by Tenant as
additional rent within ten (10) Business Days after rendition.
Section 28.7. Landlord reserves the right to stop service of the HVAC
-------------
System or the elevator, electrical, plumbing or other Building Systems when
necessary, by reason of accident or emergency, or for repairs, additions,
alterations, replacements or improvements in the judgment of Landlord desirable
or necessary to be made, until said repairs, alterations, replacements or
improvements shall have been completed (which repairs, additions, alterations,
replacements and improvements shall be performed in accordance with Section 4.3
hereof). Landlord shall have no responsibility or liability for interruption,
curtailment or failure to supply HVAC, elevator, electrical, plumbing or other
Building Systems when prevented by Unavoidable
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Delays or by any Requirement of any Governmental Authority or due to the
exercise of its right to stop service as provided in this Article 28. The
exercise of such right or such failure by Landlord shall not constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to any
compensation or to any abatement or diminution of Rental, or relieve Tenant from
any of its obligations under this Lease, or impose any liability upon Landlord
or its agents by reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business, or otherwise.
Section 28.8. Landlord shall make available to Tenant the computerized
-------------
directory in the lobby of the Building for up to five (5) listings. The initial
programming shall be without charge to Tenant. From time to time, but not more
frequently than once every three (3) months, Landlord shall reprogram the
computerized directory to reflect such changes in the listings therein as Tenant
shall request, and Tenant promptly after request shall pay to Landlord a
reasonable reprogramming charge for each reprogramming Tenant requests. If
Landlord replaces the computerized directory with a standard directory in the
lobby of the Building, Tenant shall be entitled to Tenant's Share of such
listings on such directory.
ARTICLE 29
PARTNERSHIP TENANT
------------------
If Tenant is a partnership (including, without limitation, a limited
liability partnership) or a limited liability company or a professional
corporation (or is comprised of two (2) or more Persons, individually or as co-
partners of a partnership (including, without limitation a limited liability
partnership), as members of a limited liability company or as shareholders of a
professional corporation) or if Tenant's interest in this Lease shall be
assigned to a partnership (including, without limitation, a limited liability
partnership) a limited liability company or a professional corporation (or to
two (2) or more Persons, individually or as co-partners of a partnership, as
members of a limited liability company or shareholders of a professional
corporation) pursuant to Article 12 hereof (any such partnership, professional
corporation and such Persons are referred to in this Article 29 as "Partnership
-----------
Tenant"), the following provisions shall apply to such Partnership Tenant: (a)
- ------
the liability of each of the parties comprising Partnership Tenant shall be
joint and several; (b) each of the parties comprising Partnership Tenant hereby
consents in advance to, and agrees to be bound by (x) any written instrument
which may hereafter be executed by Partnership Tenant or any successor entity,
changing, modifying, extending or discharging this Lease, in whole or in part,
or surrendering all or any part of the Premises to Landlord, and (y) any
notices, demands, requests or other communications which may hereafter be given
by Partnership Tenant or by any of the parties comprising Partnership Tenant;
(c) any bills, statements, notices, demands, requests or other communications
given or rendered to Partnership Tenant or to any of such parties shall be
binding upon Partnership Tenant and all such parties; (d) if Partnership Tenant
shall admit new partners, shareholders or members, as the case may be,
Partnership Tenant shall give Landlord notice of such event not later than ten
(10) Business Days prior to the admission of such partner(s), shareholder(s) or
member(s) together with an assumption agreement in form and substance
satisfactory to Landlord pursuant to which each of such new partners,
shareholders or
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members, as the case may be, shall, by their admission to Partnership Tenant,
agree to assume joint and several liability for the performance of all of the
terms, covenants and conditions of this Lease (as the same may have been or
thereafter be amended) on Tenant's part to be observed and performed; it being
expressly understood and agreed that each such new partner, shareholder or
member (as the case may be) shall be deemed to have assumed joint and several
liability for the performance of all of the terms, covenants and conditions of
this Lease (as the same may have been or thereafter be amended), whether or not
such new partner, shareholder or member shall have executed such assumption
agreement, and that neither Tenant's failure to deliver such assumption
agreement nor the failure of any such new partner or shareholder, as the case
may be, to execute or deliver any such agreement to Landlord shall vitiate the
provisions of this clause (d) of this Article 29).
ARTICLE 30
VAULT SPACE
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Notwithstanding anything contained in this Lease or indicated on any
sketch, blueprint or plan, any vaults, vault space or other space outside the
boundaries of the Real Property are not included in the Premises. Landlord makes
no representation as to the location of the boundaries of the Real Property. All
vaults and vault space and all other space outside the boundaries of the Real
Property which Tenant may be permitted to use or occupy are to be used or
occupied under a revocable license, and if any such license shall be revoked, or
if the amount of such space shall be diminished or required by any Governmental
Authority or by any public utility company, such revocation, diminution or
requisition shall not constitute an actual or constructive eviction, in whole or
in part, or entitle Tenant to any abatement or diminution of Rental, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord. Any fee, tax or charge imposed by any Governmental Authority for
any such vaults, vault space or other space occupied by Tenant shall be paid by
Tenant.
ARTICLE 31
SECURITY
--------
Section 31.1. Tenant shall deposit with Landlord on the signing of this
-------------
Lease the Security Amount for the First Security Period, or at Tenant's option,
a "clean," unconditional, irrevocable and transferable letter of credit (the
"Letter of Credit") in the same amount, satisfactory to Landlord, issued by and
----------------
drawn on a bank satisfactory to Landlord and which is a member of the New York
Clearing House Association, for the account of Landlord, for a term of not less
than one (1) year, as security for the faithful performance and observance by
Tenant of the terms, covenants, conditions and provisions of this Lease,
including, without limitation, the surrender of possession of the Premises to
Landlord as herein provided. If an Event of Default shall occur and be
continuing, Landlord may apply the whole or any part of the security so
deposited, or present the Letter of Credit for payment and apply the whole or
any part of the proceeds thereof, as the case may be, (i) toward the payment of
any Fixed Rent, Escalation Rent or any other item of Rental as to which Tenant
is in default, (ii) toward any sum which Landlord may expend or be required to
expend by reason of Tenant's default in respect of any of the terms,
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covenants and conditions of this Lease, including, without limitation, any
damage, liability or expense (including, without limitation, reasonable
attorneys' fees and disbursements) incurred or suffered by Landlord, and (iii)
toward any damage or deficiency incurred or suffered by Landlord in the
reletting of the Premises, whether such damages or deficiency accrue or accrues
before or after summary proceedings or other re-entry by Landlord. If Landlord
applies or retains any part of the proceeds of the Letter of Credit or the
security so deposited, as the case may be, Tenant, upon demand, shall deposit
with Landlord the amount so applied or retained so that Landlord shall have the
full deposit on hand at all times during the Term. If Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants and conditions of
this Lease, the Letter of Credit or the security, as the case may be, shall be
returned to Tenant promptly after the Expiration Date and after delivery of
possession of the Premises to Landlord. In the event of a sale or leasing of the
Real Property or the Building, Landlord shall have the right to transfer the
Letter of Credit or security, as the case may be, to the vendee or lessee and
Landlord shall thereupon be released by Tenant from all liability for the return
of such security or the Letter of Credit, as the case may be, and Tenant shall
cause the bank which issued the Letter of Credit to issue an amendment to the
Letter of Credit or issue a new Letter of Credit naming the vendee or lessee as
the beneficiary thereunder. Tenant shall look solely to the new landlord for the
return of the Letter of Credit or the security, as the case may be. The
provisions hereof shall apply to every transfer or assignment of the Letter of
Credit or security made to a new landlord. Tenant shall not assign or encumber
or attempt to assign or encumber the monies deposited herein as security and
neither Landlord nor its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance. Tenant
shall renew any Letter of Credit from time to time, at least thirty (30) days
prior to the expiration thereof, and deliver to Landlord a new Letter of Credit
or an endorsement to the Letter of Credit, and any other evidence required by
Landlord that the Letter of Credit has been renewed for a period of at least one
(1) year. If Tenant shall fail to renew the Letter of Credit as aforesaid,
Landlord may present the Letter of Credit for payment and retain the proceeds
thereof as security in lieu of the Letter of Credit.
Section 31.2. Provided no Event of Default shall have occurred and be
-------------
continuing, on the first day of the applicable Security Period, i.e. the Second
Security Period, Third Security Period and Fourth Security Period, (a) if the
Letter of Credit is on deposit, Tenant shall be entitled to replace the Letter
of Credit on deposit with Landlord with a Letter of Credit in the Security
Amount applicable to such Security Period, or (b) if Tenant shall have deposited
with Landlord cash security in lieu of a Letter of Credit, if the Security
Amount for such Security Period is less than the security then on deposit for
the immediately preceding Security Period, and provided that Tenant shall have
fully and faithfully complied with all of the terms, provisions, covenants and
conditions of this Lease, Landlord shall refund to Tenant an amount equal to the
amount by which the Security Amount for such Security Period exceeds the
security then on deposit for the immediately preceding Security Period.
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ARTICLE 32
CAPTIONS
--------
The captions are inserted only as a matter of convenience and for reference
and in no way define, limit or describe the scope of this Lease nor the intent
of any provision thereof.
ARTICLE 33
PARTIES BOUND
-------------
The covenants, conditions and agreements contained in this Lease shall bind
and inure to the benefit of Landlord and Tenant and their respective legal
representatives, successors, and, except as otherwise provided in this Lease,
their assigns.
ARTICLE 34
BROKER
------
Each party represents and warrants to the other that it has not dealt with
any broker or Person in connection with this Lease other than J. Grotto &
Associates, Inc. ("Broker"). The execution and delivery of this Lease by each
------
party shall be conclusive evidence that such party has relied upon the foregoing
representation and warranty. Landlord agrees to pay Broker pursuant to a
separate agreement between Landlord and Broker. Tenant shall indemnify and hold
Landlord harmless from and against any and all claims for commission, fee or
other compensation by any Person (other than Broker) who shall claim to have
dealt with Tenant in connection with this Lease and for any and all costs
incurred by Landlord in connection with such claims, including, without
limitation, reasonable attorneys' fees and disbursements. The provisions of this
Article 34 shall survive the Expiration Date.
ARTICLE 35
INDEMNITY
---------
Section 35.1. (A) Tenant shall not do or permit any act or thing to be
-------------
done upon the Premises which may subject Landlord to any liability or
responsibility for injury, damages to persons or property or to any liability by
reason of any violation of any Requirement, and shall exercise such control over
the Premises as to fully protect Landlord against any such liability. Tenant
shall indemnify and save the Indemnitees harmless from and against (a) except to
the extent the same are due to the negligence or willful misconduct of Landlord,
Landlord's employees, agents or licensees, all claims of whatever nature against
the Indemnitees arising from any act, omission or negligence of Tenant, its
contractors, licensees, agents, servants, employees, invitees or visitors, (b)
except to the extent the same are due to the negligence or willful misconduct of
Landlord, Landlord's employees, agents or licensees, all claims against the
Indemnitees arising from any accident, injury or damage whatsoever caused to any
person or to the property of any person and occurring during the Term in or
about the Premises, and (c)
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except to the extent the same are due to the negligence or willful misconduct of
Landlord, Landlord's employees, agents or licensees, all claims against the
Indemnitees arising from any accident, injury or damage occurring outside of the
Premises but anywhere within or about the Real Property, where such accident,
injury or damage results or is claimed to have resulted from an act, omission or
negligence of Tenant or Tenant's contractors, licensees, agents, servants,
employees, invitees or visitors. This indemnity and hold harmless agreement
shall include indemnity from and against any and all liability, fines, suits,
demands, costs and expenses of any kind or nature (including, without
limitation, attorneys' fees and disbursements) incurred in or in connection with
any such claim or proceeding brought thereon, and the defense thereof but except
with respect to claims with respect to bodily injury or death, shall be limited
to the extent any insurance proceeds collectible by Landlord under policies
owned by Landlord or such injured party with respect to such damage or injury
are insufficient to satisfy same. Tenant shall have no liability for any
consequential damages suffered either by Landlord or by any party claiming
through Landlord.
(B) Except as provided in Articles 4, 9, 10, 13, 28, 36 and 37 hereof
and otherwise as expressly provided herein and except to the extent the same are
due to the negligence or willful misconduct of Tenant, Tenant's employees,
agents or licensees, Landlord shall indemnify and save Tenant its shareholders,
directors, officers, Partners, employees and agents harmless from and against
all claims against Tenant arising from any damage to the Premises and any bodily
injury to Tenant's employees, agents or invitees resulting from the acts,
omissions or negligence of Landlord or its agents. This indemnity and hold
harmless agreement shall include indemnity from and against any and all
liability, fines, suits, demands, costs and expenses of any kind or nature
(including, without limitation, reasonable attorneys' fees and disbursements)
incurred in or in connection with any such claim or proceeding brought thereon,
but shall be limited to the extent any insurance proceeds collectible by Tenant
or such injured party with respect to such damage or injury are insufficient to
satisfy same. Landlord shall have no liability for any consequential damages
suffered either by Tenant or by any party claiming through Tenant.
Section 35.2. If any claim, action or proceeding is made or brought
-------------
against either party, which claim, action or proceeding the other party shall be
obligated to indemnify such first party against pursuant to the terms of this
Lease, then, upon demand by the indemnified party, the indemnifying party, at
its sole cost and expense, shall resist or defend such claim, action or
proceeding in the indemnified party's name, if necessary, by such attorneys as
the indemnified party shall approve, which approval shall not be unreasonably
withheld. Attorneys for the indemnifying party's insurer are hereby deemed
approved for purposes of this Section 35.2. Notwithstanding the foregoing, an
indemnified party may retain its own attorneys to defend or assist in defending
any claim, action or proceeding involving potential liability of Five Million
Dollars ($5,000,000) or more, and the indemnifying party shall pay the
reasonable fees and disbursements of such attorneys. The provisions of this
Article 35 shall survive the expiration or earlier termination of this Lease.
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ARTICLE 36
ADJACENT EXCAVATION-SHORING
---------------------------
If an excavation shall be made upon land adjacent to the Premises, or shall
be authorized to be made, Tenant, upon reasonable advance notice, shall afford
to the person causing or authorized to cause such excavation, a license to enter
upon the Premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the Building from injury or damage and to
support the same by proper foundations, without any claim for damages or
indemnity against Landlord, or diminution or abatement of Rental, provided that
Tenant shall continue to have access to the Premises and the Building.
ARTICLE 37
MISCELLANEOUS
-------------
Section 37.1. This Lease is offered for signature by Tenant and it is
-------------
understood that this Lease shall not be binding upon Landlord or Tenant unless
and until Landlord and Tenant shall have executed and unconditionally delivered
a fully executed copy of this Lease to each other.
Section 37.2. The obligations of Landlord under this Lease shall not be
-------------
binding upon Landlord named herein after the sale, conveyance, assignment or
transfer by such Landlord (or upon any subsequent landlord after the sale,
conveyance, assignment or transfer by such subsequent landlord) of its interest
in the Building or the Real Property, as the case may be, and in the event of
any such sale, conveyance, assignment or transfer, Landlord shall be and hereby
is entirely freed and relieved of (i) all covenants and obligations of Landlord
hereunder with respect to which performance of Landlord as due prior to the date
of such sale, conveyance, assignment or transfer, to the extent that such
transferee assumes the obligations of Landlord under this Lease, and (ii) all
covenants and obligations of Landlord hereunder with respect to which
performance of Landlord is due from and after the date of such sale, conveyance,
assignment or transfer. The members, partners, shareholders, directors, officers
and principals, direct and indirect, comprising Landlord (collectively, the
"Parties") shall not be liable for the performance of Landlord's obligations
-------
under this Lease. Tenant shall look solely to Landlord to enforce Landlord's
obligations hereunder and shall not seek any damages against any of the Parties.
The liability of Landlord for Landlord's obligations under this Lease shall be
limited to Landlord's interest in the Real Property and Tenant shall not look to
any other property or assets of Landlord or the property or assets of any of the
Parties in seeking either to enforce Landlord's obligations under this Lease or
to satisfy a judgment for Landlord's failure to perform such obligations. After
any such sale, conveyance, assignment or transfer, the liability of the
immediately former Landlord hereunder that may continue pursuant to clause (i)
above, shall be limited to the proceeds of such sale, conveyance, assignment or
transfer.
Section 37.3. Notwithstanding anything contained in this Lease to the
-------------
contrary, all amounts payable by Tenant to or on behalf of Landlord under this
Lease, whether or not expressly denominated Fixed Rent, Escalation Rent,
additional rent or Rental, shall constitute rent for the purposes of Section
502(b)(7) of the Bankruptcy Code.
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Section 37.4. Tenant's liability for all items of Rental shall survive the
-------------
Expiration Date.
Section 37.5. Tenant shall reimburse Landlord as additional rent, within
-------------
ten (10) days after rendition of a statement, for all expenditures made by, or
damages or fines sustained or incurred by, Landlord, due to any default by
Tenant under this Lease, with interest thereon at the Applicable Rate.
Section 37.6. This Lease shall not be recorded.
-------------
Section 37.7. Tenant hereby waives any claim against Landlord which Tenant
-------------
may have based upon any assertion that Landlord has unreasonably withheld or
unreasonably delayed any consent or approval requested by Tenant, and Tenant
agrees that its sole remedy shall be an action or proceeding to enforce any
related provision or for specific performance, injunction or declaratory
judgment. In the event of a determination that such consent or approval has been
unreasonably withheld or delayed, the requested consent or approval shall be
deemed to have been granted; however, Landlord shall have no liability to Tenant
for its refusal or failure to give such consent or approval. Tenant's sole
remedy for Landlord's unreasonably withholding or delaying consent or approval
shall be as provided in this Section 37.7.
Section 37.8. This Lease contains the entire agreement between the parties
-------------
and supersedes all prior understandings, if any, with respect thereto. This
Lease shall not be modified, changed, or supplemented, except by a written
instrument executed by both parties.
Section 37.9. Tenant hereby (a) irrevocably consents and submits to the
-------------
jurisdiction of any Federal, state, county or municipal court sitting in the
State of New York in respect to any action or proceeding brought therein by
Landlord against Tenant concerning any matters arising out of or in any way
relating to this Lease; (b) irrevocably waives personal service of any summons
and complaint and consents to the service upon it of process in any such action
or proceeding by mailing of such process to Tenant at the address set forth
herein and hereby irrevocably designates Goldberg, Weprin & Ustin LLP or other
law firm located in Manhattan if disclosed to Landlord in writing (or if not so
located, then upon any member of the law firm of Goldberg, Weprin & Ustin LLP,
or their successor, if so located in Manhattan), to accept service of any
process on Tenant's behalf and hereby agrees that such service shall be deemed
sufficient; (c) irrevocably waives all objections as to venue and any and all
rights it may have to seek a change of venue with respect to any such action or
proceedings; (d) agrees that the laws of the State of New York shall govern in
any such action or proceeding and waives any defense to any action or proceeding
granted by the laws of any other country or jurisdiction unless such defense is
also allowed by the laws of the State of New York; and (e) agrees that any final
judgment rendered against it in any such action or proceeding shall be
conclusive and may be enforced in any other jurisdiction by suit on the judgment
or in any other manner provided by law. Tenant further agrees that any action or
proceeding by Tenant against Landlord in respect to any matters arising out of
or in any way relating to this Lease shall be brought only in the State of New
York, county of New York. In furtherance of the foregoing, Tenant hereby agrees
that its address for notices given by Landlord and service of process under this
Lease shall be the Premises. Notwithstanding the foregoing provisions of this
Section 37.9, Tenant may, by written notice to
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Landlord, change the designated agent for acceptance of service of process to
any other law firm located in the City, county and State of New York.
Section 37.10. Unless Landlord shall render written notice to Tenant to
--------------
the contrary in accordance with the provisions of Article 26 hereof, Mendik
Management Company Inc. is authorized to act as Landlord's agent in connection
with the performance of this Lease, including, without limitation, the receipt
and delivery of any and all notices and consents in accordance with Article 26.
Tenant shall direct all correspondence and requests to, and shall be entitled to
rely upon correspondence received from, Mendik Management Company Inc., as agent
for the Landlord in accordance with Article 26. Tenant acknowledges that Mendik
Management Company Inc. is acting solely as agent for Landlord in connection
with the foregoing, and neither Mendik Management Company Inc. nor any of its
direct or indirect members, partners, officers, shareholders, directors or
employees shall have any liability to Tenant in connection with the performance
of Landlord's obligations under this Lease and Tenant waives any and all claims
against any such party arising out of, or in any way connected with, this Lease
or the Real Property.
Section 37.11. (A) All of the Schedules and Exhibits attached hereto are
--------------
incorporated in and made a part of this Lease, but, in the event of any
inconsistency between the terms and provisions of this Lease and the terms and
provisions of the Schedules and Exhibits hereto, the terms and provisions of
this Lease shall control. Wherever appropriate in this Lease, personal pronouns
shall be deemed to include the other genders and the singular to include the
plural. All Article and Section references set forth herein shall, unless the
context otherwise specifically requires, be deemed references to the Articles
and Sections of this Lease.
(B) If any term, covenant, condition or provision of this Lease, or
the application thereof to any person or circumstance, shall ever be held to be
invalid or unenforceable, then in each such event the remainder of this Lease or
the application of such term, covenant, condition or provision to any other
Person or any other circumstance (other than those as to which it shall be
invalid or unenforceable) shall not be thereby affected, and each term,
covenant, condition and provision hereof shall remain valid and enforceable to
the fullest extent permitted by law.
(C) All references in this Lease to the consent or approval of
Landlord shall be deemed to mean the written consent or approval of Landlord and
no consent or approval of Landlord shall be effective for any purpose unless
such consent or approval is set forth in a written instrument executed by
Landlord.
ARTICLE 38
RENT CONTROL
------------
If at the commencement of, or at any time or times during the Term of this
Lease, the Rental reserved in this Lease shall not be fully collectible by
reason of any Requirement, Tenant shall enter into such agreements and take such
other steps (without additional expense to Tenant) as Landlord may request and
as may be legally permissible to permit Landlord to collect the
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maximum rents which may from time to time during the continuance of such legal
rent restriction be legally permissible (and not in excess of the amounts
reserved therefor under this Lease). Upon the termination of such legal rent
restriction prior to the expiration of the Term, (a) the Rental shall become and
thereafter be payable hereunder in accordance with the amounts reserved in this
Lease for the periods following such termination, and (b) Tenant shall pay to
Landlord, if legally permissible, an amount equal to (i) the items of Rental
which would have been paid pursuant to this Lease but for such legal rent
restriction less (ii) the rents paid by Tenant to Landlord during the period or
periods such legal rent restriction was in effect.
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IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
570 LEXINGTON COMPANY, L.P., Landlord
By: 570 Lexington Associates, L.P., a general partner
By: Vornado 570 Lexington L.L.C.,
By: Vornado Realty Trust as authorized
signatory
By: /s/ Irwin Goldberg
-----------------------------------------
Irwin Goldberg, Vice President and Chief
Financial Officer
THE MUSIC CONNECTION CORPORATION, Tenant
By: /s/ Robert Bernardi
--------------------------------
Name:
Title:
Fed. Id. No. 54-1811721
-------------------
/s/ Mark Fowler, CFO
--------------------------------
Witness 2/22/99
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EXHIBIT 10.13
Agreement (this "Agreement") made this 8th day of June, 1999 between
---------
MusicMaker.com, Inc., 1831 Weihle Avenue, Suite 128, Reston, Virginia, 20190
(hereinafter "Licensee") and Virgin Holdings, Inc., 338 North Foothill Road,
Beverly Hills, California 90210 (hereinafter "Virgin").
Concurrently with the execution of this Agreement, the parties hereto are
entering into an agreement, pursuant to which the Licensee, in exchange for this
License, is issuing to Virgin a number of shares of common stock, par value $.01
per share, of Licensee, upon the terms and subject to the conditions set forth
in such agreement.
1. Definitions
-----------
1.01. "Affiliate" shall mean any of the entities included on, but not
limited to, the list on Schedule J, attached hereto, and as Virgin may amend
from time to time during the Term of the Agreement in its sole discretion.
1.02. "Designated Master Recording(s)" shall mean such original
recording(s) or duplicate of original recording(s) owned by Virgin or an
Affiliate of Virgin designated by Virgin from time to time in the manner
described in Section 2.03, for use by Licensee solely upon the terms and subject
to the conditions of this Agreement.
1.03. "Floor Fee" shall mean *.
1.04. "Gross Price" shall mean the price charged to a customer for a
single copy of their custom compilation Record, such price being set before any
quantity discounts or other concessions, if any, for each such Record and
excluding actual shipping charges paid and sales tax, if any.
1.05. "Internet Sales" shall mean the sale of Records ordered directly
through Licensee's internet website and excludes, among other things, the use of
a computer network to deliver computer files embodying sound recordings to a
customer's personal computer, player or other equivalent device.
1.06. "Non-Exclusivity Trigger Event" shall mean the occurrence at any
time during the Term of the Agreement of any of the following events: (i) if,
either on the third anniversary or fourth anniversary of the date hereof,
Licensee's monthly sales averaged over the previous 12-month period is less than
* Records; (ii) Raju Puthukarai shall either cease to be the President of
Licensee (unless his successor is acceptable to Virgin and appointed in a timely
manner) or cease to be actively involved in the day-to-day operations of
Licensee, in each case as determined by Virgin in its sole reasonable
discretion; (iii) the agreement between Licensee and Columbia House dated June
12, 1998 expires and fails to be renewed on the same terms, is terminated, or is
modified in a manner not approved by Virgin; (iv) any person (other than Virgin
or any of its Affiliates) shall acquire more than 50% of the outstanding Voting
Power of Licensee; or (v) Virgin's equity interest in Licensee shall fall
- -------
*Material redacted pursuant to confidential treatment request.
<PAGE>
below 25% of the issued and outstanding capital stock of Licensee on a fully
diluted basis (other than as a result of Virgin's voluntary sale or other
voluntary transfer of shares).
1.07. "Premiums" shall mean Records which are not intended for
distribution through Licensee's web-site, are intended by an advertiser or
sponsor to promote the business of the advertiser or sponsor (which is not the
business of distributing records) and which are given free of charge or
advertised and sold on special terms in conjunction with a product or service
which emanates from the advertiser or sponsor.
1.08. "Record" shall mean one (1) redbook audio compact disc (CD)
manufactured from the Designated Master Recording(s) that may be coupled with
other master recordings, but not video or images, such recordings either owned,
licensed, or leased by Licensee and produced as customized compilations ordered
by individual customers using their personal computers from Licensee's Internet
website. Without limiting the foregoing, in no event shall this definition
include any other format including, but not limited to Digital Versatile Disk
(DVD), Read-Write CD, or MiniDisc.
1.09. "Royalty Rate" shall mean *.
1.10. "Stream" or "Streaming" shall mean the digital transmission of an
excerpt from a Designated Master Recording no longer than 30 seconds that is
substantially contemporaneous with its audible performance on a customer's
personal computer and does not produce a computer file embodying such
performance on such customer's computer that is usable without a simultaneous
active connection to the digital transmission source, other than as temporarily
required to render such cotemporaneous performance as in the form of a data
buffer.
1.11. "Term of the Agreement" shall be five (5) years.
1.12. "Territory" shall mean worldwide.
1.13. "Voting Power" shall mean the ability to vote any securities or to
control the vote of any securities, directly or indirectly, by proxy or
otherwise, of Licensee having the right to vote generally in any election of
directors of Licensee (without the effect of contingencies).
2. Grant of Rights
---------------
2.01. (a) Subject to the limitations set forth in Section 3, Virgin
grants to Licensee the exclusive right, privilege, and license, without the
right to sublicense or assign to any other person, during the Term of the
Agreement in the Territory, to use the Designated Master Recording(s) solely for
the manufacture and sale of the Records in the manner described in paragraph
2.01(b), and not otherwise.
(b) The rights granted under this Section 2 shall be strictly
limited to retail Internet Sales by Licensee of Records embodying compilations
ordered from individual end-customers from their personal computers through the
internet, manufactured by Licensee's custom manufacturing facilities, and
delivered to those customers by mail or similar systems of delivery such as
courier or Federal Express, solely in the form of a Record, and subject to any
- -------
*Material redacted pursuant to confidential treatment request.
2
<PAGE>
further use restrictions applicable to any Designated Master Recording(s) as
specified by Virgin in the manner described in Section 2.03 and Section 3.
Without limiting the foregoing, Records shall not be sold or distributed as
Premiums.
(c) Virgin warrants and represents to Licensee that it or an
Affiliate of Virgin has or will have all rights necessary to grant this license
for the purpose specified in this Section, without further payment by Licensee
for the use of the Designated Master Recording(s), except as expressly provided
herein.
(d) Virgin grants to Licensee during the Term of the Agreement, a
royalty-free non-exclusive right, privilege, and license, to Stream a single
excerpt from each of the Designated Master Recording(s) solely for the purpose
of promotion of the Internet Sale of Records as permitted in this Section 2.
(e) Notwithstanding the foregoing, Licensee acknowledges that an
Affiliate of Virgin has granted to CDNow, Inc. a non-exclusive license to
include in custom compilations certain sound recordings owned by Virgin or an
Affiliate of Virgin for the period commencing October 1, 1999 and ending on
December 31, 1999. Subject to Section 3.06, Virgin agrees that during the Term
of the Agreement, its Affiliate will not renew the license to CDNow, Inc.
(f) Subject to Section 3.06 neither Virgin nor any of its Affiliates
shall grant licenses for sound recordings owned or controlled by them to any
other party for use in the limited manner as set forth in Section 2.01(b),
provided, however that Virgin and its Affiliates may at any time, as indicated
in Section 3.01, exploit themselves the same rights granted to Licensee under
Section 2.
2.02. Upon and after the designation by Virgin of a Designated Master
Recording(s), at Licensee's request, Virgin agrees to ship to Licensee, at an
address designated by Licensee, a duplicate master tape of each Designated
Master Recording in the format of either DAT (Digital Audio Tape), CD (Compact
Disc) or analog tape or any similar format, which format will be selected by
Virgin in its sole discretion. Licensee shall pay Virgin promptly after being
billed for the actual cost of dubbing said duplicate master tapes and for
packaging and shipping charges to the designated destination.
2.03. During the Term of the Agreement Virgin may from time to time and
in its sole discretion, identify Designated Master Recordings that Licensee is
permitted to use pursuant to the rights granted in this Section 2 by maintaining
a computer and written list and providing a copy of such list to Licensee. Each
Designated Master Recording shall be identified in such list by title, artist,
originating record label, required copyright notice, any use restriction (as
described in Section 3.05), and an authorized signatory of Virgin. Any sound
recording appearing on any list without all of the foregoing items shall be
deemed not to
3
<PAGE>
be a Designated Master Recording. Notwithstanding the foregoing, (i) Virgin
shall not be required to grant a license to any master recording (including,
without limitation, master recordings within the first two years of their
commercial release) that Virgin decides to withhold in its sole discretion for
any reason, and (ii) Virgin shall have the right, in its sole discretion, to
revoke or terminate the rights granted in this Section 2 with respect to any
Designated Master Recording at any time by providing Licensee with notice in
writing that henceforth such sound recording is not or is no longer a Designated
Master Recording. Licensee shall have fifteen (15) days from the date of such
notice to fulfill all orders for Records embodying such sound recording(s)
already received and paid for at the time of such notice and shall thereafter no
longer be permitted to use such sound recording(s).
2.04. From time to time during the Term of the Agreement, Virgin may, or
in its sole discretion for any reason, decline to, grant to Licensee a non-
exclusive right to include certain Designated Master Recording(s) in custom
redbook audio compact disc compilations sold to customers through direct mail,
magazine, newspaper and other print promotions. Licensee may not sublicense or
assign to any person any rights that may be granted under this Section 2.04.
3. Limitations of Rights
---------------------
3.01. The rights granted by Virgin hereunder are limited to the uses of
the Designated Master Recording(s) on the Records in the manner described in
Section 2. Any and all other rights in connection with the Designated Master
Recording(s) are specifically reserved and may be exploited by Virgin and its
designees, subject to Section 2.01(f), including without limitation: (i) all
rights to exploit the Designated Master Recordings over or through the Internet
in any manner, including without limitation, in custom compilations ordered
through websites and in any and all media and manners, (ii) all rights to
deliver, using a computer network, computer files embodying custom compilations
containing Designated Master Recording(s) to a customer's personal computer,
player, kiosk or other equivalent device, and (iii) the exercise of the same
rights granted to Licensee under Section 2.
3.02. Licensee will not edit, change, or alter in any way any Designated
Master Recording(s) without Virgin's prior written consent. No Designated Master
Recording(s) shall be sold in any Record nor shall any excerpt of a Designated
Master Recording(s) be Streamed without the inclusion of the ISRC code number
corresponding to such Designated Master Recording(s) in the digital data
embodied in such Record or Streamed excerpt.
3.03. Without in any way limiting the foregoing, without Virgin's prior
written consent, Licensee may not sublicense, assign or convey to any person any
rights under this Agreement including, but not limited to, the right to
manufacture and/or distribute Records.
4
<PAGE>
3.04. As a condition precedent to the rights granted to Licensee
hereunder, Licensee shall obtain on its own behalf (i) valid and currently
effective mechanical copyright licenses, where applicable, for use of the
copyrighted musical composition(s) embodied in the Designated Master
Recording(s) on the Records and (ii) valid and currently effective performance
licenses, where applicable, for use in Streaming the copyrighted musical
composition(s) embodied in the Designated Master Recording(s). Licensee's
failure to so obtain any such licenses from the proper copyright owners or their
agents, or to account properly thereunder, shall result in this license being
void with respect to such Designated Master Recording(s) and Licensee
specifically agrees that it shall have no right to distribute Records embodying
such unlicensed Designated Master Recording(s). Virgin reserves the right, upon
written notice to Licensee, to request copies of said valid and current licenses
which Licensee promptly will furnish to Virgin upon said written request. On
the date hereof, Licensee shall provide Virgin copies of Licensee's relevant
inquiry letters to ASCAP, BMI, and SESAC.
3.05. Virgin, in its sole discretion, shall retain all rights to place
restrictions on Licensee's use of any Designated Master Recording(s), including
without limitation, (i) prohibiting the coupling of certain Designated Master
Recording(s) with other masters or sound recordings during the Term of the
Agreement, (ii) setting a time period shorter than the Term of the Agreement
after which any use by Licensee of any such Designated Master Recording(s) shall
immediately, automatically, and thereafter be prohibited, and (iii) restricting
the territory for distribution of any such Designated Master Recording(s).
3.06. Upon the occurrence of a Non-Exclusivity Trigger Event, the rights
granted to Licensee under Section 2 which are exclusive shall immediately and
automatically cease to be exclusive rights and thereafter shall be non-
exclusive. All other provisions in this Agreement shall otherwise apply.
3.07. In addition to any restrictions on Licensee's use of any Designated
Master Recording specified in accordance with Section 3.05, Licensee shall not
permit the customer to purchase and Licensee shall not manufacture or sell (i)
any Record embodying Designated Master Recordings that contains more than one-
half (1/2) of the sound recordings otherwise manufactured as a single product
unit or components of an album by Virgin and (ii) any Record embodying any
Designated Master Recording(s) that contains fewer than five (5) total sound
recordings. For purposes of this Section 3.07, in order to be counted, a sound
recording must have a playing time of at least one (1) minute.
4. Royalties
---------
4.01. In addition to the Payment, as consideration for the rights and
license granted hereunder, pursuant to which Licensee will cause Records to be
manufactured,
5
<PAGE>
Licensee agrees to pay Virgin the royalties described in Sections 4.02 and 4.03
in accordance with Section 7 of this Agreement.
4.02. For Records on which Designated Master Recording(s) are not coupled
with sound recordings owned or controlled by an entity other than Virgin or any
of its Affiliates, the royalties shall be the greater of the following: (i) a
sum equal to the Royalty Rate times the Gross Price per Record; or (ii) the
Floor Fee multiplied by the number of Designated Master Recording(s) included on
the Record.
4.03. For Records on which Designated Master Recording(s) are coupled,
subject to Virgin's rights under Section 3.05, with sound recordings owned or
controlled by an entity other than Virgin or any of its Affiliates, the
royalties shall be the greater of the following: (i) the sum of the amounts
computed by multiplying the Royalty Rate by each portion of the Gross Price that
is charged for each Designated Master Recording(s) included on the Record; (ii)
the amount computed by multiplying (A) the Royalty Rate multiplied by a
fraction, the numerator of which is the number of Designated Master Recording(s)
included on the Record and the denominator of which is the total number of sound
recordings included on the Record, times (B) the Gross Price charged by Licensee
-----
for such Record; or (iii) the Floor Fee multiplied by the number of Designated
Master Recording(s) included on the Record. For purposes of this Section 4.03,
in order to be counted, a sound recording (other than a Designated Master
Recording) must have a playing time of at least one (1) minute.
4.04. In computing the royalties payable under Sections 4.02 and 4.03,
there shall be no packaging deductions, reserves, or other restrictions against
payment of any kind.
4.05. If at anytime the Gross Price charged a customer for a Record
having a particular number of sound recordings (the "New Price") is less than
the Gross Price charged a customer on the date hereof (as set forth in Schedule
I) for a Record having the same number of sound recordings, (the "Old Price"),
then *.
4.06. Other Licenses. If, after the date of this Agreement, Licensee
--------------
enters into or renews any similar license for the use of sound recordings in
custom compilations, the terms and conditions of which are more favorable to
such third party than the terms and conditions applicable to Virgin as set forth
in this Agreement, then such favorable terms and conditions shall, without any
further action by Virgin, automatically apply to all Designated Master
Recording(s) exploited by Licensee as of the date of entry into such license,
and Licensee shall promptly pay to Virgin all royalties due on sales of records
containing Designated Master Recording(s) made on or after such date at the
amended royalty rate and terms. Licensee hereby warrants and represents that it
shall provide Virgin notice in writing of any such license, including its terms,
no later than ten (10) days after the date of entry into such license.
- ------
*Material redacted pursuant to confidential treatment request.
6
<PAGE>
For purposes of this Section, any and all amendments after the date hereof of
any third party agreements existing as of the date hereof and disclosed on
Schedule 2.22(b) of the Agreement between the parties dated June 8, 1999
("Preexisting Agreements") shall be deemed to be an agreement entered into by
Licensee after date of the Agreement except for the case of those Preexisting
Agreements that are renewed using the same terms and conditions as existed on
the date hereof.
4.07. Throughout the Term of the Agreement, and subject to applicable law
and Licensee's previously existing contractual obligations as of the date
hereof, Licensee shall provide to Virgin any and all of the customer data and
information it collects from the use of its website or otherwise that may be
collected and retained by Licensee, including the customer database.
5. Artist, A.F. of M. and Copyright Payments
-----------------------------------------
5.01. Virgin shall be responsible for, and shall pay, all royalties due
to artists and producers in connection with Licensee's use as permitted herein
of the Designated Master Recording(s) pursuant to the recording contracts
between Virgin and any Affiliates of Virgin and such artists and producers party
to such recording contracts.
5.02. Licensee represents and warrants that it will pay, and be solely
responsible for, any and all other third party payment or clearances including,
but not limited to, (i) all payments which may be required to be made to the
Music Performance Trust Fund and the Phonograph Record Manufacturer's Special
Payments Fund (and to any similar fund based on sales which is established by
collective bargaining agreements) arising out of the manufacture and sale of
Records, (ii) all fees or royalties which may be required to be paid to the
copyright owners of the musical compositions in connection with Licensee's
exploitation of such compositions, including but not limited to, the
manufacture, distribution and sale of Records, or the Streaming of Designated
Master Recording(s), (iii) all excise taxes and other taxes (as fixed by law)
for Records manufactured and sold hereunder including, but not limited to, such
amounts, if any, which may be required to be paid under the applicable
provisions of any state and/or local, sales and/or use tax laws or regulations
which impose a tax based upon any sums paid by Licensee to Virgin, (iv) all
payments which may become due to the AFTRA Pension and Welfare Fund to the
extent that Virgin may be additionally liable therefor as a result of sales of
Records, (v) all re-use payments and fees required to be paid for the use of the
Designated Master Recording(s) and the names and likenesses of performers
associated therewith in a radio or television advertisement and (vi) all
performance royalties that may become due as a result of any of Licensee's
activities. At Virgin's request, Licensee shall supply Virgin with copies of
statements and checks relating to the items set forth in clauses (i) through
(vi) of this Section.
6. Trademarks, Trade Names, Names, Credits, Copyright Notice and Quality
---------------------------------------------------------------------
7
<PAGE>
6.01. Licensee may release the Records only under such trade names or
marks as are owned by Licensee. Licensee agrees that it will not identify the
Records with any trademarks or logotypes of Virgin or any Affiliate of Virgin,
or their names, directly or indirectly, except as provided in Section 6.03.
6.02. Unless otherwise prohibited by contract and subject to this Section
6, Virgin grants Licensee the right to use the names of the performers who
recorded the Designated Master Recording(s), solely for advertising and trade
purposes in connection with the sale and exploitation of the Records in the
manner described in Section 2.01(b). In no event shall Licensee have the right
to use the name of any artists represented by Virgin and/or its Affiliates other
than to indicate the product Licensee has available for sale and further
Licensee shall not use the names and likenesses of any artists represented by
Virgin and or its Affiliates in any broadcast, cable or other television
advertising.
6.03. Subject to the prior written consent of Virgin (as determined in
its sole discretion) for each use, and subject to Virgin's rights, Licensee may
use the name and logo of Virgin and any of its Affiliates to promote its custom
compact disc compilation service and its website; provided however, that at the
request of Virgin, Licensee shall reasonably cooperate with Virgin to take
necessary steps to protect its trademarks and further, Licensee shall pay any
costs incurred by Virgin or otherwise associated with such use.
6.04. Prior to the actual use thereof, Licensee shall submit to Virgin
for approval sample copies of all artwork, packaging, containers, labels,
advertising copy and promotional material (the "Materials") in connection with
the manufacture, promotion, sale, and delivery of Records. Licensee warrants and
agrees that the credits for Virgins' or its Affiliates' artists in connection
with the Records and in any advertising thereof shall appear in substantially
similar size, prominence and type style to the size, prominence and type style
used in connection with the other artists whose performances are embodied on the
Records and that the presentation of each artist's name shall be in the same
order as the Artist's appearance on the Record. Licensee warrants and agrees
that any changes to approved artwork, packaging, containers, labels, advertising
copy and promotional material shall be subject to Virgin's prior approval, such
approval not being unreasonably withheld.
6.05. Licensee shall comply with all copyright notice requirements
provided by Virgin pursuant to Section 2.03(a) in the manner described herein.
Licensee will place prominently on each web-site screen presentation that
provides access to any Streamed excerpt of any Designated Master Recording(s)
the required copyright notice in the following format: "(P)[Year of first
publication] [Virgin designated name]. All rights reserved." Licensee will also
cause any Streaming software to display the required copyright notices on the
listener's computer monitor screen whenever a Streamed excerpt of a Designated
Master Recording(s) is performed thereon. With respect to all other types of
Materials, Licensee will place
8
<PAGE>
prominently on each type of Material or screen presentation on which any of the
Designated Master Recording(s) appear in name the required copyright notice in
the following format: "(C) [Year of first publication] [Virgin designated name].
All rights reserved." Licensee shall not delete or authorize deletion of any
such notice from the Materials. Licensee shall use its best efforts to
prospectively cure any failure to comply with any copyright notice of which
Licensee receives written notice from Virgin.
6.06. Licensee hereby represents, warrants, and agrees that all Records
sold embodying Designated Master Recording(s) shall meet Virgin's normal
manufacturing standards for its own products. Virgin shall have the right to
evaluate the quality of the Records, and if the Records are below Virgin's
manufacturing standards, Virgin shall notify Licensee in writing. Upon receipt
of such notice of quality deficiency, Licensee shall take immediate steps to
improve the quality of the Records so that the Records meet Virgin's normal
manufacturing standards.
7. Statements and Payments
-----------------------
7.01. Licensee shall maintain full, true and accurate accounts with
respect to all Records manufactured and within forty-five (45) days after the
last day of each semi-annual accounting period ending June 30th and December
31st during which Records are manufactured will furnish Virgin with complete and
accurate royalty statements of: (i) the number of Records manufactured on which
Designated Master Recording(s) are not coupled with sound recordings owned or
controlled by an entity other than Virgin or any of its Affiliates, the Gross
Price of each such Record, the number and title of each Designated Master
Recording(s) embodied on each such Record, the applicable Royalty Rate or Floor
Fee for each such Record; and (ii) the number of Records manufactured on which
Designated Master Recording(s) are coupled with sound recordings owned or
controlled by an entity other than Virgin or any of its Affiliates, the number,
identity, and order of all sound recordings on each such Record, the applicable
Royalty Rate or Floor Fee for each Designated Master Recording(s) embodied on
each such Record, the Gross Price of each such Record, and the titles of the
Designated Master Recording(s) embodied on each such Record. Each statement
shall be delivered in a computer readable format as specified by Virgin in its
sole reasonable discretion.
7.02. The statements delivered pursuant to this Section 7 shall be
accompanied by payment of any royalties due to Virgin under this Agreement as a
result of such manufacturing. If Licensee shall fail to pay any sum due to
Virgin on the date for payment specified in this Agreement, in addition to the
royalties payable to Virgin, Licensee shall pay to Virgin (without limiting any
other rights Virgin may have) an amount equal to interest of ten percent (10%)
per annum on such unpaid sum or on a sum equal to the amount of any deficiency
in payments from Licensee to Virgin computed for the period commencing on the
last date such unpaid sum or a sum equal to such deficient amount was payable
hereunder and continuing until the date
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<PAGE>
such sum or a sum equal to such deficient amount is remitted to Virgin. Any late
payment of royalties plus the required interest due pursuant to this Section
7.02 shall not preclude or act as waiver of any other remedies permitted under
this Agreement.
7.03. Licensee will permit Virgin and/or its designated agent or agents,
upon reasonable notice to Licensee, to audit all of Licensee's applicable books
and records and to make copies of portions thereof at Licensee's principal place
of business, for the purpose of verifying Licensee's royalty payments, at
reasonable times during regular business hours. In the event that the
calculation of royalty payments is determined by a computer based system, Virgin
shall be permitted to examine the machine sensible date utilized by such system
and the related documentation describing such system and Licensee agrees to
retain such data for at least two (2) years after the Term of the Agreement. If
any audit reveals any statement hereunder to be in error by more than five
percent (5%), the reasonable costs and expenses of such inspection shall be
borne by Licensee. Licensee's accounting for any particular use of a Designated
Master Recording(s) shall become binding to Virgin on the third anniversary
after the corresponding accounting by Virgin or its Affiliates to the artist or
licensor becomes binding to such artist or licensor, as the case may be.
Licensee's accounting shall not become binding if an objection to such
accounting has been made in writing before the occurance of such corresponding
third anniversary.
8. Representations, Warranties and Agreements
------------------------------------------
8.01. Licensee represents, warrants and agrees that it has the right and
power to enter into and fully perform this agreement, to make the commitments it
makes herein and has obtained all necessary licenses, permissions and consents
required hereunder or in connection with any of the transactions contemplated
hereby. Licensee will at all times indemnify and hold harmless Virgin, its
Affiliates and any licensor of Virgin or any of its Affiliates from and against
any and all claims, damages, liabilities, costs and expenses (including legal
expenses and reasonable counsel fees) arising out of (a) the use of the
Designated Master Recording(s) or (b) any breach or claim of a breach by
Licensee of any representation, warranty or agreement made by Licensee herein.
Licensee will reimburse Virgin, its Affiliates and/or their respective licensors
on demand for any payment made at any time after the date hereof in respect of
any liability or claim in respect of which Virgin, its Affiliates and/or their
respective licensors are entitled to be indemnified. Virgin shall notify
Licensee of any such claim and Licensee shall have the right, at its expense, to
participate in the defense thereof.
8.02. Licensee represents, warrants, and agrees (i) that it shall only
produce, sell and distribute product it is duly licensed to produce, sell and
distribute and (ii) that, upon the establishment and availability of industry
standards under the Secure Digital Music Initiative (SDMI) or any other similar
standardized digital copy protection scheme, Licensee shall only deliver to
customers Records or Streamed excerpts that fully comply with such standards.
10
<PAGE>
8.03. Licensee shall not, directly or indirectly, license, transfer,
assign, sell or otherwise dispose of, pledge, mortgage or in any way encumber
the rights granted hereunder.
8.04. During the Term of the Agreement, Licensee shall comply with any
applicable law governing the promotion, marketing, sale, and delivery of
Records, including, but not limited to any law requiring that vendor's true name
and address appear on all packaging and any Optical Disk Identification Law
(ODIL) or any similar law that may become effective.
8.05. Licensee represents and warrants that it shall not engage in any
pricing conduct in violation of federal or state law or any law prohibiting
selling below cost or any loss leader law.
8.06. Licensee shall make reasonable best efforts to provide telephone
and internet customer support during normal business hours.
8.07. Virgin will at all times indemnify and hold harmless Licensee from
and against any and all claims, damages, liabilities, costs and expenses
(including legal expenses and reasonable counsel fees) arising out of any breach
by Virgin of any representation, warranty or agreement made by Virgin herein.
Licensee shall notify Virgin of any such claim and Virgin shall have the right,
at its expense, to participate in the defense thereof.
9. Ownership
---------
9.01. Licensee hereby acknowledges that all Designated Master
Recording(s) licensed hereunder, all performances embodied thereon and all
copyrights and other rights in and to the Designated Master Recording(s) (the
"Owned Property") are as between Virgin and Licensee the sole property of
- ---------------
Virgin or an Affiliate of Virgin. Virgin represents that it and/or its
Affiliates own or control, for relevant purposes, the sound recording copyright
or equivalent rights in all of the Designated Master Recording(s) licensed to
Licensee. Licensee shall not contest, or assist others in contesting, Virgin's
and/or its Affiliates' rights or interests in the Owned Property or the validity
of such ownership. Licensee shall include on its website, its products and all
other material produced and distributed publicly by Licensee, such copyright,
trademark and other notices and credits as Virgin may from time to time require.
9.02. Upon the earlier of: (i) termination or expiration of this
Agreement, (ii) when Licensee has no further legitimate use for any Designated
Master Recording(s), or (iii) upon removal of a master recording from the list
of Designated Master Recording(s), all duplicate master tapes and other
reproducing devices furnished to Licensee embodying the relevant master
recordings shall, at Virgin's election, be returned to Virgin at Licensee's
expense, and in any case Licensee shall delete any computer files embodying such
recordings, and certify to their deletion. Licensee represents, warrants and
agrees that Licensee will not, directly or
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indirectly, license, transfer, assign, sell or otherwise dispose of, pledge,
mortgage or in any way encumber the duplicate master tapes and Licensee shall
similarly bind all parties dealing with such property.
9.03. Licensee shall provide Virgin exact digital copies of the digital
masters created by Licensee embodying the Designated Master Recording(s). The
digital copies shall be delivered on computer readable format, as specified by
Virgin, within 5 days of the date on which such digital masters were created.
10. Union Signatory
---------------
10.01. Licensee represents, warrants and agrees that at all times when
Records are sold, is and will continue to be, a signatory to the American
Federation of Musicians (AFM) Phonograph Record Labor Agreement, the Special
Payments Fund Agreement and Phonograph Record Trust Agreement, all of December,
1981, and the American Federation of Television and Radio Artists (AFTRA)
National Code of Fair Practice for Phonograph Recordings and that it will fully
comply with the terms and conditions of all such agreements during the Term of
the Agreement. Those provisions of any such agreements which are required by
the terms of such agreement to be included in this Agreement shall be deemed
incorporated herein. Licensee further represents and warrants that as of the
date hereof, it has applied to the AFM, and shall provide Virgin with a copy of
its application and certify that such application has been duly submitted, and
any required application fee duly paid.
11. Notices
-------
11.01. Except as otherwise specifically provided herein, all notices
hereunder shall be in writing and shall be given by registered or certified mail
or Federal Express or similar carrier (prepaid), at the respective addresses
hereinabove set forth, or such other address or addresses as may be designated
by either party. Such notices shall be deemed given when mailed or delivered to
a Federal Express office, except that notice of change of address shall be
effective only from the date of its receipt. A copy of each notice sent to
Virgin shall be sent simultaneously to Jay Samit, EMI Recorded Music, N.A., New
Media Dpt., 1750 North Vine St., Hollywood, California, 90028; Alasdair
McMullan, Sr. Dir. Legal Affairs, EMI Recorded Music, N.A., 1290 Avenue of the
Americas, 38th Fl. New York, NY, 10104. All statements and payments from
Licensee to Virgin shall be addressed to Alasdair McMullan, Sr. Dir. Legal
Affairs, EMI Recorded Music, N.A., 1290 Avenue of the Americas, 38th Fl. New
York, NY, 10104.
12. Assignment
----------
12.01. Virgin may assign this Agreement or its rights hereunder in whole
or in part to any subsidiary, affiliated or controlling corporation or to any
person owning or acquiring a
12
<PAGE>
substantial portion of the stock or assets of Virgin, and the Agreement or such
rights may be assigned by any assignee thereof.
12.02. Licensee shall not assign its rights hereunder in whole or in part
to any person or entity, including without limitation, to any subsidiary,
affiliated or controlling corporation, or to any person or entity owning or
acquiring a substantial portion of the stock or assets of Licensee without the
prior written approval of Virgin. Any such purported assignment shall be null
and void.
13. Other
-----
In the event Virgin decides, in its sole discretion, to grant rights to the
Designated Master Recording(s) to deliver, using a computer network, computer
files embodying custom compilations containing Designated Master Recording(s) to
a customer's personal computer, player, or other equivalent device, Virgin, from
time to time during the Term of the Agreement, may in its sole discretion, (and
is not obligated to) grant to Licensee, a non-exclusive right to deliver, using
a computer network, computer files embodying custom compilations containing
Designated Master Recording(s) to a customer's personal computer, player, or
other equivalent device. Notwithstanding the foregoing, Virgin shall be
entitled to freely exploit such rights without any involvement by or notice to
Licensee. Licensee may not sublicense or assign to any person any rights that
may be granted under this Section 13.
14. Default by Licensee and Termination
-----------------------------------
14.01. The occurrence of the following events shall be deemed material
breaches and defaults by Licensee hereunder:
(a) If Licensee breaches in any material way any representation,
warranty or agreement or any other obligation in the Agreement between Virgin
and Licensee dated June 8, 1999 unless such breach or failure is fully and
immediately cured no later than ten (10) days from date of notice to Licensee.
(b) If Licensee fails to timely render statements and/or make
royalty payments to Virgin unless such breach or failure is fully and
immediately cured no later than ten (10) days from date of notice to Licensee;
and/or
(c) If Licensee breaches in any material way any representation,
warranty, agreement or any other obligation in this Agreement unless such breach
or failure is fully and immediately cured no later than ten (10) days from date
of notice to Licensee, provided, however, that the events described in clauses
(d), (e) and (g), of this Section 14 are not subject to Licensee's right to
cure; and/or
13
<PAGE>
(d) In the event of Licensee's dissolution or the liquidation of
Licensee's assets, or the filing of a petition in bankruptcy or insolvency or
for an arrangement or reorganization, by, for or against Licensee, or in the
event of the appointment of a receiver or a trustee for all or a portion of its
property, or in the event that Licensee shall make an assignment for the benefit
of creditors or commit any act for, or in, bankruptcy or become insolvent;
and/or
(e) If Licensee sublicenses or assigns any rights licensed hereunder
without Virgin's written consent or distributes or sells Records through any
distribution channels or by promotional means other than in the manner described
in Section 2.01, or beyond the dates specified pursuant to Section 3.05 with
respect to particular Designated Master Recording(s) for which the rights herein
are licensed to Licensee or in violation of any restrictions set by Virgin
pursuant to Section 3.07; and/or
(f) If Licensee shall couple the Designated Master Recording(s)
with any master recording which is duplicated without the permission of the
owner of such master recording; and/or
(g) If Licensee does not fully comply with Articles 3, 5, 6 and 8.03
hereof;
then Licensee shall be deemed in material breach hereof and Virgin, in addition
to such other rights and remedies which Virgin may have at law or otherwise
under this Agreement, may terminate the Term of the Agreement without prejudice
to any rights or claims Virgin may have and all rights granted hereunder shall
forthwith revert to Virgin or its Affiliates, and Licensee may not thereafter
manufacture Records from the Designated Master Recording(s), nor sell and
distribute such Records.
15. Miscellaneous
-------------
15.01. This Agreement contains the entire understanding of the parties
hereto relating to the subject matter hereof and cannot be changed or terminated
except by an instrument signed by an officer of Virgin and an officer of
Licensee. A waiver by either party of any term or condition of this Agreement in
any instance shall not be deemed or construed as a waiver of such term or
condition for the future, or of any subsequent breach thereof. All remedies,
rights, undertakings, obligations and agreements contained in this Agreement
shall be cumulative and none of them shall be in limitation of any other remedy,
right, undertaking, obligation or agreement of either party.
15.02. This Agreement shall be deemed entered into in the State of New
York, and the validity, interpretation and legal effect of this agreement shall
be governed by the laws of the State of New York applicable to contracts entered
into and performed entirely within the State of New York, with respect to the
determination of any claim, dispute or disagreement which may arise out of the
interpretation, performance, or breach of this agreement. Any process in any
action or proceeding commenced in the courts of the State of New York or
elsewhere arising out of any such claim, dispute or disagreement,
14
<PAGE>
may, among other methods, be served in the manner set forth in Section 11.01 or
such other address the parties may designate pursuant to Section 11 hereof. Any
such delivery or mail service shall be deemed to have the same force and effect
as personal service within the State of New York or the jurisdiction in which
such action or proceeding may be commenced.
15.03. The parties hereto are sophisticated and have had the opportunity
to be represented by lawyers throughout the negotiation of this Agreement. As a
consequence, the parties do not believe that the presumptions of any laws or
rules relating to the interpretation of contracts against the drafter of any
particular clause should be applied in this case and therefore waive their
effects.
15.04. This Agreement shall not become effective until executed by all
proposed parties hereto.
15
<PAGE>
15.05. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which, when taken together, shall
constitute one and the same instrument.
ACCEPTED AND AGREED:
MUSICMAKER.COM, INC. VIRGIN HOLDINGS, INC.
By: /s/ Robert Bernardi By: /s/ Susan Feingold
----------------------------- -----------------------------
Title: Chairman and Co-CEO Title: Secretary
-------------------------- --------------------------
By: /s/ Devarajan S. Puthukarai
-----------------------------
Title: President and Co-CEO
--------------------------
16
<PAGE>
EXHIBIT 10.14
________________________________________________
AGREEMENT
between
MUSICMAKER.COM, INC.
AND
VIRGIN HOLDINGS, INC.
__________________________________________
Dated June 8, 1999
__________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE TRANSACTIONS; DEFINITIONS........................ 1
1.1 Transaction............................................... 1
1.2 Closing and Other Deliveries.............................. 1
1.3 The Closing............................................... 2
1.4 Definitions............................................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY........ 4
2.1 Corporate Organization.................................... 4
2.2 Subsidiaries.............................................. 4
2.3 Capital Stock............................................. 4
2.4 Books and Records......................................... 5
2.5 Newly Issued Shares....................................... 5
2.6 Title to Properties....................................... 5
2.7 Authority................................................. 6
2.8 No Violation.............................................. 6
2.9 Litigation................................................ 7
2.10 Compliance with Laws...................................... 7
2.11 Financial Condition....................................... 7
2.12 No Undisclosed Financial Liabilities...................... 7
2.13 No Material Adverse Change; Ordinary Course of Business... 8
2.14 No General Solicitation................................... 8
2.15 Taxes..................................................... 9
2.16 Brokers................................................... 9
2.17 Investment Company........................................ 9
2.18 Certain Agreements........................................ 9
2.19 Registration Rights.......................................10
2.20 Trade Relations...........................................10
2.21 Environmental Matters.....................................10
2.22 Proprietary Rights........................................11
2.23 Employee Benefit Plans....................................14
2.24 Employment Matters........................................15
2.25 Potential Conflicts of Interest...........................16
2.26 Insurance.................................................16
2.27 Hart-Scott................................................16
2.28 Registration Statement....................................16
2.29 Disclosure................................................17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF VIRGIN.............17
3.1 Organization..............................................17
3.2 Authority.................................................17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
3.3 No Violation............................................. 17
3.4 Brokers.................................................. 18
3.5 Securities Act Representation............................ 18
ARTICLE IV INDEMNIFICATION..................................... 18
4.1 Indemnification.......................................... 18
4.2 Notification............................................. 19
4.3 Limitations.............................................. 20
4.4 Exclusive Remedy; Related Agreements..................... 20
ARTICLE V AGREEMENTS.......................................... 20
5.1 License Agreement........................................ 20
5.2 Registration Rights Agreement............................ 20
5.3 Stockholders Agreement................................... 20
5.4 Public Offering.......................................... 21
5.5 Sale of Shares in the IPO................................ 21
5.6 Errors and Omissions Insurance........................... 21
5.7 Policies and Procedures.................................. 21
5.8 Directors and Officers Insurance......................... 21
5.9 Charter Amendment........................................ 22
ARTICLE VI MISCELLANEOUS....................................... 22
6.1 Survival of Representations and Warranties............... 22
6.2 Notices.................................................. 22
6.3 Headings; Agreement...................................... 23
6.4 Publicity................................................ 23
6.5 Entire Agreement......................................... 23
6.6 Assignment............................................... 24
6.7 Counterparts............................................. 24
6.8 Governing Law............................................ 24
6.9 Third Party Beneficiaries................................ 24
6.10 Costs and Expenses....................................... 24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS Page
- -------- ----
<S> <C>
Exhibit A Form of License Agreement
Exhibit B-1 Form of Opinion Counsel to the Company
Exhibit B-2 Form of Opinion of Counsel to Virgin
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Stockholders Agreement
</TABLE>
<PAGE>
AGREEMENT
---------
AGREEMENT (this "Agreement"), dated June 8, 1999, between
---------
musicmaker.com, Inc., a Delaware corporation (the "Company"), and Virgin
-------
Holdings, Inc., a Delaware corporation ("Virgin").
------
The Company has agreed to issue to Virgin shares of common stock, par
value $.01 per share (the "Common Stock"), of the Company, on the terms and
------------
subject to the conditions set forth in this Agreement.
Concurrently with the execution of this Agreement, the Company and
Virgin are entering into a license agreement (the "License Agreement") in the
-----------------
form attached hereto as Exhibit A, pursuant to which Virgin has agreed to
---------
license to the Company from time to time over a five-year period certain songs
owned by Virgin upon the terms and subject to conditions set forth in the
License Agreement.
The Company intends to consummate an initial public offering of shares
of Common Stock (an "IPO"), subject to obtaining all regulatory and other
---
requisite approvals, and subject to market conditions.
NOW, THEREFORE, intending to be legally bound hereby, the parties
agree as follows:
ARTICLE I
THE TRANSACTIONS; DEFINITIONS
1.1 Transaction. Subject to the terms and conditions of this
-----------
Agreement, at the Closing (as defined below), in exchange for the rights granted
by Virgin to the Company under the License Agreement, the Company will issue to
Virgin a number of shares of Common Stock (the "Shares"), which Shares, after
giving effect to the transactions contemplated in this Agreement, constitute 50%
of the issued and outstanding shares of capital stock of the Company on a fully
diluted basis on the date hereof.
1.2 Closing and Other Deliveries. At the Closing, each party shall
----------------------------
deliver to the other party:
(a) a certificate of the Secretary of such party, dated the
date of Closing (the "Closing Date"), (i) attaching a true, complete and correct
------------
copy of the certificate of incorporation of such party, as amended through the
Closing Date, in each case as certified by the Secretary of State of the State
of Delaware, (ii) certifying the
<PAGE>
genuineness, and attaching a true, complete and correct copy, of the Bylaws of
such party, as amended through the Closing Date, (iii) certifying as to the
incumbency and genuineness of the signatures of each officer of such party
executing the Agreement, the License Agreement, the Stockholders Agreement and
the Registration Rights Agreement (the "Related Agreements"), and
------------------
(iv) certifying the genuineness and attaching copies of the resolutions of the
Board of Directors of such party authorizing the execution, delivery and
performance of the Agreement and the Related Agreements and the consummation of
the transactions contemplated hereby and thereby.
(b) a certificate of an officer of such party, dated the
Closing Date, certifying that all consents, approvals and other actions of, and
notices and filings with, all entities and persons as may be necessary or
required with respect to the execution and delivery of the Agreement and the
Related Agreements, and the consummation of the transactions contemplated hereby
and thereby, have been obtained or made.
(c) an opinion of counsel of such party, dated the Closing
Date, in the forms attached hereto as Exhibit B-1 and Exhibit B-2.
----------- -----------
In addition, at the Closing, the Company shall issue to Virgin a share
certificate or share certificates representing the Shares.
1.3 The Closing. The closing (the "Closing") will take place
----------- -------
simultaneously with the execution and delivery of this Agreement and will be
held at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of
the Americas, New York, NY.
1.4 Definitions. When used in this Agreement, the following terms
-----------
shall have the meanings ascribed to them in the sections noted below:
Term Section
- ---- -------
1997 Audited Financials................... 2.11
1998 Audited Financials................... 2.11
1999 Interim Financials................... 2.11
Act....................................... 2.28
affiliate................................. 2.16
Agreement................................. Preamble
Assets.................................... 2.6
Benefit Plans............................. 2.23(a)
Claims.................................... 2.9
Closing................................... 1.3
Closing Date.............................. 1.2(a)
2
<PAGE>
Code...................................... 2.23(a)
Common Stock.............................. Preamble
Common Stock Warrants..................... 2.3
Company................................... Preamble
Employees................................. 2.24
Environmental Claims...................... 2.21(b)
Environmental Laws........................ 2.21(b)
ERISA..................................... 2.23(a)
ERISA Affiliate........................... 2.23(b)
Hazardous Substances...................... 2.21(b)
HSR Act................................... 2.27
Indemnified Party......................... 4.1
Indemnifying Party........................ 4.1
Intellectual Property..................... 2.22(a)
IP Licenses............................... 2.22(b)
IPO....................................... Preamble
IRS....................................... 2.23(a)
License Agreement......................... Preamble
Liens..................................... 2.5
Listed Contract........................... 2.18
Losses.................................... 4.1
Material Adverse Effect................... 2.1
Permits................................... 2.10(b)
Preferred Stock........................... 2.3
Preferred Stock Warrants.................. 2.3
Proposed Intellectual Property Agreements 2.22(b)
Registration Rights Agreement............. 5.2
Registration Statement.................... 2.28
Related Agreements........................ 1.2(a)
Requirements of Law....................... 2.8
Rules..................................... 2.27
SEC....................................... 2.28
Series A Preferred Stock.................. 2.3
Series B Preferred Stock.................. 2.3
Shares.................................... 1.1
Software.................................. 2.22(a)
Stockholders Agreement.................... 5.3
Systems................................... 2.22(h)
Technology................................ 2.22(a)
Underwriters.............................. 5.4
Virgin.................................... Preamble
Year 2000 Compliant....................... 2.22(h)
3
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Virgin as follows:
2.1 Corporate Organization. The Company is a corporation duly
----------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, with all requisite corporate power and authority to own and operate
its property and to lease the properties it operates as lessee and to carry on
its business as it is now being conducted and is duly qualified or licensed to
do business and is in good standing in each jurisdiction in which it currently
carries on business except where failure to be so qualified would not have,
individually or in the aggregate, a material adverse effect upon the business,
prospects, results of operations or financial condition of the Company, or a
material adverse effect on the ability of the Company to perform its obligations
under this Agreement or any Related Agreement to which it is a party or the
ability of the Company to consummate the transactions contemplated hereby or
thereby (a "Material Adverse Effect"). True, complete and correct copies of the
-----------------------
Certificate of Incorporation and the Bylaws of the Company, as amended to date,
heretofore have been delivered to Virgin.
2.2 Subsidiaries. Except as set forth an Schedule 2.2, the
------------ ------------
Company does not, directly or indirectly, own any voting securities of any
corporation or other entity.
2.3 Capital Stock. The authorized capital stock of the Company
-------------
consists of 15,584,415 shares of Common Stock, of which, as of the date hereof,
2,960,058 shares are issued and outstanding (after giving effect to the
transactions contemplated hereby) and 5,219,086 are reserved for issuance under
the terms of the Company's outstanding options, warrants and other convertible
securities which includes only the following: (i) 1,802,575 shares of Common
Stock reserved for issuance under the Company's Amended Stock Option Plan, of
which, as of the date hereof, 812,403 are issued and outstanding; (ii) 454,545
shares of Series A Convertible Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"), of which, as of the date hereof, 454,545 are issued
- -------------------------
and outstanding; (iii) 865,801 shares of Series B Convertible Preferred Stock,
par value $.01 per share (the "Series B Preferred Stock"), of which, as of the
------------------------
date hereof, 364,654 are issued and outstanding; (iv) 227,578 shares Series C
Convertible Preferred Stock, par value $.01 per share (collectively, with the
Series A Preferred Stock and the Series B Preferred Stock, the "Preferred
---------
Stock"), of which no shares are issued and outstanding; (v) 775,128 warrants to
- -----
purchase shares of Common Stock (the "Common Stock Warrants"), all of which are
---------------------
issued and
4
<PAGE>
outstanding; (vi) 865,801 warrants to purchase Series B Preferred Stock, of
which 501,147 are outstanding; and (vii) 227,578 warrants to purchase
Series C Preferred Stock, all of which are outstanding (collectively, the
"Preferred Stock Warrants"). All of the outstanding shares of Common Stock and
- -------------------------
Preferred Stock have been duly and validly authorized and issued, are fully paid
and nonassessable and were issued in compliance with all applicable federal and
state securities laws. Except as set forth on Schedule 2.3, (i) upon exercise
------------
of the Common Stock Warrants, the shares of Common Stock issued pursuant to such
warrants will be duly and validly issued, fully paid and nonassessable and
issued in compliance with all applicable federal and state securities laws and
(ii) upon exercise of the Preferred Stock Warrants, the shares of Preferred
Stock issued pursuant to such warrants will be duly and validly issued, fully
paid and nonassessable and issued in compliance with all federal and state
securities laws. Except for the Common Stock Warrants, the Preferred Stock and
the Preferred Stock Warrants, and except as set forth on Schedule 2.3, there are
------------
no preemptive rights, options, warrants, conversion privileges or other rights
presently outstanding to purchase or otherwise acquire any authorized but
unissued shares of capital stock or other securities of the Company.
2.4 Books and Records. Copies of all the minute books and stock
-----------------
record books of the Company have been delivered to Virgin for inspection and
contain accurate records of all meetings of, and written consents by, the Board
of Directors (and any committees thereof) and stockholders of the Company since
its incorporation through the date hereof.
2.5 Newly Issued Shares. The Shares constitute 50% of the issued
-------------------
and outstanding shares of capital stock of the Company on a fully diluted basis,
after giving effect to the transactions described herein, the conversion,
exercise or exchange of all securities of the Company convertible into or
exercisable or exchangeable for shares of Common Stock of the Company and all
anti-dilution adjustments required by the transactions described hereunder.
Except as set forth on Schedule 2.5, there are no anti-dilution adjustments
------------
required by the transactions described hereunder. The Shares have been duly
authorized and, when issued as contemplated hereby at the Closing will be duly
and validly issued, fully paid and non-assessable, and issued in compliance with
all applicable federal and state securities laws. The issuance of the Shares by
the Company will not be subject to preemptive or other similar rights or such
rights have been waived in writing by the holders thereof. At the Closing,
Virgin will acquire good title to the Shares free and clear of any and all
liens, pledges, claims, security interests, mortgages, assessments, covenants,
restrictions, rights of first refusal, defects in title or other burdens
(collectively, "Liens"), except for such Liens as may be created pursuant to
-----
this Agreement or the Related Documents or imposed by applicable federal and
state securities laws.
5
<PAGE>
2.6 Title to Properties. The Company does not own any real
-------------------
property interests. The Company has, and upon consummation of the transactions
contemplated hereby will have, good record and marketable title to, or holds,
and upon consummation of the transactions contemplated hereby will hold,
interests as lessee under leases in full force and effect in, all of its assets,
rights, interests and other properties, tangible and intangible (the "Assets"),
------
except for such defects in title as would not have a Material Adverse Effect.
2.7 Authority. The Company has full corporate power and
---------
authority to execute and deliver this Agreement and each Related Agreement to
which it is a party, to carry out its obligations hereunder and thereunder. The
execution, delivery and performance by the Company of this Agreement and each
Related Agreement to which it is a party have been duly authorized by the board
of directors of the Company and its stockholders and no other corporate
proceedings on the part of the Company are necessary to authorize the execution
and delivery of this Agreement and each Related Agreement by the Company or the
performance by the Company of its obligations hereunder or thereunder. This
Agreement and each Related Agreement have been duly executed and delivered by
the Company and (assuming due execution and delivery by the other parties
hereto) constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws affecting creditors' rights generally and subject to general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
2.8 No Violation. The execution, delivery and performance of this
------------
Agreement and each Related Agreement by the Company do not (a) violate any
provision of the Certificate of Incorporation or By-laws of the Company or any
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award in effect on the date hereof (collectively, "Requirements of Law")
-------------------
applicable to the Company, (b) except as set forth on Schedule 2.8(b), require
---------------
the consent, waiver, approval, license or authorization of or any notice or
filing by the Company with any person or governmental authority or (c) violate,
result (with or without notice or the passage of time, or both) in a breach of
or give rise to the right to accelerate, terminate or cancel any obligation
under, constitute (with or without notice or the passage of time, or both) a
default under, any of the terms or provisions of any charter or bylaw,
indenture, mortgage, agreement, contract, order, judgment, ordinance, regulation
or decree to which the Company is subject or by which the Company is bound.
Except as set forth on Schedule 2.8, the Company is not party to any agreement
------------
which is currently in effect, or by which the Company is currently bound,
granting any rights to any person which are inconsistent with the rights to be
granted by the Company in this Agreement and each Related Agreement. Except as
set forth on Schedule 2.8, the execution, delivery and performance of this
------------
Agreement and each Related Agreement by
6
<PAGE>
the Company and the consummation by it of the transactions contemplated on its
part hereby and thereby will not result in a "change of control" or similar
event occurring under any agreement, indenture, mortgage, contract or plan to
which the Company is subject or by which the Company is bound or give rise to a
payment by the Company under a change of control or similar provision in any
agreement, indenture, mortgage or contract to which the Company is subject or by
which the Company is bound.
2.9 Litigation. Schedule 2.9 lists all actions, suits,
---------- ------------
proceedings, written complaints or, to the Company's knowledge, claims or
investigations (collectively, "Claims") pending or, to the Company's knowledge,
------
threatened, at law, in equity, in arbitration or before any governmental
authority against the Company and with respect to which the Company is a party
or responsible by way of indemnity. Other than as set forth on Schedule 2.9, no
------------
such Claim would, if adversely determined, have a Material Adverse Effect. No
injunction, writ, temporary restraining order, decree or order of any nature has
been issued by any court or other governmental authority against the Company
purporting to enjoin or restrain the execution, delivery or performance of this
Agreement or any Related Agreement.
2.10 Compliance with Laws.
--------------------
(a) The Company is in compliance with all Requirements of Law
in all respects, except to the extent that the failure to comply with such
Requirements of Law would not have a Material Adverse Effect.
(b) (i) The Company has all licenses, permits, orders or
approvals of any governmental authority (collectively, "Permits") that are
-------
material to or necessary for the conduct of the business of the Company,
(i) such Permits are in full force and effect, and (ii) no material violations
with respect to any Permit has occurred and is continuing.
2.11 Financial Condition. The Company heretofore has delivered to
-------------------
Virgin true and correct copies of audited consolidated financial statements of
the Company for the years ended December 31, 1997 (the "1997 Audited
------------
Financials") and December 31, 1998 (the "1998 Audited Financials") and the
- ---------- -----------------------
unaudited financial statements of the Company for the three-month period ended
March 31, 1999 (the "1999 Interim Financials"). The 1997 Audited Financials,
-----------------------
1998 Audited Financials and the 1999 Interim Financials have been prepared in
accordance with GAAP applied consistently and fairly present in all material
respects the financial condition of the Company as of the dates thereof and the
results of operations of the Company for the period, or portion thereof, then
ended (except in the case of the 1999 Interim Financials, for normal year-end
adjustment and the absence of footnotes).
7
<PAGE>
2.12 No Undisclosed Financial Liabilities. The Company does not,
------------------------------------
and upon consummation of the transactions contemplated hereby will not, have any
direct or indirect indebtedness, liability (including, without limitation,
product liability or warranty claim), obligation, fixed or unfixed, contingent
or otherwise, and whether or not of a kind required by GAAP to be set forth on a
financial statement, other than (i) liabilities fully and adequately reflected
on the 1998 Audited Financials, including the Notes thereto and on the Interim
Financials, (ii) those incurred since March 31, 1999 in the ordinary course of
business, (iii) liabilities incurred pursuant to this Agreement, (iv)
liabilities which would not have a Material Adverse Effect or (v) as set forth
on Schedule 2.12.
-------------
2.13 No Material Adverse Change; Ordinary Course of Business.
-------------------------------------------------------
Except as contemplated by this Agreement and as set forth on Schedule 2.13,
-------------
since December 31, 1998, the Company has not (a) experienced any change, event
or condition which has had, or could reasonably be expected to have, a Material
Adverse Effect, (b) conducted its business in any material respect other than in
the ordinary course consistent with past practices, (c) incurred any
indebtedness for borrowed money or issued any debt securities or assumed,
guaranteed or endorsed the obligations of any other person, (d)(i) except in
the ordinary course of business, sold, transferred or otherwise disposed of any
of its property or Assets or (ii) mortgaged or encumbered any of its property or
Assets, (e) suffered any casualty losses not covered by insurance,
(f) repurchased any of its capital stock, (g) declared, set aside or paid any
dividend or other distribution in respect of its capital stock, (h) amended its
Certificate of Incorporation or Bylaws or merged with or into or consolidated
with any other person, (i) split, combined or reclassified its capital stock,
(j) issued or sold (or agreed to issue or sell) any of its equity securities or
any options, warrants, conversion or other rights to purchase any such
securities or any securities convertible into or exchangeable for such
securities, or granted, or agreed to grant any such rights, (k) increased the
rates of compensation (including bonuses) payable or to become payable to any of
its officers, employees, agents, independent contractors or consultants other
than increases made in the ordinary course of business except to persons
receiving less than $50,000 per year or where the effect thereof will not either
individually or in the aggregate have, or could reasonably be expected to have,
a Material Adverse Effect (l) entered into any new or amended any existing
employment contracts, severance agreements or consulting contracts or instituted
or agreed to institute any increase in benefits or altered its employment
practices or the terms and conditions of employment, (m) changed in any respect
its accounting methods, principles or practices, (n) entered into or amended or
terminated any transaction or contract that has had, or could reasonably be
expected to have, a Material Adverse Effect on the Company, (o) entered into any
joint ventures or partnerships or any kind, or (p) entered any contract or other
agreements to do any of the foregoing.
8
<PAGE>
2.14 No General Solicitation. No form of general solicitation or
-----------------------
general advertising was used by the Company or its representatives in connection
with the offer or sale of the Shares. Assuming the accuracy of Virgin's
representations in Section 4.5, no registration of the Shares, pursuant to the
provisions of the Securities Act or any state securities or "blue sky" laws,
will be required by the offer, sale or issuance of the Shares.
2.15 Taxes.
-----
(a) The Company has filed or caused to be filed, or has
properly filed extensions for, all income tax returns which are required to
be filed and have paid or caused to be paid all taxes as shown on said
returns and on all assessments received by it to the extent that such taxes
have become due, except taxes the validity or amount of which is being
contested in good faith by appropriate proceedings and with respect to
which adequate reserves have been set aside in accordance with GAAP. The
Company has paid or caused to be paid, or have established reserves that
the Company reasonably believes to be adequate for all income tax
liabilities applicable to the Company for all fiscal years which have not
been examined and reported on by the taxing authorities (or closed by
applicable statutes). The Company has given or otherwise made available to
Virgin correct and complete copies of all tax returns, examination reports
and statements of deficiencies for all periods for which the statute of
limitations has not expired.
(b) No audit or other proceeding by any taxing authority,
court or similar person is pending or to the Company's knowledge, threatened,
with respect to any taxes due from or with respect to the operations of the
Company or any tax return filed by or with respect to the operations of the
Company. The Company has not received any notice of any assessment of taxes
proposed against the Company or any of its assets.
2.16 Brokers. Except as set forth on Schedule 2.16, neither the
------- -------------
Company nor any person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with (an
"affiliate") the Company has committed on behalf of itself or a third party to
---------
pay any fee or commission to any broker, finder, investment banker or other
intermediary in connection with this Agreement.
2.17 Investment Company. Neither the Company nor any person
------------------
controlling the Company is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
2.18 Certain Agreements.
------------------
9
<PAGE>
(a) Except as set forth on Schedule 2.18, the Company is not a
-------------
party to any (i) agreement, contract, indenture or other instrument relating to
the borrowing of money or the guarantee of any obligation for the borrowing of
money, (ii) employment, consulting, compensation or severance agreement with any
of its directors, employees or consultants, (iii) agreement, contract or
commitment limiting or restraining it from engaging or competing in any
business, (iv) lease pursuant to which it leases any real property, (v)
distribution, dealer, representation or agency agreement, outside of the
ordinary course of business, (vi) record label, music content, marketing
alliance, music license or similar agreement, or (vii) contract, agreement,
obligation or commitment with any affiliates (each of the foregoing a "Listed
------
Contract"). Each Listed Contract is in full force and effect and has been
- --------
complied with in all material respects by the Company and, to the Company's
knowledge, has been complied with in all material respects by all other
parties thereto. Except as set forth in Schedule 2.18, no consent is
-------------
required under any Listed Contract in connection with the consummation of the
transactions contemplated by this Agreement or any Related Agreement. Each
Listed Contract constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms and, to
the Company's knowledge, each other party thereto.
2.19 Registration Rights. Schedule 2.19 sets forth all agreements
------------------- -------------
to which the Company is a party or by which it is bound relating to the
registration of its securities.
2.20 Trade Relations. To the Company's knowledge, there exists no
---------------
actual or threatened termination, cancellation or material adverse limitation
of, or any material adverse modification or material change in, the business
relationship or business of the Company or its business with any customer or any
group of customers which is individually or in the aggregate material to the
business of the Company, or with any supplier which is material to the business
of the Company.
2.21 Environmental Matters.
---------------------
(a) Except as disclosed on Schedule 2.21 or as would not be
-------------
reasonably likely to have a Material Adverse Effect on its operations or
property, (i) the Company is in compliance with all applicable Environmental
Laws, (ii) the Company has all Permits and authorizations required pursuant to
Environmental Laws; all such Permits and authorizations are in full force and
effect; and no actions are pending to revoke, limit or modify any of such
Permits or authorizations, (iii) no Environmental Claims are pending or to the
Company's knowledge, threatened, against the Company and there are no civil,
criminal or administrative judgments or notices of violation against the Company
pursuant to Environmental Laws, and (iv) to the Company's knowledge, there are
no events, conditions or circumstances which have resulted or will result in
obligations or liability pursuant to Environmental Laws or
10
<PAGE>
principles of common law relating to the protection of the environment or health
and safety which are reasonably likely to have a Material Adverse Effect.
(b) For purposes of this Agreement, "Environmental Laws" means
------------------
any law, statute, code, ordinance or other legal requirement relating to
pollution, protection of the environment, or the emission, discharge or release
of Hazardous Substances into the environment or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances or the protection of employee or
public health and safety; "Environmental Claims" means any written
--------------------
notification pursuant to Environmental Laws that any of the current or past
operations of the Company, or any by-products thereof, or any of the property
currently or formerly owned, leased or operated by the Company is or may be
implicated in or subject to any proceeding, action, complaint, suit, demand,
litigation, investigation, claim, order, hearing, notice or agreement by any
governmental authority or any other person; and "Hazardous Substances"
--------------------
means any toxic waste, pollutant, contaminant, hazardous substance,
toxic substance, hazardous waste, special waste, industrial substance or waste,
petroleum-derived substance or waste, radioactive substance or waste, or any
constituent of any such substance or waste, or any other substance regulated or
defined as hazardous or harmful by any governmental authority.
2.22 Proprietary Rights.
------------------
(a) "Intellectual Property" shall mean all of the following
---------------------
as they exist in all jurisdictions throughout the world, in each case, to the
extent owned by or licensed to, or otherwise used by the Company which,
individually or in the aggregate, are material to the business of the Company:
(i) patents, patent applications, and other patent rights
(including any divisions, continuations, continuations-in-part,
substitutions, or reissues thereof, whether or not patents are issued on
any such applications and whether or not any such applications are
modified, withdrawn, or resubmitted);
(ii) trademarks, service marks, trade dress, trade names,
brand names, Internet domain names, designs, logos, or corporate names
(including, in each case, the goodwill associated thereto), whether
registered or unregistered, and all registrations and applications for
registration thereof;
(iii) copyrights, including all renewals and extensions
thereof, copyright registrations and applications for registration
thereof, and non-registered copyrights;
11
<PAGE>
(iv) trade secrets, and proprietary: designs; research;
processes; procedures; techniques; methods; know-how; data; mask works;
discoveries; inventions; and other rights (whether or not patentable or
subject to copyright, mask work, or trade secret protection)
(collectively, "Technology"); and
-----------
(v) computer software programs, including, without
limitation, all source code, object code, and documentation related
thereto (the "Software").
--------
(b) Disclosure.
----------
(i) Schedule 2.22(b) lists all United States and foreign
----------------
patents and patent applications, trademark and service mark registrations
and applications, Internet domain name registrations and applications,
and copyright registrations and applications owned by the Company,
specifying as to each item, as applicable: the nature of the item,
including the title; the jurisdictions in which the item is issued or
registered or in which an application for issuance or registration has
been filed; and the issuance, registration, or application numbers and
dates.
(ii) Schedule 2.22(b) lists all licenses, sublicenses, and
----------------
other agreements or permissions necessary to conduct the business of the
Company in all material respects ("IP Licenses") under which the Company
-----------
is a licensee or otherwise is authorized to use any Intellectual
Property, specifying as to each item, as applicable: the nature of the
item, including the title; the owner of the item; and the term of the
license. The Company represents and warrants that it is authorized to use
the Intellectual Property subject to the IP Licenses in all manners
necessary to the conduct of the business of the Company.
(iii) Schedule 2.22(b) lists and describes the status of
----------------
any agreements involving Intellectual Property currently in negotiation
by the Company ("Proposed Intellectual Property Agreements").
-----------------------------------------
(c) Ownership. Except as set forth on Schedules 2.22(b) and
--------- ---------------------
2.22(c), the Company owns and, upon consummation of the transactions
- -------
contemplated hereby will own, free and clear of all Liens, and has and, upon
consummation of the transactions contemplated hereby will have, the
unrestricted right to use, sell, or license, all Intellectual Property
material to the conduct of the business of the Company.
(d) Claims. Except as set forth on Schedule 2.22(d), to the
------ ----------------
Company's knowledge, the Company has not infringed, and is not infringing as of
the
12
<PAGE>
date hereof, upon or otherwise violated the intellectual property rights of
any third party or received any claim, charge, demand, or notice alleging
any such infringement or other violation. Except as set forth on Schedule
--------
2.22(d), the Company has not been, during the three years preceding the
- -------
date hereof, a party to any Claim nor, to the Company's knowledge, is any
Claim threatened, that challenges the validity, enforceability, ownership,
or right to use, sell, or license any Intellectual Property. To the
Company's knowledge, no third party is infringing upon any Intellectual
Property.
(e) Administration and Enforcement. The Company has taken all
------------------------------
necessary action to maintain and protect each item of Intellectual Property
owned by the Company which is necessary to the conduct of its business.
(f) Protection of Trade Secrets and Technology. The Company
------------------------------------------
reasonable precautions to protect the secrecy, confidentiality, and value of its
trade secrets and the proprietary nature and value of the Technology. Schedule
--------
2.22(f) lists every employee and third party who has contributed to the
- -------
development of Intellectual Property on behalf of the Company. Employee or third
party listed on Schedule 2.22(f) has signed an agreement with the Company
----------------
stating that such employee or third party (i) shall maintain the confidentiality
of the Company's trade secrets and other confidential information, (ii) assigns
to the Company all rights that such employee or third party might have in such
Intellectual Property, and (iii) has not breached, and shall not breach, any
confidentiality, non-competition, or other obligation to any other person or
entity in contributing to the development of Intellectual Property on behalf of
the Company. To the Company's knowledge, no such employee or third party has
breached any such agreement.
(g) Software. All Software which is necessary to the
--------
Company's business is described in Schedule 2.22(g) hereto. Such Software is
----------------
held by the Company legitimately, and, to the Company's knowledge, is free from
any significant software defect, performs in all necessary respects in
conformance with its documentation, and does not contain any bugs or viruses or
any code or mechanism that could be used to interfere with the operation of the
Software. The Company has furnished all documentation relating to the use,
maintenance, and operation of such Software, all of which, to the Company's
knowledge, is true and accurate.
(h) Year 2000 Compliance. All Software, hardware, databases,
--------------------
and embedded control systems which, individually or in the aggregate, are
necessary to the business of the Company (collectively, the "Systems") owned
-------
or used by the Company are, to the Company's knowledge, Year 2000 Compliant.
Notwithstanding the foregoing, the Company represents and warrants that (i) all
Software listed on Schedule 2.22(g)(1)-(g)(6) is Year 2000 Compliant and
--------------------------
(ii) all Software and databases necessary to calculate and track royalties due
to Virgin under the License Agreement are Year 2000 Compliant. As used herein,
the term "Year 2000
---------
13
<PAGE>
Compliant" means that the Systems (i) accurately process date and time data
- ---------
(including, without limitation, calculating, comparing, and sequencing) from,
into, and between the twentieth and twenty-first centuries, the years 1999 and
2000, and leap year calculations and (ii) operate accurately with other software
and hardware that use standard date format (4 digits) for representation of the
year. The Company has not incurred and does not reasonably expect to incur any
material expenses arising from or relating to the failure of any Systems of the
Company or of any supplier, manufacturer, distributor, or other third party to
be Year 2000 Compliant.
(i) Effect of Transaction. The Company is not, nor, as a
---------------------
result of the execution and delivery of this Agreement or the performance of its
obligations hereunder, will be, in violation of any agreement relating to
any Intellectual Property.
2.23 Employee Benefit Plans.
----------------------
(a) Schedule 2.23 lists all employee benefit plans,
-------------
arrangements, policies or commitments (whether or not an employee benefit plan
within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), including any employment,
-----
consulting or deferred compensation agreement, executive compensation, bonus,
incentive, pension, profit-sharing, savings, retirement, stock option, stock
purchase or severance pay plan, any life, health, disability, or accident
insurance plan or any holiday or vacation practice, as to which the Company
has or in the future would have any direct or indirect, actual or contingent
liability ("Benefit Plans"). With respect to each such Benefit Plan, the
-------------
Company heretofore has delivered to Virgin true, correct and complete copies of
(i) all plan texts and agreements and related trust agreements or annuity
contracts, (ii) all summary plan descriptions and material employee
communications, (iii) the most recent annual report (including all schedules
thereto); and (iv) if the plan is intended to qualify under Section 401(a) or
403(a) of the Internal Revenue Code of 1986, as amended (the "Code"), the
----
most recent determination letter received from the Internal Revenue Service
(the "IRS"), if any.
---
(b) Except as specifically set forth on Schedule 2.23, (i) the
-------------
Company and any person who would be considered a single employer with the
Company pursuant to section 414(b), (c), (m) or (o) of the Code (an "ERISA
-----
Affiliate") has made all material payments due from it to date under or with
- ---------
respect to each Benefit Plan, (ii) the Company has performed all material
obligations required to be performed by it under, and is not in material default
under or in violation of, any Benefit Plan and to the Company's knowledge,
no other party is in default thereunder or in violation thereof, (iii) the
Company is in compliance in all material respects with the requirements
prescribed by all statutes, orders or governmental rules or regulations
applicable to the Benefit Plans, including, without limitation, ERISA and
the Code,
14
<PAGE>
(iv) neither the Company nor to the Company's knowledge, any other "disqualified
person" or "party in interest" (as defined in section 4975 of the Code and
section 3 of ERISA, respectively) has engaged in any "prohibited transaction,"
as such term is defined in section 4975 of the Code or section 406 of ERISA, for
which no exception or exemption exists, (v) there are no actions, suits or
claims pending (other than routine claims for benefits) or to the Company's
knowledge, threatened, with respect to any Benefit Plan, (vi) no Benefit Plan is
subject to Title IV of ERISA or Section 412 of the Code, (vii) the Company has
no liability under or pursuant to any plan which provides medical or death
benefits with respect to current or former employees of the Company beyond their
termination of employment (other than coverage mandated by law), (viii) no
Benefit Plan is a "multiple employer plan" or "multiemployer plan" within the
meaning of the Code or ERISA or the regulations promulgated thereunder, and (ix)
neither the Company nor any ERISA Affiliate has made any contributions to nor
participated in any "multiple employer plan" or "multiemployer plan" (as defined
in subsection (viii)) within the last five years.
(c) No Asset is subject to any Lien under sections 302(f),
306(a), 307(a) and 4068 of ERISA and sections 401(a)(29) and 412(n) of the Code
or, to the knowledge of the Company, under any other provisions of ERISA or
the Code.
(d) Each Benefit Plan conforms in all material respects to, and
its administration is in substantial compliance with, its terms and all
Requirements of Law and regulations. Each Benefit Plan intended to be qualified
under Code section 401(a) is so qualified and each trust established in
connection with any Benefit Plan that is intended to be exempt from federal
income taxation under Code section 501(a) is so exempt.
(e) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee to severance pay
or unemployment compensation, (ii) accelerate the time of payment or vesting, or
increase the amount of any compensation due to, any current or former employee,
(iii) result in a payment that would constitute a parachute payment within the
meaning of section 280G of the Code or (iv) constitute or involve a "prohibited
transaction" (as defined in section 406 or section 4975 of the Code) with
respect to a Benefit Plan.
2.24 Employment Matters. The Company has 16 employees (the
------------------
"Employees"), of which 7 are paid hourly and 9 are salaried. To the Company's
---------
knowledge, no Employee has indicated that such Employee will cancel or otherwise
terminate or modify such Employee's relationship with the Company or decrease or
eliminate such Employee's services to the Company as a result of the
consummation of the transactions contemplated hereby or by the Related
Agreements, or otherwise. No Employee is a member of any union and, except as
set forth on Schedule 2.24, no Employee has an employment agreement, whether
-------------
written or oral, with the Company.
15
<PAGE>
Except as set forth on Schedule 2.24, the Company has no liability, whether
-------------
absolute or contingent, direct or indirect, including any obligation under any
Benefit Plan, with respect to any misclassification of a person as an
independent contractor rather than as an employee. The Company currently does
not have or at any time in the past has not had nor is there now, to the
Company's knowledge, threatened, any walkout, strike, union activity, picketing,
work stoppage, work slowdown or any other similar occurrence that has had or
could reasonably be expected to have a Material Adverse Effect. The Company has
complied in all material respects with all applicable laws (including, without
limitation, the National Labor Relations Act, as amended), rules and
regulations, relating to the employment of labor, including those relating to
wages, hours, unemployment insurance, collective bargaining and the payment and
withholding of taxes, and the Company has withheld all amounts required by law
or agreement to be withheld from the wages or salaries of the Employees and the
Company is not liable for any arrears of wages or other taxes or penalties for
failure to comply with any of the foregoing. There are no material controversies
pending or to the Company's knowledge, threatened, between the Company and any
of the Employees or any labor union or other collective bargaining unit
representing any of the Employees. No union or other collective bargaining unit
has been certified or recognized by the Company as representing any of the
Employees and there has not been to the Company's knowledge any attempt by any
union to organize or represent the Employees within the last five years. No
approval of any union or other collective bargaining unit is required in
connection with the execution or delivery, performance of this Agreement or any
Related Agreement or the consummation of the transactions contemplated hereby
and thereby. The Company has no outstanding liability for any violations of the
Workers Adjustment and Retraining Notification Act.
2.25 Potential Conflicts of Interest. Except as set forth on
-------------------------------
Schedule 2.25, to the knowledge of the Company, no officer, director or
- -------------
affiliate of the Company: (a) owns, directly or indirectly, any interest in
(excepting less than 1% stock holdings for investment purposes in securities of
publicly held and traded companies), or is an officer, director, employee or
consultant of, any person which is, or is engaged in business as, a competitor,
lessor, lessee, supplier, distributor, sales agent or customer of, or lender to
or borrower from, the Company; (b) owns, directly or indirectly, in whole or in
part, any tangible or intangible property that the Company uses in the conduct
of its business; or (c) has any cause of action or other claim whatsoever
against, or owes any amount to, the Company, except for claims in the ordinary
course of business such as for accrued vacation pay, accrued benefits under the
Benefit Plans, and similar matters and agreements arising in the ordinary course
of business.
2.26 Insurance. Schedule 2.26 (i) accurately lists all of the
--------- -------------
Company's insurance policies or programs (including all key-man and similar
insurance) and indicates the insurer's name, policy number, expiration date,
amount of coverage, type
16
<PAGE>
of coverage, annual premiums, exclusions and deductibles, and (ii) indicates any
self-insurance program that is in effect. The Company maintains insurance in
such amounts and covering such risks as it believes are usually and customarily
carried with respect to similar businesses.
2.27 Hart-Scott. The Company (i) is its own "ultimate parent
----------
entity" as such term is defined in Section 801.1(a)(3) of the Rules (the
"Rules") promulgated under the Hart-Scott-Rodino Antitrust Improvements Act of
-----
"HSR Act") and (ii) does not have annual net sales or total assets of 1976
-------
(the $10,000,000 or more as determined in accordance with the HSR Act and Rules.
2.28 Registration Statement. The Registration Statement on Form S-1
----------------------
(Reg. No. 333-72685) (the "Registration Statement") filed by the Company with
----------------------
the Securities and Exchange Commission (the "SEC") on February 19, 1999 and all
---
amendments to the Registration Statement thereafter filed with the SEC conformed
as of the date so filed, and will conform as of the date thereafter filed, in
all materials respects to the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations of the SEC thereunder, and
---
did not at the date of filing and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
2.29 Disclosure. The representations and warranties contained in
----------
this Agreement and the Schedules to this Agreement and all documents and
certificates furnished to Virgin by the Company in connection herewith or
pursuant hereto at the Closing do not or as of the date such document and
certificates were prepared did not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make any statement
contained herein or therein, in the light of the circumstances under which it
was made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF VIRGIN
Virgin represents and warrants to the Company as follows:
3.1 Organization. Virgin is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware.
3.2 Authority. (i) Virgin has full corporate power and authority
---------
to execute and deliver this Agreement and each Related Agreement to which it is
a party, to carry out its obligations hereunder and thereunder and to consummate
the
17
<PAGE>
transactions contemplated on its part hereby and thereby, (ii) the execution,
delivery and performance by Virgin of this Agreement and each Related Agreement
to which it is a party have been duly authorized by all necessary corporate
action on the part of Virgin, (iii) no other action on the part of Virgin is
necessary to authorize the execution and delivery of this Agreement and each
Related Agreement by Virgin or the performance by Virgin of its obligations
hereunder or thereunder and (iv) this Agreement and each Related Agreement to
which Virgin is a party have been duly executed and delivered by Virgin and
(assuming due execution and delivery by the other parties hereto) constitutes a
legal, valid and binding agreement of Virgin, enforceable against it in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting creditors'
rights generally and subject to general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
3.3 No Violation. The execution and delivery by Virgin of this
------------
Agreement and each Related Agreement to which it is a party, the performance by
Virgin of its obligations hereunder and thereunder and the consummation by it of
the transactions contemplated on its part hereby and thereby will not (a)
violate any provision of the Certificate of Incorporation or By-laws of Virgin
or any Requirements of Law applicable to Virgin, (b) require Virgin to obtain
the consent, waiver, approval, license or authorization of or make any filing
with any person or governmental authority or (c) violate, result (with or
without notice or the passage of time, or both) in a breach of or give rise to
the right to accelerate, terminate or cancel any obligation under or constitute
(with or without notice or the passage of time, or both) a default under, any of
the terms or provisions of any charter or bylaw, indenture, mortgage, agreement,
contract, order, judgment, ordinance, regulation or decree to which Virgin is
subject or by which Virgin is bound.
3.4 Brokers. Neither Virgin nor any of its affiliates has
-------
committed on behalf of itself or a third party to pay any fee or commission to
any broker, finder, investment banker or other intermediary in connection with
this Agreement.
3.5 Securities Act Representation. As of the Closing hereunder,
-----------------------------
Virgin will be an "accredited investor" as defined in Rule 501 promulgated as
part of Regulation D under the Securities Act. Virgin is not purchasing the
Shares with a view to a distribution or resale of any of such securities in
violation of any applicable securities laws.
18
<PAGE>
ARTICLE IV
INDEMNIFICATION
4.1 Indemnification. Except as otherwise provided in this
---------------
Article IV, the Company (the "Indemnifying Party") agrees to indemnify, defend
------------------
and hold harmless Virgin and its affiliates and their respective officers,
directors, agents, employees and subsidiaries (each, an "Indemnified Party")
-----------------
to the fullest extent permitted by law from and against any and all losses,
Claims (including Claims by a third party), damages, expenses (including
reasonable fees, disbursements and other charges of counsel incurred by the
Indemnified Party, including those reasonably incurred in connection with
investigative, administrative or judicial proceedings commenced or threatened,
whether or not an Indemnified Party shall be designated a party thereby, and
those incurred in connection with any claim for indemnity hereunder) or other
liabilities suffered or incurred (collectively, "Losses") resulting from,
------
arising out of or relating to (a) any breach of any representation or warranty
by the Company in this Agreement, (b) any breach of any covenant or agreement by
the Company in this Agreement or (c) any legal, administrative or other actions
(including without limitation actions brought by any equity holders of the
Company or derivative actions brought by any person claiming through or in the
Company's name other than Virgin and its affiliates), proceedings or
investigations (whether formal or informal), or written threats of any of them,
based upon, relating to or arising out of (x) the Company's execution of this
Agreement or any Related Agreement or (y) the Company's performance of the
transactions contemplated by this Agreement or any Related Agreement; provided,
--------
that if and to the extent that indemnification is unenforceable for any reason,
the Indemnifying Party shall make the maximum contribution to the payment and
satisfaction of the Losses which shall be permissible under applicable laws. In
connection with the obligation of the Indemnifying Party to indemnify for
expenses as set forth above, the Indemnifying Party shall, upon presentation of
appropriate invoices containing reasonable detail, reimburse each Indemnified
Party for all such expenses as they are incurred by such Indemnified Party;
provided, however, that if an Indemnified Party is reimbursed for any expenses,
- -------- -------
the reimbursement of such expenses shall be refunded to the extent it is finally
judicially determined that the Losses in question resulted primarily from the
willful misconduct or gross negligence of the Indemnified Party.
4.2 Notification. Each Indemnified Party under this Article IV
------------
shall, promptly after the receipt of notice of the commencement of any Claim
against the Indemnified Party in respect of which indemnity may be sought from
the Indemnifying Party under this Article IV, notify the Indemnifying Party in
writing of its commencement. The omission of any Indemnified Party to so notify
the Indemnifying Party of any action shall not relieve the Indemnifying Party
from any liability which it may have to the Indemnified Party (a) other than
under this Article IV or (b) under this Article IV unless, and only to the
extent that, such omission materially and adversely prejudices the Indemnifying
Party with respect to substantive rights or defenses. In case any Claim shall be
brought against any Indemnified Party, and it shall notify the Indemnifying
Party of its commencement, the Indemnifying Party shall be entitled to
19
<PAGE>
assume and control the defense thereof at its own expense, with counsel
satisfactory to the Indemnified Party in its reasonable judgment; provided,
--------
however, that any Indemnified Party may, at its own expense, retain separate
- -------
counsel to participate in the defense. Notwithstanding the above, in any Claim
in which both the Indemnifying Party, on the one hand, and an Indemnified Party,
on the other hand, are, or are reasonably likely to become, a party, the
Indemnified Party shall have the right to employ separate counsel at the expense
of the Indemnifying Party and to control its own defense of the Claim if, in the
reasonable written opinion of counsel to the Indemnified Party, a conflict or
potential conflict exists between the Indemnifying Party, on the one hand, and
the Indemnified Party, on the other hand, that would make separate
representation advisable; provided, however, that the Indemnifying Party shall
-------- -------
not be liable for the fees and expenses of more than one counsel to all
Indemnified Parties. The Indemnifying Party agrees that it will not, without
the prior written consent of Virgin, settle, compromise or consent to the entry
of any judgment in any pending or threatened Claim relating to the matters
contemplated by this Agreement (if any Indemnified Party is a party or has been
actually threatened in writing to be made a party to it) unless the settlement,
compromise or consent includes an unconditional release of Virgin and each other
Indemnified Party from all liability arising out of or alleged in the Claim.
The Indemnifying Party shall not be liable for any settlement of any Claim
effected by an Indemnified Party without the Indemnifying Party's written
consent, which consent shall not be unreasonably withheld.
4.3 Limitations. Notwithstanding the foregoing, with respect to
-----------
Section 4.1(a) of this Agreement, an Indemnifying Party shall not have any
liability (other than with respect to any Losses incurred, arising under or
resulting from a breach of any of Sections 2.1, 2.3, 2.5, 2.16 and 2.28 of this
Agreement ("Excepted Claims")) unless the aggregate of all Losses relating
---------------
thereto for which an Indemnifying Party would, but for this provision, be liable
(other than with respect to Excepted Claims) exceeds on a cumulative basis an
amount equal to $75,000, in which event the Indemnified Parties shall be
entitled to indemnification hereunder in full for all Losses in excess of such
amount; provided, that an Indemnifying Party's aggregate liability under this
--------
Section 4.3 shall in no event exceed an amount equal to $40,000,000.
4.4 Exclusive Remedy; Related Agreements. Virgin agrees that,
------------------------------------
from and after the Closing, its sole and exclusive remedy with respect to any
claims relating to the subject matter of this Agreement shall be pursuant to the
indemnification provisions set forth in this Article IV, except that nothing in
this Agreement shall be deemed to constitute a waiver of any rights that any
Indemnified Party may have by separate agreement or a waiver of any tort claims
of, or causes of action arising from, fraudulent misrepresentation or deceit.
Notwithstanding anything to the contrary herein, (i) nothing in this Article IV
restricts or limits any rights that any Indemnified Party may have to seek
equitable relief and (ii) the indemnification and contribution provisions of the
Related Agreements shall govern any claim made with respect to matters arising
thereunder.
20
<PAGE>
ARTICLE V
AGREEMENTS
5.1 License Agreement. In connection with the transactions
-----------------
contemplated by this Agreement, simultaneously with the execution of this
Agreement, the Company and Virgin will enter into the License Agreement.
5.2 Registration Rights Agreement. In connection with the
-----------------------------
transactions contemplated by this Agreement, simultaneously with the execution
of this Agreement, the Company, Virgin and certain other stockholders of the
Company will enter into a registration rights agreement (the "Registration
------------
Rights Agreement"), a form of which is attached hereto as Exhibit C.
- ---------------- ---------
5.3 Stockholders Agreement. In connection with the transactions
----------------------
contemplated by this Agreement, the Company, simultaneously with the execution
of this Agreement, Virgin and certain other stockholders of the Company will
enter into a stockholders agreement (the "Stockholders Agreement"), a form of
----------------------
which is attached hereto as Exhibit D.
---------
5.4 Public Offering. Upon execution of this Agreement, the Company
---------------
shall authorize the amendment of, and shall amend, the Registration Statement to
disclose the transactions contemplated by this Agreement and the Related
Agreements. All changes to the Registration Statement shall be subject to the
approval of Virgin prior to filing with the SEC. The parties intend to
consummate the IPO after the Closing, subject to obtaining all regulatory and
other requisite approvals, and subject to market conditions. The Company and
Virgin shall mutually agree on the selection of underwriters (the
"Underwriters") for the IPO which, as of the date hereof, are agreed to be
------------
Ferris, Baker Watts, Inc. and Fahnestock & Co. Inc. Virgin agrees to enter into
a customary lock-up agreement with the Underwriters, on terms acceptable to
Virgin, providing for a "lock-up period" not to exceed the shorter of (i) 180
days, (ii) the period requested by the Underwriters or (iii) the period agreed
to by any other major stockholder of the Company.
5.5 Sale of Shares in the IPO or Other Offering. The Company shall
-------------------------------------------
include in the IPO, without regard to any cut-backs imposed by the Underwriters,
such number of Shares as Virgin may elect, up to a maximum number of Shares
equal to such number that results in Virgin receiving proceeds (after deduction
of underwriters commissions and discounts) in the IPO of $40 million. If prior
to the IPO the Company
21
<PAGE>
proposes to sell shares of Common Stock (or securities convertible into, or
exercisable or exchangeable for, shares of Common Stock, other than options to
employees of the Company under the Company's Amended Stock Option Plan), the
Company agrees that it will use its best efforts to arrange for Virgin to sell
such number of Shares (as determined by Virgin in its sole discretion) so that
Virgin realizes proceeds (after deduction of placement and other agent
commissions, discounts or similar fees), up to $40 million, sufficient to pay
any taxes arising from the acquisition by Virgin of the Shares under this
Agreement.
5.6 Errors and Omissions Insurance. Prior to the execution of this
------------------------------
Agreement, the Company will purchase errors and omissions insurance coverage in
the form, and in an amount, reasonably satisfactory to Virgin, and such
insurance shall be in full force and effect on the Closing Date.
5.7 Policies and Procedures. On the Closing Date, the Company
-----------------------
shall have in place and thereafter maintain adequate procedures to be observed
by the Company with respect to taking mechanical licenses, payments of record
and mechanical royalties, maintenance of and compliance with all licenses to
which the Company is a party and all other matters relating to the Company's
administration of its catalog of masters and use of musical compositions. In
addition, as soon as practicable following the Closing Date but in no event
later than 30 days thereafter, the Company shall use its best efforts to hire
sufficient staff to implement such procedures including, at a minimum, an
individual with a royalty accounting background to oversee the establishment and
enforcement of the matters contemplated above.
5.8 Directors and Officers Insurance. Prior to the consummation
--------------------------------
of the IPO, the Company shall increase its directors and officers coverage to a
level reasonably satisfactory to Virgin.
5.9 Charter Amendment. Prior to the consummation of the IPO, the
-----------------
Company shall amend its Certificate of Incorporation to remove certain
conversion, voting, registration and other rights of the holders of the
Preferred Stock.
ARTICLE VI
MISCELLANEOUS
6.1 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties made in this Agreement shall survive the Closing
and shall terminate on April 30, 2002, except that the representations and
warranties contained in Sections 2.1, 2.3, 2.5, 2.15, 2.16, 2.21, 2.23 and 2.28
of this Agreement shall survive without limitation.
22
<PAGE>
6.2 Notices. All notices, demands and other communications
-------
provided for or permitted under this Agreement shall be made in writing and
shall be by registered or certified first-class mail, return receipt requested,
telecopier, courier service or personal delivery:
If to the Company, to:
musicmaker.com, Inc.
1831 Wiehle Avenue
Suite 128
Reston, VA 20190
Facsimile: (703) 904-4117
Attention: Robert P. Bernardi
with copies to:
Venable, Baetjer and Howard, LLP
2010 Corporate Ridge Rd.
McLean, VA 22102
Facsimile: (703) 904-4117
Attention: John L. Sullivan, II
If to Virgin, to:
Virgin Holdings, Inc.
338 North Foothill Road
Beverly Hills, CA 90210
Facsimile: (310) 288-2745
Attention: Susan Feingold
with copies to:
EMI Recorded Music North America
1290 Avenue of the Americas
38th Floor
New York, NY 10104
Facsimile: (212) 492-5095
Attention: Alasdair J. McMullan
23
<PAGE>
and
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Facsimile: (212) 757-3990
Attention: Peter L. Felcher, Esq.
All such notices and communications shall be deemed to have been duly
given when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial courier service; five business days after
being deposited in the mail, postage prepaid, if mailed; when receipt is
mechanically acknowledged, if telecopied or transmitted by e-mail.
6.3 Headings; Agreement. The headings contained in this Agreement
-------------------
are inserted for convenience only and do not constitute a part of this
Agreement. The term "Agreement" for purposes of representations and warranties
---------
hereunder shall be deemed to include the Exhibits hereto to be executed
and delivered by parties relevant thereto.
6.4 Publicity. So long as this Agreement is in effect, except as
---------
required by law, regulation or stock exchange requirements, the parties hereto
shall not, and shall cause their affiliates not to, issue or cause the
publication of any press release or other announcement with respect to the
transactions contemplated by this Agreement or the other agreements contemplated
hereby without the consent of the other party, which consent shall not be
unreasonably withheld or delayed or without consulting with the other parties as
to the content of such press release or other announcement.
6.5 Entire Agreement. This Agreement and the Related Agreements
----------------
(including all Schedules and Exhibits hereto and thereto) constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them.
6.6 Assignment. This Agreement and all of the provisions hereof
----------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Virgin may transfer or assign this
Agreement and any of its rights, interests and obligations hereunder and to the
Shares to one or more of its affiliates and such assignee shall be a "Purchaser"
for all purposes under this Agreement. Except as provided in the immediately
preceding sentence, neither this Agreement nor any of the rights, interests or
obligations shall be assigned by any of the parties hereto without the prior
written consent of the other party; provided, that
--------
24
<PAGE>
nothing in this Section 6.6 shall prohibit Virgin from transferring some or all
of the Shares (but not its rights under this Agreement except to the extent
permitted under this Section 6.6).
6.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
6.8 Governing Law. The validity and interpretation of this
-------------
Agreement shall be governed by the laws of the State of New York, without
reference to the conflict of laws principles thereof which might indicate the
applicability of the laws of any other jurisdiction.
6.9 Third Party Beneficiaries. Except as provided in Article IV,
-------------------------
no person other than the parties and their successors and permitted assigns is
intended to be a beneficiary of this Agreement.
6.10 Costs and Expenses.
------------------
(a) Each of the Company and Virgin shall pay its own fees and
expenses (including attorneys fees) incurred in connection with the negotiation,
execution and delivery of this Agreement and the Related Agreements.
(b) The Company shall pay all costs and other expenses incurred
from time to time by the Company in connection with the Company's performance
of, and compliance with, this Agreement and the Related Agreements and all
conditions contained herein or therein on its part to be performed or complied
with.
(c) All sales, use, transfer, stamp (including documentary
stamp taxes, if any), excise, recording, income, capital gain, franchise and
other similar taxes or governmental charges with respect to the Shares shall be
borne by the Company.
25
<PAGE>
IN WITNESS WHEREOF, the Company and Virgin have caused this Agreement
to be duly signed as of the date first written above.
MUSICMAKER.COM, INC.
By: /s/ Robert Bernardi
--------------------------------------
Name: Robert Bernardi
Title: Chairman and Co-CEO
By: /s/ Devarajan S. Puthukarai
--------------------------------------
Name: Devarajan S. Puthukarai
Title: President and Co-CEO
VIRGIN HOLDINGS, INC.
By: /s/ Susan Feingold
--------------------------------------
Name: Susan Feingold
Title: Secretary
26
<PAGE>
EXHIBIT 10.15
================================================================================
STOCKHOLDERS AGREEMENT
among
MUSICMAKER.COM, INC.,
VIRGIN HOLDINGS, INC.
and
THE OTHER STOCKHOLDERS LISTED ON SCHEDULE I HERETO
---------------------------------------
Dated as of: June 8, 1999
---------------------------------------
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
<S> <C> <C>
1. General; Definitions.................................................... 1
1.1 General............................................................ 1
1.2 Definitions........................................................ 1
2. Restrictions on Transfer of Shares...................................... 6
2.1 Limitation on Transfer............................................. 6
2.2 Permitted Transfers................................................ 6
2.3 Permitted Transfer Procedures...................................... 7
2.4 Transfers in Compliance with Law; Substitution of Transferee....... 7
3. Right of First Offer.................................................... 7
3.1 Proposed Voluntary Transfers....................................... 7
3.2 Involuntary Transfers.............................................. 10
4. Future Issuance of Shares; Preemptive Rights 12
4.1 Offering Notice.................................................... 12
4.2 Preemptive Rights; Exercise........................................ 13
4.3 Closing............................................................ 13
4.4 Sale to Subject Purchaser.......................................... 14
5. After-Acquired Securities; Agreement to be Bound 14
5.1 After-Acquired Securities.......................................... 14
5.2 Agreement to be Bound.............................................. 14
6. Corporate Governance 15
6.1 General............................................................ 15
6.2 Stockholder Actions................................................ 15
6.3 Election of Directors; Number and Composition...................... 15
6.4 Removal and Replacement of Directors............................... 16
6.5 Reimbursement of Expenses.......................................... 16
6.6 Actions of the Board of Directors; Extraordinary Transactions...... 17
6.7 Company Information................................................ 18
6.8 Meetings........................................................... 18
6.9 Directors' and Officers' Insurance................................. 18
7. Stock Certificate Legend................................................ 18
8. Representations and Warranties.......................................... 19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
9. Miscellaneous........................................................... 20
9.1 Notices........................................................... 20
9.2 Successors and Assigns............................................ 21
9.3 Amendment and Waiver.............................................. 21
9.4 Counterparts...................................................... 22
9.5 Specific Performance.............................................. 22
9.6 Headings.......................................................... 22
9.7 GOVERNING LAW..................................................... 22
9.8 Severability...................................................... 22
9.9 Entire Agreement.................................................. 22
9.10 Duration of Agreement............................................. 22
9.11 Further Assurances................................................ 23
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
A Certificate of Incorporation
B By-laws
C-1 Form of Transfer Agreement (Previously issued shares)
C-2 Form of Transfer Agreement (Newly issued shares)
</TABLE>
ii
<PAGE>
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of June 8, 1999 (this "Agreement"), among
---------
musicmaker.com, Inc., a Delaware corporation (the "Company"), Virgin Holdings,
-------
Inc., a Delaware corporation ("Virgin"), and the other stockholders of the
------
Company listed on Schedule I hereto.
WHEREAS, on the date hereof, the Company shall issue to Virgin shares of
Common Stock (as defined below) of the Company pursuant to the Agreement, dated
the date hereof, between the Company and Virgin;
WHEREAS, the parties hereto wish to restrict the transfer of the Shares (as
defined below) and to provide for, among other things, first offer and
preemptive rights, corporate governance rights and obligations and certain other
rights; and
WHEREAS, the rights granted by the Company under this Agreement replace and
supersede all such existing rights granted by the Company to any stockholder of
the Company under the agreements listed on Schedule II hereto (the "Existing
--------
Agreements").
- ----------
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
1. General; Definitions.
--------------------
1.1 General. The Company hereby represents and warrants that,
-------
except as set forth on Schedule 1.1 and other than those rights granted
------------
pursuant to the Existing Agreements, the Company has not granted or agreed to
grant any first offer, preemptive, corporate governance or other rights
similar to those granted under this Agreement to any other person, and there
are no other agreements, arrangements or understandings between the Company
and any other person relating to such rights. Each of the stockholders listed
on Schedule I hereto hereby acknowledges and agrees that, effective as of the
date hereof, this Agreement replaces and supersedes any and all agreements
(including the Existing Agreements), arrangements and understandings, whether
written or oral, between the Company and each of them with respect to the rights
granted hereunder.
1.2 Definitions. As used in this Agreement, the following terms
-----------
shall have the meanings set forth below:
"Affiliate" shall mean any Person who is an "affiliate" as defined
---------
in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
<PAGE>
"Board of Directors" means the Board of Directors of the Company.
------------------
"Business Day" means any day other than a Saturday, Sunday or other
------------
day on which commercial banks in the State of New York are authorized or
required by law or executive order to close.
"Charter Documents" means the Certificate of Incorporation and the
-----------------
By-laws of the Company as in effect on the date hereof, copies of which are
attached hereto as Exhibits A and B, respectively.
----------------
"Commission" means the Securities and Exchange Commission or any
----------
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the Common Stock, par value $.01 per share, of
------------
the Company or any other capital stock of the Company into which such stock is
reclassified or reconstituted and any other common stock of the Company.
"Common Stock Equivalents" means any security or obligation which is
------------------------
by its terms convertible into shares of Common Stock, including, without
limitation, the Preferred Stock, and any option, warrant or other subscription
or purchase right with respect to Common Stock.
"Company" has the meaning set forth in the recitals to this
-------
Agreement.
"Company Director" has the meaning set forth in Section 6.3 of this
----------------
Agreement.
"Company Option" has the meaning set forth in Section 3.1.2 of this
--------------
Agreement.
"Company Option Period" has the meaning set forth in Section 3.1.2
---------------------
of this Agreement.
"Contract Date" has the meaning set forth in Section 3.1.5 of this
-------------
Agreement.
"Excess New Securities" has the meaning set forth in Section 4.2.1
---------------------
of this Agreement.
"Excess Offered Securities" has the meaning set forth in Section
-------------------------
3.1.3 of this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations of the Commission thereunder.
"Existing Agreements" has the meaning set forth in the recitals to
-------------------
this Agreement.
2
<PAGE>
"Family Members" has the meaning set forth in Section 2.2 of this
--------------
Agreement.
"Governmental Authority" means the government of any nation, state,
----------------------
city, locality or other political subdivision thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended.
"Independent Director" has the meaning set forth in Section 6.3 of
--------------------
this Agreement.
"Initial Public Offering" means an underwritten initial public
-----------------------
offering pursuant to an effective Registration Statement filed under the
Securities Act.
"Involuntary Transfer" means any transfer, proceeding or action by
--------------------
or in which a Stockholder shall be deprived or divested of any right, title or
interest in or to any of the Shares, including, without limitation, any seizure
under levy of attachment or execution, any transfer in connection with
bankruptcy (whether pursuant to the filing of a voluntary or an involuntary
petition under the United States Bankruptcy Code of 1978, or any modifications
or revisions thereto) or other court proceeding to a debtor in possession,
trustee in bankruptcy or receiver or other officer or agency, any transfer to a
state or to a public officer or agency pursuant to any statute pertaining to
escheat or abandoned property and any transfer pursuant to a divorce or
separation agreement or a final decree of a court in a divorce action.
"Involuntary Transferee" has the meaning set forth in Section 3.2.1
----------------------
of this Agreement.
"IPO Effectiveness Date" means the date upon which the Company
----------------------
consummates its Initial Public Offering.
"Liens" has the meaning set forth in Section 3.1.4 of this Agreement.
-----
"New Issuance Notice" has the meaning set forth in Section 4.1 of
-------------------
this Agreement.
3
<PAGE>
"New Securities" has the meaning set forth in Section 4.1 of this
--------------
Agreement.
"New Stockholder" means (a) any transferee of a Virgin Stockholder
---------------
or an Other Stockholder (other than a Permitted Transferee) who has agreed to
be bound by the terms and conditions of this Agreement in accordance with
Section 2.4 and to whom Shares have been transferred in accordance with Section
3.1.5 and (b) any Person other than a Virgin Stockholder or an Other Stockholder
who has agreed to be bound by the terms and conditions of this Agreement in
accordance with Section 5.2(a).
"Offer Price" has the meaning set forth in Section 3.1.1 of this
-----------
Agreement.
"Offered Securities" has the meaning set forth in Section 3.1.1 of
------------------
this Agreement.
"Offering Notice" has the meaning set forth in Section 3.1.1 of this
---------------
Agreement.
"Option Period" has the meaning set forth in Section 3.1.3 of this
-------------
Agreement.
"Other Stockholder" means the Stockholders (other than Virgin)
-----------------
listed on Schedule I hereto and any Permitted Transferee of an Other
Stockholder to which Shares are transferred in accordance with Section 2.2.
"Permitted Transferee" has the meaning set forth in Section 2.2 of
--------------------
this Agreement.
"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint stock company, trust,
unincorporated organization, Governmental Authority or other entity.
"Preferred Stock" means, collectively, the Series A Convertible
---------------
Preferred Stock, par value $.01 per share, of the Company, the Series B
Convertible Preferred Stock, par value $.01 per share, of the Company and the
Series C Convertible Preferred Stock, par value $.01 per share, of the Company.
"Proposed Price" has the meaning set forth in Section 4.1 of this
--------------
Agreement.
4
<PAGE>
"Registration Statement" means a registration statement filed
----------------------
pursuant to the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended, and
--------------
the rules and regulations promulgated thereunder.
"Selling Stockholder" has the meaning set forth in Section 3.1.1 of
-------------------
this Agreement.
"Shares" means, with respect to each Stockholder, all shares,
------
whether now owned or hereafter acquired, of Common Stock and Common Stock
Equivalents owned thereby; provided, however, for the purposes of any
-------- -------
computation of the number of Shares either outstanding or owned or held by any
Stockholder or otherwise to be determined pursuant to Sections 2, 3, 4.2, 6
and 9.3(b), the shares of Common Stock issuable upon conversion, exercise or
exchange of all Common Stock Equivalents shall be deemed outstanding whether
or not such conversion, exercise or exchange has actually been effected.
"Stockholder Exercise Period" has the meaning set forth in
---------------------------
Section 4.2.1 of this Agreement.
"Stockholder Option Period" has the meaning set forth in
-------------------------
Section 3.1.3 of this Agreement.
"Stockholders" means (a) the Virgin Stockholders and the Other
------------
Stockholders and any transferee thereof who has agreed to be bound by the
terms and conditions of this Agreement in accordance with Section 2.4 and (b)
any Person who has agreed to be bound by the terms and conditions of this
Agreement in accordance with Section 5.2(a), and the term "Stockholder" shall
mean any such Person.
"Stockholders Meeting" has the meaning set forth in Section 6.1 of
--------------------
this Agreement.
"Subject Purchaser" has the meaning set forth in Section 4.1 of this
-----------------
Agreement.
"Subsidiaries" means, as of the relevant date of determination, with
------------
respect to any Person, a corporation or other Person of which 50% or more of the
voting power of the outstanding voting equity securities or 50% or more of the
outstanding economic equity interest is held, directly or indirectly, by such
Person. Unless otherwise qualified, or the context otherwise requires, all
references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer
to a Subsidiary or Subsidiaries of the Company.
5
<PAGE>
"Transfer" has the meaning set forth in Section 2.1 of this
--------
Agreement.
"Transferred Shares" has the meaning set forth in Section 3.2.1 of
------------------
this Agreement.
"Third Party Purchaser" has the meaning set forth in Section 3.1.1
---------------------
of this Agreement.
"Virgin Directors" has the meaning set forth in Section 6.3 of this
----------------
Agreement.
"Virgin Exercise Period" has the meaning set forth in Section 4.2.1
----------------------
of this Agreement.
"Virgin Stockholders" means Virgin and any Permitted Transferee of
-------------------
Virgin to which Shares are transferred in accordance with Section 2.2.
"Written Consent" has the meaning set forth in Section 6.1 of this
---------------
Agreement.
2. Restrictions on Transfer of Shares.
----------------------------------
2.1 Limitation on Transfer. No Stockholder shall sell, give,
----------------------
assign, hypothecate, pledge, encumber, grant a security interest in or
otherwise dispose of (whether by operation of law or otherwise) (each a
"transfer") any Shares or any right, title or interest therein or thereto,
--------
except in accordance with the provisions of this Agreement, and in the event
of such transfer, any transferee obtaining any record or beneficial interest
or right to vote such Shares hereunder shall agree to be bound by this
Agreement and shall comply with Section 2.4. Any attempt to transfer any
Shares or any rights thereunder in violation of the preceding sentence shall
be null and void ab initio and the Company shall not register any such transfer.
-- ------
2.2 Permitted Transfers. Notwithstanding anything to the
-------------------
contrary contained in this Agreement, but subject to Sections 2.3 and 2.4, at
any time, (a) each of Virgin and any Other Stockholder that is not a natural
person may transfer all or a portion of its Shares to any of their Affiliates
and (b) each Stockholder that is a natural person may transfer all or a
portion of his or her Shares to or among (i) a member of such Stockholder's
immediate family, which shall include his or her spouse, siblings, children or
grandchildren ("Family Members") or (ii) a trust, corporation, partnership or
--------------
limited liability company, all of the beneficial interests in which shall be
held by such Stockholder or one or more Family Members of such Stockholder;
provided, however, that during the period that any such trust, corporation,
- -------- -------
6
<PAGE>
partnership or limited liability company holds any right, title or interest in
any Shares, no Person other than such Stockholder or one or more Family Members
of such Stockholder may be or become beneficiaries, stockholders, limited or
general partners or members thereof (the Persons referred to in the preceding
clauses (a) and (b) are each referred to hereinafter as a "Permitted
---------
Transferee"). A Permitted Transferee of Shares pursuant to this Section 2.2
- ----------
may transfer its Shares pursuant to this Section 2.2 only to the transferor
Stockholder or to a Person that is a Permitted Transferee of such transferor
Stockholder. Notwithstanding anything to the contrary contained in this
Agreement, if any Permitted Transferee of a Stockholder to whom Shares have been
transferred in accordance with this Section 2.2 ceases to be a Permitted
Transferee of such Stockholder, then, prior to such event, such Stockholder may
repurchase such Shares or, if such Stockholder does not wish to repurchase such
Shares, then such Permitted Transferee shall offer such Shares to the Company
and the other Stockholders in accordance with Section 3.1.
2.3 Permitted Transfer Procedures. If any Stockholder wishes to
-----------------------------
transfer Shares to a Permitted Transferee under Section 2.2, such Stockholder
shall give notice to the Company of its intention to make any transfer permitted
under Section 2.2 not less than ten (10) days prior to effecting such transfer,
which notice shall state the name and address of each Permitted Transferee to
whom such transfer is proposed and the number of Shares proposed to be
transferred to such Permitted Transferee.
2.4 Transfers in Compliance with Law; Substitution of
-------------------------------------------------
Transferee. Notwithstanding any other provision of this Agreement, no transfer
- ----------
may be made pursuant to this Section 2 or pursuant to Section 3 below unless
(a) the transferee has agreed in writing to be bound by the terms and
conditions of this Agreement pursuant to an instrument substantially in the
form attached hereto as Exhibit C-1, (b) the transfer complies in all respects
-----------
with the applicable provisions of this Agreement and (c) the transfer complies
in all respects with applicable federal and state securities laws, including,
without limitation, the Securities Act. Upon becoming a party to this
Agreement, (i) the Permitted Transferee of a Stockholder shall be substituted
for, and shall enjoy the same rights and be subject to the same obligations as,
the transferring Stockholder hereunder with respect to the Shares transferred to
such Permitted Transferee, (ii) a New Stockholder shall be subject to the same
obligations as, but none of the rights of, the transferring Stockholder and
(iii) the transferee of a New Stockholder shall be substituted for, and shall be
subject to the same rights and obligations as, the transferring New Stockholder
hereunder with respect to the Shares transferred to such transferee.
7
<PAGE>
3. Right of First Offer.
--------------------
3.1 Proposed Voluntary Transfers.
----------------------------
3.1.1 Offering Notice. Subject to Section 2, if any
---------------
Stockholder (a "Selling Stockholder") wishes to transfer all or any portion of
-------------------
its, his or her Shares to any Person (other than to a Permitted Transferee) (a
"Third Party Purchaser") prior to the IPO Effectiveness Date, such Selling
---------------------
Stockholder shall offer such Shares first to the Company, by sending written
notice (the "Offering Notice") to the Company which shall state (a) the number
---------------
of Shares proposed to be transferred (the "Offered Securities") and (b) the
------------------
proposed purchase price per Share which the Selling Stockholder is willing to
accept (the "Offer Price"). The Company, upon delivery of the Offering Notice,
-----------
promptly will send copies of such notice to all Stockholders who are not
Selling Stockholders. Upon delivery of the Offering Notice to the Company,
such offer shall be irrevocable unless and until the rights of first offer
provided for herein shall have been waived or shall have expired.
3.1.2 Company Option; Exercise. For a period of fifteen (15)
------------------------
days after the giving of the Offering Notice pursuant to Section 3.1.1 (the
"Company Option Period"), the Company shall have the right (the "Company
--------------------- -------
Option") to purchase any or all of the Offered Securities at a purchase price
- ------
equal to the Offer Price and upon the terms and conditions set forth in the
Offering Notice. The right of the Company to purchase any or all of the
Offered Securities under this Section 3.1.2 shall be exercisable by delivering
written notice of the exercise thereof, prior to the expiration of the Company
Option Period, to the Selling Stockholder, with a copy to the Stockholders who
are not Selling Stockholders, which notice shall state the number of Offered
Securities proposed to be purchased by the Company. The failure of the Company
to respond within the Company Option Period shall be deemed to be a waiver of
the Company Option, provided that the Company may waive its rights under this
--------
Section 3.1.2 prior to the expiration of such period by giving written notice
to the Selling Stockholder, with a copy to the Stockholders who are not
Selling Stockholders.
3.1.3 Stockholder Option; Exercise.
----------------------------
(a) If the Company does not elect to purchase all of the
Offered Securities pursuant to Section 3.1.2, then for a period of thirty (30)
days after the earlier to occur of (a) the expiration of the Company Option
Period pursuant to Section 3.1.2 and (b) the date upon which the Selling
Stockholder shall have received written notice from the Company of its exercise
of the Company Option pursuant to Section 3.1.2 or its waiver thereof (the
"Option Period"), the Virgin Stockholders (if not a Selling Stockholder) shall
-------------
have the right to purchase all, but not less than all, of the remaining Offered
Securities at a purchase price equal to the Offer Price and upon the terms and
conditions set forth in the Offering Notice. If the Virgin Stockholders do not
fully subscribe for the number or amount of Offered Securities it is entitled
to purchase, then, for a period of fifteen (15) days following the expiration
of the Option Period (the "Stockholder Option Period") each Other Stockholder
-------------------------
8
<PAGE>
shall have the right to purchase that percentage of the Offered Securities not
so subscribed for (for the purposes of this Section 3.1.3, the "Excess Offered
--------------
Securities") determined by dividing (x) the total number of Shares then owned
- ----------
by such Stockholder by (y) the total number of Shares then owned by all such
Stockholders who elect to purchase Offered Securities. If the Company, the
Virgin Stockholders and/or the Other Stockholders do not purchase all, but
not less than all, of Offered Securities pursuant to Section 3.1.2 and/or
Section 3.1.3, then the Selling Stockholder may, subject to Section 3.1.6,
sell the Offered Securities to a Third Party Purchaser in accordance with
Section 3.1.5.
(b) The right of each Stockholder to purchase the
remaining Offered Securities under subsection (a) above shall be exercisable
by delivering written notice of the exercise thereof, in the case of the
Virgin Stockholders, prior to the expiration of the Option Period and, in the
case of the Other Stockholders (if applicable), the Stockholder Option Period,
to the Selling Stockholder with a copy to the Company. Each such notice shall
state (i) the number of Shares held by such Stockholder and (ii) the number of
Shares that such Stockholder is willing to purchase pursuant to this Section
3.1.3. The failure of a Stockholder to respond within the time periods
specified above shall be deemed to be a waiver of such Stockholder's rights
under this Section 3.1.3, provided that each Stockholder may waive its
--------
rights under this Section 3.1.3 prior to the expiration of the Option Period
or the Stockholder Option Period, as the case may be, by giving written notice
to the Selling Stockholder, with a copy to the Company.
3.1.4 Closing. The closing of the purchases of Offered
-------
Securities subscribed for by the Company under Section 3.1.2 and/or the Virgin
Stockholders and the Other Stockholders (if applicable) under Section 3.1.3
shall be held at the executive office of the Company on the later to occur of
(i) the 60th day after the giving of the Offering Notice pursuant to
Section 3.1.1 or (ii) two (2) Business Days after the receipt of all approvals
required (or the expiration of any waiting periods) under the HSR Act or at
such other time and place as the parties to the transaction may agree. At such
closing, the Selling Stockholder shall deliver certificates representing the
Offered Securities, duly endorsed for transfer and accompanied by all
requisite transfer taxes, if any, and such Offered Securities shall be free and
clear of any liens, claims, options, charges, encumbrances or rights ("Liens")
-----
(other than those arising hereunder and those attributable to actions by the
purchasers) and the Selling Stockholder shall so represent and warrant, and
shall further represent and warrant that it is the sole beneficial and record
owner of such Offered Securities. The Company and/or each Stockholder, as the
case may be, purchasing Offered Securities shall deliver at the closing payment
in full in immediately available funds for the Offered Securities purchased by
it, him or her. At such closing, all of the parties to the transaction shall
execute such additional documents as are otherwise necessary or appropriate.
9
<PAGE>
3.1.5 Sale to a Third Party Purchaser. Unless the Company, the
-------------------------------
Virgin Stockholders and/or the Other Stockholders elect to purchase all, but
not less than all, of the Offered Securities under Sections 3.1.2 and 3.1.3,
the Selling Stockholder may, subject to Section 3.1.6, sell the Offered
Securities to a Third Party Purchaser on the terms and conditions set forth in
the Offering Notice; provided, however, that such sale is bona fide and made
-------- -------
pursuant to a contract entered into within sixty (60) days of the earlier to
occur of (i) the waiver by the Company and the Stockholders of their options to
purchase the Offered Securities and (ii) the expiration of the later to occur
of the Option Period and the Stockholder Option Period (the earlier of dates
in (i) and (ii) being referred to herein as the "Contract Date"); and
-------------
provided further, that such sale shall not be consummated unless and until all
- -------- -------
of the following conditions are met:
(a) The Selling Stockholder shall deliver to the Company
a certificate of a Third Party Purchaser stating that (i) such Third Party
Purchaser is aware of the rights of the Company, the Virgin Stockholders and
the Other Stockholders contained in Section 3.1 and (ii) prior to the purchase
by such Third Party Purchaser of any of such Offered Securities, such Third
Party Purchaser shall become a party to this Agreement and agrees to be bound
by the terms and conditions hereof in accordance with Section 2.4 hereof.
(b) The consummation of such sale to a Third Party
Purchaser shall not be subject to any conditions (other than necessary filings
under the HSR Act), except that it may be conditioned upon the truth as of the
closing of the proposed purchase of customary representations and warranties
and the delivery of stock certificates and a customary legal opinion.
(c) A Third Party Purchaser shall have furnished evidence
satisfactory to the Company, in its reasonable judgment, as to the financial
ability of such Third Party Purchaser to consummate the proposed purchase.
If such sale is not consummated within thirty (30) days of the Contract Date for
any reason, then the restrictions provided for herein shall again become
effective, and no transfer of such Offered Securities may be made thereafter by
the Selling Stockholder without again offering the same to the Company, the
Virgin Stockholders and the Other Stockholders in accordance with this Section
3.1.
3.2 Involuntary Transfers.
---------------------
3.2.1 Rights of First Offer upon Involuntary Transfer.
-----------------------------------------------
If an Involuntary Transfer of any Shares (the "Transferred Shares") owned by any
------------------
Stockholder shall occur prior to the IPO Effectiveness Date, then the Company,
10
<PAGE>
the Virgin Stockholders and the Other Stockholders (unless such Stockholder is
the Involuntary Transferee) shall have the same rights as specified in Sections
3.1.2 and 3.1.3, respectively, with respect to such Transferred Shares as if the
Involuntary Transfer had been a proposed voluntary transfer by a Selling
Stockholder and shall be governed by Section 3.1 except that (a) the time
periods shall run from the date of receipt by the Company of actual notice of
the Involuntary Transfer (and the Company shall immediately give notice to the
Virgin Stockholders and the Other Stockholders of the date of receipt of such
notice), (b) such rights shall be exercised by notice to the transferee of such
Transferred Shares (the "Involuntary Transferee") rather than to the Stockholder
----------------------
who suffered or will suffer the Involuntary Transfer and (c) the purchase price
per Transferred Share shall be agreed upon by the Involuntary Transferee and the
Company, the Virgin Stockholder or the Other Stockholders, as the case may be;
provided, however, that if such parties fail to agree as to such purchase price,
- -------- -------
the purchase price shall be the Fair Value thereof as determined in accordance
with Section 3.2.2.
3.2.2 Fair Value. If the parties fail to agree upon the
----------
purchase price of the Transferred Shares in accordance with Section 3.2.1
hereof, then the Company, the Virgin Stockholders or the Other Stockholders,
as the case may be, shall purchase the Transferred Shares at a purchase price
equal to the Fair Value (as hereinafter defined) thereof. The Fair Value of
the Transferred Shares shall be determined by a panel of three independent
appraisers, which shall be nationally recognized investment banking firms or
nationally recognized experts experienced in the valuation of corporations
engaged in the business conducted by the Company. Within five (5) Business
Days after the date the applicable parties determine that they cannot agree as
to the purchase price, the Involuntary Transferee and the Board of Directors
(in the case of a purchase by the Company), the Virgin Stockholders or the
Other Stockholders, as the case may be, shall each designate one such appraiser
that is willing and able to conduct such determination; provided, that if the
--------
appraiser is to be designated by the Other Stockholders, it will be designated
by Other Stockholders holding 60% of the outstanding Shares held by all Other
Stockholders. If either the Involuntary Transferee or the Board of Directors,
the Virgin Stockholders or the Other Stockholders, as the case may be, fails
to make such designation within such period, then the other party that has
made the designation shall have the right to make the designation on its
behalf. The two appraisers designated shall, within a period of five (5)
Business Days after the designation of the second appraiser, agree to
designate a third appraiser. The three appraisers shall conduct their
determination as promptly as practicable, and the Fair Value of the Transferred
Shares shall be the average of the determination of the two appraisers that
are closer to each other than to the determination of the third appraiser,
which third determination shall be discarded; provided, however, that
-------- -------
if the determination of two appraisers are equally close to the determination of
the third appraiser, then the Fair Value of the Transferred Shares shall be the
average of the determination of all three appraisers. Such determination shall
11
<PAGE>
be final and binding on the Involuntary Transferee, the Company, the Virgin
Stockholders and the Other Stockholders. The Involuntary Transferee shall be
responsible for the fees and expenses of all appraisers. For purposes of this
Section 3.2.2, the "Fair Value" of the Transferred Shares means the fair market
----------
value of such Transferred Shares determined in accordance with this Section
3.2.2 based upon all considerations that the appraisers determine to be
relevant.
3.2.3 Closing. The closing of any purchase under this
-------
Section 3.2 shall be held at the executive office of the Company on the earlier
to occur (subject to the receipt of all approvals required, or the expiration
of any waiting periods, under the HSR Act) of (a) the fifth Business Day after
the purchase price per Transferred Share shall have been agreed upon by the
Involuntary Transferee and the Company, the Virgin Stockholders or the Other
Stockholders, as the case may be, in accordance with Section 3.2.1(c) or (b) the
fifth Business Day after the determination of the Fair Value of the Transferred
Shares in accordance with Section 3.2.2, or at such other time and place as the
parties to the transaction may agree. At such closing, the Involuntary
Transferee shall deliver certificates, if applicable, or other instruments or
documents representing the Transferred Shares being purchased under this Section
3.2, duly endorsed with a signature guarantee for transfer and accompanied by
all requisite transfer taxes, if any, and such Transferred Shares shall be free
and clear of any Liens (other than those arising hereunder) arising through the
action or inaction of the Involuntary Transferee and the Involuntary Transferee
shall so represent and warrant, and further represent and warrant that it is the
beneficial owner of such Transferred Shares. The Company, the Virgin
Stockholders or the Other Stockholders, as the case may be, purchasing such
Transferred Shares shall deliver at closing payment in full in immediately
available funds for such Transferred Shares. At such closing, all parties to
the transaction shall execute such additional documents as are otherwise
necessary or appropriate.
3.2.4 General. In the event that the provisions of this
-------
Section 3.2 shall be held to be unenforceable with respect to any particular
Involuntary Transfer, the Company, the Virgin Stockholders and the Other
Stockholders shall have the rights specified in Sections 3.1.2 and 3.1.3,
respectively, with respect to any transfer by an Involuntary Transferee of
such Shares, and any Involuntary Transfer shall be subject to such rights, in
which case the Involuntary Transferee shall be deemed to be the Selling
Stockholder for purposes of Section 3.1 of this Agreement and shall be bound
by the provisions of Section 3.1 and other related provisions of this Agreement.
4. Future Issuance of Shares; Preemptive Rights.
--------------------------------------------
4.1 Offering Notice. Except for (a) capital stock of
---------------
the Company which may be issued to employees, consultants or directors of the
Company pursuant to a stock option plan or other employee benefit arrangement
12
<PAGE>
approved by the Board of Directors, (b) a subdivision of the outstanding shares
of Common Stock into a larger number of shares of Common Stock, (c) capital
stock issued upon exercise, conversion or exchange of any Common Stock
Equivalent or (d) capital stock of the Company issued in consideration of the
acquisition, approved by the Board of Directors, by the Company or any of its
Subsidiaries of another Person, if the Company wishes to issue any shares of
capital stock or any other securities convertible into or exchangeable for
capital stock of the Company (collectively, "New Securities") to any Person
--------------
(the "Subject Purchaser") prior to the IPO Effectiveness Date, then the
-----------------
Company shall offer such New Securities first to the Virgin Stockholders by
sending written notice (the "New Issuance Notice") to the Virgin Stockholders,
-------------------
which New Issuance Notice shall state (a) the number of New Securities proposed
to be issued and (b) the proposed purchase price per share of the New
Securities that the Company is willing to accept (the "Proposed Price"). Upon
--------------
delivery of the New Issuance Notice, such offer shall be irrevocable unless and
until the rights provided for in Section 4.2 shall have been waived or shall
have expired.
4.2 Preemptive Rights; Exercise.
---------------------------
4.2.1 Exercise Periods. For a period of fifteen (15) days
----------------
after the giving of the New Issuance Notice pursuant to Section 4.1 (the
"Virgin Exercise Period"), the Virgin Stockholders shall have the right to
----------------------
purchase the New Securities at a purchase price equal to the Proposed Price and
upon the terms and conditions set forth in the New Issuance Notice. If the
Virgin Stockholders do not fully subscribe for the number or amount of New
Securities that it is entitled to purchase pursuant to the preceding sentence,
then, for a period of ten (10) days following the expiration of the Virgin
Exercise Period (the "Stockholder Exercise Period"), each Other Stockholder
---------------------------
shall have the right to purchase that percentage of the remaining New
Securities not so subscribed for (for the purposes of this Section 4.2(a), the
"Excess New Securities") determined by dividing (x) the total number of Shares
---------------------
then owned by such Stockholder by (y) the total number of Shares then owned by
all such Stockholders who elected to purchase Excess New Securities.
4.2.2 Notices. The right of the Virgin Stockholders and
-------
the Other Stockholders to purchase the New Securities under subsection
(a) above shall be exercisable by delivering written notice of the exercise
thereof, in the case of the Virgin Stockholders, prior to the expiration of
the Virgin Exercise Period and, in the case of the Other Stockholders (if
applicable), prior to the expiration of the Stockholder Exercise Period, to
the Company, which notice shall state the amount of New Securities that such
Stockholder elects to purchase pursuant to Section 4.2(a). The failure of a
Stockholder to respond within the time periods specified above shall be deemed
to be a waiver of such Stockholder's rights under Section 4.2(a), provided that
--------
each Stockholder may waive its rights under Section 4.2(a) prior to the
expiration of the Virgin Exercise Period or the Stockholder Exercise period,
as the case may be, by giving written notice to the Company.
13
<PAGE>
4.3 Closing. The closing of the purchase of New
-------
Securities subscribed for by the Virgin Stockholders and the Other Stockholders
(if applicable) under Section 4.2, shall be held at the executive office of the
Company on the later to occur of (i) the 45th day after the giving of the New
Issuance Notice pursuant to Section 4.1 or (ii) two (2) Business Days after
the receipt of all approvals required (or the expiration of any waiting
periods) under the HSR Act or (b) at such other time and place as the parties
to the transaction may agree. At such closing, the Company shall deliver
certificates representing the New Securities, and such New Securities shall be
issued free and clear of all Liens and the Company shall so represent and
warrant, and further represent and warrant that such New Securities shall be,
upon issuance thereof to the Stockholders and after payment therefor, duly
authorized, validly issued, fully paid and nonassessable. The Stockholders
purchasing the New Securities shall deliver at the closing payment in full in
immediately available funds for the New Securities purchased by him, her or it.
At such closing, all of the parties to the transaction shall execute such
additional documents as are otherwise necessary or appropriate.
4.4 Sale to Subject Purchaser. Unless all of the New
-------------------------
Securities are purchased pursuant to Section 4.2, the Company may sell to the
Subject Purchaser all of the New Securities not purchased by the Stockholders
pursuant to Section 4.2 on terms and conditions that are no more favorable to
the Subject Purchaser than those set forth in the New Issuance Notice;
provided, however, that such sale is bona fide and made pursuant to a contract
- -------- -------
entered into within three (3) months of the earlier to occur of (i) the waiver
by all of the Stockholders of their option to purchase all of the New
Securities pursuant to Section 4.2 and (ii) the expiration of the later to
occur of the Virgin Exercise Period and the Stockholder Exercise Period. If
such sale is not consummated within such three (3) month period for any reason,
then the restrictions provided for herein shall again become effective, and no
issuance and sale of New Securities may be made thereafter by the Company
without again offering the same in accordance with this Section 4. The
closing of any issue and purchase pursuant to this Section 4.4 shall be held
at the time and place as the parties to the transaction may agree.
5. After-Acquired Securities; Agreement to be Bound.
------------------------------------------------
5.1 After-Acquired Securities. All of the provisions of
-------------------------
this Agreement shall apply to all of the Shares and Common Stock Equivalents
now owned or which may be issued or transferred hereafter to a Stockholder in
consequence of any additional issuance, purchase, exchange or reclassification
of any of such Shares or Common Stock Equivalents, corporate reorganization, or
any other form of recapitalization, consolidation, merger, share split or share
dividend, or which are acquired by a Stockholder in any other manner.
14
<PAGE>
5.2 Agreement to be Bound. The Company shall not issue
---------------------
any Shares or any Common Stock Equivalents to any Person not a party to this
Agreement, unless either (a) such Person has agreed in writing to be bound by
the terms and conditions of this Agreement pursuant to an instrument
substantially in the form attached hereto as Exhibit C-2 or (b) such Person
-----------
has entered into an agreement with the Company restricting the transfer of its,
his or her Shares in form and substance reasonably satisfactory to the Virgin
Stockholders. Upon becoming a party to this Agreement, such Person shall be
deemed to be, and shall be subject to the same obligations as an Other
Stockholder hereunder. Any issuance of Shares or any Common Stock Equivalents
by the Company in violation of this Section 5.2 shall be null and void
ab initio.
- -- ------
6. Corporate Governance.
--------------------
6.1 General. From and after the execution of this
-------
Agreement, each Stockholder shall vote its, his or her Shares at any regular
or special meeting of stockholders of the Company (a "Stockholders Meeting")
--------------------
or in any written consent executed in lieu of such a meeting of stockholders
(a "Written Consent"), and shall take all other actions necessary, to give
---------------
effect to the provisions of this Agreement (including, without limitation,
Section 6.3 hereof) and to ensure that the Charter Documents do not, at any
time hereafter, conflict in any respect with the provisions of this Agreement.
In addition, each Stockholder shall vote its, his or her Shares at any
Stockholders Meeting or act by Written Consent with respect to such Shares,
upon any matter submitted for action by the Company's stockholders or with
respect to which such Stockholder may vote or act by Written Consent, in
conformity with the specific terms and provisions of this Agreement and the
Charter Documents.
6.2 Stockholder Actions. In order to effectuate the
-------------------
provisions of this Section 6, each Stockholder (a) hereby agrees that when any
action or vote is required to be taken by such Stockholder pursuant to this
Agreement, such Stockholder shall use its best efforts to call, or cause the
appropriate officers and directors of the Company to call, a Stockholders
Meeting or to execute or cause to be executed a Written Consent to effectuate
such stockholder action, (b) shall use its best efforts to cause the Board of
Directors to adopt, either at a meeting of the Board of Directors or by
unanimous written consent of the Board of Directors, all the resolutions
necessary to effectuate the provisions of this Agreement and (c) shall use its
best efforts to cause the Board of Directors to cause the Secretary of the
Company, or if there be no secretary, such other officer of the Company as the
Board of Directors may appoint to fulfill the duties of Secretary, not to
record any vote or consent contrary to the terms of this Section 6.
15
<PAGE>
6.3 Election of Directors; Number and Composition. Each
---------------------------------------------
Stockholder shall vote its, his or her Shares at any Stockholders Meeting, or
act by Written Consent with respect to such Shares, and take all other actions
necessary to ensure that the number of directors constituting the entire Board
of Directors shall be seven (7). Each Stockholder shall vote its, his or her
shares at any Stockholders Meeting called for the purpose of filling the
positions on the Board of Directors, or in any Written Consent executed for
such purpose, and to take all other actions necessary to ensure (i) the
election to the Board of Directors of three (3) individuals designated by
Virgin (the "Virgin Directors"), (ii) the election to the Board of Directors
of one (1) individual designated by the Company who (x) satisfies the criteria
for treatment as an "independent director" under the rules of any stock
exchange on which securities of the Company are listed (including The Nasdaq
Stock Market) and (y) is agreeable to Virgin (the "Independent Director") and
(iii) the election to the Board of Directors of three (3) individuals
designated by the Company (the "Company Directors"); provided, that if one of
----------------- --------
the three Virgin Directors at any time is not also an Independent Director and
the Company has consummated an Initial Public Offering, the Company shall
designate two (2) Independent Directors and the number of Company Directors
shall be reduced from three to two. If the Company divides the Board of
Directors into separate classes, each such class shall include at least one
Virgin Director. The Board of Directors shall take all actions necessary to
ensure the election of one (1) Virgin Director to each of the Company's audit
committee and compensation committee.
On the date hereof, the Virgin Directors shall be Jay A. Samit, John A.
Skolas and Jonathan A.B. Smith, the Independent Director shall be Edward J.
Mathias and the Company Directors shall be Robert P. Bernardi, Devarajan S.
Puthukarai and Irwin H. Steinberg.
6.4 Removal and Replacement of Directors .
------------------------------------
6.4.1 Removal of Virgin Directors. If at any time the
---------------------------
Virgin Stockholders notify the other Stockholders of their wish to remove at
any time and for any reason (or no reason) any of the Virgin Directors, then
each Stockholder shall vote all of its, his or her Shares so as to remove such
Virgin Director.
6.4.2 Replacement of Directors.
------------------------
(a) If at any time, a vacancy is created on the
Board of Directors by reason of the incapacity, death, removal or resignation
of a Virgin Director, then Virgin shall designate an individual who shall be
elected to fill such vacancy until the next Stockholders Meeting.
16
<PAGE>
(b) Upon receipt of notice of the designation of
a nominee, each Stockholder shall, as soon as practicable after the date of
such notice, take action, including the voting of its or his Shares, to elect
the director designated by Virgin to fill such vacancy.
6.5 Reimbursement of Expenses. Notwithstanding anything to the
-------------------------
contrary contained in this Agreement, the Company shall reimburse Virgin, or its
designee, for all reasonable travel and accommodation expenses incurred by the
Virgin Directors in connection with the performance of their duties as directors
of the Company.
6.6 Actions of the Board of Directors; Extraordinary
------------------------------------------------
Transactions. Notwithstanding anything to the contrary contained in this
- ------------
Agreement, prior to the IPO Effectiveness Date, the Board of Directors shall
not take, approve or otherwise ratify any of the following actions without the
consent of at least a majority of the directors constituting the entire Board
of Directors, which majority shall include at least one Virgin Director:
(a) other than equity securities of the Company that may
be issued to employees, consultants or directors of the Company pursuant to a
stock option plan or other employee benefit arrangement approved by the Board of
Directors, any issuance of or agreement to issue any equity securities of the
Company or any Subsidiaries thereof or rights of any kind convertible into or
exchangeable for, any equity securities of capital stock of the Company or any
Subsidiaries thereof, or any option, warrant or other subscription or purchase
right with respect to equity securities of the Company;
(b) the declaration of any dividend;
(c) the adoption of any stock option, incentive or other
compensation plan, or the amendment of any such existing plan;
(d) any issuance of or agreement to issue any long term
indebtedness of the Company in excess of $50,000;
(e) any transaction of merger or consolidation of the
Company or any Subsidiary with one or more Persons;
(f) any sale, conveyance, exchange or transfer to another
Person of (x) the voting stock of the Company or any Subsidiary of the Company,
if, after such sale, conveyance, exchange or transfer, the stockholders of the
Company or such Subsidiary prior to such sale, conveyance, exchange or transfer
do not retain at least a majority of the voting power of the Company or such
Subsidiary or (y) all or substantially all of the assets of the Company or any
Subsidiary;
17
<PAGE>
(g) any expenditure by the Company in excess of $50,000
not provided for in the annual operating budget of the Company submitted at
the end of each fiscal year to the Board of Directors;
(h) any material changes in accounting methods or policies
of the Company or any Subsidiary; and
(i) any amendment, modification or restatement of the
Charter Documents, any modification of the number of directors constituting
the entire Board of Directors pursuant to Section 6.3 and any amendment or
modification of this Section 6.6.
6.7 Company Information. The Company shall provide to
-------------------
the Virgin Directors the same information concerning the Company and access
thereto, provided to other members of the Board of Directors, as well as any
other information reasonably requested by the Virgin Directors, and access
thereto.
6.8 Meetings. If the Company holds meetings of the Board of
--------
Directors more than one time per fiscal quarter, every third meeting of the
Board of Directors shall be held in Los Angeles or such other location agreed
to by the Virgin Directors in writing not less than 30 days prior to the date
scheduled for such meeting.
6.9 Directors' and Officers' Insurance. For so long as the
----------------------------------
Board of Directors include Virgin Directors, the Charter Documents shall
provide for indemnification of directors to the fullest extent permitted by law
and the Company shall maintain at all times directors' and officers' insurance
upon terms customary for a company of its size and operating in its industry and
reasonably acceptable to Virgin.
7. Stock Certificate Legend. A copy of this Agreement shall
------------------------
be filed with the Secretary of the Company and kept with the records of the
Company. Each certificate representing Shares now held or hereafter acquired
by any Stockholder shall for as long as this Agreement is effective bear legends
substantially in the following forms:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES
LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
18
<PAGE>
THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER
DISPOSITION (EACH A "TRANSFER") AND VOTING OF ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE
STOCKHOLDERS AGREEMENT, DATED MAY __, 1999, AMONG MUSICMAKER.COM, INC.,
VIRGIN HOLDINGS, INC. AND THE OTHER STOCKHOLDERS LISTED ON SCHEDULE I
THERETO. THE COMPANY WILL NOT REGISTER THE TRANSFER OF SUCH SECURITIES ON
THE BOOKS OF THE COMPANY UNLESS AND UNTIL THE TRANSFER HAS BEEN MADE IN
COMPLIANCE WITH THE TERMS OF THE STOCKHOLDERS AGREEMENT. THE COMPANY WILL
MAIL A COPY OF SUCH AGREEMENT, TOGETHER WITH A COPY OF THE EXPRESS TERMS OF
THE SECURITIES AND THE OTHER CLASS OR CLASSES AND SERIES OF SHARES, IF ANY,
WHICH THE COMPANY IS AUTHORIZED TO ISSUE, TO THE RECORD HOLDER OF THIS
CERTIFICATE, WITHOUT CHARGE, WITHIN FIVE DAYS AFTER RECEIPT OF A WRITTEN
REQUEST THEREFOR.
8. Representations and Warranties. Each Stockholder represents
------------------------------
and warrants to the other Stockholders as follows:
(a) The execution, delivery and performance of this
Agreement by such Stockholder will not violate any provision of law, any order
of any court or other agency of government, or any provision of any indenture,
agreement or other instrument to which such Stockholder or any of his, her or
its properties or assets is bound, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any
such indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon
any of the properties or assets of such Stockholder.
(b) This Agreement has been duly executed and delivered by
such Stockholder and constitutes the legal, valid and binding obligation of such
Stockholder, enforceable in accordance with its terms.
(c) The Shares of such Stockholder listed on Schedule I
----------
hereto constitute all the shares of Common Stock or Common Stock Equivalents
owned by such Stockholder and, except as set forth in this Agreement, such
Stockholder does not have any right or obligation to acquire any additional
shares of Common Stock or Common Stock Equivalents.
19
<PAGE>
(d) The representations and warranties contained in this
Section 8 shall survive the execution and delivery of this Agreement.
9. Miscellaneous.
-------------
9.1 Notices. All notices, demands or other
-------
communications provided for or permitted hereunder shall be made in writing and
shall be by registered or certified first class mail, return receipt requested,
telecopier, courier service, overnight mail or personal delivery:
(a) if to the Company:
musicmaker.com, Inc.
1831 Wiehle Avenue
Suite 128
Reston, VA 20190
Facsimile: (703) 904-4117
Attention: Robert P. Bernardi
with a copy to:
Venable, Baetjer and Howard, LLP
2010 Corporate Ridge Rd.
McLean, VA 22102
Facsimile : (703) 904-4117
Attention: John L. Sullivan, III
(b) if to the Virgin Stockholders:
Virgin Holdings, Inc.
338 North Foothill Road
Beverly Hills, CA 90210
Facsimile: (310) 288-2745
Attention: Susan Feingold
with copies to:
EMI Recorded Music North America
1290 Avenue of the Americas
38th Floor
New York, NY 10104
Facsimile: (212) 492-5095
Attention: Alasdair J. McMullan
20
<PAGE>
and
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Facsimile: (212) 757-3990
Attention: Peter L. Felcher, Esq.
(c) if to any Other Stockholder, at its address as it
appears on the record books of the Company.
Any party may by notice given in accordance with this Section 9.1 designate
another address or Person for receipt of notices hereunder. All such notices
and communications shall be deemed to have been duly given when delivered by
hand, if personally delivered; when delivered by courier or overnight mail, if
delivered by commercial courier service or overnight mail; five (5) Business
Days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is mechanically acknowledged, if telecopied.
9.2 Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties and their respective successors,
heirs, legatees and legal representatives. This Agreement is not assignable
except in connection with a transfer of Shares in accordance with this
Agreement.
9.3 Amendment and Waiver.
--------------------
(a) Except as specifically set forth in this Agreement,
no failure or delay on the part of any party hereto in exercising any right,
power or remedy hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. The remedies provided for herein are cumulative and are not
exclusive of any remedies that may be available to the parties hereto at
law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by any party from the terms of any provision of
this Agreement, shall be effective only if it is made or given in writing and
signed by (x) the Company and (y) the Virgin Stockholders holding Shares
21
<PAGE>
representing at least 75% of the Shares owned by all of the Virgin Stockholders.
Any such amendment, supplement, modification, waiver or consent shall be binding
upon the Company and all of the Stockholders.
9.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
9.5 Specific Performance. The parties hereto intend that each
--------------------
of the parties have the right to seek damages or specific performance in the
event that any other party hereto fails to perform such party's obligations
hereunder. Therefore, if any party shall institute any action or proceeding to
enforce the provisions hereof, any party against whom such action or proceeding
is brought hereby waives any claim or defense therein that the plaintiff party
has an adequate remedy at law.
9.6 Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
9.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION.
9.8 Severability. If any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
9.9 Entire Agreement. This Agreement, together with the
----------------
exhibits hereto, is intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein and therein. There are no restrictions, promises, warranties
or undertakings, other than those set forth or referred to herein or therein.
This Agreement, together with the exhibits hereto, supersede all prior
agreements and understandings between the parties with respect to such subject
matter.
9.10 Duration of Agreement. The rights and obligations of each
---------------------
Stockholder under this Agreement shall terminate as to such Stockholder upon the
transfer of all Shares owned by such Stockholder in accordance with this
Agreement. Notwithstanding the foregoing, on the IPO Effectiveness Date, this
Agreement, other than Sections 6.1, 6.2, 6.3, 6.4, 6.5, 6.7, 6.8 and 6.9, shall
22
<PAGE>
terminate. Sections 6.1, 6.2, 6.3, 6.4, 6.5, 6.7, 6.8 and 6.9 shall terminate
upon the transfer by Virgin of more than 50% of the Shares held by it on the
date of this Agreement.
9.11 Further Assurances. Each of the parties shall, and shall
------------------
cause their respective Affiliates to, execute such instruments and take such
action as may be reasonably required or desirable to carry out the provisions
hereof and the transactions contemplated hereby.
23
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed, or have cause to be
executed, this Agreement on the date first written above.
MUSICMAKER.COM, INC.
By: /s/ Robert Bernardi
---------------------------------------
Name: Robert Bernardi
Title: Chairman and Co-CEO
By: /s/ Devarajan S. Puthukarai
---------------------------------------
Name: Devarajan S. Puthukarai
Title: President and Co-CEO
VIRGIN HOLDINGS, INC.
By: /s/ Susan Feingold
---------------------------------------
Name: Susan Feingold
Title: Secretary
RHO MANAGEMENT TRUST I
By: /s/ Joshua Ruch
---------------------------------------
Name:
Title:
RHL VENTURES LLC
By: /s/ Robert Lessin
---------------------------------------
Name:
Title:
/s/ Robert P. Bernardi
---------------------------------------
Robert P. Bernardi
<PAGE>
/s/ Devarajan S. Puthukarai
---------------------------------------
Devarajan S. Puthukarai
/s/ Irwin H. Steinberg
---------------------------------------
Irwin H. Steinberg
<PAGE>
SCHEDULE I
----------
STOCKHOLDERS
1. Robert P. Bernardi, Co-Chief Executive Officer and Chairman of the Board of
Directors.
2. Devarajan S. Puthukarai, President, Co-Chief Executive Officer, Chief
Operating Officer and Director.
3. Rho Management Trust I.
4. RHL Ventures LLC c/o Robert Lessin.
5. Irwin H. Steinberg, Vice-Chairman of the Board of Directors and Consultant.
<PAGE>
SCHEDULE II
-----------
EXISTING AGREEMENTS
1. Robert P. Bernardi, pursuant to a Securities Purchase Agreement dated as of
December 9, 1997, between the Company and Rho Management Trust I, RHL
Ventures LLC, Robert P. Bernardi, and Devarajan S. Puthukarai.
2. Devarajan S. Puthukarai, pursuant to a Securities Purchase Agreement dated
as of December 9, 1997, between the Company and Rho Management Trust I, RHL
Ventures LLC, Robert P. Bernardi, and Devarajan S. Puthukarai.
3. Rho Management Trust I, pursuant to a Securities Purchase Agreement dated as
of December 9, 1997, between the Company and Rho Management Trust I, RHL
Ventures LLC, Robert P. Bernardi, and Devarajan S. Puthukarai.
4. RHL Ventures LLC c/o Robert Lessin, pursuant to a Securities Purchase
Agreement dated as of December 9, 1997, between the Company and Rho
Management Trust I, RHL Ventures LLC, Robert P. Bernardi, and Devarajan S.
Puthukarai.
5. Irwin H. Steinberg, pursuant to a Letter Agreement between the Company and
Irwin H. Steinberg, dated January 23, 1997.
<PAGE>
SCHEDULE 1.1
------------
The Certificate of Incorporation of the Company includes certain
rights and preferences granted to Rho Management Trust I ("Rho"), RHL Ventures
---
LLC, Robert P. Bernardi and Devarajan S. Puthukarai (the "Investors"). In
---------
connection with the transactions contemplated by the Agreement, dated the date
hereof, between the Company and Virgin, the Investors have executed and
delivered to the Company a waiver of these rights. The Company intends to amend
its Certificate of Incorporation shortly after the date hereof to permanently
remove these rights. Notwithstanding the foregoing, the Company and Rho have
proposed to enter into an agreement pursuant to which the Company will agree
that, if at any time prior to the IPO Rho notifies the Company in writing of its
desire to have a representative of Rho on the board of directors of the Company,
the Company will designate such representative of Rho as one of the Company
Directors, as defined in Section 6.3 hereof.
<PAGE>
EXHIBIT 10.16
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of June 8, 1999 (the
"Registration Rights Agreement"), by and among musicmaker.com, Inc., a Delaware
- ------------------------------
corporation (the "Company"), Virgin Holdings, Inc., a Delaware corporation,
-------
including any of its transferees of Registrable Securities (together with any
holder of Virgin Registrable Securities (as hereinafter defined), "Virgin"), Rho
------
Management Trust I, a New York trust ("Rho"), The Columbia House Company, a New
---
York partnership ("Columbia House"), certain officers and directors of the
--------------
Company who are shareholders of the Company listed on Schedule I ("Officers and
---------- ------------
Directors") and the other shareholder of the Company listed on Schedule II
- --------- -----------
(collectively with the Officers and Directors, the "Other Holders"). Virgin,
-------------
Rho, Columbia House and the Other Holders are referred to collectively herein as
the "Registration Rights Holders."
---------------------------
WHEREAS, pursuant to the Agreement, dated as of June 8, 1999 (the
"Agreement"), between the Company and Virgin, in exchange for the rights granted
- ----------
by Virgin to the Company under a License Agreement, the Company will issue to
Virgin shares of common stock of the Company (the "Common Stock").
------------
WHEREAS, in order to induce Virgin to enter into the Agreement, the Company
has agreed to grant registration rights with respect to Virgin Registrable
Securities as set forth in this Registration Rights Agreement;
WHEREAS, the registration rights of Rho, Columbia House and the Other
Holders under this Registration Rights Agreement replace and supersede existing
registration rights granted by the Company to Rho, Columbia House and the Other
Holders pursuant to those agreements listed on Schedule III hereto (the
------------
"Existing Registration Rights Agreements") which are being terminated effective
- ----------------------------------------
the date hereof; and
WHEREAS, each Rho, Columbia House and the Other Holders own the shares of
Common Stock set forth beside its name on Schedule IV;
-----------
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereby agree as follows:
Section 1. General; Securities Subject to this Registration Rights
-------------------------------------------------------
Agreement.
- ---------
(a) Grant of Rights. The Company hereby grants registration rights to
---------------
Virgin, Rho, Columbia House and the Other Holders upon the terms and conditions
set forth in this Registration Rights Agreement.
<PAGE>
(b) No Other Rights. The Company hereby represents and warrants
---------------
that, other than those rights granted pursuant to the Existing Registration
Rights Agreements (which are being terminated upon execution of this
Registration Rights Agreement) and the rights granted pursuant to the agreements
listed on Schedule V, the Company has not granted or agreed to grant any
----------
registration rights to any individual, firm, corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind, and shall include any successor (by merger
or otherwise) of any such entity, any of the foregoing herein being referred to
as "Person," and there are no other existing agreements, arrangements or
------
understandings between the Company and any other Person relating to registration
rights.
(c) Agreement of Registration Rights Holders. Rho, Columbia House
----------------------------------------
and the Other Holders hereby acknowledge and agree that, effective as of the
date hereof, the Existing Registration Rights Agreements are terminated and of
no further force and effect, and that this Registration Rights Agreement
replaces and supersedes any and all agreements, arrangements and understandings
(including the Existing Registration Rights Agreements), whether written or
oral, between the Company and each of Rho, Columbia House and the Other Holders
with respect to registration rights.
(d) Registrable Securities. Registrable Securities means each of the
----------------------
following: (a) any and all shares of Common Stock currently held by the
Registration Rights Holders; (b) any and all shares of Common Stock issued to
any of the Registration Rights Holders upon conversion or exercise of
convertible securities of the Company currently held by them; (c) all Common
Stock which Virgin holds at any time ("Virgin Registrable Securities"); and
-----------------------------
(d) any shares of Common Stock issued or issuable to any of the Registration
Rights Holders by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
For the purposes of this Registration Rights Agreement, Registrable
Securities will cease to be Registrable Securities when (i) a registration
statement covering such Registrable Securities has been declared effective under
the Securities Act of 1933, as amended, (the "Securities Act") by the Securities
--------------
and Exchange Commission (the "Commission") and such Registrable Securities have
----------
been disposed of pursuant to such effective registration statement, (ii) such
Registrable Securities (other than Virgin Registrable Securities) may be
distributed to the public without any limitation as to volume pursuant to Rule
144 (or any successor provision then in effect) under the Securities Act, (iii)
such Registrable Securities are proposed to be sold or distributed by a Person
not entitled to the registration rights granted by this Registration Rights
Agreement or (iv) such Registrable Securities cease to be outstanding. From and
after the date that a Registration Rights Holder no longer owns
2
<PAGE>
Registrable Securities, such Registration Rights Holder shall not be subject to
the provisions of this Registration Rights Agreement.
Section 2. Demand Registrations.
--------------------
(a) Requests for Registration. At any time after 9 months of an
-------------------------
initial public offering of shares of Common Stock (an "IPO"), and subject to the
---
limitations set forth in Sections 2(c) and (d), Virgin, Rho or Columbia House
may request registration under the Securities Act of all or any portion of their
Registrable Securities on Form S-1 or any similar long-form registration
("Long-Form Registrations") or on Form S-2 or S-3 or any similar short-form
------------------------
registration ("Short-Form Registrations"), if available. Subject to the
------------------------
limitations set forth in Section 2(g), any Other Holder of Registrable
Securities may participate in registrations under the Securities Act of all or
any portion of its Registrable Securities initiated by Virgin, Rho and/or
Columbia House. All registrations requested pursuant to this Section 2(a) are
referred to herein as "Demand Registrations." The Registration Rights Holder
--------------------
initially requesting a registration of Registrable Securities shall be referred
to herein as the "Initiating Holder." Demand Registrations shall be made through
-----------------
Short-Form Registrations whenever the Company is permitted to do so. After the
Company has become subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, the Company shall use its reasonable best
efforts to make Short-Form Registrations on Form S-3 available for the sale of
Registrable Securities. Each request for a Demand Registration shall specify the
approximate number of Registrable Securities requested to be registered and the
anticipated per share price range for such offering. Within ten days after
receipt of any such request, the Company shall give written notice of such
requested registration to all Registration Rights Holders and, subject to the
limitations set forth in Section 2(g), shall include in such registration all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the Company's
notice. Notwithstanding anything herein to the contrary, a Demand Registration
may not be requested pursuant to this Section 2(a) unless the number of
Registrable Securities requested to be included in such Demand Registration is
at least 750,000.
(b) Additional Virgin Rights. In addition to the Demand Registration
------------------------
rights granted to Virgin pursuant to Section 2(a), Virgin shall be entitled to
cause the Company to effect an IPO. The Company shall include in any IPO
(whether or not caused by Virgin), without regard to Section 3(c) below, such
number of Virgin Registrable Securities as Virgin may elect, up to a maximum
number of Registrable Securities equal to such number that results in Virgin
receiving proceeds (after deduction of underwriters commissions and discounts)
in the IPO of $40 million. The Registration Expenses of Virgin shall be paid by
the Company. Rho, Columbia House and the Other Holders shall not be entitled to
include any of their Registrable Securities in the IPO.
3
<PAGE>
(c) Permitted Virgin Demand Registrations. Virgin shall be entitled to
-------------------------------------
request four Demand Registrations, two of which may be Long-Form Registrations.
(d) Permitted Rho and Columbia House Demand Registrations. Rho and
-----------------------------------------------------
Columbia House each shall be entitled to request, (i) in the case of Rho, one
Long-Form and two Short-Form Registrations, and (ii) in the case of Columbia
House, one Long-Form and one Short-Form Registration; provided that, if Rho
--------
requests a Long-Form Registration, Columbia House may not request a Long-Form
Registration, and if Columbia House requests a Long-Form Registration, Rho may
not request a Long-Form Registration.
(e) Inclusion in Demand Registrations. In addition to the rights
---------------------------------
granted to the Registration Rights Holders, subject to Sections 2(b) and 2(g),
(i) Virgin, Rho and Columbia House are entitled to participate in a Demand
Registration requested by any one of them and (ii) each Other Holder may
participate in a Demand Registration initiated by Virgin, Rho and/or Columbia
House.
(f) Effective Registration Statement. A registration requested
--------------------------------
pursuant to this Section 2 shall not be deemed to have been effected:
(i) unless a registration statement with respect thereto has
become effective and remained effective in compliance with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
covered by such registration statement until the earlier of (x) such time as all
of such Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in
such registration statement or (y) 180 days after the effective date of such
registration statement, except with respect to any registration statement filed
pursuant to Rule 415 under the Securities Act, in which case the Company shall
use its best efforts to keep such registration statement effective until such
time as all of the Registrable Securities cease to be Registrable Securities;
(ii) if after it has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or court for any reason not
attributable to the Registration Rights Holders and has not thereafter become
effective; or
(iii) if the conditions to closing specified in the underwriting
agreement, if any, entered into in connection with such registration are not
satisfied or waived, other than by reason of a failure on the part of the
Registration Rights Holders.
(g) Priority on Demand Registrations. The Company shall not include
--------------------------------
in any Demand Registration any securities which are not Registrable
4
<PAGE>
Securities without the prior written consent of the Registration Rights Holders
holding a majority of the Registrable Securities included in such registration.
If a Demand Registration is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the Registration Rights Holders
holding a majority of the Registrable Securities to be included in such
registration without adversely affecting the marketability of the offering, the
Company shall only include Registrable Securities in such registration and shall
include Registrable Securities in such registration in the following priority,
(i) first, the number of Registrable Securities requested to be included by
-----
Virgin, Rho and Columbia House which in the opinion of such underwriters can be
sold in an orderly manner within the price range of such offering, pro rata
among the respective holders thereof on the basis of their respective percentage
ownership of Registrable Securities, and (ii) second, all securities requested
------
to be registered by the Other Holders which in the opinion of such underwriters
can be sold in an orderly manner within the price range of such offering, pro
rata among the respective holders thereof on the basis of their respective
percentage ownership of Registrable Securities. If the total number of
Registrable Securities requested to be included in such registration cannot be
included as provided in the preceding sentence, the Initiating Holder of such
registration shall have the right to withdraw the request for registration by
giving written notice to the Company within 20 days after receipt of such notice
by the Company and, in the event of such withdrawal, such request shall be
counted for purposes of the requests for registration to which such Initiating
Holder is entitled pursuant to Section 2, unless such Initiating Holder pays the
expenses of such registration.
(h) Listing. The Company shall list the Registrable Securities
-------
subject to Section 2(a) on The Nasdaq Stock Market or another of the national
securities exchanges or automated quotation system.
(i) Expenses. The Company will pay all Registration Expenses (except
--------
for any underwriting commissions or discounts) in connection with the IPO and
any Demand Registration requested pursuant to this Section 2.
(j) Limitations, Conditions and Qualifications to Obligations Under
---------------------------------------------------------------
Registration Covenants. The Company shall not be obligated to effect any
- ----------------------
Demand Registration within 180 days after the effective date of a previous
Demand Registration. Anything in this Registration Rights Agreement to the
contrary notwithstanding, it is understood and agreed that the Company shall not
be required to file a registration statement, amendment or post-effective
amendment thereto or prospectus supplement or to supplement or amend any
registration statement if the Company is then involved in discussions
concerning, or otherwise engaged in, an acquisition, disposition, financing or
other material transaction if the Board of Directors
5
<PAGE>
of the Company determines in good faith that the making of such a filing,
supplement or amendment at such time would materially adversely effect or
interfere with such transaction (a "Valid Business Reason"); provided that the
--------------------- --------
Company shall not postpone making filings, supplements or amendments for more
than an aggregate of 90 days in any 12-month period. The Company shall promptly
give the Registration Rights Holders written notice of such postponement,
containing a general statement of the reasons for such postponement and an
approximation of the anticipated delay. Upon receipt by a Registration Rights
Holder of notice of an event of the kind described in this Section 2(j), such
Registration Rights Holder will discontinue its disposition of Registrable
Securities until it receives a notice from the Company that such disposition may
continue and of any supplemented or amended prospectus indicated in such notice.
If the Company postpones the filing of a registration statement, the Initiating
Holder of such registration shall have the right to withdraw the request for
registration by giving written notice to the Company within 30 days after
receipt of notice of postponement and, in the event of such withdrawal, such
request shall not be counted for purposes of the requests for registration to
which such Initiating Holder is entitled pursuant to Section 2. If the Company
shall give any notice of postponement or withdrawal of a registration statement,
the Company shall, at such time as the Valid Business Reason that caused such
postponement or withdrawal no longer exists (but in no event later than 90 days
after the date of the postponement) and upon notification by the Initiating
Holder that it wishes to proceed, use its best efforts to promptly effect the
registration under the Securities Act of the Registrable Securities covered by
such postponed or withdrawn registration statement. Notwithstanding anything to
the contrary contained herein, the Company may not postpone or withdraw a filing
pursuant to this paragraph more than once in any 12-month period.
(k) Underwriting Procedures. If the Initiating Holder so elects, the
-----------------------
offering of Registrable Securities pursuant to a Demand Registration shall be in
the form of a firm commitment underwritten offering and the managing underwriter
shall be selected in accordance with Section 2(l).
(l) Selection of Underwriters. The Registration Rights Holders
-------------------------
holding a majority of the Registrable Securities included in any underwritten
Demand Registration shall have the right to select the managing underwriters of
such underwritten offering. The Company shall have the right to approve such
managing underwriters, which approval shall not be unreasonably withheld.
(m) Other Registration Rights. Except as provided in this
-------------------------
Registration Rights Agreement, (i) the Company shall not grant to any Person the
right to request the Company to register any equity securities of the Company,
or any securities convertible or exchangeable into or exercisable for such
securities, without the prior written consent of the Registration Rights Holders
holding a majority of the Registrable Securities, and (ii) the Company shall not
grant to any Person the right to request the Company to register any equity
securities of the Company, or any securities
6
<PAGE>
convertible or exchangeable into or exercisable for such securities, on terms
which are more favorable (e.g., rights which are other than pari passu) to such
Person than those granted to Virgin hereunder without the prior written consent
of the Registration Rights Holders holding a majority of the Registrable
Securities.
Section 3. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Whenever the Company proposes to register
------------------
any of its securities under the Securities Act at any time after an IPO (other
than pursuant to a Demand Registration (which is addressed under Section 2 above
rather than under this Section 3)) and the registration form to be used may be
used for the registration of Registrable Securities (a "Piggyback
---------
Registration"), the Company shall give prompt written notice to all Registration
- ------------
Rights Holders of its intention to effect such a registration and, subject to
Section 3(c), shall include in such registration all Registrable Securities with
respect to which the Company has received written requests for inclusion therein
within 20 days after the receipt of the Company's notice; provided, that if,
--------
at any time after giving written notice of its intention to register any
securities and prior to the effective date of the registration statement filed
in connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities, the Company may, at
its election, give written notice of such determination to each Registration
Rights Holder requesting inclusion in such registration and (i) in the case of a
determination not to register, shall be relieved of its obligation to register
any Registrable Securities in connection with such registration (but not from
any obligation of the Company to pay the Registration Expenses in connection
therewith), without prejudice, however, to the rights of any Registration Rights
Holder entitled to cause a registration to be effected as a registration under
Section 2, and (ii) in the case of a determination to delay registering, shall
be permitted to delay registering any Registrable Securities for the same period
as the delay in registering such Company securities.
(b) Piggyback Expenses. The Registration Expenses of the
------------------
Registration Rights Holders shall be paid by the Company in all Piggyback
Registrations, whether or not such Piggyback Registration becomes effective.
(c) Priority on Piggyback Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten registration and the managing underwriters advise the Company
in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in an orderly
manner in such offering within a price range acceptable to the Company, the
Company shall include in such registration (i) first, the securities the
-----
Company proposes to sell for its own account, (ii) second, the Registrable
------
Securities requested to be included in such registration, pro rata among the
Registration Rights Holders on the basis of their respective ownership of
Registrable Securities, and (iii) third, other securities requested to be
-----
included in such registration; provided, however, that for purposes of this
-------- -------
Section
7
<PAGE>
3(c), all holders of Virgin Registrable Securities shall be considered one
Registration Rights Holder. The Company shall not limit the number of
Registrable Securities to be included in a Piggyback Registration pursuant to
this Registration Rights Agreement in order to include shares held by
stockholders with no registration rights or to include any shares of stock
issued to employees, officers, directors or consultants pursuant to any stock
option plan unless such employees, officers, directors or consultants have
registration rights.
(d) Selection of Underwriters. Registration Rights Holders holding a
-------------------------
majority of the Registrable Securities included in any underwritten Piggyback
Registration shall have the right to approve the managing underwriters selected
for such offering, which approval shall not be unreasonably withheld.
Section 4. Holdback Agreements.
-------------------
(a) No Registration Rights Holder shall effect any public sale or
distribution (including sales pursuant to Rule 144, except in the case of
Columbia House, which shall be entitled to effect sales pursuant to Rule 144;
provided, that Columbia House shall not effect any public sale or distribution,
- --------
including pursuant to Rule 144, during the seven days prior to and the 180-day
period beginning on the effective date of an IPO, unless the underwriters
managing the IPO otherwise agree) of equity securities of the Company, or any
securities convertible into or exchangeable or exercisable for such securities,
during the seven days prior to and the 180-day period beginning on the effective
date of any underwritten registration (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
180-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) shall use reasonable best efforts to cause each holder
of at least 5% (on a fully-diluted basis) of its shares of Common Stock, or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock, purchased from the Company at any time after the date of this
Registration Rights Agreement (other than in a registered public offering) to
agree not to effect any public sale or distribution (including sales pursuant to
Rule 144) of any such securities during such period (except as part of such
underwritten registration, if otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
Section 5. Registration Procedures. Whenever the Registration Rights
-----------------------
Holders have requested that any Registrable Securities be registered pursuant to
8
<PAGE>
this Registration Rights Agreement, the Company shall use its best efforts to
effect the registration and the sale of such Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant thereto
the Company shall as expeditiously as possible:
(a) prepare and (within 90 days after the end of the period within
which requests for registration may be given to the Company or in any event as
soon thereafter as practicable) file with the Commission a registration
statement with respect to such Registrable Securities and use its reasonable
best efforts to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by a
majority of the Registration Rights Holders covered by such registration
statement copies of all such documents proposed to be filed, which documents
shall be subject to the prompt review and comment of such counsel);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities covered by such registration statement
until the earlier of (x) such time as all of such Registrable Securities have
been disposed of in accordance with the intended methods of disposition by the
seller or sellers thereof set forth in such registration statement or (y) 180
days after the effective date of such registration statement, except with
respect to any registration statement filed pursuant to Rule 415 under the
Securities Act, in which case the Company shall use its best efforts to keep the
registration statement effective and updated, from the date such registration
statement is declared effective until such time as all of the Registrable
Securities cease to be Registrable Securities;
(c) furnish to each seller of Registrable Securities covered by such
registration statement, such number of copies of such registration statement,
each amendment and supplement thereto, the prospectus included in such
registration statement (including each preliminary prospectus) and such other
documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such seller;
(d) use its reasonable best efforts (x) to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such States of the
United States of America where an exemption is not available and as the sellers
of Registrable Securities covered by such registration statement shall
reasonably request, (y) to keep such registration or qualification in effect for
so long as such registration statement remains in effect and (z) to take any
other action that may be reasonably necessary or advisable to enable such
sellers to consummate the disposition in such jurisdictions of the securities to
be sold by
9
<PAGE>
such sellers, except that the Company shall not for any such purpose be required
to qualify generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this paragraph (d) be obligated
to be so qualified or to consent to general service of process in any such
jurisdiction;
(e) use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by such other
federal or state governmental agencies or authorities as may be necessary in the
opinion of counsel to the Company and counsel to the seller or sellers of
Registrable Securities to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
(f) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(g) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the National Association of
Securities Dealers, Inc. (the "NASD") automated quotation system and, if
----
listed on the NASD automated quotation system, use its best efforts to secure
designation of all such Registrable Securities covered by such registration
statement as a "national market system security" on The Nasdaq Stock Market
within the meaning of Rule 11Aa2-1 of the Commission or, failing that, to secure
authorization of The Nasdaq Stock Market for such Registrable Securities and,
without limiting the generality of the foregoing, to arrange for at least two
market makers to register as such with respect to such Registrable Securities
with the NASD;
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(i) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions (including,
without limitation, causing representatives of the Company to participate in any
"road show" or "road shows") as the Registration Rights Holders holding a
majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including effecting a stock split or a combination of
shares);
10
<PAGE>
(j) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement, in each case
subject to confidentiality restrictions reasonably imposed by the Company;
(k) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months beginning with the first day of the Company's
first full calendar quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder;
(l) permit any Registration Rights Holder which holder, in its sole and
exclusive judgment, might be deemed to be an underwriter or a controlling Person
of the Company, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material, furnished
to the Company in writing, which in the reasonable judgment of such holder and
its counsel should be included;
(m) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Stock included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order; and
(n) in the case of an underwritten or "best efforts" offering, at
the request of any seller or sellers of Registrable Securities, furnish at the
effective date of such registration statement to such sellers of Registrable
Securities, and such sellers' underwriters, if any, a signed counterpart of:
(x) an opinion of counsel for the Company, dated the effective
date of such registration statement or, if applicable, the date of the closing
under the underwriting agreement, and
(y) a "comfort" letter signed by the independent public
accountants who have certified the Company's financial statements included or
incorporated by reference in such registration statement,
11
<PAGE>
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' comfort letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' comfort letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the accountants'
comfort letter, such other financial matters, and, in the case of the legal
opinion, such other legal matters, as the underwriters may reasonably request.
Section 6. Registration Expenses. "Registration Expenses" means all
--------------------- ---------------------
expenses incident to the Company's performance of or compliance with Section 2,
including, without limitation, all registration and filing fees, all fees of The
Nasdaq Stock Market, other national securities exchanges or the NASD, all fees
and expenses of complying with securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of "cold comfort" letters required by or
incident to such performance and compliance, any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities (excluding any
underwriting discounts or commissions with respect to the Registrable
Securities). The reasonable fees and expenses of one counsel to the
Registration Rights Holders (selected by Registration Rights Holders
representing at least 50% of the Registrable Securities covered by such
registration) and the reasonable fees and disbursements of each additional
counsel retained by any Registration Rights Holder for the purpose of rendering
a legal opinion to the underwriter on behalf of such Registration Rights Holder
in connection with any underwritten Demand Registration or Piggyback
Registration. Notwithstanding the foregoing, in the event the Company shall
determine, in accordance with Section 3(a) or Section 2(j), not to register any
securities with respect to which it had given written notice of its intention to
so register to Registration Rights Holders, all of the costs of the type (and
subject to any limitation to the extent) set forth in this definition and
incurred by Registration Rights Holders in connection with such registration on
or prior to the date the Company notifies the Registration Rights Holders of
such determination shall be deemed Registration Expenses.
Section 7. Indemnification.
---------------
(a) The Company agrees to indemnify, to the extent permitted by law,
each Registration Rights Holder, its officers, directors, partners, members,
affiliates and each Person who controls such holder (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and expenses,
caused by any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as the same are caused by or contained in
any information furnished in writing to the
12
<PAGE>
Company by such holder expressly for use therein or caused by the failure of
such holder to deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Company has furnished such holder
with a sufficient number of copies of the same and such holder was legally
obligated to make such delivery. In connection with an underwritten offering,
the Company shall indemnify such underwriters, their officers and directors and
each Person who controls such underwriters (within the meaning of the Securities
Act) to the same extent as provided above with respect to the indemnification of
the Registration Rights Holders. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such indemnified
party and shall survive the transfer of such securities by any Registration
Rights Holder.
(b) In connection with any registration statement in which a
Registration Rights Holder is participating, each such holder shall furnish to
the Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, shall indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses caused by any untrue or alleged untrue statement of material fact
contained in the registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in any information or affidavit so furnished
in writing by such holder specifically stating that it is for use in the
preparation of such registration statement, prospectus or preliminary
prospectus, amendment or supplement; provided that the obligation to
--------
indemnify shall be individual, not joint and several, for each holder and shall
be limited to the net amount of proceeds received by such holder from the sale
of Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder unless and only
to the extent that such failure results in the indemnifying party's forfeiture
of substantive rights or defenses) and (ii) unless such indemnified party has
been advised in writing by counsel that a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party; provided, however, that any
indemnified party may, at its own expense, retain separate counsel to
participate in such defense. If such defense is assumed, the indemnifying party
shall not be subject to any liability for any settlement made by the indemnified
party without its consent (but such consent shall not be unreasonably withheld).
No indemnifying
13
<PAGE>
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of an unconditional release from all liability in respect to
such claim or litigation or which requires action other than the payment of
money by the indemnifying party. An indemnifying party who is not entitled to,
or elects not to, assume the defense of a claim shall not be obligated to pay
the fees and expenses of more than one counsel for all parties indemnified by
such indemnifying party with respect to such claim, unless an indemnified party
has been advised in writing by counsel that a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.
(d) Contribution. If the indemnification provided for in this
------------
Section 7 shall for any reason be held by a court to be unavailable to an
indemnified party under Section 7(a) or 7(b) hereof in respect of any loss,
claim, damage or liability, or any action in respect thereof, then, in lieu of
the amount paid or payable under Section 7(a) or 7(b), the indemnified party and
the indemnifying party under Section 7(a) or 7(b) shall contribute to the
aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating the same,
including those incurred in connection with any claim for indemnity hereunder),
(i) in such proportion as is appropriate to reflect the relative fault of the
Company and the prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claim, damage or liability,
or action or proceeding in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and such prospective
sellers from the offering of the securities covered by such registration
statement; provided, however, that for purposes of this clause (ii), the
-------- -------
relative benefits received by the prospective sellers shall be deemed not to
exceed the amount of proceeds received by such prospective sellers. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation. Such prospective sellers'
obligations to contribute as provided in this Section 7(d) are several in
proportion to the relative value of their respective Registrable Securities
covered by such registration statement and not joint. In addition, no Person
shall be obligated to contribute hereunder any amounts in payment for any
settlement of any action or claim effected without such Person's consent, which
consent shall not be unreasonably withheld.
(e) Other Indemnification. Indemnification and contribution similar
---------------------
to that specified in the preceding subdivisions of this Section 7 (with
appropriate modifications) shall be given by the Company and each seller of
Registrable Securities
14
<PAGE>
with respect to any required registration or other qualification of securities
under any federal or state law or regulation of any governmental authority
other than the Securities Act.
(f) Indemnification Payments. The indemnification and contribution
------------------------
required by this Section 7 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
Section 8. Rule 144. The Company covenants that, after the IPO, it shall
--------
file (a) any reports required to be filed by it under the Exchange Act of 1934,
as amended, and (b) take such further action as each holder of Registrable
Securities may reasonably request (including providing any information necessary
to comply with Rule 144 under the Securities Act), all to the extent required
from time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144 under the Securities Act, as such rule may be amended
from time to time, or (ii) any similar rules or regulations hereafter adopted by
the Commission. The Company shall, upon the request of any holder of
Registrable Securities, deliver to such holder a written statement as to whether
it has complied with such requirements.
Section 9. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided, that no
--------
holder of Registrable Securities included in any underwritten registration shall
be required to make any representations or warranties to the Company or the
underwriters (other than representations and warranties regarding such holder
and such holder's intended method of distribution) or to undertake any
indemnification obligations to the Company or the underwriters with respect
thereto, except as otherwise provided in Section 7 hereof.
Section 10. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter
--------------------------
enter into any agreement with respect to its securities which is inconsistent
with or violates the rights granted to the Registration Rights Holders in this
Registration Rights Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall
--------------------------------------------
not take any action, or permit any change to occur, with respect to its
securities which would adversely affect the ability of the Registration Rights
Holders to
15
<PAGE>
include their Registrable Securities in a registration undertaken pursuant to
this Registration Rights Agreement or which would adversely affect the
marketability of such Registrable Securities in any such registration.
(c) Remedies. Any Person having rights under any provision of this
--------
Registration Rights Agreement shall be entitled to enforce such rights
specifically and to recover damages caused by reason of any breach of any
provision of this Registration Rights Agreement and to exercise all other rights
granted by law. The parties hereto agree and acknowledge that money damages may
not be an adequate remedy for any breach of the provisions of this Registration
Rights Agreement and that any party may in its sole discretion apply to any
court of law or equity of competent jurisdiction (without posting any bond or
other security) for specific performance and for other injunctive relief in
order to enforce or prevent violation of the provisions of this Registration
Rights Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Registration Rights Agreement may be amended or waived only
upon the prior written consent of the Company and the Registration Rights
Holders holding a majority of the Registrable Securities; provided
--------
that (i) no such amendment or action which adversely affects any one
Registration Rights Holder or group of Registration Rights Holders, as such,
vis-a-vis the other Registration Rights Holders, as such, shall be effective
against such Registration Rights Holder or Registration Rights Holders without
the prior written consent of such Registration Rights Holder or Registration
Rights Holders and (ii) no such amendment or action which adversely affects the
unique rights of Virgin, Rho and Columbia House hereunder (e.g., a reduction in
the number of their Demand Registrations) shall be effective against Virgin, Rho
or Columbia House without the prior written consent of Virgin, Rho and Columbia
House, as the case may be.
(e) Successors and Assigns. All covenants and agreements in this
----------------------
Registration Rights Agreement by or on behalf of any of the parties hereto shall
bind and inure to the benefit of the respective successors and permitted assigns
of the parties hereto. Except by operation of law, this Agreement may not be
assigned by the Company or any other party without the prior written consent of
a majority of the Registrable Securities outstanding at the time consent is
requested. In addition and notwithstanding the foregoing, Virgin may assign this
Agreement to any holder of Virgin Registrable Securities and, whether or not any
express assignment has been made, the provisions of this Registration Rights
Agreement which are for the benefit of Virgin are also for the benefit of, and
enforceable by, any subsequent holder of Virgin Registrable Securities.
(f) Severability. Whenever possible, each provision of this
------------
Registration Rights Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Registration Rights
16
<PAGE>
Agreement is held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Registration Rights
Agreement.
(g) Counterparts. This Registration Rights Agreement may be executed
------------
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Registration Rights Agreement.
(h) Descriptive Headings. The descriptive headings of this
--------------------
Registration Rights Agreement are inserted for convenience only and do not
constitute a part of this Registration Rights Agreement.
(i) Governing Law. The corporate law of the State of Delaware shall
-------------
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other issues and questions concerning the
construction, validity, interpretation and enforcement of this Registration
Rights Agreement and the exhibits and schedules hereto shall be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
the State of New York or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of New York.
(j) Notices. All notices, demands or other communications provided
-------
for or permitted hereunder shall be made in writing and shall be by registered
or certified first class mail, return receipt requested, telecopier, e-mail,
courier service, overnight mail or personal delivery:
(i) if to Virgin, addressed to it in the manner set forth in
the Agreement, or at such other address as it shall have furnished to the
Company in writing in the manner set forth herein;
(ii) if to Rho, Columbia House or the Other Holders, at the
address that such holder shall have furnished to the Company in writing; or
(iii) if to the Company, addressed to it in the manner set
forth in the Agreement, or at such other address as the Company shall have
furnished to each Registration Rights Holder at the time outstanding in the
manner set forth herein.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered to a
courier, if delivered by overnight courier service; five Business Days after
being deposited in the
17
<PAGE>
mail, postage prepaid, if mailed; and when receipt is acknowledged, if
telecopied or transmitted by e-mail.
(k) Entire Agreement. This Registration Rights Agreement is
----------------
intended by the parties as a final expression of their agreement and intended to
be a complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Registration Rights Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter, including the Existing Registration Rights Agreements.
(l) Further Assurances. Each of the parties shall execute such
------------------
documents and perform such further acts as may be reasonably required or
desirable to carry out or to perform the provisions of this Registration Rights
Agreement.
* * * * *
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
MUSICMAKER.COM, INC.
By: /s/ Robert Bernardi
______________________________
Name: Robert Bernardi
Title: Chairman and Co-CEO
By: /s/ Devarajan S. Puthukarai
______________________________
Name: Devarajan S. Puthukarai
Title: President and Co-CEO
VIRGIN HOLDINGS, INC.
By: /s/ Susan Feingold
______________________________
Name: Susan Feingold
Title: Secretary
RHO MANAGEMENT TRUST I
By: /s/ Joshua Ruch
______________________________
Name: Joshua Ruch
Title: Chairman and CEO
THE COLUMBIA HOUSE COMPANY
By: /s/ Richard C. Wolter
______________________________
Name: Richard C. Wolter
Title: Chairman and C.E.O.
/s/ Robert P. Bernardi
_________________________________
Robert P. Bernardi
19
<PAGE>
/s/ Devarajan S. Puthukarai
_________________________________
Devarajan S. Puthukarai
/s/ Irwin H. Steinberg
_________________________________
Irwin H. Steinberg
RHL VENTURES LLC
By: /s/ Robert Lessin
______________________________
Name:
Title:
20
<PAGE>
Schedule I
Officers and Directors
----------------------
1. Robert P. Bernardi, Co-Chief Executive Officer and Chairman of the Board of
Directors.
2. Devarajan S. Puthukarai, President, Co-Chief Executive Officer, Chief
Operating Officer and Director.
3. Irwin H. Steinberg, Vice Chairman of the Board of Directors and Consultant.
<PAGE>
Schedule II
Other Shareholder
-----------------
1. RHL Ventures LLC c/o Robert Lessin.
<PAGE>
Schedule III
Existing Registration Rights Agreements
---------------------------------------
1. Rho Management Trust I, pursuant to a Securities Purchase Agreement dated
as of December 9, 1997, between the Company and Rho Management Trust I, RHL
Ventures LLC, Robert P. Bernardi, and Devarajan S. Puthukarai.
2. The Columbia House Company, pursuant to Section 4 of the Warrant Agreement
dated as of June 11, 1998 between the Company and The Columbia House
Company. Nothing in this Registration Rights Agreement shall affect the
provisions of the Warrant Agreement other than Section 4 thereof.
3. Robert P. Bernardi, pursuant to a Securities Purchase Agreement dated as of
December 9, 1997, between the Company and Rho Management Trust I, RHL
Ventures LLC, Robert P. Bernardi, and Devarajan S. Puthukarai.
4. Devarajan S. Puthukarai, pursuant to a Securities Purchase Agreement dated
as of December 9, 1997, between the Company and Rho Management Trust I, RHL
Ventures LLC, Robert P. Bernardi, and Devarajan S. Puthukarai.
5. Irwin H. Steinberg, pursuant to a Letter Agreement between the Company and
Irwin H. Steinberg, dated January 23, 1997.
6. RHL Ventures LLC c/o Robert Lessin, pursuant to a Securities Purchase
Agreement dated as of December 9, 1997, between the Company and Rho
Management Trust I, RHL Ventures LLC, Robert P. Bernardi, and Devarajan S.
Puthukarai.
<PAGE>
Exhibit 10.17
CO-BRANDING AND MEDIA PURCHASE AGREEMENT
This Co-Branding and Media Purchase Agreement (the "Agreement") is made as
of 3/26, 1999 (the "Effective Date") by and between The Music Connection, a
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Delaware corporation with offices at 1831 Wiehle Avenue, Suite 128, Reston, VA
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20190 ("TMC") and Spinner Networks, Inc. a California corporation with offices
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at 1209 Howard Avenue, Burlingame, California 94010 ("Spinner.com").
BACKGROUND
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A. Spinner owns and operates a leading Internet radio web site, located
primarily at http://www.spinner.com (The "Spinner Site"), and related software
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and services.
B. TMC owns and operates a custom compilation music store through its
Internet web site, located primarily at http://www.musicmaker.com (the
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"MusicMaker Site").
C. Both parties desire for TMC to construct, host and maintain a co-
branded version of the MusicMaker Site which will provide Spinner.com end-users
with access to the products, services and information available through the
MusicMaker Site.
In consideration of the foregoing, the parties hereby agree as follows:
A G R E E M E N T
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1. Definitions. Capitalized terms used herein are defined in Exhibit A and
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throughout the Agreement.
2. TMC Obligations.
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2.1 Site Development and Operation. TMC will construct, operate, and
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maintain a co-branded web site which will, at a minimum, provide Spinner Users
with access to the products, services, content, and support available through
the MusicMaker Site (the Co-Branded Site"). TMC will provide, at its sole
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expense, all web development services, engineering support, technical support,
sales, administrative and management personnel, facilities, equipment and
supplies necessary to construct, operate, and maintain the Co-Branded Site. TMC
will be solely responsible for providing customer support to Spinner Visitors.
The Co-Branded Site shall be constructed and maintained such that its average
web page response times shall be substantially equivalent to the MusicMaker Site
and commercially similar web sites.
2.2 Co-Branding. TMC will incorporate on each page of the Co-Branded
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Site: (a) the Brand Feature of both parties; and (b) Spinner.com's navigation
bar(s) and/or other elements of the Spinner Look & Feel; in a design mutually
agreed to by the parties. Spinner's brand and navigation bar shall appear at
the top of the co-branded page. Spinner and MusicMaker brand/log elements in
the Co-Branded Site will be of equal size. No third party Brand Features shall
appear on the Co-Branded Site.
2.3 Promotions. Each month during the Initial Term (as defined below),
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TMC will implement a promotion on the Co-Branded Site. Such promotion will
include: (a) the creation and/or sale of a Customized CD, (B) related thematic
or promotional content, and (c) at TMC's option, a discounted price for the
purchase of such Customized, CD. Following the launch of the music store area
of the Spinner Site (the "Music Store"), currently estimated to occur in May of
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1999, Spinner.com will create and display one or more persistent navigation
link(s) from the Music Store to the promotion described in this Section 2.3.
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2.4 TMC's Business. TMC will be responsible for : (a) all information and
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transaction processing at the Co-Branded Site, including but not limited to, all
order fulfillment, credit-card processing, and shipping and handling, (b)
establishing and maintaining all legal and other regulatory requirements for
operating the Co-Branded Site, including but not limited to all licensing
obligations, and (c) all taxes, duties, and other charges relating to the
operation of the Co-Branded Site and the transactions conducted there, including
without limitation collecting and paying all sales and other taxes and filing
tax returns.
3. Exclusivity: Option. During the Initial Term, Spinner.com will not
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enter into any agreement with a third party to co-brand a web-site on which
customized CDs are made available for purchase. Notwithstanding anything
contained in this Agreement to the contrary, at any time following three (3)
months after the Effective Date, Spinner may at its option request that TMC
remove Digital Downloads from the Co-Branded Sites, and any access to purchase
Digital Downloads.
4. Revenue Share.
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4.1 Subscription Revenue. TMC will pay Spinner.com a percentage of Net
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Revenue (the "Revenue Share") as follows: (a) for each Spinner Visitor who
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purchases a Digital Download, TMC will pay Spinner.com fifteen percent (15%) of
the Net Revenue derived from such purchase; and (b) for each Spinner Visitor who
purchases a Customized CD, TMC will pay twenty-two percent (22%) of the Net
Revenue derived from such purchase. As used herein, "Net Revenue" means the
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revenue actually received by TMC from Spinner Visitors for purchase of Digital
Downloads and Customized CDs, as applicable, less (a) returns and credits, (b)
applicable sales tax, and (c) shipping and handling costs.
4.2 Payment Terms. Within thirty (30) days following the end of each
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month, TMC will provide Spinner.com with the Revenue Share for such month,
accompanied by a written report showing in sufficient detail the calculation of
the Revenue Share for such month.
4.3 Records: Audit Rights. TMC will maintain complete and accurate
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records of purchases made by Spinner Visitors and Net Revenue during the Term
and for a period of six-months thereafter. During such period, Spinner.com will
have the right, at its own expense, to direct an independent certified public
accounting firm to inspect and audit the accounting and sales books and records,
of TMC that are relevant to verifying the accuracy of the Revenue Share,
provided that: (a) any such inspection and audit will be conducted during
regular business hours in such a manner as not to interfere with normal business
activities, (b) in no event will audits be made more frequently than once in
each six-month period., (c) if any audit should disclose an underpayment, TMC
will pay such amount to Spinner.com within thirty (30) days from notice thereof,
and (d) the reasonable fees and expenses relating to any audit which reveals an
underpayment in excess of five percent (5%) of the amounts owed, will be borne
entirely by TMC.
5. Media Purchase.
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5.1 Minimum Purchase. TMC agrees to purchase a minimum of $37,500 of
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Media Placements (the "Minimum Purchase") at the CPM rates set forth in Exhibit
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B. Spinner.com will determine in its sole discretion the allocation of Media
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Placements, and the placement and allocation of corresponding impressions, in a
manner designed to drive traffic to the Co-Branded Site. Notwithstanding the
foregoing, Spinner agrees that Media Placements shall be planned to distribute
impressions across the entire six month period. All banner ads and other
content supplied by TMC for Media Placements (the "Advertisements") shall
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promote the Co-Branded Site, and will be subject to Spinner's standard insertion
order terms and conditions. Spinner will deliver Media Placements associated
with the Minimum Purchase during the Initial Term (as defined below), provided,
however, that TMC's sole remedy for any under delivery will be delivery of
remaining impressions or Media Placements, as applicable, following the Initial
Term. TMC may purchase additional Media Placements at its discretion, at the
CPM rates set forth in Exhibit B.
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5.2 Payment and Reports. TMC agrees to pay Spinner.com $37,500 on the
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Effective Date (the "Prepayment"). The Prepayment will be creditable against
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amounts due for Media Placements delivered during the Initial Term. Spinner.com
will maintain complete and accurate records of all Media Placements during the
term and for a period of six-months thereafter. Within 30 days following the
end of each quarter, Spinner.com shall provide TMC with a written report which
will include a description of the Media Placements delivered during such
quarter, and the total amount deducted from the Prepayment for such Media
Placements.
6. License.
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6.1 Grant of License by Spinner.com.
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(a) Subject to the terms and conditions of this Agreement, Spinner.com
hereby grants to TMC a non-exclusive, royalty-free, worldwide license to use,
reproduce, publicly display, publicly perform, distribute and transmit
Spinner.com's Brand Features on the Co-Branded Site, provided that any display
of Spinner.com's Brand Features will be subject to compliance with any brand
guidelines communicated by Spinner.com to TMC.
(b) Spinner.com may, at any time, terminate the license granted
pursuant to subsection (a) above if, in its sole and reasonable discretion,
TMC's use of Spinner.com's Brand Features on the Co-Branded Site is diluting or
tarnishing the goodwill of Spinner.com's Brand Features.
6.2 Grant of License by TMC. Subject to the terms and conditions of this
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Agreement, TMC hereby grants to Spinner.com a nonexclusive, royalty-free,
worldwide license to use, modify, reproduce, publicly display, publicly perform,
distribute and transmit TMC's Brand Features in the Spinner Site in connection
with the marketing and promotion of the Co-Branded Site, subject to compliance
with any brand guidelines communicated by TMC to Spinner.com.
6.3 Reserved Rights. Without limitation of the foregoing, each party
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reserves all rights other than those expressly granted in this Agreement, and no
licenses are granted except as expressly set forth herein.
7. Proprietary Information.
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7.1 Confidentiality. TMC and Spinner.com hereby acknowledge that in the
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course of activities under this Agreement each of them may have access to
confidential and proprietary information which relates to the other party's
marketing and business (the "Confidential Information"). Each party agrees to
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preserve and protect the confidential Information of the party to any third
party without the prior written consent of the other party; provided, however,
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that either party may disclose any information which is: (a) already publicly
known; (b) discovered or created by the receiving party without reference to the
Confidential Information of the other party, as shown in records of receiving
party; (c) otherwise known to the receiving party through no wrongful conduct of
the receiving party, or (d) required by law. Moreover, any party hereto may
disclose may Confidential Information hereunder to such party's agents,
attorneys and other representatives or any court of competent jurisdiction or
any other party empowered hereunder as reasonably required to resolve any
dispute between the parties hereto. Each party shall treat the terms of this
Agreement as "Confidential Information."
7.2 User Information and Reports. TMC will own all right, title and
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interest in and to all end-user information that is created or collected in the
operation of the Co-Branded Site. TMC will provide Spinner.com with aggregated
usage data concerning access by Spinner Visitors to the Co-Branded Site. Usage
data reports will be provided quarterly and as reasonably requested. The
reports will be delivered in the format most commonly collected by TMC. All
usage data will be considered Confidential Information of TMC. TMC usage data
shall not include specific Spinner
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Visitor names or traceable addresses, however, TMC will provide Spinner.com, at
a minimum, the following information pertaining to Spinner Visitors: number of
Spinner Visitors, page views per visit, Spinner Visitors who register with TMC,
total transaction, total revenue per transaction, and products/services
purchased per transaction. Spinner.com may use any such information provided by
TMC in any manner so long as it is for internal purposes and complies with
Spinner.com's privacy policy.
7.3 Ownership. As between TMC and Spinner.com: (a) Spinner.com will have
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full and exclusive right, title and ownership interest in and to Spinner.com's
Brand Features, together with any Intellectual Property rights thereto, and (b)
TMC will have full and exclusive right, title and ownership interest in and to:
(I) the TMC Brand Features, (ii) the Co-Branded site except for any Spinner.com
Brand Features contained therein, and (iii) any Intellectual Property Rights to
the foregoing.
8. Termination.
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8.1 Term. This Agreement will become effective as of the Effective Date
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and, unless sooner terminated as provided below, will remain effective for a
period of six (6) months (the "Initial Term"). If during the Initial Term, the
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total Revenue Share received by Spinner is $50,000 or more, the Agreement shall
be automatically extended for an additional term of six (6) months (the
"Extension Term"). As used herein, "Term" shall mean the Initial Term, and if
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applicable, the Extension Term.
8.2 Termination. This Agreement may be terminated at any time by a party,
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effective immediately upon notice, if the other party: (a) becomes insolvent;
(b) files a petition in bankruptcy, (c) makes an assignment for the benefit of
its creditors, or (d) breaches any of its material responsibilities or
obligations under the Agreement which breach is not remedied within thirty (30)
days from receipt of written notice of such breach.
8.3 Effect of Termination. Upon expiration or termination of this
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Agreement: (a) each party shall return or, at the disclosing party's request
destroy, the Confidential Information of the other party, (b) all licenses
granted herein shall terminate; (c) TMC shall cease operation of the Co-Branded
Site and (d) TMC shall, within forty-five (45) days, pay to Spinner.com all sums
duc as of the effective date of expiration or termination, and (c) Sections 4.3,
7, 8.3, 9, 10, 11, and 12 shall survive any termination or expiration of the
Agreement.
9. Representation and Warranties.
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9.1 By Each Party. Each party represents and warrants to the other that:
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(a) such party has the full corporate right, power and authority to enter into
this Agreement and to perform the acts required of it hereunder; (b) the
execution of this Agreement by such party, and the performance by such party of
its obligations and duties hereunder, do not and will not violate any agreement
to which such party is a party or by which it is otherwise bound; and (c) when
executed and delivered by such party, this Agreement will constitute the legal,
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
9.2 No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN SECTION
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9.1 ABOVE, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES EXPRESS OR IMPLIED, REGARDING
THE SERVICE OR THE CO-BRANDED SITE, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT AND
IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
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10. Indemnification.
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10.1 Indemnification by Spinner.com. Spinner.com agrees, at its own
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expense, to defend or at its option to settle any claim or action brought
against TMC arising out of: (a) a claim that use of Spinner.com's Brand Features
in accordance with the terms of this Agreement infringes a third party copyright
or trademark, and/or (b) a breach by Spinner.com of any representation or
warranty contained in Section 9.1; and Spinner.com will indemnify TMC against
any and all losses, damages, suits, judgments, costs and expenses (including
litigation costs and reasonable attorney's fees) arising under any such claim or
action; provided that TMC provides Spinner.com with: (x) prompt written notice
of such claim or action, (y) sole control and authority over the defense or
settlement of such claim or action (provided that Spinner.com shall not enter
into any settlement which materially affects TMC's rights without TMC's prior
written consent), and (z) proper and full information and reasonable assistance
to defend and/or settle any such claim or action.
10.2 Indemnification by TMC . TMC agrees, at its own expense, to defend or
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at its option to settle any claim or action brought against Spinner.com arising
out of: (a) a claim that use of TMC's Brand Features in accordance with the
terms of this Agreement infringes a third party copyright or trademark, (b) a
claim related to the Co-Branded Site (excluding any infringement claim related
to Spinner.com's Brand Features), and/or (c) a breach by TMC of an
representation or warranty contained in Section 9.1; and TMC will indemnify
Spinner.com against any and all losses, damages, suites, judgments, costs and
expenses, (including litigation costs and reasonable attorneys' fees) arising
under any such claim or action; provided that Spinner.com provides TMC with: (x)
prompt written notice of such claim or action, (y) sole control and authority
over the defense or settlement of such claim or action (provided that TMC shall
not enter into any settlement which materially affects Spinner.com's rights
without Spinner.com's prior written consent) and (z) proper and full information
and reasonable assistance to defend and/or settle any such claim or action.
11. Limitation of Liability. EXCEPT FOR LIABILITY ARISING UNDER SECTION 10,
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UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY DAMAGES (EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM ANY
PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR
ANTICIPATED PROFITS OR LOST BUSINESS. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE.
12. Miscellaneous.
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12.1 Press Release. Notwithstanding Section 7.1, the parties will
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cooperate to create appropriate, mutually agreeable, public announcements of the
relationship set forth in this Agreement. No party will make any separate
public announcement without first delivering the announcement to the other party
and obtaining the other party's prior consent, which will not be unreasonably
withheld or delayed.
12.2 Notices. Any notice or other communication to be given hereunder will
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be in writing and given by facsimile, postpaid registered or certified mail
return receipt requested, or electronic mail (with a copy concurrently mailed as
set forth above). The date of receipt shall be deemed the date on which such
notice is given. Notice hereunder will be directed to a party at the address
for such party set forth in the first paragraph of this Agreement. Either party
may change its address for notice purposes hereof on written notice to the other
party in accordance with this Section 12.2.
12.3 Counterparts. This Agreement may be executed in any number of
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counterparts with the same effect as if all parties hereto had all signed the
same document. All counterparts will be construed together and will constitute
one agreement.
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12.4 No Assignment. Neither party will transfer or assign any rights or
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delegate any obligations hereunder, in whole or in part, whether voluntarily or
by operation of law, without the prior written consent of the other party. Any
purported transfer, assignment or delegation by either party without the
appropriate prior written approval will be null and void and of no force or
effect. Notwithstanding the foregoing, each party will have the right to assign
this Agreement to any successor of such party by way of merger or consolidation
or the acquisition of all or substantially all of the business and assets of the
assigning party relating to the Agreement.
12.5 Headings. Sections, titles or captions in no way define, limit,
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extend or describe the scope of this Agreement nor the intent of any of its
provisions.
12.6 Severability. Any provision of this Agreement that is prohibited or
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unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining portions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
12.7 Entire Agreement. This Agreement together with its Exhibits contains
----------------
the entire agreement of the parties with respect to the subject matter hereof,
and supersedes all prior and/or contemporaneous agreements or understandings,
written or oral, between the parties with respect to the subject matter hereof.
12.8 Governing Law. This Agreement will be governed by and interpreted
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under the laws of the State of California, without giving effect to applicable
conflicts of law principles.
12.9 Amendment. This Agreement may not be amended or modified by the
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parties in any manner, except by an instrument in writing signed on behalf of
each of the parties to which such amendment or modification applies by a duly
authorized officer or representative.
12.10 Waiver. Any of the provisions of this Agreement may be waived by
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the party entitled to the benefit thereof. Neither party will be deemed., by
any act or omission, to have waived any of its rights or remedies hereunder
unless such waiver is in writing and signed by the waiving party, and then only
to the extent specifically set forth in such writing. A waiver with reference
to one event will not be construed as continuing or as a bar to or waiver of any
right or remedy as to a subsequent event.
12.11 Arbitration. Any dispute, claim or controversy of any kind
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arising in connection with, or relating to, this Agreement, except for a
dispute, claim or controversy arising under Sections 7 and/or 8 shall be
resolved exclusively by binding arbitration in San Francisco, California, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect, by three (3) arbitrators appointed in accordance
with said rules. Judgment on the award rendered by the arbitrators may be
entered into any court of competent jurisdiction.
12.12 Recovery of Costs and Expenses. If either party brings an action
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against the other party to enforce its rights under this Agreement, the
prevailing party will be entitled to recover its costs and expenses, including,
without limitation, attorneys' fees and costs incurred in connection with such
action, including any appeal of such action.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers or representatives as of
the Effective Date.
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<PAGE>
THE MUSIC CONNECTION
By: /s/ William R. Crowley
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Name: William R. Crowley
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Title: VP/ Sales & Marketing
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Date: 3/28/99
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SPINNER NETWORKS, INC.
By: /s/ Dave Samuel
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Name: Dave Samuel
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Title: CEO
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Date: 3/26/99
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<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, 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 12, as to which the
date is June 14, 1999) in Amendment No. 2 to the Registration Statement (Form
S-1 No. 333-72685) and the related Prospectus of musicmaker.com, Inc. (formerly
The Music Connection Corporation) for the registration of 5,000,000 shares of
its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
June 14, 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> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 972,954 1,685,234
<SECURITIES> 0 0
<RECEIVABLES> 99,029 110,851
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,097,378 1,852,298
<PP&E> 552,688 653,649
<DEPRECIATION> (191,979) (245,979)
<TOTAL-ASSETS> 3,233,963 4,444,315
<CURRENT-LIABILITIES> 1,385,145 1,626,740
<BONDS> 0 0
2,776,782 2,817,888
0 0
<COMMON> 63,095 68,969
<OTHER-SE> (1,717,845) (2,283,568)
<TOTAL-LIABILITY-AND-EQUITY> 3,233,963 4,444,315
<SALES> 74,028 20,160
<TOTAL-REVENUES> 74,028 20,160
<CGS> (677,700) (463,283)
<TOTAL-COSTS> (677,700) (463,283)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 40,406
<INCOME-PRETAX> (4,654,767) (1,804,727)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,654,767) (1,804,727)
<EPS-BASIC> (0.94) (0.27)
<EPS-DILUTED> (0.94) (0.27)
</TABLE>
