<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ARTISTDIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7375 [TO COME]
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
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17835 VENTURA BOULEVARD, SUITE 310
ENCINO, CALIFORNIA 91316
(818) 758-8700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES B. CARROLL
CHIEF FINANCIAL OFFICER
17835 VENTURA BOULEVARD, SUITE 310
ENCINO, CALIFORNIA 91316
(818) 758-8700
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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RICHARD A. FINK, ESQ. STEVEN L. GROSSMAN, ESQ.
JOSEPH H. CHI, ESQ. ROBERT E. BENFIELD, ESQ.
KOUROSH VOSSOUGHI, ESQ. O'MELVENY & MYERS LLP
BROBECK, PHLEGER & HARRISON LLP 1999 AVENUE OF THE STARS, SUITE 700
38 TECHNOLOGY DRIVE LOS ANGELES, CALIFORNIA 90067
IRVINE, CALIFORNIA 92618 (310) 553-6700
(949) 790-6300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes 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, please 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
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING AMOUNT(1) REGISTRATION FEE
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Common Stock, $0.01 par value...................... $86,250,000 $23,977.50
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
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 THE 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> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued September , 1999
__________ Shares
[ARTISTDIRECT LOGO]
COMMON STOCK
-------------------------
ARTISTDIRECT, INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS
OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$ AND $ PER SHARE.
-------------------------
WE HAVE APPLIED TO HAVE THE SHARES OF COMMON STOCK APPROVED FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ARTD."
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
-------------------------
PRICE $ A SHARE
-------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ARTISTDIRECT
-------- ------------- ------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
ARTISTdirect has granted the underwriters the right to purchase up to an
additional shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 1999.
-------------------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
DEUTSCHE BANC ALEX. BROWN
, 1999
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 3
Risk Factors........................ 7
Special Note Regarding
Forward-Looking Statements........ 22
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 26
Unaudited Pro Forma Consolidated
Financial Data.................... 27
Selected Consolidated Financial
Data.............................. 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 31
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business............................ 41
Management.......................... 56
Certain Transactions................ 65
Principal Stockholders.............. 70
Description of Capital Stock........ 73
Rescission Offer.................... 76
Shares Eligible For Future Sale..... 76
Underwriters........................ 79
Legal Matters....................... 81
Experts............................. 81
Where You Can Find Information...... 81
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
In this prospectus, "ARTISTdirect," "we," "us" and "our" refer to
ARTISTdirect, Inc., our subsidiaries and our predecessor ARTISTdirect, LLC.
Unless otherwise indicated, all information in this prospectus:
- reflects the merger of ARTISTdirect, LLC into ARTISTdirect, Inc.
effective as of September , 1999;
- reflects the one-for-four reverse split of our common stock effective
upon the closing of this offering;
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock effective upon the closing of this
offering;
- assumes no exercise of the underwriters' over-allotment option;
- excludes shares of our common stock issuable pursuant to options or
warrants outstanding as of August 31, 1999; and
- excludes shares of common stock to be issued as accrued but
unpaid dividends on preferred stock as of the closing of this offering.
UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THE OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
We use the following registered service marks and domain names of
ARTISTdirect in this prospectus: ARTISTdirect(SM), UBL(SM), iMusic(SM),
www.artistdirect.com, www.ubl.com and www.imusic.com. All other trade names and
trademarks appearing in this prospectus are the property of their respective
holders.
2
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and the notes to those financial
statements appearing elsewhere in this prospectus.
ARTISTDIRECT
We are a leading online music company that connects artists directly with
their fans worldwide. We provide music entertainment through our ARTISTdirect
Network, an integrated network of Web sites offering multi-media content, music
news and information, community around shared music interests, and music-related
commerce. ARTISTdirect currently features 30 unique, artist-owned
ARTISTchannels, and has signed agreements to launch channels with an additional
37 artists. The ARTISTdirect Network also features the Ultimate Band List, or
the UBL, a leading music search engine on the Web, and iMusic, a popular online
community where fans exchange music interests and commentary. During July 1999,
users viewed more than 50 million pages in our ARTISTdirect Network.
Our ARTISTdirect Network consists of:
- ARTISTchannels -- customized Web sites that we build, operate and
maintain on behalf of each of our artists. These sites enable artists to
control the programming, promotion and distribution of their products and
services and provide consumers with a single destination for
artist-specific music, merchandise and content. We share with our artists
revenue generated by their ARTISTchannels. A selection of artists with
ARTISTchannels includes:
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Backstreet Boys Def Leppard Ozzy Osbourne
Beastie Boys Kenny G Tom Petty
Beck Korn Pink Floyd
blink-182 Limp Bizkit Red Hot Chili Peppers
Chris Cornell Marilyn Manson Robbie Williams
Cypress Hill Metallica Rob Zombie
</TABLE>
- The Ultimate Band List -- a comprehensive online music search engine and
resource for music information on more than 75,000 artists across
numerous musical genres, featuring news, concert information, artist
biographies, album reviews, contests, promotions, music samples and
downloads. The UBL also offers links to thousands of other Web sites in
the online music community;
- iMusic -- a highly trafficked online music community providing chats,
message boards and fan clubs relating to specific artists and general
music topics. iMusic also serves as a platform for fans to interact
directly with their favorite artists through hosted chats and fan
conferences; and
- The ARTISTdirect Superstore -- a retail site offering over 200,000 music
titles and a wide selection of artist merchandise. The ARTISTdirect
Superstore complements the ARTISTchannels by offering music and
merchandise from a wider range of artists.
We also operate a music talent agency, the ARTISTdirect Agency, and manage
a traditional record label, Kneeling Elephant Records, which, when combined with
our ARTISTdirect Network, allow us to provide a full range of traditional and
online services to artists. We believe that our management team's extensive
music industry experience and its understanding of the needs of artists and
music consumers provide us with a distinct advantage in pursuing opportunities
arising from the convergence of the music industry and the Internet.
3
<PAGE> 5
Music is one of the most popular forms of entertainment worldwide and a
multi-billion dollar industry. In 1998, worldwide sales of recorded music were
$38.7 billion, according to the International Federation of the Phonographic
Industry. Sales of concert tickets, advertising and merchandise related to music
events and individual artists also generate substantial revenue. The Internet is
emerging as an important new medium for music, enabling music fans to
communicate with, and purchase music and related merchandise directly from,
their favorite artists. According to Jupiter Communications, online sales of
recorded music in the United States are projected to grow from $152 million in
1998 to approximately $2.6 billion in 2003.
We provide artists with a platform to develop their presence on the Web,
enabling them to assume creative control over their image, promote their music
in innovative ways, interact with their fans, extend their reach and participate
in incremental revenue streams. We also provide music consumers with a
comprehensive one-stop destination to enjoy the music experience and interact
directly with their favorite artists.
We generate revenue from music-related electronic commerce, online
advertising and sponsorships, royalties on record sales and talent agency
commissions. In 1998, we generated revenue of $4.6 million. We believe that we
can add to and diversify our revenue opportunities, including revenue from
digitally distributed music, content syndication and database marketing.
Our objective is to be the leading provider of music entertainment,
information, community and electronic commerce on the Internet. Our strategy
includes the following elements:
- add ARTISTchannels aggressively;
- build brand awareness rapidly;
- enhance our users' experience;
- leverage our unique assets; and
- pursue additional revenue streams.
-------------------------
ARTISTdirect, Inc. was incorporated in Delaware in July 1999. ARTISTdirect,
LLC, our predecessor, was organized as a California limited liability company in
August 1996. Our principal executive offices are located at 17835 Ventura
Boulevard, Suite 310, Encino, California 91316, and our telephone number is
(818) 758-8700. Our World Wide Web address is www.artistdirect.com. The
information on our Web site is not a part of this prospectus.
4
<PAGE> 6
THE OFFERING
Common stock offered................ shares
Common stock to be outstanding after
the offering........................ shares
Over-allotment option............... shares
Use of proceeds..................... We intend to use the proceeds for
advertising and promotion of our
brands, content production and Web site
development and for other general
corporate purposes, including working
capital. See "Use of Proceeds" on page
23 for more information on our use of
the proceeds from this offering.
Proposed Nasdaq National Market
symbol.............................. ARTD
The foregoing information is based upon shares outstanding as of August 31,
1999.
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<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following pro forma basic and diluted net loss per share and the
weighted average shares outstanding used in computing pro forma basic and
diluted net loss per share give effect to:
- the exchange transaction and issuance of ARTISTdirect, LLC Series B
Preferred units as more fully discussed at page 66;
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc. effective as of
September , 1999;
- the one-for-four reverse split of our common stock effective upon the
closing of the offering; and
- the conversion of all outstanding shares of preferred stock into shares
of common stock upon the closing of this offering.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
AUGUST 8, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.................. $ -- $ 1,888 $ 4,582 $ 1,300 $ 3,682
Gross profit................. -- 1,280 2,067 703 733
Operating expense............ 28 1,737 8,416 3,131 8,887
Loss from operations......... (28) (457) (6,349) (2,428) (8,154)
Net loss..................... $(28) $ (460) $ (6,318) $ (2,443) $ (8,044)
Pro forma basic and diluted
net loss per share......... $ (.44) $ (.45)
Weighted average shares
outstanding used in
computing pro forma basic
and diluted net loss per
share...................... 14,514,508 17,735,212
</TABLE>
The "pro forma as adjusted" column below reflects our capitalization as of
June 30, 1999 with adjustments to give effect to:
- the events listed above related to the pro forma basic and diluted net
loss per share; and
- the issuance and sale of shares of our common stock at an
assumed initial public offering price of $ per share and the
application of the net proceeds from the offering, after deducting the
underwriting discounts, commissions and estimated offering expenses, as
set forth under "Use of Proceeds" on page 23.
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<CAPTION>
AS OF JUNE 30, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $11,159 $
Working capital............................................. 8,852
Goodwill and intangibles, net............................... 15,000
Total assets................................................ 29,292
Total redeemable securities................................. 22,331
Total members' and stockholders' equity..................... 3,200
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline, and you may lose part
or all of your investment.
RISKS RELATED TO OUR BUSINESS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A
LIMITED OPERATING HISTORY.
We were formed in August 1996. We acquired the UBL in July 1997, launched
our first ARTISTchannel in September 1997 and acquired iMusic in February 1999.
Our limited operating history, particularly as an integrated network of Web
sites, makes it difficult to evaluate our current business and prospects or to
accurately predict our future revenue or results of operations. Our revenue and
income potential are unproven, and our business model is constantly evolving.
Because the Internet is constantly changing, we may need to modify our business
model to adapt to these changes. Before investing, you should evaluate the
risks, uncertainties, expenses and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving Internet industry segments.
OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY NOT BE ABLE TO GENERATE
SUFFICIENT REVENUE TO OPERATE OUR BUSINESS SUCCESSFULLY.
Our model for conducting business and generating revenue is new and
unproven. Our success will depend primarily on our ability to generate revenue
from multiple sources through the ARTISTdirect Network, including:
- online sales of music and related merchandise;
- sales of advertising and sponsorships;
- marketing our database of consumer information and preferences; and
- sales of, or subscription fees for, digitally distributed music.
It is uncertain whether a music-related Web site that relies on attracting
people to learn about, listen to and purchase music and related merchandise can
generate sufficient revenue from electronic commerce, advertising, sales of
database information and sales of, or fees for, digital downloads of music, to
become a viable business. We provide many of our products and services without
charge, and we may not be able to generate sufficient revenue to pay for these
products and services. Accordingly, we are not certain that our business model
will be successful or that we can sustain revenue growth or be profitable. If
our markets develop more slowly than expected or become saturated with
competitors, or our products and services do not achieve or sustain market
acceptance, we may not be able to successfully operate our business.
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE LOSSES AND NEGATIVE
CASH FLOW FOR THE FORESEEABLE FUTURE.
To date, we have not been profitable on an annual basis. We expect our
operating losses and negative cash flow to continue for the foreseeable future.
We anticipate our losses will increase
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<PAGE> 9
significantly from current levels because we plan to significantly increase our
expenditures for sales and marketing, content development, and technology and
infrastructure development to enhance the ARTISTdirect Network. As a result, we
expect that our operating expenses will increase significantly for the
foreseeable future. With increased expenses, we will need to generate
significant additional revenue to achieve profitability. Consequently, it is
possible that we may never achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not achieve or sustain profitability in the
future, then we will be unable to continue our operations.
OUR OPERATING RESULTS MAY PROVE UNPREDICTABLE, AND OUR COMMON STOCK PRICE
MAY DECREASE OR FLUCTUATE SIGNIFICANTLY.
Our operating results are likely to fluctuate significantly in the future
due to a variety of factors, many of which are outside of our control. Because
our operating results are volatile and difficult to predict, in some future
quarters our operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of our common stock may
fall significantly. Factors that may cause our operating results to fluctuate
significantly include the following:
- fluctuations in the demand for, and pricing of, online advertising;
- the timing and uncertainty of advertising sales cycles and seasonal
declines in advertising sales;
- fluctuations in the levels of user visits to our Web sites and the amount
of time that users spend on our Web sites;
- our ability to retain existing artists, recruit new artists and increase
the number of ARTISTchannels;
- fluctuations in the levels of consumer purchasing activity through the
ARTISTdirect Network;
- new Web sites, services or products introduced by us or by our
competitors;
- general economic conditions, as well as economic conditions specific to
online advertising, electronic commerce and the music industry; and
- seasonality and fluctuations in the demand for products associated with
music and other entertainment events, especially with respect to
holiday-based commerce and concert tours.
OUR BUSINESS SUCCESS DEPENDS ON OUR ABILITY TO INCREASE ELECTRONIC COMMERCE
REVENUE AND TO DEVELOP A SCALABLE COMMERCE PLATFORM.
If we do not generate increased revenues from electronic commerce, our
growth will be limited and our business will be adversely affected. To generate
significant electronic commerce revenue, we will have to offer music and related
merchandise that appeal to a large number of online consumers. We also will have
to continue to create online communities that are conducive to electronic
commerce, build or license a sufficiently robust and scalable electronic
commerce platform and increase our order fulfillment capability. A portion of
our active and potential users, including those below the age of 18, have
limited access to credit cards. Since the most widely adopted method of online
payment is through the use of credit, these users' ability to participate in
electronic commerce may be limited. If we are not successful in meeting these
challenges, our business will be adversely affected.
8
<PAGE> 10
IF WE DO NOT INCREASE ADVERTISING REVENUE OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
If we do not increase advertising revenue, our business will be adversely
affected. Increasing our advertising revenue depends upon many factors,
including our ability to:
- conduct successful selling and marketing efforts aimed at advertisers;
- increase the size of our audience and the amount of time that our
audience spends on our Web sites;
- increase our direct advertising sales force and build up our
international marketing team;
- increase the amount of revenue per advertisement;
- aggregate our target demographic group of 12 to 34 year-old active music
consumers;
- offer advertisers the means to effectively target their advertisements to
our audience; and
- accurately measure the size and demographic characteristics of our
audience.
Our failure to achieve one or more of these objectives could impair our
ability to increase advertising revenue, which could adversely affect our
business.
Because our agreements with advertisers are short-term, our advertisers can
move their advertisements from our Web sites to our competitors' sites or to
other advertising media. The loss of key advertising relationships or the
cancellation or deferral of even a limited number of orders could adversely
affect our quarterly operating results. Moreover, intense competition for
advertisers among present and future Web sites, as well as competition with
traditional media for advertisers, may result in significant price competition,
which may reduce the advertising rates we are able to charge.
WE DEPEND UPON ARTISTS TO ATTRACT ADVERTISERS AND GENERATE ELECTRONIC
COMMERCE REVENUE.
We believe that our future success depends on our ability to maintain our
existing artist agreements and to secure additional agreements with artists. Our
business would be adversely affected by any of the following:
- inability to recruit new artists and increase the number of
ARTISTchannels;
- the loss of popularity of artists for whom we operate ARTISTchannels;
- increased competition to maintain existing relationships with artists;
- non-renewals of our current agreements with artists; and
- poor performance or negative publicity of our artists.
If we are not able to provide valuable services to artists, or if we
otherwise fail to maintain good relations with our artists, they may lose
interest in providing content and merchandise and otherwise promoting their
ARTISTchannels. In addition, if these artists decide to remove their online
stores from the ARTISTdirect Network when their agreements terminate, we may be
unable to recoup our costs to develop and operate the sites. The artists own
their domain names for the ARTISTchannels and some of the intellectual property
rights with respect to content developed for the ARTISTchannels. Most of our
current artist contracts have a term of three years, and these artists may not
renew these contracts on reasonable terms, if at all. We have granted options to
purchase our common stock to a number of artists. These options provide artists
with an additional incentive to actively promote the ARTISTchannels and the
ARTISTdirect Network. Following this offering we may not be able to offer
artists options or other
9
<PAGE> 11
equity incentives on terms as attractive to artists as what we have offered
previously. If we cannot provide adequate incentives our efforts to sign new
artists may be impaired. If we cannot maintain our current relationships with
artists or sign agreements with new artists, our user base would likely diminish
and our ability to generate revenues from electronic commerce and advertising
would be seriously harmed.
WE MAY NOT BE ABLE TO DEVELOP OR OBTAIN SUFFICIENTLY COMPELLING CONTENT TO
ATTRACT AND RETAIN OUR TARGET AUDIENCE.
For our business to be successful, we must provide content and services
that attract consumers who will purchase music and related merchandise online.
We may not be able to provide consumers with an acceptable mix of products,
services, information and community to attract them to our Web sites frequently
or to encourage them to remain on our Web sites for an extended period of time.
If our audience determines that our content does not reflect its tastes, then
our audience size could decrease or the demographic characteristics of our
audience could change. Further, consumer tastes change, particularly those of
our target audience of 12 - 34 year-olds, and we may be unable to react to those
changes effectively or in a timely manner. Any of these results would adversely
affect our ability to attract advertisers and sell music and other related
merchandise. Our ability to provide compelling content could be impaired by any
of the following:
- reduced access to content controlled by record labels, music publishers
and artists;
- diminished technical expertise and creativity of our production staff;
and
- inability to anticipate and capitalize on trends in music.
Furthermore, because much of our content, including artist interviews,
audio and video performances and music, are provided to us by record labels and
artists at minimal or no charge, we depend on our good relations with record
labels and artists to offer compelling content. If record labels, music
publishers or artists were to charge significant fees for their content or
discontinue their relationships with us, then our content offering could be
adversely affected.
IF WE DO NOT BUILD AND MAINTAIN STRONG BRANDS, WE MAY NOT BE ABLE TO
ATTRACT A SUFFICIENT NUMBER OF USERS TO OUR WEB SITES.
To attract users we must develop a brand identity for ARTISTdirect and
increase public awareness of the ARTISTchannels, the UBL and iMusic. To increase
brand awareness, traffic and revenue, we intend to substantially increase our
offline and online advertising and promotional efforts. Our marketing activities
may, however, not result in increased revenue and, even if they do, any
increased revenue may not offset the expenses we incur in building our brands.
Moreover, despite these efforts we may be unable to increase public awareness of
our brands, which would have an adverse effect on our results of operations.
OUR ONLINE STORE AGREEMENTS WITH ARTISTS DO NOT PRECLUDE OUR ARTISTS FROM
SELLING MUSIC AND RELATED MERCHANDISE ON OTHER WEB SITES.
Our online store agreements with artists do not preclude them from selling
merchandise and compact discs or offering music downloads on other Web sites. If
we are unable to attract sufficient traffic to the ARTISTdirect Network,
consumers may purchase the products that we offer on other Web sites. If we are
unable to generate revenue from the sale of music and related merchandise, our
results of operations will be adversely affected.
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OUR MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE COMPETITORS.
The market for the online promotion and distribution of music and related
merchandise is highly competitive and rapidly changing. The number of Web sites
competing for the attention and spending of consumers, advertisers and users has
increased, and we expect it to continue to increase because there are few
barriers to entry to Internet commerce. We face competitive pressures from
numerous actual and potential competitors.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Certain companies have
announced agreements to work together to offer music over the Internet, and we
may face increased competitive pressures as a result. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages relative to us, including:
- longer operating histories;
- significantly greater financial, technical and marketing resources;
- greater brand name recognition;
- larger existing customer bases; and
- more popular content or artists.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to develop, promote and sell their products or services than we can. Web sites
maintained by our existing and potential competitors may be perceived by
consumers, artists, talent management companies and other music-related vendors
or advertisers as being superior to ours. In addition, increased competition
could result in reduced advertising rates and margins and loss of market share,
any of which could harm our business. For additional information regarding
competition, see "Business -- Competition" on page 51.
WE DEPEND ON A LIMITED NUMBER OF PARTNERS FOR MUSIC MERCHANDISE,
FULFILLMENT AND DISTRIBUTION; IF THEY DO NOT PERFORM, OUR RELATIONSHIP WITH
CUSTOMERS WILL BE HARMED.
We rely to a large extent on timely distribution by third parties. We
currently rely substantially on one vendor, Alliance Entertainment, to fulfill
and distribute our orders for music and related merchandise. In July 1997,
Alliance filed for protection from its creditors under Chapter 11 of the U.S.
Bankruptcy Code. Alliance has since emerged from Chapter 11 and is under new
ownership. Our agreement with Alliance covers fulfillment services for sales
under the ARTISTdirect Superstore, but does not cover fulfillment services for
our ARTISTchannels. Although Alliance has been fulfilling orders for music and
related merchandise from the ARTISTchannels on the same terms as orders from the
ARTISTdirect Superstore, Alliance may terminate the ARTISTchannel arrangement at
any time. We also obtain a substantial majority of our music-related merchandise
from two vendors, Giant Merchandising and Winterland Concessions Company. Our
business could be significantly disrupted if Alliance, Giant or Winterland were
to terminate or breach their agreements or suffer adverse developments that
affect their ability to supply products to us. If, for any reason, Alliance,
Giant or Winterland are unable or unwilling to supply products to us in
sufficient quantities and in a timely manner, we may not be able to secure
alternative fulfillment partners or sources for music and related merchandise on
acceptable terms in a timely manner, or at all.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. If our distribution partners'
systems fail or are unable to scale or adapt to changing
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needs, or if we cannot integrate our information systems with any new
distributors, we may not have adequate, accurate or timely inventory or
financial information.
We also rely on third-party carriers for shipments to and from distribution
facilities. We are therefore subject to the risks, including employee strikes
and inclement weather, associated with our carriers' ability to provide delivery
services to meet our distribution and shipping needs. Failure to deliver
products to our customers in a timely and accurate manner would harm our
reputation, the ARTISTdirect and UBL brands and our results of operations.
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR NEW ACCOUNTING AND FINANCIAL
REPORTING SYSTEMS, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We are currently implementing a comprehensive enterprise resource planning
system based on SAP software provided to us by Pandesic, LLC, a joint venture
between Intel and SAP. If we fail to successfully implement and integrate this
system with our existing systems, or if we are not able to expand this system to
accommodate our growth, we may not have adequate, accurate or timely financial
information. Our failure to have adequate, accurate or timely financial
information would harm our business. In addition, we have encountered
difficulties integrating this new software with our other information systems.
If we continue experiencing such difficulties, or if the implementation of this
system is delayed, fulfillment of customer orders could be delayed. Delays in
shipping products to customers may lead to customer dissatisfaction and result
in cancellations of orders, which could have a material adverse effect on our
results of operations.
WE MAY BE SUBJECT TO SYSTEM DISRUPTIONS, WHICH COULD REDUCE OUR REVENUE.
Our ability to attract and retain artists, users, advertisers and merchants
depends on the performance, reliability and availability of our Web sites and
network infrastructure. We have periodically experienced service interruptions
caused by temporary problems in our own systems or software or in the systems or
software of third parties upon whom we rely to provide service or support. We
believe that these interruptions will continue to occur from time to time in the
future. The maintenance and operation of substantially all of our Internet
communications hardware and servers have been outsourced to the facilities of
AT&T CerfNet, Digex and American Digital Network. Fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events could
damage these systems and interrupt our services. Computer viruses, electronic
break-ins or other similar disruptive events also could disrupt our services.
System disruptions could result in the unavailability or slower response times
of our Web sites, which would reduce the number of advertisements delivered or
commerce conducted on our Web sites and lower the quality of our users'
experience. Service disruptions could adversely affect our revenue and, if they
were prolonged, would seriously harm our business and reputation. Our business
interruption insurance may not be sufficient to compensate us for losses that
may occur as a result of these interruptions. In addition, under our agreements
with Digex and American Digital Network, they are not liable to us for any
damage or loss they may cause to our business and, accordingly, we may be unable
to seek reimbursement from them for losses that they cause. In addition, our
users depend on Internet service providers and other Web site operators for
access to our Web sites. These entities have experienced significant outages in
the past, and could experience outages, delays and other difficulties due to
system failures unrelated to our systems. Moreover, the Internet network
infrastructure may not be able to support continued growth. Any of these
problems could adversely affect our business.
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IF WE DO NOT MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS
EFFECTIVELY.
Since our inception in August 1996, we have rapidly and significantly
expanded our operations. We expect further significant expansion will be
required to address potential growth in our artist and consumer bases, the
breadth of our product and service offerings, and other opportunities. This
expansion has strained, and we expect that it will continue to strain, our
management, operations, systems and financial resources. To manage our recent
growth and any future growth of our operations and personnel, we must improve
and effectively utilize our existing operational, management, marketing and
financial systems and successfully recruit, hire, train and manage personnel and
maintain close coordination among our technical, finance, marketing, sales and
production staffs. We expect we will need to hire additional personnel in all
areas during 2000. In addition, we may also need to increase the capacity of our
software, hardware and telecommunications systems on short notice. We also will
need to manage an increasing number of complex relationships with users,
strategic partners, advertisers and other third parties. Our failure to manage
growth could disrupt our operations and ultimately prevent us from generating
the revenue we expect.
THE LOSS OF CERTAIN KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
BECAUSE THESE INDIVIDUALS ARE IMPORTANT TO OUR CONTINUED GROWTH.
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, particularly Marc
Geiger and Donald Muller. The loss of either of these individuals or certain
other key employees would likely have an adverse effect on our business. Even
though we have employment agreements with these and certain other key employees,
competition for personnel throughout our industry is intense and we may be
unable to retain our current key employees or attract, integrate or retain other
highly qualified employees in the future. We have in the past experienced, and
we expect to continue to experience, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business could be adversely affected.
THERE ARE RISKS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS.
If we are presented with appropriate opportunities, we intend to invest in
complementary companies, products or technologies. We may not, however, realize
the anticipated benefits of any acquisition or investment. If we buy a company,
we could have difficulty in assimilating that company's personnel, technology,
operations or products into our operations. In addition, the key personnel of
the acquired company may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses, and our business could be seriously harmed.
In addition, acquisitions or business combinations could cause us to issue
equity securities that would dilute your percentage ownership in us, incur debt
or assume contingent liabilities and take large immediate or future write-offs
or charges, including amortization of goodwill or compensation expense. Each of
these results could materially and adversely affect our business and adversely
affect the price of our common stock.
WE DEPEND UPON INTELLECTUAL PROPERTY RIGHTS AND LICENSED MATERIAL.
We rely upon common-law trademark rights that arise from our commercial use
of the ARTISTdirect, ARTISTdirect Agency, UBL, Ultimate Band List, iMusic and
Kneeling Elephant Records brand names, and the respective associated domain
names, and the ARTISTdirect logo. We seek to protect our trademarks, copyrights
and other proprietary rights by registration and other means, but these actions
may be inadequate. ARTISTdirect has trademark applications pending in several
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jurisdictions, but our registrations may not be accepted or may be preempted by
third parties and/or we may not be able to register our trademarks in all
jurisdictions in which we intend to do business. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
proprietary information. The steps we have taken may not prevent
misappropriation of our proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States. If third parties were to use or otherwise
misappropriate our copyrighted materials, trademarks or other proprietary rights
without our consent or approval, our competitive position could be harmed, or we
could become involved in litigation to enforce our rights. In addition, policing
unauthorized use of our content, trademarks and other proprietary rights could
be very expensive, difficult or impossible, particularly given the global nature
of the Internet.
A significant portion of the music content available on the ARTISTdirect
Network is licensed from publishers, record labels, performing rights societies
and artists. We frequently either do not have written contracts or have
short-term contracts with copyright owners, and, accordingly, our access to
copyrighted content depends upon the willingness of such parties to continue to
make their content available. If the fees for music content increase
substantially or if significant music content becomes unavailable, our ability
to offer music content could be materially limited. We currently use certain
content without first obtaining a license because we believe that a license is
not required under existing law. However, this area of law remains uncertain and
may not be resolved for a number of years. When this area of law is resolved, we
may be required to obtain licenses for such content, alter or remove substantial
content from our Web sites and be forced to pay potentially significant
financial damages for past conduct.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN
THE LOSS OF SIGNIFICANT RIGHTS.
Third parties may assert trademark, copyright, patent and other types of
infringement or unfair competition claims against us. If we are forced to defend
against any such claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, or product shipment delays. As a result of
such a dispute, we may have to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all. If there is a
successful claim of product infringement against us and we are unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, it could harm our business.
In addition, we rely on third parties to provide services enabling our
electronic commerce transactions. We could become subject to infringement
actions by third parties based upon our use of intellectual property provided by
our third-party providers. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against ARTISTdirect, the UBL and iMusic are successful,
we may be required to change our trademarks, alter or remove content, pay
financial damages, or alter our business practices. We cannot assure you that
such changes of trademarks, alteration of content, payment of financial damages
or alteration of practices will not adversely affect our business.
WE MAY BE UNABLE TO ACQUIRE NECESSARY WEB DOMAIN NAMES.
We may be unable to acquire or maintain Web domain names relating to our
brand or to specific ARTISTchannels in the United States and other countries in
which we may conduct business. We currently hold various relevant domain names,
including the "artistdirect.com," "ubl.com" and
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"imusic.com" domain names. The acquisition and maintenance of domain names
generally is regulated by governmental agencies and their designees and is
subject to change. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring or using
domain names that infringe or otherwise decrease the value of our brand name,
trademarks and other proprietary rights.
IF OUR ONLINE SECURITY MEASURES FAIL, OUR NET REVENUE WOULD SIGNIFICANTLY
DECREASE, AND WE WOULD BE SUBJECT TO CLAIMS.
Our relationships with consumers would be adversely affected if the
security measures that we use to protect their personal information, especially
credit card numbers, are ineffective. We rely on security and authentication
technology that we license from third parties to perform real-time credit card
authorization and verification with our bank. We cannot predict whether events
or developments will result in a compromise or breach of the technology we use
to protect a customer's personal information.
Our infrastructure is vulnerable to unauthorized access, physical or
electronic computer break-ins, computer viruses and other disruptive problems.
Internet service providers have experienced, and may continue to experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees and others. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. Security breaches relating to our
activities or the activities of third-party contractors that involve the storage
and transmission of proprietary information could damage our reputation and our
relationships with our content providers, advertisers and merchants. We also
could be liable to our content providers, advertisers and merchants for the
damages caused by such breaches or we could incur substantial costs as a result
of defending claims for those damages. We may need to expend significant capital
and other resources to protect against such security breaches or to address
problems caused by such breaches. Our security measures may not prevent
disruptions or security breaches.
WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION PROVIDED BY OUR USERS
WERE MISUSED.
Our privacy policy discloses how we use individually identifiable
information that we collect. This policy is displayed and accessible throughout
the ARTISTdirect Network. Despite this policy, however, if third persons were
able to penetrate our network security or otherwise misappropriate our users'
personal information or credit card information, we could be subject to
liability. We could also be subject to liability for claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims, or other misuses of personal information, such as for unauthorized
marketing purposes. These claims could result in costly and time-consuming
litigation.
Legislatures and government agencies have adopted and are considering
adopting laws and regulations regarding the collection and use of personal
information obtained from individuals when accessing Web sites. For example,
Congress recently enacted the Children's Online Privacy Protection Act, which
restricts the ability of Internet companies to collect information on children
under the age of 13 without their parents' consent. In addition, the Federal
Trade Commission and state and local authorities have been investigating
Internet companies regarding their use of personal information. Our privacy
programs may not conform with laws or regulations that are adopted. In addition,
these legislative and regulatory initiatives may adversely affect our ability to
collect demographic and personal information from users, which could have an
adverse effect on our ability to provide advertisers with demographic
information. The European Union has adopted a directive that imposes
restrictions on the collection and use of personal data. The directive could
impose restrictions that are more stringent than current Internet privacy
standards in the United States. If this directive were applied to us, it could
prevent us from collecting data from users in European Union member countries or
subject us to liability
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for use of information in contravention of the directive. Other countries have
adopted or may adopt similar legislation. We could incur additional expenses if
new regulations regarding the use of personal information are introduced or if
government authorities choose to investigate our privacy practices. See
"Business -- Government Regulation" on page 52 for more information on
governmental regulation issues applicable to our business.
WE MAY BE ADVERSELY IMPACTED IF THE SOFTWARE, COMPUTER TECHNOLOGY AND OTHER
SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT.
The risks posed by Year 2000 issues could adversely affect our business in
a number of ways. Although we believe that our internal systems and technology
are Year 2000 compliant, software and hardware from third parties that have been
integrated into our systems may need to be updated or replaced, which may be
time consuming and expensive. We rely on a number of third parties to support
and operate our Web sites. In addition, our distribution partner and suppliers,
including our accounting services provider, depend on their own information
technology systems and on the systems of their vendors. Failures or
interruptions of our systems or those of third parties because of Year 2000
problems could seriously damage our business and our relationships with our
content, distribution and technology providers, advertisers and users. Failures,
interruptions or other service problems due to Year 2000 could result in lost
revenue, increased operating costs and loss of significant user traffic.
Governmental agencies, public utilities, Internet service providers and others
that we rely on or that our customers rely on and which we do not control may
not be Year 2000 compliant. This could result in systemic failures beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
and prevent us from providing our content or reduce user traffic.
RISKS RELATED TO OUR INDUSTRY
WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITES OR PRODUCTS
SOLD THROUGH OUR WEB SITES.
We may be liable to third parties for content published on our Web sites
and other Web sites where our syndicated content appears if the music, artwork,
text or other content available violates their copyright, trademark or other
intellectual property rights or if the available content is defamatory, obscene
or pornographic. Those types of claims have been brought, sometimes
successfully, against Web site operators in the past. We also may be liable for
content uploaded or posted by our users on our Web sites, such as digitally
distributed music files, postings on our message boards, chat room discussions
and copyrightable works. In addition, we could have liability to some of our
content licensors for claims made against them for content available on our Web
sites. We also could be exposed to these types of claims for the content that
may be accessed from our Web sites or other Web sites via links to other Web
sites. We may need to implement measures to reduce exposure to these types of
claims. Such measures may not be successful and may require us to expend
significant resources. Any litigation as a result of defending these types of
claims could result in substantial costs and damages. Our insurance may not
adequately protect us against these types of claims or the costs of their
defense or payment of damages.
THE EFFECTIVENESS OF THE INTERNET FOR ADVERTISING IS UNPROVEN, WHICH MAY
DISCOURAGE SOME ADVERTISERS FROM ADVERTISING ON OUR SITES.
Our future depends in part on an increase in the use of the Internet and
other forms of digital media for advertising. The Internet advertising market is
new and rapidly evolving, and we cannot yet gauge the effectiveness of
advertising on the Internet as compared to traditional media. As a result,
demand for Internet advertising is uncertain. Many advertisers have little or no
experience using the Internet for advertising purposes. The adoption of Internet
advertising, particularly by companies that have
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historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Such customers may find advertising on the
Internet to be undesirable or less effective than traditional advertising media
for promoting their products and services. If the Internet advertising market
fails to fully develop or develops more slowly than we expect, our business
could be adversely affected. In addition, the market for advertising on other
forms of digital media, such as broadband distribution, is even less developed
than Internet advertising, and if that market does not develop, our growth may
be limited.
Additionally, there are currently few, well established standards to
measure the effectiveness of advertising on the Internet and other digital
media, and the absence of these standards could adversely impact our ability to
attract and retain advertisers. Currently available software programs that track
Internet usage and other tracking methodologies are rapidly evolving, but such
standard measurements may never develop. In addition, the development of such
software or other methodologies may not keep pace with our information needs,
particularly to support the growing needs of our internal business requirements
and advertising clients.
In addition, "filter" software programs that limit or prevent advertising
from being delivered to an Internet user's computer are available. Widespread
adoption of this software could adversely affect the commercial viability of
Internet advertising.
WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF
GOVERNMENT REGULATION INCREASES.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues such as user privacy, pricing,
taxation, content, copyrights, distribution, security, and the quality of
products and services. For example, the Telecommunications Act sought to
prohibit transmitting certain types of information and content over the Web.
Several telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies. Any imposition of access fees could increase the cost
of transmitting data over the Internet. In addition, the growth and development
of the market for online commerce may lead to more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on us. The United States Congress recently enacted Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material. The law of the Internet, however, remains largely unsettled,
even in areas where there has been some legislative action. Moreover, it may
take years to determine the extent to which existing laws relating to issues
such as property ownership, libel and personal privacy are applicable to the
Web. Any new, or modifications to existing, laws or regulations relating to the
Web could adversely affect our business.
Prohibition and restriction of Internet content and commerce could reduce
or slow Internet use, decrease the acceptance of the Internet as a
communications and commercial medium and expose us to liability. Any of these
outcomes could have a material adverse effect on our business, results of
operations and financial condition. The growth and development of the market for
Internet commerce may prompt calls for more stringent consumer protection laws,
both in the United States and abroad, that may impose additional burdens on
companies conducting business over the Internet.
THE INTERNET IS SUBJECT TO RAPID CHANGES, WHICH COULD RESULT IN SIGNIFICANT
ADDITIONAL COSTS.
The market for Internet products and services is characterized by rapid
change, evolving industry standards and frequent introductions of new
technological developments. These new standards and developments could make our
existing or future products or services obsolete. Keeping pace with the
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introduction of new standards and technological developments could result in
significant additional costs or prove difficult or impossible for us. The
failure to keep pace with these changes and to continue to enhance and improve
the responsiveness, functionality and features of our Web sites could harm our
ability to attract and retain users. Among other things, we will need to license
or develop leading technologies, enhance our existing services and develop new
services and technologies that address the varied needs of our users.
OUR NET SALES COULD BE ADVERSELY AFFECTED IF WE BECOME SUBJECT TO SALES AND
OTHER TAXES.
If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California and Florida. However, one or more states may seek to impose sales tax
collection obligations on companies, such as ARTISTdirect, which engage in or
facilitate online commerce. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of goods and
services through the Internet. Such proposals, if adopted, could substantially
impair the growth of electronic commerce and could adversely affect our
opportunity to derive financial benefit from electronic commerce. Moreover, if
any state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on its system, our results
of operations could be adversely affected. In addition, any new operations in
states outside California could subject our shipments in such states to state
sales taxes under current or future laws.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by Congress. However, this
legislation, known as the Internet Tax Freedom Act, imposes only a three-year
moratorium ending on October 21, 2001 on state and local taxes on electronic
commerce where such taxes are discriminatory and on Internet access unless such
taxes were generally imposed and actually enforced before October 1, 1998.
Failure to renew this legislation would allow various states to impose taxes on
Internet-based commerce.
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE
INTERNET AND THE AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS.
The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to conduct commercial
transactions with us, as well as to continue to upload and download music files,
without significant delays or aggravation that may be associated with decreased
availability of Internet bandwidth and access to our Web site. This will depend
upon the maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of complementary products,
such as high speed modems, for providing reliable Internet access and services.
The failure of the Internet to achieve these goals will reduce our ability to
generate significant revenue.
Our penetration of a broader consumer market will depend, in part, on
continued proliferation of high speed Internet access. The Internet has
experienced, and is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. As the Internet continues to experience
increased numbers of users, increased frequency of use and increased bandwidth
requirements, the Internet infrastructure may be unable to support the demands
placed on it. In addition, increased users or bandwidth requirements may harm
the performance of the Internet. The Internet has experienced a variety of
outages and other delays and it could face outages and delays in the future.
These outages and delays could reduce the level of Internet usage as well as the
level of traffic, and could result in the Internet becoming an inconvenient or
uneconomical source of music and related products and
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merchandise which would cause our revenue to decrease. The infrastructure and
complementary products or services necessary to make the Internet a viable
commercial marketplace for the long term may not be developed successfully or in
a timely manner. Even if these products or services are developed, the Internet
may not become a viable commercial marketplace for the products or services that
we offer.
RISKS RELATED TO THE OFFERING
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL BE ABLE TO
EXERCISE SIGNIFICANT CONTROL OVER ARTISTDIRECT AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of the outstanding ARTISTdirect common stock together will beneficially own
% of our outstanding common stock. These stockholders would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying, deterring or preventing a change in control of ARTISTdirect and may
make some transactions more difficult or impossible to complete without the
support of these stockholders.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, DELAWARE LAW AND OTHER
AGREEMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.
Upon the closing of this offering, we will be subject to the Delaware
anti-takeover laws regulating corporate takeovers. These anti-takeover laws
prevent a Delaware corporation from engaging in a merger or sale of more than
10% of its assets with any stockholder, including all affiliates and associates
of the stockholder, who owns 15% or more of the corporation's outstanding voting
stock, for three years following the date that the stockholder acquired 15% or
more of the corporation's assets unless:
- the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
- after the transaction where the stockholder acquired 15% or more of the
corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
- on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if
its certificate of incorporation or bylaws so provide. We have not opted out of
the provisions of the anti-takeover laws. As such, these laws prohibit or delay
mergers or other takeover or change of control of ARTISTdirect and may
discourage attempts by other companies to acquire us.
Before the consummation of this offering, we intend to amend and restate
our certificate of incorporation and our bylaws to include a number of
provisions that may delay, deter or impede hostile takeovers or changes of
control or management. These provisions include:
- our board is classified into three classes of directors as nearly equal
in size as possible with staggered three year-terms;
- the authority of our board to issue up to five million shares of
preferred stock and to determine the price, rights, preferences and
privileges of these shares, without stockholder approval;
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- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
- special meetings of the stockholders may be called only by the Chairman
of the Board, the Chief Executive Officer or the board; and
- the elimination of cumulative voting.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. These provisions may have the effect
of preventing changes in our management.
OUR STOCK PRICE MAY DECLINE AFTER THIS OFFERING, AND A PUBLIC MARKET MAY
NOT EXIST FOR YOU TO SELL YOUR STOCK.
Before this offering, there has not been a public market for our common
stock, and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between us and the representatives of the
underwriters, and this price is not necessarily indicative of the market price
for our common stock. In addition, an active public market for our common stock
may not develop or be sustained after this offering, meaning that you may not be
able to sell your stock.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR INDIVIDUAL STOCKHOLDERS.
The market prices of stock for Internet and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the past or present operating performance of such
companies. Such market prices may not be sustainable and may be subject to wide
variations. If our common stock trades to such levels following this offering,
it may thereafter experience a material decline.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER
PRICE THAN EXISTING STOCKHOLDERS.
We expect the initial public offering price to be substantially higher than
the book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
experience immediate dilution of approximately $ in the book value per
share of the common stock, based on an assumed initial public offering price of
$ per share. In addition, if outstanding options and warrants to purchase
shares of common stock are exercised, investors in this offering could
experience further dilution. Existing stockholders paid an average price of
$ per share.
WE HAVE BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM THIS OFFERING
AND MAY NOT USE THE PROCEEDS EFFECTIVELY.
Most of the net proceeds of this offering are not allocated for specific
uses. Our management has broad discretion to spend the proceeds from this
offering in ways with which stockholders may not agree. The failure of our
management to apply these funds effectively could result in unfavorable returns.
This
20
<PAGE> 22
could have significant adverse effects on our financial condition and could
cause the price of our common stock to decline.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE
CAPITAL NEEDS.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated needs
for working capital and capital expenditures for at least twelve months
following the date of this prospectus. If we are unable to generate sufficient
cash flows from operations to meet our anticipated needs for working capital and
capital expenditures, we will need to raise additional funds to promote our
brands, develop new or enhanced services, respond to competitive pressures or
make acquisitions. We may be unable to obtain any required additional financing
on terms favorable to us, if at all. If adequate funds are not available on
acceptable terms, we may be unable to fund our expansion, successfully promote
our brands, develop or enhance services, respond to competitive pressures or
take advantage of acquisition opportunities, any of which could have a material
adverse effect on our business. If we raise additional funds through the
issuance of equity securities, our stockholders may experience dilution of their
ownership interest, and the newly-issued securities may have rights superior to
those of the common stock. If we raise additional funds by issuing debt, we may
be subject to limitations on our operations, including limitations on the
payment of dividends.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after June 30,
1999. Of these shares, the shares sold in this offering are freely tradable.
This leaves remaining shares. of such shares will
be eligible for sale in the public market beginning 180 days after the date of
this prospectus subject to volume and other restrictions pursuant to Rule 144
under the Securities Act.
SALES OF STOCK TO EMPLOYEES, ARTISTS AND KEY INDIVIDUALS WILL REDUCE YOUR
OWNERSHIP PERCENTAGE.
We seek to attract and retain officers, directors, employees, artists and
other key individuals, in part by offering them stock options and other rights
to purchase shares of common stock. As of August 31, 1999, we had outstanding
options to purchase 3,524,339 shares of our common stock. We also have reserved
a total of shares for future grants under our three option plans. The
exercise of stock options will reduce your percentage ownership in ARTISTdirect.
21
<PAGE> 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
22
<PAGE> 24
USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of
common stock in this offering will be approximately $ million, assuming
an initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment option in full, we
estimate that our net proceeds will be $ million. We currently anticipate
that our available cash resources combined with the net proceeds from this
offering will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least twelve months following the date of this
prospectus.
We plan to use the net proceeds for the following purposes:
- advertising and promoting our brands and network of Web sites to increase
consumer traffic;
- content production and Web site development, in particular to develop and
launch additional ARTIST channels;
- to repay notes issued to several stockholders in satisfaction of our
obligation to make distributions triggered by the merger of ARTISTdirect,
LLC into ARTISTdirect, Inc. See "Certain Transactions -- Debt to
Executive Officers and Director" on page 67 for more information on these
notes; and
- general corporate purposes, including working capital, international
expansion and possible complementary acquisitions.
Our management will have broad discretion in allocating the net proceeds of
this offering. We are not currently a party to any contract or letters of intent
with respect to any acquisitions, and our expansion plans may not be realized
or, if realized, may not prove profitable for us. We intend to invest the net
proceeds in short-term interest-bearing, investment grade securities until we
use them.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. Our
predecessor, ARTISTdirect, LLC, made cash distributions to its members,
principally to pay taxes. We currently intend to retain all available funds and
any future earnings for use in the operation and expansion of our business, and
we do not expect to pay any cash dividends in the foreseeable future.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on pro forma basis to reflect:
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc.;
- the filing of an amended and restated certificate of incorporation to
provide for authorized capital stock of 150 million shares of common
stock and five million shares of undesignated preferred stock and a
one-for-four reverse stock split of our common stock and preferred
stock; and
- the automatic conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this offering.
- on a pro forma as adjusted basis to reflect the pro forma adjustments and
the issuance and sale of shares of common stock at an
assumed initial public offering price of $ per share and the
application of the net proceeds from the offering after deducting the
underwriting discounts, commissions and estimated offering expenses, as
set forth in "Use of Proceeds" on page 23;
None of the columns set forth below reflects the following:
- the 905,140 shares of common stock issuable upon exercise of warrants of
which 359,676 were exercisable as of August 31, 1999, with a weighted
average exercise price of $4.00 per share;
- the shares reserved for issuance under our stock option
plans, of which 2,619,200 shares were subject to outstanding options as
of August 31, 1999, with a weighted average exercise price of $3.45 per
share;
- the issuance of shares after June 30, 1999 in connection with
the exercise of options; and
- shares of common stock to be issued as accrued but unpaid
dividends on preferred stock as of the close of this offering.
24
<PAGE> 26
The table below should be read in conjunction with our financial statements
and the notes to those financial statements, which are included elsewhere in
this prospectus:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------
(UNAUDITED)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable Securities:
Series A redeemable preferred securities -- issued and
outstanding:
shares actual; none pro forma and pro forma as
adjusted................................................ $ 4,909 --
Series B redeemable preferred securities -- issued and
outstanding:
shares actual; none pro forma and pro forma as
adjusted................................................ 15,175 --
Redeemable common securities -- issued and outstanding:
shares actual; none pro forma and pro forma as
adjusted(1)....................................... 2,247 $ 2,800
-------- -------- --------
Total redeemable securities............................. 22,331 2,800
-------- -------- --------
Members' and stockholders' equity:
Preferred stock, $0.01 par value, no shares authorized or
issued on
actual basis; 5,000,000 shares authorized, no
shares issued on a pro forma and pro forma as
adjusted basis;................................... -- --
Common stock, $.01 par value, no shares authorized or
issued on actual
basis; 150,000,000 shares authorized;
shares issued on a pro forma basis; and
shares issued on a pro forma as adjusted basis.... -- 206
Additional paid in capital................................ -- 39,278
Members' interest......................................... 19,953 --
Unearned compensation....................................... (1,903) (1,903)
Accumulated deficit......................................... (14,850) (14,850)
-------- -------- --------
Total members' and stockholders' equity................. 3,200 22,731
-------- -------- --------
Total capitalization............................... $ 25,531 $ 25,531 $
======== ======== ========
</TABLE>
- ------------------------
(1) The redeemable common securities are 170,443 common securities that are
subject to a put option granted to the holder in connection with our
acquisition of iMusic. If the holder does not exercise this option, he will
retain ownership of these securities, which will no longer be subject to the
option.
25
<PAGE> 27
DILUTION
Our pro forma net tangible book value, which is the same as the actual book
value, as of June 30, 1999 was approximately $ million or $ per
share. Pro forma net tangible book value per share is determined by dividing our
pro forma tangible net worth (total tangible assets minus total liabilities) by
the total number of shares of common stock outstanding after giving effect to:
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc. effective as of
September ,1999;
- the one-for-four reverse stock split effective upon the closing of this
offering; and
- the automatic conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this
offering.
Assuming the sale of the shares of common stock offered by
us at an assumed initial public offering price of $ per share, and
after deducting the underwriting discounts, commissions and estimated offering
expenses, our pro forma net tangible book value as of June 30, 1999 would have
been approximately $ million or $ per share of common stock. This
represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of
$ per share to new investors purchasing shares at the initial public
offering price. The following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of June 30,
1999................................................... $
Increase in pro forma net tangible book value per share
attributable to new investors..........................
-------
Pro forma net tangible book value per share after the
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1999,
the number of shares of common stock purchased from us by existing stockholders
and new investors, the total consideration paid to us and the average price per
share paid after giving effect to the offering. The calculation is based on an
assumed initial public offering price of $ per share, before deducting
estimated underwriting discounts, commissions and offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
-------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... % $ % $
New investors...................
-------- ----- -------- -----
Total................. 100% 100%
======== ===== ======== =====
</TABLE>
The foregoing table excludes shares of common stock reserved
for issuance under our stock option plans, of which 2,619,200 were subject to
outstanding options as of August 31, 1999 at a weighted average exercise price
of $3.45 per share, shares issued after August 31, 1999 upon exercise of
outstanding options, and 905,140 shares of common stock issuable upon exercise
of warrants outstanding as of June 30, 1999 at a weighted average exercise price
of $4.00 per share.
26
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data has been
derived by applying pro forma adjustments to the historical financial statements
of ARTISTdirect and iMusic for the periods indicated. The adjustments are
described in accompanying notes.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998 and the six months ended June 30, 1999 give effect to:
- our acquisition of the 80% interest of iMusic we did not own;
- our acquisition of the interests in The Ultimate Band List, LLC we did
not own; and
- the merger of ARTISTdirect, LLC into ARTISTdirect, Inc.
as if each occurred at the beginning of the period.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods presented
and should not be construed as being representative of future operating results.
The historical financial statements of ARTISTdirect and iMusic, Inc. are
included elsewhere in this prospectus and the unaudited pro forma consolidated
financial data presented herein should be read in conjunction with those
financial statements and related notes.
27
<PAGE> 29
ARTISTDIRECT, LLC AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
ARTISTDIRECT
AND SUBSIDIARIES
ACTUAL IMUSIC, INC. ADJUSTMENTS PRO FORMA
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue
E-commerce, net................... $ 1,548 $ -- $ -- $ 1,548
Advertising....................... 502 260 -- 762
Agency commissions................ 1,917 -- -- 1,917
Record label...................... 615 -- -- 615
------- ---- ------- -----------
Total net revenue........... 4,582 260 -- 4,842
------- ---- ------- -----------
Cost of revenue..................... 2,515 115 -- 2,630
------- ---- ------- -----------
Gross profit................ 2,067 145 -- 2,212
Operating expense:
Product development............... 589 -- -- 589
Sales and marketing............... 1,395 33 -- 1,428
General and administrative........ 2,545 56 -- 2,601
Amortization of stock-based
compensation.................... 3,828 -- -- 3,828
Depreciation and amortization..... 59 1 3,074(b) 3,134
------- ---- ------- -----------
Income (loss) from
operations................ (6,349) 55 (3,074) (9,368)
Income from equity investment....... 2 -- -- 2
Interest income, net................ 29 (2) -- 27
------- ---- ------- -----------
Loss before provision for income
tax............................... (6,318) 53 (3,074) (9,339)
Provision for income tax(a)......... -- -- -- --
------- ---- ------- -----------
Net income (loss)........... $(6,318) $ 53 $(3,074) $ (9,339)
======= ==== ======= ===========
Pro forma basic and diluted net loss
per share......................... $ (.61)(c)
===========
Weighted average shares outstanding
used in computing pro forma basic
and diluted net loss per share 15,196,280(c)
===========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------
ARTISTDIRECT
AND SUBSIDIARIES
ACTUAL ADJUSTMENTS PRO FORMA
---------------- ----------- -----------
<S> <C> <C> <C>
Revenue
E-commerce, net................... $ 2,335 $ -- $ 2,335
Advertising....................... 724 63(d) 787
Agency commissions................ 291 -- 291
Record label...................... 332 -- 332
------- ------- -----------
Total net revenue........... 3,682 63 3,745
------- ------- -----------
Cost of revenue..................... 2,949 20(d) 2,969
------- ------- -----------
Gross profit................ 733 43 776
Operating expense:
Product development............... 631 -- 631
Sales and marketing............... 2,537 2(d) 2,539
General and administrative........ 3,237 52(d) 3,289
Amortization of stock-based
compensation.................... 1,769 -- 1,769
Depreciation and amortization..... 713 1,160(b) 1,873
------- ------- -----------
Income (loss) from
operations................ (8,154) (1,171) (9,325)
Income from equity investment....... 33 -- 33
Interest income, net................ 77 -- 77
------- ------- -----------
Loss before provision for income
tax............................... (8,044) (1,171) (9,215)
Provision for income tax(a)......... -- -- --
------- ------- -----------
Net income (loss)........... $(8,044) $(1,171) $ (9,215)
======= ======= ===========
Pro forma basic and diluted net loss
per share......................... $ (.50)(e)
===========
Weighted average shares outstanding
used in computing pro forma basic
and diluted net loss per share 18,289,151(e)
===========
</TABLE>
28
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(a) In September 1999 ARTISTdirect, LLC will be merged into ARTISTdirect, Inc.
Prior to that time, we operate as a limited liability company and did not
incur federal and state income taxes. Federal and state income taxes
attributable to income during such periods were incurred and paid directly
by the members. Upon the merger, the Company will be taxed as a corporation.
No impact of the merger is reflected on the statements of operations since
we have incurred operating losses to date, and we have recorded a full
valuation allowance for the deferred tax asset. The valuation allowance is
based on management's consideration of historical and projected future
taxable income.
(b) In February 1999, ARTISTdirect, LLC and related companies ("Company")
acquired the remaining 80% of iMusic, Inc. that it did not own. iMusic, Inc.
operates a Web site that provides music-related content. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair
values on the acquisition date. The total purchase price of $2.5 million
consisted of a 2% redeemable interest in The Ultimate Band List, LLC with an
estimated fair value of $2.2 million, a cash payment of $110,000, and the
assumption of $185,000 in liabilities, resulting in excess purchase price
over net tangible assets acquired of $2.4 million. In May 1999, the Company
acquired the interests of the minority unit holders of The Ultimate Band
List, LLC in exchange for common interests in ARTISTdirect, LLC. The
acquisition of the minority interests was accounted for using the purchase
method of accounting. The fair value of the consideration given was $13.9
million, which resulted in excess purchase price over net tangible assets
acquired of $13.0 million. The adjustments reflect the additional
amortization expense for total goodwill resulting from the iMusic
transaction and purchase of the interests of The Ultimate Band List, LLC
that it did not own using a five year estimated useful life for the
applicable period. The acquisitions have been structured as a tax free
exchange of securities; therefore, the differences between the recognized
fair values of acquired assets, including intangible assets, and their
historical tax bases are not deductible for tax purposes.
(c) Reflects the pro forma weighted average common stock and common stock
equivalent shares outstanding in basic and diluted net loss per share giving
effect to:
- increase in outstanding shares resulting from inclusion of shares issued
in connection with the acquisition of iMusic and the acquisition of the
UBL minority interest as if such shares were outstanding from January 1,
1998;
- automatic conversion of our redeemable preferred securities as of January
1, 1998 in connection with this offering;
- the one-for-four reverse stock split from January 1, 1998; and
- elimination of the accrued dividends on redeemable preferred securities.
(d) The adjustments reflect the inclusion of the operations of iMusic, Inc. from
January 1, 1999 through the date of the acquisition.
(e) Reflects the pro forma weighted average common stock and common stock
equivalent shares outstanding and resulting in basic and diluted net loss
per share giving effect to:
- increase in outstanding shares resulting from inclusion of shares issued
in connection with the iMusic acquisition and the acquisition of the UBL
minority interest acquisition as if such shares were outstanding from
January 1, 1999;
- automatic conversion of our redeemable preferred securities as of January
1, 1999 in connection with this offering;
- the one-for-four reverse stock split from January 1, 1999; and
- elimination of the accrued dividends on redeemable preferred securities.
29
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period
from August 8, 1996 (inception) to December 31, 1996, for the years ended
December 31, 1997, and December 31, 1998 and as of December 31, 1996, 1997, and
1998 are derived from our audited financial statements. The selected
consolidated financial data for the six months ended June 30, 1998 and June 30,
1999 and as of June 30, 1999 are derived from our unaudited financial
statements.
You should read the financial data presented below together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED
AUGUST 8, 1996 DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue
E-commerce, net............. $ -- $ 269 $ 1,548 $ 360 $ 2,335
Advertising................. -- 95 502 156 724
Agency commissions.......... -- 974 1,917 444 291
Record label................ -- 550 615 340 332
----------- ----------- ----------- ----------- -----------
Total net revenue........ -- 1,888 4,582 1,300 3,682
Cost of revenue............... -- 608 2,515 597 2,949
----------- ----------- ----------- ----------- -----------
Gross profit............. -- 1,280 2,067 703 733
Operating expense:
Product development......... -- 78 589 237 631
Sales and marketing......... 10 196 1,395 373 2,537
General and
administrative........... 13 1,442 2,545 1,208 3,237
Amortization of stock-based
compensation............. -- -- 3,828 1,288 1,769
Depreciation and
amortization............. 5 21 59 25 713
----------- ----------- ----------- ----------- -----------
Loss from operations..... (28) (457) (6,349) (2,428) (8,154)
Income from equity
investment.................. -- -- 2 -- 33
Interest income, net.......... -- (3) 29 (15) 77
----------- ----------- ----------- ----------- -----------
Net loss................. $ (28) $ (460) $ (6,318) $ (2,443) $ (8,044)
=========== =========== =========== =========== ===========
Pro forma basic and diluted
net loss per share.......... $ (.44) $ (.45)
=========== ===========
Weighted average shares used
in computing pro forma basic
and diluted net loss per
share(1).................... 14,514,508 17,735,212
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
--------------------------------------- JUNE 30,
1996 1997 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 80 $ 186 $ 1,940 $ 11,159
Working capital.................................. (20) (526) 1,079 8,852
Goodwill and intangibles, net.................... -- 16 45 15,000
Total assets..................................... 173 314 3,187 29,292
Total redeemable securities...................... -- -- 5,021 22,331
Total members' equity (deficit).................. 72 (412) (3,322) 3,200
</TABLE>
- -------------------------
(1) See Note 2 to notes to consolidated financial statements for an explanation
of the determination of the number of shares and share equivalents used in
computing pro forma per share amounts.
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those financial statements
included elsewhere in this prospectus. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements
are based on current expectations and actual results could differ materially
from those discussed herein. Factors that could cause or contribute to the
differences are discussed in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are a leading online music company that connects artists directly with
their fans worldwide. We provide music entertainment through our ARTISTdirect
Network, an integrated network of Web sites offering multi-media content, music
news and information, community around shared music interests, and music-related
commerce. ARTISTdirect currently features 30 unique, artist-owned
ARTISTchannels, and has signed agreements to launch channels with an additional
37 artists. The ARTISTdirect Network also features the UBL, a leading music
search engine on the Web, and iMusic, a popular online community where fans
exchange music interests and commentary. We also operate a music talent agency,
the ARTISTdirect Agency, and manage a traditional record label, Kneeling
Elephant Records.
ARTISTdirect was organized as a California limited liability company in
August 1996 and conducts operations through a group of affiliated limited
liability companies. From inception through December 1996, our primary
activities consisted of developing our business model, recruiting and training
employees and developing our infrastructure. During 1997, our operations
consisted primarily of the ARTISTdirect Agency and the Kneeling Elephant Records
label. In July 1997, we formed a joint venture to own a controlling interest in
UBL, LLC.
In September 1997, we launched our first ARTISTchannel. In June 1998, we
expanded content offerings on the UBL and added an online retail store now known
as the ARTISTdirect Superstore. Also in June 1998, we launched our second
ARTISTchannel and, by the end of 1998, we had nine ARTISTchannels in operation.
In February 1999, ARTISTdirect acquired all of the outstanding capital
stock of iMusic, Inc. The purchase consideration for iMusic was approximately
$2.5 million, including $110,000 in cash, a redeemable put option valued at
approximately $2.2 million and the assumption of approximately $185,000 in
liabilities. The acquisition was accounted for as a purchase. The purchase price
has been largely allocated to goodwill, which will be amortized over five years.
In May 1999, we engaged in an exchange transaction in which all membership
interests in UBL, LLC that we did not own were exchanged for membership
interests in ARTISTdirect, LLC. The value of the consideration given was
approximately $13.9 million and the transaction was accounted for as a purchase.
The purchase price has been largely allocated to goodwill, which will be
amortized over five years.
In July 1999, we officially launched the ARTISTdirect Network, integrating
the UBL and iMusic Web sites with our ARTISTchannels. Since 1997, our revenue
mix has shifted from primarily agency commissions and record label revenue to
electronic commerce revenue and online advertising and we expect this trend to
continue.
ARTISTdirect has incurred cumulative net losses of $14.9 million from
inception to June 30, 1999. We expect our net losses to increase and to continue
for the foreseeable future. We plan to expend significant resources developing
our ARTISTdirect Network, building our brands, increasing our traffic, expanding
our operations, enhancing and acquiring content, and improving our technology
infrastructure. We have a limited operating history on which to base an
evaluation of our business and prospects. Our prospects must be considered in
light of the risks, expenses, and difficulties encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets, such as electronic commerce. See "Risk Factors" beginning on page 7 for
a more complete description of the many risks we face. Our business
31
<PAGE> 33
is evolving rapidly, and therefore we believe that period-to-period comparisons
of our operating results are not meaningful and should not be relied upon as an
indication of future performance.
In September 1999, ARTISTdirect, LLC merged into ARTISTdirect, Inc. Before
that time, we operated as a group of limited liability companies and did not
incur federal and state income taxes, other than iMusic, which is a Washington
corporation that we acquired in February 1999. Federal and state income taxes
attributable to income during such periods were incurred and paid directly by
the members. Accordingly, no discussion of income taxes is included in "Results
of Operations" beginning on page 34. Any tax benefit attributable to losses
generated before our conversion will not be available to us. As a Delaware
corporation, we are fully subject to federal and state income taxation.
REVENUE
We generate revenue from three sources: the ARTISTdirect Network, the
ARTISTdirect Agency, and Kneeling Elephant Records. Substantially all of our
revenue is generated in cash.
Revenue from the ARTISTdirect Network, including the ARTISTchannels, the
UBL, iMusic, and the ARTISTdirect Superstore, consists primarily of electronic
commerce and advertising revenue as described below:
- Electronic commerce revenue includes the sale of music and related
merchandise, such as apparel, collectibles and accessories, through our
ARTISTchannels and the ARTISTdirect Superstore. We recognize merchandise
and shipping revenue upon shipment of the item and record appropriate
reserves for product returns.
- Advertising revenue consists primarily of sales of banner advertisements
and sponsorships. In sales of banner advertisements, we principally earn
revenue based on the number of impressions or times an advertisement
appears on pages viewed within our Web sites. Our banner advertising
commitments generally range from one to three months. Banner advertising
revenue is recognized ratably over the period in which the advertising is
displayed, provided no significant obligations remain and collection of
the receivable is probable. We typically guarantee a minimum number of
impressions to the advertiser. To the extent that minimum guaranteed page
deliveries are not met, we defer recognition of the corresponding revenue
until the guaranteed impressions are delivered. We also sell to
advertisers sponsorship of a certain page or event for a specified period
of time. We recognize sponsorship revenue over the period in which the
sponsored page or event is displayed. To the extent that committed
obligations under sponsorship agreements are not met, revenue recognition
is deferred until the obligations are met.
Revenue from the ARTISTdirect Agency consists primarily of commissions
generated on tour and event bookings of artists represented by the agency.
Agency commission revenue is recognized at the time of the event. Agency
commission revenue fluctuates depending on touring schedules of major artists
represented by the agency. Touring schedules are subject to seasonality, with
summer typically being a more active period.
Revenue from Kneeling Elephant Records is generated from overhead advances
and from royalties earned on albums sold by artists signed to the label. We
recognize royalties at the time the releases are shipped to the retailer.
Reserves are established for possible returns.
COST OF REVENUE
Cost of revenue consists primarily of the product cost of music and
music-related merchandise, credit card fees, fulfillment and shipping costs,
artist royalties, Web site maintenance expenses, content acquisition costs,
talent agent salaries and amortization of non-cash compensation expense related
to vendor warrants and ARTISTchannel stock options granted to artists in
connection with opening their ARTISTchannels. Artist royalties are based on
electronic commerce and advertising revenue generated
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<PAGE> 34
from their ARTISTchannels. Web site maintenance costs include personnel-related
costs, software consulting costs, Internet connectivity charges, and networking
costs.
In connection with the amortization of vendor warrants and ARTISTchannel
stock options granted through 1999, we expect to record non-cash
compensation expense of approximately $ in the third quarter of 1999
and approximately $ in the fourth quarter of 1999. We expect to grant
additional equity instruments in the future related to ARTISTchannels. Due to
these equity grants, we expect to record substantial non-cash compensation
expense into the foreseeable future.
Amortization expense associated with this non-cash compensation is expected
to be approximately as follows for each of the next five years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1999........................................................ $
2000........................................................
2001........................................................
2002........................................................
2003........................................................
</TABLE>
OPERATING EXPENSE
Product Development. Product development expense consists primarily of
expenses required to design and develop our Web sites and underlying technology
infrastructure. These expenses primarily include payments to third-party service
vendors and personnel costs.
Sales and Marketing. Sales and marketing expense consists primarily of
advertising, marketing and promotion expenses incurred to promote our Web sites
and our brands, plus payroll and related expenses for personnel engaged in
advertising sales, marketing and customer service activities.
General and Administrative. General and administrative expense consists of
payroll and related expenses for executive and administrative personnel,
professional services expenses, facilities expenses, travel and other general
corporate expenses.
Amortization of Stock-based Compensation. We recorded a total of $5.6
million of stock-based compensation expense for the period from inception
through June 30, 1999 in connection with equity granted to employees, directors
and certain professional firms during this period. Commencing July 1999, we
granted options to certain artists for promotional services, and we expect to
grant additional options for promotional services in the future. We expect to
record additional amortization of stock-based compensation expense of
approximately $ in the third quarter of 1999 and approximately
$ in the fourth quarter of 1999, related to equity grants through
1999. We also anticipate granting additional equity securities in the
future to employees, directors and artists.
Depreciation and Amortization. Depreciation and amortization expense
consists of the depreciation of fixed assets and the amortization of acquired
intangible assets. The acquisition of iMusic and the minority interest of the
UBL were accounted for using the purchase method of accounting and, accordingly,
the purchase prices have been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their fair values on the
acquisition dates. Substantially all of the purchase price of these transactions
is attributable to the acquired intangible assets. As a result, the aggregate
excess purchase price over the net tangible assets has been estimated to be
$15.4 million and will be amortized over five years, the expected estimated
average useful life of these assets. These non-cash charges will significantly
affect our reported operating results over the next several years.
INTEREST INCOME AND EXPENSE
Interest income consists of earnings on our cash and cash equivalents and
interest expense consists of interest associated with short-term borrowings.
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<PAGE> 35
RESULTS OF OPERATIONS
Operations in 1996 were limited and consisted primarily of start-up
operations of ARTISTdirect. Accordingly, we believe that year-to-year
comparisons between 1996 against 1997 are not meaningful.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
NET REVENUE
Net revenue increased to $3.7 million in the six months ended June 30, 1999
from $1.3 million in the same period of 1998. The increase was primarily due to
an increase in electronic commerce revenue to $2.3 million from $360,000,
reflecting additional ARTISTchannels plus the contribution from the ARTISTdirect
Superstore. Advertising revenue also increased to $724,000 from $156,000,
reflecting an increase in the page views generated by our Web sites plus a
significant increase in sales of sponsorships.
COST OF REVENUE
Cost of revenue increased to $2.9 million in the six months ended June 30,
1999 from $597,000 for the same period of 1998. This $2.3 million increase
corresponded with the increase in electronic commerce revenue and was primarily
attributable to the direct costs of merchandise sold and an increase in Web site
maintenance expenses. Web site maintenance costs increased due to an expansion
in our technology staff plus the increased number of ARTISTchannels in
operation. Our gross profit margin decreased to 20% of net revenue for the six
months ended June 30, 1999 from 54% of net revenue for the six months ended June
30, 1998. This margin decline was primarily due to a higher proportion of
electronic commerce revenue which has lower gross margin than our other sources
of revenue.
In the six months ended June 30, 1999, we recorded non-cash compensation
charges of approximately $1.6 million in connection with warrants issued to
vendors and options issued to artists. Such amount will be amortized to expense
over the life of the contract periods associated with the warrants and options,
resulting in $51,000 of amortization for the six months ended June 30, 1999,
which has been included in cost of revenue.
OPERATING EXPENSE
Product Development. Product development expense increased to $631,000 for
the six months ended June 30, 1999 from $237,000 for the same period in 1998.
This increase was primarily attributable to fees paid to third party service
vendors relating to the development of the new ARTISTdirect Network Web site
which launched in July 1999.
Sales and Marketing. Sales and marketing expense increased to $2.5 million
for the six months ended June 30, 1999 from $373,000 for the same period in
1998. The increase was primarily attributable to a significant increase in
online and offline advertising, promotion and sponsorship. In addition,
personnel and related expenses increased as we added to our advertising sales
and marketing staffs. We intend to continue to pursue an aggressive branding and
marketing campaign and, therefore, expect sales and marketing expenses to
increase significantly in future periods.
General and Administrative. General and administrative expense increased to
$3.2 million for the six months ended June 30, 1999 from $1.2 million for the
six months ended June 30, 1998. This increase was primarily attributable to an
increase in personnel and related expenses and greater use of outside
professional services. We expect general and administrative expense to increase
as we expand our staff to support our growth strategy and incur the higher costs
of operating as a public company.
Amortization of Stock-based Compensation. We recorded a total of $1.8
million of stock-based compensation expense for the six months ended June 30,
1999 in connection with stock issuances to
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<PAGE> 36
employees and directors which are being treated as variable stock compensation.
Stock-based compensation for the comparable period in 1998 was $1.3 million,
primarily in connection with the same stock issuances.
Depreciation and Amortization. Depreciation and amortization expense
increased to $713,000 for the six months ended June 30, 1999 from approximately
$25,000 in the same period of 1998. This increase was primarily attributable to
the amortization of the goodwill associated with the acquisition of iMusic and
the minority interest in the UBL.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUE
Net revenue increased to $4.6 million for the fiscal year ended December
31, 1998 from $1.9 million for the fiscal year ended December 31, 1997. The
increase was primarily attributable to a $1.3 million increase in electronic
commerce revenue and a $900,000 increase in ARTISTdirect Agency commission
revenue. The increase in electronic commerce revenue resulted primarily from the
June 1998 introduction of the ARTISTdirect Superstore and the addition of ten
ARTISTchannels during 1998. The increase in ARTISTdirect Agency commission
revenue reflects a significant increase in touring activity by major artists
represented by the agency.
COST OF REVENUE
Cost of revenue increased to $2.5 million for the fiscal year ended
December 31, 1998 from $608,000 for the fiscal year ended December 31, 1997.
This increase corresponded with the increase in electronic commerce revenue and
was primarily attributable to higher direct costs of merchandise sold,
additional Web site maintenance expenses and an increase in personnel and
related expenses. Our gross profit margin decreased to 45% of net revenue for
the fiscal year ended December 31, 1998 from 68% of net revenue for the fiscal
year ended December 31, 1997. The margin decline primarily reflects an increase
in electronic commerce revenue, which has a lower gross margin than other
sources of revenues.
OPERATING EXPENSE
Product Development. Product development expense increased to $589,000 for
the fiscal year ended December 31, 1998 from $78,000 for fiscal year ended
December 31, 1997. The $511,000 increase was primarily attributable to increased
staffing and fees paid to third-party vendors for development costs related to
the expanded content offerings on the UBL and new ARTISTchannels.
Sales and Marketing. Sales and marketing expense increased to $1.4 million
for the fiscal year ended December 31, 1998 from $196,000 for the fiscal year
ended December 31, 1997. This $1.2 million increase was primarily attributable
to the expansion of our online and offline advertising, as well as to increased
personnel and related expenses required to implement our marketing strategy.
General and Administrative. General and administrative expense increased to
$2.5 million for the fiscal year ended December 31, 1998 from $1.4 million for
the fiscal year ended December 31, 1997. This $1.1 million increase was
primarily attributable to increased personnel and related expenses associated
with the hiring of additional personnel and increased professional services
expenses.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation expense was $3.8 million for the fiscal year ended December 31,
1998. There was no stock-based compensation expense in the fiscal year ended
December 31, 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased to $59,000 for the fiscal year ended December 31, 1998 from $21,000 in
the same period of 1997. This increase is primarily attributable to the
amortization associated with fixed asset purchases during 1998.
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<PAGE> 37
SEGMENT OPERATIONS
ARTISTdirect provides music entertainment products and services through the
following three reportable segments:
- ARTISTdirect Network -- music-related Web site operations;
- Talent Agency -- artist booking operations; and
- Record Label -- record label operations.
The factors for determining reportable segments were based on service and
products. Each segment is responsible for executing a segment-specific business
strategy. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. ARTISTdirect
evaluates performance based on profit or loss from operations before income
taxes. The following table summarizes the net revenue, cost of revenue, gross
profit, operating expenses, and operating income (loss) by segment for the years
ended December 31, 1998 and 1997 and the six months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ARTISTDIRECT NETWORK
Net revenue:
E-commerce, net........................... $ 269 $ 1,548 $ 360 $ 2,335
Advertising............................... 95 502 156 724
------- ------- ------- -------
Total net revenue....................... 364 2,050 516 3,059
Cost of revenue.............................. 434 2,240 474 2,671
------- ------- ------- -------
Gross profit................................. (70) (190) 42 388
Operating expense............................ 670 5,116 1,665 7,748
------- ------- ------- -------
Loss from operations......................... (740) (5,306) (1,623) (7,360)
------- ------- ------- -------
TALENT AGENCY
Net revenue.................................. $ 974 $ 1,917 $ 444 $ 291
Cost of revenue.............................. 174 259 108 220
------- ------- ------- -------
Gross profit................................. 800 1,658 336 71
Operating expense............................ 603 2,287 814 577
------- ------- ------- -------
Income (loss) from operations................ 197 (629) (478) (506)
------- ------- ------- -------
RECORD LABEL
Net revenue.................................. $ 550 $ 615 $ 340 $ 332
Cost of revenue.............................. -- 16 15 58
------- ------- ------- -------
Gross profit................................. 550 599 325 274
Operating expense............................ 464 1,013 652 562
------- ------- ------- -------
Income (loss) from operations................ 86 (414) (327) (288)
------- ------- ------- -------
TOTAL LOSS FROM OPERATIONS..................... $ (457) $(6,349) $(2,428) $(8,154)
======= ======= ======= =======
</TABLE>
Segment income (loss) from operations excludes interest income, interest
expense, and provision for income tax.
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<PAGE> 38
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for the six most recent quarters ended June 30, 1999. This unaudited quarterly
information has been derived from our unaudited financial statements and, in our
opinion, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered. The quarterly data should be read in conjunction with our
financial statements and related notes. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 30, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Revenue:
E-commerce, net.............. $ 134 $ 226 $ 444 $ 744 $ 1,080 $ 1,255
Advertising.................. 77 79 128 218 317 407
Agency commissions........... 72 372 1,338 135 130 161
Record label................. 194 146 138 137 171 161
------- ------- ------- ------- ------- -------
Total net revenue..... 477 823 2,048 1,234 1,698 1,984
Cost of revenue................ 230 367 677 1,241 1,296 1,653
------- ------- ------- ------- ------- -------
Gross profit (loss)... 247 456 1,371 (7) 402 331
Operating expense:
Product development.......... 126 111 99 253 191 440
Sales and marketing.......... 113 260 419 603 777 1,760
General and administration... 473 735 590 747 1,308 1,929
Amortization of stock-based
compensation............... 443 845 1,090 1,450 802 967
Depreciation and
amortization............... 12 13 17 17 88 625
------- ------- ------- ------- ------- -------
Loss from
operations.......... (920) (1,508) (844) (3,077) (2,764) (5,390)
Income from equity
investment................... -- -- -- 2 33 --
Interest income (expense),
net.......................... (2) (13) (1) 45 12 65
------- ------- ------- ------- ------- -------
Net loss.............. $ (922) $(1,521) $ (845) $(3,030) $(2,719) $(5,325)
======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, many of which
are outside of our control. We believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance.
LIQUIDITY AND CAPITAL RESOURCES
From our inception in August 1996 through July 1998, we financed our
operations and growth entirely from internally generated cash flow and capital
contributions from founders. Since July 1998, we have raised $19.9 million
through private sales of preferred securities.
Net cash used in operating activities was $5.0 million for the six months
ended June 30, 1999, and $2.3 million for the fiscal year ended December 31,
1998. Net cash used in operating activities for each of these periods primarily
consisted of net losses, partially offset by increases in accounts payable and
accrued expenses. Net cash provided by operating activities was $347,000 for the
fiscal year ended December 31, 1997.
Net cash used in investing activities was $699,000 for the six months ended
June 30, 1999, and $548,000 and $117,000 for the fiscal years ended December 31,
1998 and 1997, respectively. Net cash used in investing activities for each of
these periods consisted of purchases of fixed assets, primarily computer
equipment and systems, totaling $574,000 for the six months ended June 30, 1999
and $141,000 for the year ended December 31, 1998.
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<PAGE> 39
Net cash provided by financing activities was $14.9 million for the six
months ended June 30, 1999, and $4.6 million for the fiscal year ended December
31, 1998. Net cash provided by financing activities during each of these periods
primarily consisted of cash proceeds from the following issuances of preferred
securities:
- Between July 1998 and December 1998, we issued 12,831,261 shares of
Series A preferred securities in exchange for an aggregate purchase price
of $4.9 million.
- In May 1999, we issued 15,000,000 shares of Series B preferred securities
in exchange for an aggregate purchase price of $15.0 million.
As of June 30, 1999, we had $10.8 million of cash and cash equivalents,
excluding cash held for clients. As of that date, our principal commitments
consisted of obligations outstanding under operating leases and employment
contracts. Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in our capital expenditures and lease
commitments in connection with anticipated growth in operations and
infrastructure. Furthermore, we will need to spend significant amounts for sales
and marketing, advertising and promoting our brands, content development and
technology and infrastructure development. We will need to expend funds to add
personnel in all areas.
We currently anticipate that the net proceeds from this offering, together
with our current cash, cash equivalents, short-term investments and credit
facility, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, we
may need to raise additional funds in future periods through public or private
financings, or other arrangements to fund our operations and potential
acquisitions, if any, until we achieve profitability, if ever. Any additional
financings, if needed, might not be available on reasonable terms or at all.
Failure to raise capital when needed could seriously harm our business and
operating results. If additional funds are raised through the issuance of equity
securities, the percentage of ownership of our stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
YEAR 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the Year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the Year 2000
phenomenon. For example, we depend on third parties to process our customers'
credit card payments, host our servers, maintain our network, deliver orders to
customers, and provide fulfillment and accounting services.
We have completed the process of reviewing the Year 2000 compliance of our
internal software. This review included testing to determine how our systems
will function at and beyond the Year 2000. Substantially all of the systems for
the operation of our Web site have been developed within the last three years.
These systems include the software used to provide our Web sites' search,
customer interaction, and transaction processing and distribution functions, as
well as monitoring and back-up capabilities. Based upon our work to date, and
the fact that most of our systems were recently developed, we believe that our
internal software is Year 2000 compliant and we do not expect to incur any
material remediation expenses to update our internal systems.
We have completed our assessment of the Year 2000 readiness of our
third-party supplied software, computer technology and other services, which
include software for use in our accounting, database and security systems. The
failure of such software or systems to be Year 2000 compliant could have a
material adverse impact on our corporate accounting functions and the operation
of our Web site. As part of the assessment of the Year 2000 compliance of these
systems, we have sought assurances from
38
<PAGE> 40
these vendors that their software, computer technology and other services are
year 2000 compliant. To date our expenses associated with this assessment have
not been material and we do not expect to incur any material remediation
expenses in connection with our third-party supplied software and computer
systems. The failure of our software and computer systems and of our third-party
suppliers to be year 2000 complaint would have a material adverse effect on us.
The Year 2000 readiness of the general infrastructure necessary to support
our operations is more difficult to assess. For instance, we depend on the
integrity and stability of the Internet to provide our services. We also depend
on the Year 2000 compliance of the computer systems and financial services used
by consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
Year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based on
these sources, we believe most entities and individuals that rely significantly
on the Internet are carefully reviewing and attempting to remediate issues
relating to Year 2000 compliance, but it is not possible to predict whether
these efforts will be successful in reducing or eliminating the potential
negative impact of Year 2000 issues. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and would
have a material adverse effect on us.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve Year 2000
compliance. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of our material systems, our vendors' material
systems or the Internet to be Year 2000 compliant could have material adverse
consequences for us. Such consequences could include difficulties in operating
our Web site effectively, taking product orders, making product deliveries or
conducting other fundamental parts of our business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in
members' equity, except those arising from transactions with members, and
includes net income and net unrealized gains or losses on securities. There is
no impact on our financial statements as a result of the implementation of SFAS
No. 130.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did
not have a material impact on the financial statements.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. We are required to adopt SOP 98-5
for the year ended December 31, 1999. The adoption of SOP 98-5 is not expected
to have a material impact on our consolidated financial statements.
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal years beginning after September 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities by requiring that all derivative instruments be reported as
assets or liabilities and
39
<PAGE> 41
measured at their fair values. Under SFAS 133, changes in the fair values of
derivative instruments are recognized immediately in earnings unless those
instruments qualify as hedges of the (1) fair values of existing assets,
liabilities, or firm commitments, (2) variability of cash flows of forecasted
transactions, or (3) foreign currency exposures on net investments in foreign
operations. As of June 30, 1999, we had not entered into any derivative
contracts nor had we held any derivative financial instruments. Therefore, SFAS
133 does not have a material impact on our consolidated results of operations,
financial position, or cash flows.
40
<PAGE> 42
BUSINESS
OVERVIEW
We are a leading online music company that connects artists directly with
their fans worldwide. We provide music entertainment through our ARTISTdirect
Network, an integrated network of Web sites offering multi-media content, music
news and information, community around shared music interests, and music-related
commerce. ARTISTdirect currently features 30 unique, artist-owned
ARTISTchannels, and has signed agreements to launch channels with an additional
37 artists. The ARTISTdirect Network also features the UBL, a leading music
search engine on the Web, and iMusic, a popular online community where fans
exchange music interests and commentary. During July 1999, users viewed more
than 50 million pages in our ARTISTdirect Network.
- ARTISTchannels -- customized Web sites that we build, operate and
maintain on behalf of each of our artists, directly linking artists and
fans. These sites provide artists with a unique opportunity to control
the programming, promotion and distribution of a broad range of their
products and services. Artists share in revenue generated by their
ARTISTchannel. These sites also provide consumers with a single
destination to access a large selection of artist-specific music,
merchandise and content. A selection of artists with ARTISTchannels
includes:
<TABLE>
<S> <C> <C>
Backstreet Boys Def Leppard Ozzy Osbourne
Beastie Boys Kenny G Tom Petty
Beck Korn Pink Floyd
blink-182 Limp Bizkit Red Hot Chili Peppers
Chris Cornell Marilyn Manson Robbie Williams
Cypress Hill Metallica Rob Zombie
</TABLE>
- The Ultimate Band List -- a comprehensive online music search engine and
resource for music information. The UBL provides information on more than
75,000 artists across numerous musical genres, featuring news, concert
information, artist biographies, album reviews, contests, promotions,
music samples and downloads. The UBL also offers links to thousands of
other Web sites in the online music community;
- iMusic -- a highly trafficked music-oriented online community providing
chats, message boards and fan clubs relating to specific artists and
general music topics. iMusic allows fans to communicate with others
around the world to share interests and commentary about their favorite
music and artists. iMusic also serves as a platform for fans to interact
directly with their favorite artists through hosted chats and fan
conferences that we organize periodically; and
- The ARTISTdirect Superstore -- a retail site offering over 200,000 music
titles and a wide selection of artist merchandise. The ARTISTdirect
Superstore complements the ARTISTchannels by offering music and
merchandise from a wider range of artists.
We also operate a music talent agency, the ARTISTdirect Agency and manage a
traditional record label, Kneeling Elephant Records, which, when combined with
our ARTISTdirect Network, allow us to provide a full range of traditional and
online services to artists. We believe that our management team's extensive
music industry experience and its understanding of the needs of artists and
music consumers provide us with a distinct advantage in pursuing opportunities
arising from the convergence of the music industry and the Internet.
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<PAGE> 43
INDUSTRY BACKGROUND
THE MUSIC INDUSTRY
Music is one of the most popular forms of entertainment worldwide and a
multi-billion dollar consumer industry. According to the International
Federation of the Phonographic Industry, worldwide sales of recorded music were
$38.7 billion in 1998, 34% of which were in the United States. Concert tours
also generate significant revenue for the music industry. Pollstar estimates
that the total gross ticket sales for major concerts in North America was
approximately $1.3 billion in 1998. In addition, the music industry generates
substantial advertising, sponsorship, promotional and merchandise revenue
related to music events and individual artists.
The music industry identifies artists and develops, promotes and
distributes their content. The high cost associated with development, promotion
and distribution has led artists to rely on third parties such as record labels,
merchandisers and tour promoters. Consequently, artists have had limited ability
to control how they are marketed to consumers, to identify and communicate
directly with their fans and to maximize their economic participation in all
available revenue streams.
The experience of the typical music consumer has been fragmented and
inefficient. Music consumers have had to search a variety of media to find music
news and information and have had to purchase compact discs, tickets and
merchandise through different retail channels. Certain goods, such as apparel
and other artist merchandise, have been difficult to find and frequently
available only at concerts or selected retail outlets. For music fans,
opportunities to interact with their favorite artists and fellow enthusiasts
have been limited.
THE INTERNET OPPORTUNITY
The Internet has emerged as a platform that allows millions of people
worldwide to deliver and receive information rapidly, create virtual communities
around shared interests and engage in electronic commerce. This has made the
Internet an important new medium for music, dramatically altering the way
consumers search for, discover, listen to and purchase music. The Internet
offers:
- efficient reach to a worldwide audience;
- convenient access to a vast offering of musical content and services;
- ongoing flexibility to tailor products and services to consumer interests
and market dynamics;
- digital distribution of music;
- consumer personalization of the music experience; and
- timely collection of customer preferences and demographics for targeted
advertising and promotion.
Artists have begun to view the Internet as a platform to gain greater
control over the programming, promotion and distribution of their music and
related merchandise and to communicate directly with their fans. Consumers have
adopted the Internet to locate music information, share interests and discover
and buy music. According to Jupiter Communications, online sales of recorded
music in the United States are projected to grow from $152 million in 1998,
representing 1.1% of music sales, to approximately $2.6 billion in 2003,
representing 14.0% of music sales. Forrester Research estimates that
approximately 50 million individuals will be capable of downloading and playing
digital music by the end of 1999, and by 2003, downloading will add $1.1 billion
to the U.S. music industry. Forrester also estimates that 56% of consumers want
to communicate with artists directly, and 31% would pay for non-music products
from their favorite artists.
The largest demographic group driving music sales also is the largest
demographic group using the Internet. According to the United States Census
Bureau, this group of consumers, aged 10 through 34, comprised approximately 95
million individuals in the United States, and according to the Recording
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Industry Association of America, purchased 60% of the music sold in the United
States in 1998. Not surprisingly, the music industry has historically focused
its promotional and marketing efforts on this group. According to International
Data Corporation, approximately 58% of the 35 million home Internet users at the
end of 1998 were from essentially the same demographic group, aged 12 through
34. According to the Internet Advertising Bureau, advertisers on the Internet
spent $2.3 billion during the 12 months ended March 30, 1999.
We believe that the features of the Internet and the common demographics of
music consumers and Internet users present an opportunity to reshape the music
industry. Artists now have the opportunity to exert greater control over the
programming, promotion and distribution of their music and consumers can now
search for, discover and purchase music and related merchandise and content at a
single destination.
OUR SOLUTION
BENEFITS TO ARTISTS
By providing artists with a platform to develop their presence on the Web,
we enable artists to assume more creative control over their image, promote
their music in innovative ways, interact with their fans, extend their reach and
participate in incremental revenue streams. Our benefits to artists include:
Artist-controlled Online Media Channel. We offer artists an online media
presence, the ARTISTchannels, to create, present, promote and distribute their
content. The ARTISTchannels include auto-publishing tools, content management
features, and capabilities for advertising and direct marketing and electronic
commerce. Our technology enables us to quickly launch customized Web sites for
our artists. Artists actively collaborate on the design, content and other
features of their ARTISTchannels. With continuing advances in broadband
technology and standards for digital music distribution, we believe the
ARTISTchannels will emerge as the artists' preferred platform for the full range
of their content, commerce and community activities on the Internet.
Closer Relationships with Fans. The ARTISTchannels promote greater fan
affinity and loyalty by directly linking artists and fans. Artists can use the
ARTISTchannels to provide content and products to fans, including artist news,
concert information, music and video programming, exclusive chats, ticket
giveaways and fan club activities. Artists can also solicit the views of fans on
new music, live performances and music videos. A better understanding of their
fans enables artists to develop relevant content for their ARTISTchannels,
promote their music more effectively and create new revenue opportunities.
Access to Traffic from the ARTISTdirect Network. We attract, aggregate and
retain consumers within the ARTISTdirect Network through our compelling content
and commerce offerings, thereby providing our artists the opportunity to tap
into an active community of millions of music fans. The ARTISTchannels can be
accessed directly or through the ARTISTdirect Network, allowing artists the
opportunity not only to reach their existing audience, but to broaden their fan
base as well. As one of the most heavily trafficked music destinations on the
Internet, we aggregate global consumer traffic, collect targeted fan information
and generate incremental revenue from electronic commerce and advertising for
the shared benefit of the artist and ARTISTdirect.
New Revenue Opportunities. We provide artists with a number of incremental
revenue opportunities, including from music and related merchandise sales and
auctions, advertising and direct marketing. Our sites significantly increase
consumers' access to artist merchandise previously available only at concert
venues or selected retail locations. We also assist artists in developing
original merchandise items for sale through their sites. We believe that our
revenue-sharing with artists provides incentives for them to actively promote
their ARTISTchannels and the ARTISTdirect Network.
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Direct Marketing Opportunities. We encourage fans to provide identifying
information that allows the artists to develop consumer databases through their
ARTISTchannels. Artists use this database information to communicate important
news, upcoming music releases, live appearances or online events that are
targeted to a particular fan base. Data also may be used to develop
artist-approved targeted advertising and marketing opportunities. Artists have
access to detailed information about how many people visited their sites,
listened to or downloaded their music and purchased compact discs. We maintain
each artist database and share any revenue generated through its use with the
artist.
New Platform for Digital Distribution. The Internet represents an important
new platform for digital music distribution. As the music industry develops
standards for secure digital distribution, we are implementing the
infrastructure and systems for digital distribution through the ARTISTdirect
Network. We currently allow free digital downloads of promotional music and a
variety of streaming audio services. We intend to provide artists with a broad
array of opportunities to generate revenue from digital music distribution,
including pay-per-download, subscription services and advertising or
sponsor-supported services.
BENEFITS TO CONSUMERS
Our ARTISTdirect Network offers a compelling music experience and a
comprehensive one-stop destination for the music consumer. Our benefits to
consumers include:
Direct Connection to Artists. Our ARTISTchannels provide a unique fan
experience. Consumers have access to content specifically created or endorsed by
their favorite artists, as well as official artist news and concert information,
music, merchandise, special promotions and other benefits. Special promotions
have included opportunities to meet artists, concert ticket giveaways, trips to
live concerts, online fan conferences with artists, exclusive music downloads
and exclusive videos. Consumers can interact with artists and offer direct
feedback on new releases, concert performances and videos.
Comprehensive Music Resource. The ARTISTdirect Network includes the UBL, a
comprehensive destination for searching, discovering and enjoying music content.
The UBL is an online search engine and database of more than 75,000 artists
covering a wide variety of musical genres, organized links to other Internet
music resources, news, concert information, artist biographies, album reviews,
contests and promotions, music samples and downloads. The UBL is designed to
encourage user participation by allowing users to create entries in the artist
database and links from the UBL to music sites elsewhere on the Internet. The
UBL also includes tools to allow artists to upload content, including
biographies, pictures and music for the benefit of their fans.
Rich Community Features. Our iMusic community site provides chats, message
boards, fan clubs and personalization tools relating to both specific artists
and more general music topics. Our site enables fans around the world to share
interests and commentary about their favorite music and artists and facilitates
their discovery of new music. iMusic also serves as a platform for fans to
interact directly with their favorite artists through hosted chats and fan
conferences.
Comprehensive Shopping Destination. The ARTISTdirect Network brings
together many of the disparate elements of the music shopping experience. Music
consumers can purchase and pre-order a full range of recorded music and shop for
artist-related merchandise, including some items available only through
ARTISTdirect. In addition, our content, downloadable music, weekly specials and
auctions enhance the consumer experience. The UBL and iMusic provide relevant
information to help consumers make purchasing decisions.
Access to Online Digital Distribution. The UBL has provided downloadable
digital audio files since 1995 and continue to utilize technology to enhance the
user experience. We currently allow free digital downloads of promotional music
and provide users with a variety of streaming audio services, including some
content that is available only through ARTISTdirect. As digital distribution
becomes commercially
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viable, we plan to offer consumers many ways to acquire and experience music,
including subscription services, pay-per-download and advertising or
sponsor-supported services.
BUSINESS STRATEGY
Our objective is to be the leading provider of music entertainment,
information, community and electronic commerce on the Internet. Our strategy is
to:
Add ARTISTchannels Aggressively. We intend to aggressively add
ARTISTchannels by continuing to market the benefits of our unique ARTISTchannel
model to high-profile artists. We intend to add artists from U.S. and
international markets and a variety of music genres. We are currently in
discussions with more than 50 additional artists whose popularity makes them
excellent candidates for ARTISTchannels. We believe that our ARTISTchannel
model, current roster of prominent artists and experienced, artist-oriented
management team will enable us to attract additional artists to expand the
ARTISTdirect Network.
Build Brand Awareness Rapidly. We intend to establish ARTISTdirect as the
leading brand for online music entertainment. We have achieved our current brand
recognition with aggregate marketing expenditures of less than $2.5 million
through June 30, 1999. We intend to increase our marketing expenditures through
a television, radio, print and online advertising campaign that features a
number of our high-profile artists promoting and endorsing the ARTISTdirect
Network. We will continue to encourage our artists to use their album releases,
concert tours and personal appearances to promote their ARTISTchannels. Through
the ARTISTdirect Agency, we intend to create ARTISTdirect-branded concerts and
concert tours that will include both media and venue promotion.
Enhance Our Users' Experience. We plan to add features and content to the
ARTISTdirect Network to enhance our users' experience. For example, we are
currently developing a number of interactive applications designed to exploit
new and existing technologies. We plan to help our users discover new music by
providing personalization tools, targeted recommendations, digital downloads and
streaming audio and video.
Leverage Our Unique Assets. We intend to leverage our uniquely integrated
assets, broad reach and experienced, artist-oriented management team to
differentiate ourselves from companies with less comprehensive offerings. For
example, we aim to:
- offer selected artists a range of services, including live performance
booking through our talent agency; development, marketing and promotion
through our record label; and online programming, promotion and
distribution through both an ARTISTchannel and the ARTISTdirect
Superstore;
- cross-promote specific ARTISTchannels to the audiences of the UBL and
iMusic, as well as to the audiences of other ARTISTchannels;
- develop branded live events and tours sponsored by advertisers and
merchants; and
- enable advertisers and merchants to deliver their messages to the
audience of the entire ARTISTdirect Network or to targeted audiences
within the ARTISTdirect Network.
Pursue Additional Revenue Streams. We intend to increase revenue from
existing sources and add new revenue streams. New revenue opportunities include:
- digital distribution of music: As the music industry develops standards
for secure digital distribution, we plan to provide consumers with a
variety of products and services that will generate revenue from sales of
digital music and subscription fees;
- database marketing: We plan to derive revenue from our growing databases
of consumer information and preferences. Our databases enable us to
create affinity groups and frequent buyer
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programs, promote existing artists more effectively, and assist advertisers and
merchants in targeting specific audiences;
- international markets: We will pursue opportunities to obtain and
distribute localized ARTISTdirect content and merchandise in
international markets; and
- ancillary network opportunities: Our network will allow us to pursue a
variety of incremental revenue, for example, by offering a tiered menu of
subscription services and syndicated content for use both online and
offline.
ARTISTDIRECT BUSINESS UNITS
ARTISTDIRECT NETWORK
The ARTISTdirect Network is comprised of the ARTISTchannels, the UBL,
iMusic and the ARTISTdirect Superstore.
ARTISTchannels. Our ARTISTchannels are designed to strengthen the
relationship between artists and their fans and to provide a wide range of
content (news, tour information, music samples, special offers), community
(artist-hosted clubs, fan clubs, message boards) and products (music and
merchandise and collectibles). These Web sites are individually designed for,
and owned by, the artists and are produced and operated by ARTISTdirect,
typically under a contractual arrangement that provides artists with a share of
the revenue generated by their sites, including both electronic commerce and
advertising revenue. Each ARTISTchannel contains an official online store, where
consumers can shop directly from the artist. These stores benefit the artist by
making both their music and merchandise available to fans 24 hours a day,
resulting in incremental sales. For fans, a large selection of artist-specific
music and merchandise is readily available in one place, combined with content
and community features. In addition, the ARTISTchannels are designed to serve as
an outlet for merchandise, collectibles, memorabilia and items sold through
auction. The ARTISTchannels are accessible directly using their specific Web
site addresses, or through the ARTISTdirect home page, the UBL or iMusic. Many
artists take an active role in promoting their ARTISTchannels, displaying their
Web site addresses in album packaging, in advertising, on merchandise and in fan
club communications.
As broadband technology continues to advance, we expect artists to use
their ARTISTchannels as platforms for a broader array of programming, including
music videos, live video chats, fan conferences, Webcasts and access to archives
of pre-recorded content. We also expect artists to use the databases we are
building on their behalf to market new music and merchandise directly to fans
and offer those fans certain benefits for loyalty and active purchasing.
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Our current roster of ARTISTchannels includes:
<TABLE>
<S> <C> <C>
Backstreet Boys Kenny G Pink Floyd
www.bsbdirect.com www.kennygdirect.com www.pinkfloyddirect.com
Beastie Boys Korn Primus
www.grandroyaldirect.com www.korndirect.com www.clubbastardo.com
Beck Limp Bizkit Red Hot Chili Peppers
www.beckdirect.com www.limpbizkitdirect.com www.chilipeppersdirect.com
blink-182 Marilyn Manson The Rolling Stones
www.loserkids.com www.marilynmansondirect.com www.stonesbazaar.com
Chris Cornell Megadeth Slayer
www.chriscornelldirect.com www.megadethdirect.com www.slayerdirect.com
Cypress Hill Metallica Soul Coughing
www.cypresshilldirect.com www.metallicadirect.com www.soulcoughingdirect.com
Def Leppard The Offspring Sublime
www.deflepparddirect.com www.offspringdirect.com www.sublimedirect.com
Everclear Ozzy Osbourne System of a Down
www.evercleardirect.com www.ozzydirect.com www.soaddirect.com
Bryan Ferry Pantera Robbie Williams
www.bryanferrydirect.com www.panteradirect.com www.robbiewilliamsdirect.com
Chris Isaak Tom Petty Rob Zombie
www.chrisisaakdirect.com www.tompettydirect.com www.robzombiedirect.com
</TABLE>
In addition to the ARTISTchannels already launched, we have agreements in
place for the launch of additional ARTISTchannels for artists such as:
<TABLE>
<S> <C> <C>
Aerosmith Filter Diana Ross
Tori Amos Foo Fighters Brian Setzer
B-52's Incubus Social Distortion
George Benson Indigo Girls Sonic Youth
Clint Black Kenny Loggins Stabbing Westward
Frank Black Matchbox 20 Static-X
Black Crowes Monster Magnet Stone Temple Pilots
Danielle Brisebois Stevie Nicks Matthew Sweet
Cher Powerman 5000 Toto
Counting Crows Rage Against The Machine Tina Turner
David Crosby Rancid The Who
DJ Shadow Remy Zero Dwight Yoakam
Fastball
</TABLE>
The UBL. The UBL is a leading music-specific Internet search engine,
attracting an average of more than 100,000 visits per day during July 1999. The
UBL serves as a comprehensive resource for music information relating to
specific artists, various genres and a wide range of events. The UBL combines
content generated by our staff with third-party content either licensed for use
on our Web site or accessible using edited links to other Web sites. Users have
ready access to artist profiles, music downloads, tour information, contests,
Internet radio, Webcasts and other content. The UBL allows users to add or
update their own information about their favorite artists. We believe that this
process, together with links to other music content sites, has made the UBL one
of the most comprehensive databases of
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bands available on the Web. The UBL currently contains information regarding
more than 75,000 artists and contains links to thousands of other music-related
sites.
iMusic. We believe iMusic is one of the most active music-specific
community sites on the Internet. During July 1999, iMusic averaged more than
80,000 visits and more than 400,000 page views per day. iMusic offers message
boards, text chats, video chats, fan conferences and other opportunities for
fans to interact with each other and with artists. We plan to introduce e-mail
and personal home page services through iMusic in the near future. We also plan
to host a regular series of artist chats and conferences, providing users with
the opportunity to interact and communicate with their favorite artists.
ARTISTdirect Superstore. The ARTISTdirect Superstore is a retail center for
leading brands and artists, offering recorded music and related merchandise. The
ARTISTdirect Superstore offers more than 200,000 music titles and merchandise
for a broad range of artists, including those with an ARTISTchannel who want to
reach a broader audience of music consumers.
ARTISTDIRECT AGENCY
The ARTISTdirect Agency is a music talent organization that represents a
roster of high-profile artists for live performances and concert touring
appearances. We believe that our agency services enhance the relationships we
have with many of our artists for whom we also host ARTISTchannels. The
activities of the agency also serve to identify potential sponsorship
opportunities for our advertiser relationships, as the ARTISTdirect Agency is
frequently involved in the creation of major, national concert tours. Currently,
the ARTISTdirect Agency roster includes over 65 acts, including:
<TABLE>
<S> <C> <C>
Alice in Chains Crystal Method Rage Against the Machine
Beastie Boys Everclear Red Hot Chili Peppers
Beck Foo Fighters Elliott Smith
Ben Folds Five Hovercraft Sonic Youth
Frank Black Ben Lee Pearl Jam
Blues Traveler The London Suede Sunny Day Real Estate
Catherine Wheel Marcy Playground The The
Chris Cornell Primus Paul Westerberg
</TABLE>
KNEELING ELEPHANT RECORDS
Kneeling Elephant Records is an independent record label managed by
ARTISTdirect pursuant to a label agreement with RCA Records. RCA provides all
funding for the label and owns the rights to all sound recordings made under
artist agreements during the initial three year term of the label agreement. The
initial term ends December 31, 1999. During the initial term, RCA provides
overhead advances, funding for artist advances and recording costs and marketing
resources for a minimum of three artists per year. Kneeling Elephant finds new
talent and negotiates contracts, including royalties, advances and artist
development, and works with RCA's marketing, promotion, publicity and sales
force to develop a marketing strategy for each album. Manufacturing, packaging
and distribution are handled by RCA's affiliated worldwide distribution network.
Kneeling Elephant participates on a royalty basis in the proceeds of the albums
recorded during the initial term. At the end of the initial term, unless
terminated by RCA, this royalty arrangement will convert to a three-year 50/50
joint venture with respect to all product created after the initial term. Each
party will continue to be responsible generally for the same functions under the
joint venture arrangement, including RCA continuing to be responsible for
funding. If RCA terminates the label agreement at the end of the initial term
the artists signed to the label will remain with RCA. If we desire to continue
with the record label business, we will be responsible for funding the label's
future operations unless we can enter into an arrangement with another record
company.
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Kneeling Elephant has signed eight bands to date: Fly/Longslide, Gloritone,
Snakefarm, The Innocence Mission, Lea Krueger, Zen Mafia, Wan Santo Condo and
Adam Elk. We have begun to use the ARTISTdirect Network to market some Kneeling
Elephant artists directly to electronic consumers.
INFRASTRUCTURE AND OPERATIONS
TECHNOLOGY
Our infrastructure is designed to be integrated, scalable, reliable and
secure. The software that we use supports the acquisition, management and
publication of content on our Web sites.
Our Web sites and servers for content, applications, database and
electronic commerce are currently hosted at AT&T CerfNet and American Digital
Network in San Diego, California, and at Digex, Inc. in Cupertino, California,
under either co-location or managed server agreements. Some of our digital
content is hosted by InterVU in San Diego, California. Our operations depend on
these companies' ability to protect their systems against fire, power loss,
telecommunications failure, break-ins and other events. These companies provide
comprehensive facilities management services, including human and technical
monitoring of all production servers 24 hours per day, seven days per week. All
Web sites, servers, and systems are monitored continuously. Backups are
performed daily. Weekly backups are stored at a remote location.
We are currently implementing a comprehensive enterprise resource planning
system based on SAP software provided to us by Pandesic, LLC, a joint venture
between Intel and SAP. This system is an integrated production, electronic
commerce and management information solution that we expect will provide us with
significant benefits over the systems we currently use. Our plan is to have a
substantial portion of our existing systems transitioned to the Pandesic system
by late-1999 and to fully transition to this system by mid-2000.
ORDER PROCESSING AND FULFILLMENT
Our Web sites include an ordering system that is designed to facilitate
convenient online purchasing of pre-recorded music and merchandise. Customers
can add items to their "shopping cart" while surfing our Web sites. At any time
they can securely "checkout", at which time they need to register (if they are
new customers), or enter a username and password to retrieve previously saved
billing, shipping and credit card information. We verify orders submitted for
credit card payment for fraud detection and sufficient funds before we release
them for fulfillment. We also accept alternative modes of payment, such as
checks and money orders. Credit card numbers are encrypted, and all customer,
commerce and transactional data are stored in secure databases protected by
firewalls. The transmission of information over the Internet uses Secure Socket
Layer security technology verified by VeriSign.
Alliance Entertainment. We entered into a five-year agreement with Alliance
Entertainment Corp. in August 1998 to be our primary fulfillment partner and a
supplier of music-related information for our ARTISTdirect Superstore. Alliance
owns the All Music Guide, a comprehensive source of artist and album information
that is supplied to our users primarily through its integration into the UBL. In
addition to fulfilling compact discs ordered by our customers, Alliance has also
provided warehouse space for our music-related merchandise that allows the
consolidated shipping of customer orders for both music and merchandise. We have
integrated our order processing system with Alliance's information systems to
assist in fulfillment tracking, inventory management and customer service.
We maintain very low levels of inventory. Almost all of the music titles
available for sale on our Web sites are the inventory of Alliance. Similarly,
almost all of the music-related merchandise available for sale is the inventory
of the artist. We take physical title to the product at the time of shipment and
have ultimate credit and collection risk.
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Giant and Winterland. We entered into a four-year agreement with Giant
Merchandising in April 1999 and a three-year agreement with Winterland
Concessions Company in June 1999 to supply merchandise for both our
ARTISTchannels and the ARTISTdirect Superstore. Together, Giant and Winterland
represent more than 225 artists, including 21 of those with whom we have
agreements for ARTISTchannels. We believe that our inventory management and
distribution strategy allows us to offer extensive selection while avoiding the
high fixed costs and capital requirements associated with owning and warehousing
product inventory as well as the operational effort integral to shipping and
delivery.
We depend on Alliance, Giant and Winterland for timely shipment of products
purchased through our Web sites. Alliance currently provides fulfillment
services for our ARTISTchannels pursuant to an oral agreement that Alliance may
terminate at any time. If we are unable to renew our agreements with these
suppliers when they expire, on favorable terms or at all, or if Alliance ceases
to provide fulfillment services for our ARTISTchannels, our business could be
adversely affected.
CUSTOMER SERVICE
We have established an in-house customer service operation currently
operating five days per week from 7 a.m. to 11 p.m. Pacific time to respond to
customer inquiries, orders and other requests made by phone, fax, e-mail and
regular mail.
SALES AND MARKETING
ADVERTISING SALES
We sell advertising and sponsorships to a variety of advertisers seeking to
reach one or more of the distinct demographic audiences viewing content in the
ARTISTdirect Network. This advertising may take the form of banner ads or
sponsorship of specific content areas. Because the ARTISTdirect Network is
comprised of a large number of distinct Web sites, advertisers may choose a
broad run-of-network campaign or one that is highly targeted based upon the
demographics of a particular section within a single site or a grouping of
sites. Placement and pricing are negotiated based upon the size of the target
audience and the duration and intensity of the campaign desired by the
advertiser. Our strategy is to expand the number of advertisers using the
ARTISTdirect Network and increase the number of product and service categories
represented by these advertisers.
We derive a significant portion of our revenue from the sale of
advertising. In 1998 and the first six months of 1999, advertising represented
11% and 20% of revenue, respectively. In these periods, no single advertiser
represented more than 7% of advertising revenue. We employ a direct sales force
of eight people in Los Angeles and New York and intend to expand this staff.
Advertisers on the ARTISTdirect Network during the first six months of 1999
included the following:
<TABLE>
<S> <C> <C>
Atlantic Records Dreamworks Microsoft
Butterfinger Epic Records Milky Way
Coca Cola Gateway OnNow.com
Columbia Records Honda Second Spin
Discover Card Island Records Talk City
</TABLE>
MARKETING AND PROMOTION
We use a number of methods to create awareness of the ARTISTdirect Network
and drive traffic to our Web sites. We have focused much of our online
advertising on specific artists, contests, promotions and other events designed
to attract interest to our sites. We have also used print and radio advertising
to create brand awareness for ARTISTdirect and to promote special events taking
place on the ARTISTdirect Network. In addition, we participate in the
sponsorship of live music and other industry
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events that provide prominent visibility for either ARTISTdirect and the UBL and
maintain an aggressive public relations program generating press coverage and
speaking engagements for our senior executives.
We also use e-mail direct marketing to communicate with registered users of
the ARTISTdirect Network. Campaigns have included direct notification of special
merchandise offers, live artist chats, music downloads and non-scheduled live
performances. As we continue to build our user databases, we expect to expand
the use of e-mail direct marketing to facilitate user retention and create
loyalty and affinity programs.
We are finalizing plans for a new marketing program using print, radio and
television mediums. The purpose of this campaign will be to increase awareness
of the ARTISTdirect Network and its association with high profile music artists.
Certain of the artists for whom we operate Web sites have agreed to participate
in this advertising campaign. We expect this campaign to commence in late-1999.
COMPETITION
The market for the online promotion and distribution of music and
music-related products and services is new, highly competitive and rapidly
changing. The number of Web sites competing for the attention and spending of
consumers and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenue, both on Web sites and in more
traditional media, is intense. Currently, there are more than one hundred music
retailing Web sites. We compete as follows:
- for music consumers, advertisers and, to a lesser extent, artist
relationships, with providers of music information, community and content
such as MTVi, Launch Media, mp3.com, EMusic and various other companies;
- with major online music retailers such as Amazon.com and CDnow in selling
music and merchandise;
- for music consumers and advertisers with online "portals" which have
music-oriented sites, including America Online and Yahoo!;
- for music consumers and artist relationships with traditional music
industry companies, including BMG Entertainment, a unit of Bertelsmann
AG, EMI Music, a unit of EMI Group, Sony Music Entertainment, a unit of
Sony Corporation, Warner Music Group, a unit of Time Warner Inc., and
Universal Music Group, a unit of the Seagram Company. Certain of these
companies have recently established online presences to promote and
distribute the music and tours of their respective artists;
- for music consumers and advertisers with publishers and distributors of
traditional media, such as television, radio and print, including MTV,
CMT, Rolling Stone and Spin and their Internet affiliates; and
- with traditional retailers targeting music consumers, including Tower
Records and Virgin Megastore and their Internet affiliates, in selling
music and merchandise.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, Columbia House, a unit of Time Warner and Sony, announced that they
will merge with CDnow. In addition, Universal Music Group and BMG Entertainment
recently formed a joint venture to operate an online music store.
We believe that we compete primarily on the basis of:
- the popularity, quality and variety of our ARTISTchannels, including our
ability to attract well-known artists;
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- the breadth and quality of the UBL database and the community features of
iMusic;
- the variety, availability and price of music-related merchandise on our
sites;
- the ease of use and consumer acceptance of the ARTISTdirect Network; and
- the ability to effectively promote our brands.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages to us, including:
- longer operating histories;
- significantly greater financial, technical and marketing resources;
- greater brand name recognition;
- larger existing customer bases; and
- more popular content or artists.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products or services
than we can. Web sites maintained by our existing and potential competitors may
be perceived by consumers, artists, talent management companies and other music-
related vendors or advertisers as being superior to ours. In addition, we may
not be able to maintain or increase our Web site traffic levels, purchase
inquiries and number of click-throughs on our online advertisements. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.
GOVERNMENTAL REGULATION
The laws and regulations that govern our business change rapidly. Although
our operations are currently based in California, the United States government
and the governments of other states and foreign countries have attempted to
regulate activities on the Internet. The following are some of the evolving
areas of law that are relevant to our business:
CONTENT REGULATION
Federal, state and foreign governments have adopted and proposed laws
governing the content of material transmitted over the Internet. These include
laws relating to obscenity, indecency, libel and defamation. We could be liable
if content delivered by us or placed on our Web sites violates these
regulations.
PRIVACY LAW
Current and proposed federal, state and foreign privacy regulations and
other laws restricting the collection, use and disclosure of personal
information could limit our ability to use the information in our databases to
generate revenues. In late 1998, the Children's Online Privacy Protection Act,
or COPPA, was enacted, mandating that certain measures be taken to safeguard
minors under the age of 13. It is expected that COPPA will become effective
sometime between April 21, 2000 and April 21, 2001. The principal COPPA
requirement is that individually identifiable information about minors under the
age of thirteen not be collected, used or displayed without first obtaining
informed parental consent that is verifiable in light of present technology. We
cannot predict the methods of verifiable consent that will eventually be
approved by the FTC, or what the cost will be to us to obtain consent for future
or past
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members under 13 who have already signed up. At present, we endeavor not to
collect or use personally identifiable information about minors under the age of
13 without verifiable parental consent or notice as required by COPPA. While we
believe that our practices conform with the general COPPA requirements, specific
regulations implementing the Act have not yet been promulgated. While we plan to
be fully compliant by the time that the law becomes effective, our efforts may
not be successful or cost effective.
SALES TAX
The tax treatment of goods sold over the Internet is currently unsettled.
We collect sales taxes for goods shipped to California and Florida. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
adversely affect our opportunity to derive financial benefit from electronic
commerce. Recently, though, the Internet Tax Freedom Act was signed into law,
placing a three-year moratorium on new state and local taxes on Internet
commerce. However, the tax moratorium may not continue. Failure to renew this
legislation would allow various states to impose taxes on Internet-based
commerce, which could adversely affect our business.
ONLINE CONTESTS AND SWEEPSTAKES
We conduct online promotional contests and sweepstakes. No purchase is
necessary to participate. Our official rules, with all material terms,
conditions of eligibility, dates of participation, methods of entry and
limitations, if any, along with the odds and prize offerings, are posted on our
Web sites. In order to comply with New York and Florida state law, our prizes
are limited in value to less than $5,000, or we comply with those states'
registration and bonding requirements. While we attempt to comply with the law
of all fifty state jurisdictions, we may not be uniformly successful, and
foreign jurisdictions may attempt to regulate or ban our promotional contests.
In that event, we could lose an effective tool for increasing and keeping
visitors to our Web site, and our business could be adversely affected.
INTELLECTUAL PROPERTY
OUR PROPRIETARY RIGHTS
Copyrighted material that we develop, as well as our service marks and
domain names relating to the ARTISTdirect, UBL or iMusic brands and other
proprietary rights are important to our business prospects. We seek to protect
our common-law copyrights and trademarks through federal registration, but these
actions may be inadequate. Where consultants develop copyrighted content for us,
our general policy is to use written agreements prior to content creation to
obtain ownership of that content. In addition, we principally rely upon
trademark, copyright, trade secret and contract law to protect our proprietary
rights. We generally enter into confidentiality agreements, "work-made-for-hire"
contracts and intellectual property licenses with our employees, consultants and
corporate partners, respectively, as part of our efforts to control access to
and distribution of our technologies, content and other proprietary information.
Despite our efforts to protect our proprietary rights from unauthorized use or
disclosure, parties may attempt to disclose or use our customer lists, Web site
content, service marks, domain names or confidential commercial data. The steps
that we have taken may not prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights at all, or as fully as in the United States.
If third parties were to use or otherwise misappropriate our copyrighted
materials, trademarks or other proprietary rights without our consent or
approval, our competitive position could be harmed, or we could become involved
in costly and distracting litigation to enforce our rights.
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OUR WEB SITES FEATURE CONTENT THAT IS COPYRIGHTED BY MULTIPLE THIRD-PARTIES
A copyright gives the owner certain divisible rights, including those of
performance, reproduction and distribution. The music featured by us is
typically comprised of copyrighted works owned, controlled or administered by
multiple third parties, including record labels, artists, songwriters, music
publishers and performance rights and licensing organizations such as The Harry
Fox Agency, Broadcast Music Inc. and the American Society of Composers, Authors
and Publishers. Each song often has multiple copyright owners, who control
rights which may include performance, reproduction and distribution rights in
the "musical composition" comprised of the lyrics and music, as well as with the
"sound recording" of the artist's interpretation of the "musical composition."
In the case of music videos, there are separate copyrights to the visual
content. We, or our business partners, may have different licensing arrangements
with some or all of these parties to perform, reproduce and distribute works
depending upon how the song or music video is used by us.
Our Web sites, depending upon the specific musical work, may offer audio
streaming of an entire song or "webcasting", downloading of an entire song in an
MP3 format or the downloading of part of a song. Full-length streaming only
occurs in special instances after obtaining an oral license from the record
label or band manager for the "sound recording." In that case, an ASCAP or BMI
blanket music license is also obtained by us or by our business partners for
rights to perform the associated underlying "musical composition." Where we
offer a full-length download of a song in an MP3 format, performance and
reproduction rights to the "sound recording" are generally obtained from the
owner of the copyright by means of a written agreement. With respect to the
reproduction of "musical compositions" by means of an MP3 or other sound file
format download, the law is presently unsettled as to whether a separate
mechanical license is required for such form of reproduction. We believe that no
such license is required and does not presently obtain a separate "reproduction
and distribution" mechanical license from the Harry Fox Agency or any other
administrator of music publishing rights; however, there can be no assurance
whatsoever that our view of copyright law will eventually be vindicated. If
wrong, we may be forced to obtain such licenses or may be prevented from third
party content use, and may further be liable to pay actual or statutory damages,
profits attributable to any alleged infringement, as well as attorneys' fees.
In certain cases, such as a limited thirty second MP3 sample of a song that
is downloaded, we use content without a license because we do not believe that
one is required. However, the laws in this area are uncertain, although the
Recording Industry Association of America presently considers a limited download
of less than 30 seconds in duration for promotion purposes generally to be a
"fair use." Our licensing arrangements for third-party content vary from formal
contracts to informal agreements based on the promotional nature of the content.
In some cases we pay a fee to the licensor for use of the "sound recording,"
"musical composition" or music video and in other cases the use is free. We also
use other third-party content, including photographs, artist names, likenesses
and concert reviews. While it is our general policy to obtain a written release
or license for such use, in many instances we rely only upon an oral license for
such use. We rely upon our positive working relationships with copyright owners
to obtain licenses on favorable terms. Any changes in the nature or terms of
these arrangements, including any requirement that we pay significant fees for
the use of the content, could have a negative impact on the availability of
content or our business.
LINKING AND FRAMING OF THIRD-PARTY WEB SITES
We link to and "frame" third-party Web sites of our artists without express
written permission to do so. Those practices are controversial, and have, in
instances not involving us, resulted in litigation. Various claims, including
trademark and copyright infringement, unfair competition, and commercial
misappropriation, as well as infringement of the right of publicity
(unauthorized commercial use of name and likeness) may be asserted against us as
a result. The law regarding linking and framing remains
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unsettled; it is uncertain as to how existing laws, especially trademark and
copyright law, will be applied by the judiciary to the Internet. Also, Congress
is increasingly active in passing new laws related to the Internet, and there is
uncertainty as to the impact of future potential laws, especially those
involving domain names, databases and privacy.
Our Web sites feature live "chat," or interactive on line discussion groups
made up of our customers. We do not censor such comments in advance and it is
possible that a customer could use our Web sites as a forum to make false,
misleading or disparaging remarks about others. Such on-line comments could lead
to claims for defamation or infringement. Separately, our Web sites allow
consumers to use our personal web publishing tool to post samples of their
works. Such postings could be misused to post unlicensed copyrighted content of
others. While we have not designated an agent for notification of infringement
with the Copyright Office, we intend to do so shortly. Doing so may provide us
with limited safe-harbor protection under the recently-enacted Digital
Millennium Copyright Act against liability for infringing material of which we
do not have knowledge.
EMPLOYEES
As of August 31, 1999, we had 127 full-time employees. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
FACILITIES
Our principal corporate offices are located in Encino, California where we
lease approximately 11,400 square feet under leases that expire in 2000 and
2002. To accommodate our growth, we recently leased approximately 8,200 square
feet in Woodland Hills, California under an eight month sublease. We are opening
a New York sales office and have leased approximately 1,400 square feet under a
lease that expires in November 2002. Lastly, our iMusic community Web site
operation is based in Seattle, Washington, where we lease approximately 2,200
square feet under a lease that expires in January 2002. We will need to lease
additional space within the near future, and we have and will continue to search
for appropriate locations and facilities.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not presently involved in
any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth specific information regarding our
directors, executive officers and other key employees as of August 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Marc P. Geiger........................... 36 Chairman of the Board and Chief Executive
Officer
Donald P. Muller......................... 38 President, ARTISTdirect Agency and
Kneeling Elephant Records and Director
Keith K. Yokomoto........................ 36 President, Chief Operating Officer and
Director
Stephen P. Rennie........................ 44 President, The Ultimate Band List
James B. Carroll......................... 44 Executive Vice President and Chief
Financial Officer
Scott M. Blum............................ 31 President, iMusic and Vice President,
Research & Development, ARTISTdirect
Pascal O. Desmarets...................... 37 Vice President, Information Technology
and Operations
Allan G. Kass............................ 45 Vice President, Sales
Robert A. Morse.......................... 36 Vice President, Business Administration
and Treasurer
Nicholas J. Turner....................... 40 Vice President, ARTISTchannels
Lori Weintraub........................... 42 Vice President
Clifford H. Friedman..................... 40 Director
Stephen M. Krupa......................... 34 Director
Allen D. Lenard.......................... 57 Director
Rick Rubin............................... 36 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Marc P. Geiger is a co-founder of ARTISTdirect and has served as Chief
Executive Officer since our inception and as our Chairman of the Board since
July 1998. From January 1992 to December 1996, Mr. Geiger was the Senior Vice
President of Marketing, A&R and New Media at American Recordings, Inc. From 1984
to 1991, Mr. Geiger worked as a talent agent for Regency Artists, that was later
acquired by the William Morris Agency. In 1990, Mr. Geiger co-founded the
Lollapalooza concert tour.
Donald P. Muller is a co-founder of ARTISTdirect and has served as the
President of both ARTISTdirect Agency and Kneeling Elephant Records since July
1999 and as a director of ARTISTdirect since July 1998. From January 1997 to
June 1999, Mr. Muller was a co-Chief Executive Officer of ARTISTdirect, LLC.
From October 1992 to December 1996, Mr. Muller was a talent agent overseeing
William Morris Agency's Contemporary Music Worldwide division. From 1986 to
September 1992, Mr. Muller was a club agent at International Creative
Management. Mr. Muller received his B.A. in Communications from the University
of Iowa. In 1990, Mr. Muller co-founded the Lollapalooza concert tour.
Keith K. Yokomoto is a co-founder of ARTISTdirect and has served as our
President since July 1999, as our Chief Operating Officer since January 1997,
and as a director since July 1998. From September 1985 to January 1997, Mr.
Yokomoto was a manager of new ventures and business development and a project
engineer at Hughes Electronics. Mr. Yokomoto received his B.S. in Mechanical
Engineering from the University of California at San Diego and his M.B.A. from
the University of Southern California.
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Stephen P. Rennie has served as the President of the Ultimate Band List
since April 1998. From October 1994 to April 1998, Mr. Rennie was Senior Vice
President and General Manager, West Coast at Epic Records. From 1990 to 1994,
Mr. Rennie was in artist management. From 1984 to 1990, Mr. Rennie was a Senior
Vice President for Avalon Attractions.
James B. Carroll has served as our Executive Vice President and Chief
Financial Officer since May 1999. From November 1994 to May 1999, Mr. Carroll
was a Managing Director in the Media & Entertainment Group at Bear, Stearns &
Co. Inc., where he served as an investment banker to companies primarily in
broadcasting and new media. From January 1989 to August 1994, Mr. Carroll was a
Managing Director at Smith Barney Inc., where he co-founded the Media &
Communications Group and served on the Investment Banking Management Committee.
Mr. Carroll received his B.A. in Psychology from Claremont McKenna College and
his M.B.A. from Harvard Business School.
Clifford H. Friedman has served as a director since July 1998. Mr. Friedman
is a Senior Managing Director at Bear, Stearns & Co. Inc. where he manages
venture capital funds, including Constellation Venture Capital, L.P. Mr.
Friedman serves on the board as a representative of Constellation. From January
1996 to August 1997, Mr. Friedman served as a Senior Vice President of Universal
Studios. From January 1995 to January 1996 Mr. Friedman was a Vice President of
Corporate Development at NBC. Mr. Friedman received his B.S. in Electrical
Engineering and Computer Science and his M.S. in Electrophysics from Polytechnic
University. Mr. Friedman received his M.B.A. from Adelphi University.
Stephen M. Krupa has served as a director since May 1999. Mr. Krupa is a
founding member and Managing Director of Psilos Group Managers, LLC, a private
venture capital fund focused on the digital media, information technology and
health care sectors. Mr. Krupa serves on the board as a representative of Chase
Capital Partners. Mr. Krupa is currently a director of several private Internet
companies. From February 1995 to July 1998, Mr. Krupa was a Vice President of
Wasserstein Perella & Co., where he specialized in mergers and acquisitions
advisory work. Mr. Krupa received his B.S. in Mechanical Engineering from the
University of South Florida and his M.B.A. from the Wharton School of the
University of Pennsylvania.
Allen D. Lenard has served as a director since July 1998. Mr. Lenard is
Managing Partner of Lenard & Gonzalez LLP, a transactional entertainment law
firm. Mr. Lenard received his B.A. in Business Administration from the
University of Wisconsin, Madison and his J.D. from the University of California
at Los Angeles School of Law.
Rick Rubin has served as a director since May 1999. Mr. Rubin is founder
and President of American Recordings, Inc. He has produced various artists,
including Black Crowes, Johnny Cash, Red Hot Chili Peppers and Tom Petty and
numerous Grammy Award winning albums, including the 1998 Country Album of the
Year -- "Unchained" by Johnny Cash. In 1984, Mr. Rubin was a founder of the Def
Jam label, where he signed or produced such artists as LL Cool J, Beastie Boys
and Public Enemy. Mr. Rubin received his B.F.A. in Philosophy, Film and
Television from New York University.
Our executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of our directors or executive
officers.
OTHER KEY EMPLOYEES
Scott M. Blum has served as President of iMusic since June 1995 and our
Vice President, Research and Development, since February 1999. From May 1993 to
June 1995, Mr. Blum was Executive Producer at Starwave, a CD-ROM and Internet
game development company, where he led the development of Peter Gabriel's "Eve"
CD-ROM project.
Pascal O. Desmarets has served as our Vice President, Information
Technology and Operations since February 1999. From February 1997 to February
1999, Mr. Desmarets held various management positions in the engineering group
at Optum Software. Mr. Desmarets received his B.S. in Industrial
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Engineering and Management from the Catholic University of Louvain, Belgium and
his M.B.A. from the University of Southern California.
Allan G. Kass has served as our Vice President, Sales since April 1999.
From January 1995 to April 1999, Mr. Kass was Vice President of Sales at Turner
Broadcasting. From September 1991 to January 1995, Mr. Kass was Director of
Sports Marketing at Tribune Broadcasting KTLA-TV. From 1986 to 1988, Mr. Kass
was National Sales Manager at WTAF-TV in Philadelphia. Mr. Kass received his
B.A. in Speech from Brooklyn College and his M.S. in Television from Indiana
State University.
Robert A. Morse has served as our Vice President, Business Administration
and Treasurer since May 1999. Mr. Morse served as our Chief Financial Officer
from March 1998 to May 1999. From October 1994 to March 1998, Mr. Morse was Vice
President and Chief Financial Officer of Pacific Bell Interactive Media. From
1989 to 1994, Mr. Morse served in a variety of corporate financial and strategic
roles for the Times Mirror Company. From 1985 to 1989, Mr. Morse was a certified
public accountant with Arthur Andersen. Mr. Morse received his B.A. in Economics
from the University of California at Los Angeles and his M.B.A. from the
University of Southern California.
Nicholas J. Turner has served as our Vice President, ARTISTchannels, since
March 1999. From June 1996 to February 1999, Mr. Turner was Vice President, West
Coast for N2K's Music Boulevard, and from June 1994 to June 1996, Mr. Turner
founded and operated Rocktropolis. Music Boulevard and Rocktropolis are online
music entertainment companies. Before founding Rocktropolis, Mr. Turner was an
associate of artist manager Miles Copeland, working in various capacities with
recording artists.
Lori Weintraub has served as a Vice President since September 1999. Between
July 1997 and February 1999, Ms. Weintraub served as Vice President, and later
President, of The Krane Group, where she supervised motion picture development.
From April 1990 to October 1996, Ms. Weintraub held various positions at Time
Warner, including President and CEO of Time Warner Audiobooks, President of
Warner Kids and Executive Vice President of AVision. Ms. Weintraub received her
B.A. in English from Barnard College and her J.D. from the University of
California at Los Angeles School of Law.
BOARD COMPOSITION
Upon the closing of this offering, our board will be divided into three
classes designated as Class I, Class II and Class III and our directors will be
assigned to each class by the board. At the first annual meeting of stockholders
following the closing of this offering, the term of office of the Class I
directors will expire, and Class I directors will be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of this offering, the term of office of the Class II directors will expire, and
Class II directors will be elected for a full term of three years. At the third
annual meeting of stockholders following the closing of this offering, the term
of office of the Class III directors will expire, and Class III directors will
be elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors will be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
The Class I directors are and ; the Class II directors
are , and ; and the Class III directors
are and .
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee reviews and recommends to the Board
of Directors the compensation and benefits of all our officers and establishes
and reviews general policies relating to compensation and benefits of our
employees. The members of the Compensation Committee are Messrs. Friedman, Krupa
and Lenard. The Audit Committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent accountants.
The members of our Audit Committee are Messrs. Krupa and Lenard.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation Committee of the Board of Directors are
currently Messrs. Friedman, Krupa and Lenard, none of whom has ever been an
officer or employee of ARTISTdirect. Prior to establishing the Compensation
Committee in September 1999, the Board of Directors as a whole performed the
functions delegated to the Compensation Committee. None of our executive
officers serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers who serve on our board or
compensation committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their service as members of the Board of Directors, although they are reimbursed
for travel and lodging expenses in connection with attendance at Board and
Committee meetings. Our directors are eligible to participate in the 1999 Stock
Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
in the fiscal year ended December 31, 1998 for the two individuals who served as
our Co-Chief Executive Officers for that year and for one other executive
officer whose compensation, as defined by the Securities and Exchange
Commission, exceeded $100,000. These people are referred to as the "named
executive officers." The information in the table includes salaries, bonuses
granted and other miscellaneous compensation. ARTISTdirect has not granted stock
appreciation rights or restricted stock awards and has no long-term compensation
benefits other than stock options. No other executive officers received total
compensation in excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- --------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Marc P. Geiger................ 1998 $ 175,192 $ 50,000 -- -- --
Chairman and 1997 50,000 -- -- -- --
Chief Executive Officer
Donald P. Muller.............. 1998 176,431 50,000 -- -- --
President, ARTISTdirect 1997 71,500 -- -- -- --
Agency and
Kneeling Elephant Records
Keith K. Yokomoto............. 1998 130,769 25,000(1) -- -- --
President, Chief Operating 1997 96,153 -- -- -- --
Officer and Director
</TABLE>
- -------------------------
(1) Does not include deferred compensation of up to $200,000. The actual amount
of such deferred compensation is not determinable as of the date of this
prospectus. For more information on the deferred compensation arrangement,
please see "Certain Transactions -- Deferred Compensation Agreement on page
67.
In addition to the named executive officers as of December 31, 1998,
ARTISTdirect currently employs certain other executive officers who it
anticipates will qualify as named executive officers in future years. Those
executives include: Stephen P. Rennie, President, UBL, LLC (annual salary of
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$150,000); James B. Carroll, Executive Vice President and Chief Financial
Officer (annual salary of $150,000); Pascal O. Desmarets, Vice President,
Information Technology and Operations (annual salary of $150,000); and Nicholas
J. Turner, Vice President (annual salary of $150,000).
BENEFIT PLANS
STOCK OPTION PLANS.
Introduction. We maintain the following three separate stock option plans:
- The 1999 Stock Option Plan under which we have reserved
shares of our common stock for issuance to our employees, non-employee
members of our board of directors and consultants. This share reserve
will automatically increase on the first trading day in January each
calendar year, beginning 2001, by an amount equal to five percent (5%) of
the total number of shares of our common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will
this annual increase exceed shares. As of September ,
1999, options for shares of our common stock were
outstanding under this plan, options for shares had been
exercised, and shares remained available for future option
grant;
- The 1999 Artist Stock Option Plan under which we have reserved an
additional shares of our common stock for issuance to
artists for whom we maintain ARTISTchannels. This share reserve will
automatically increase on the first trading day in January each calendar
year, beginning 2001, by an amount equal to five percent (5%) of the
total number of shares of our common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will
this annual increase exceed shares. As of September ,
1999, options for shares of our common stock were
outstanding under this plan, options for shares had been
exercised, and shares remained available for future option
grant; and
- The 1999 Artist and Artist Advisor Stock Option Plan under which we have
reserved additional shares of our common stock for
issuance to artists for whom we maintain ARTISTchannels and their agents,
business managers, attorneys and other advisors. This share reserve will
automatically increase on the first trading day in January each calendar
year, beginning 2001, by an amount equal to five percent (5%) of the
total number of shares of our common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will
this annual increase exceed shares. As of September ,
1999, options for shares of our common stock were
outstanding under this plan, options for shares had been
exercised, and shares remained available for future option
grant.
Administration. Each plan is administered by our compensation committee.
This committee will determine which eligible persons are to receive option
grants under the plan, the time or times when the grants are to be made, the
number of shares subject to each grant, the exercise price in effect for each
option, the status of any granted option as either an incentive stock option or
a nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding. However, each option must have an exercise
price not less than 85% of the fair market value of our common stock on the
grant date, and no option may have a term in excess of 10 years.
Plan Features. The terms and provisions governing the option grants made
under each of our three plans are substantially the same and may be summarized
as follows:
- The exercise price for any options granted under the plans may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised
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through a same-day sale program pursuant to which the purchased shares
are immediately sold through a designated broker and a portion of the
sale proceeds delivered to us in payment of the option exercise price;
- The compensation committee will have the authority to cancel outstanding
options under the plans in return for the grant of new options for the
same or different number of option shares with an exercise price per
share based upon the fair market value of our common stock on the new
grant date;
- Each optionee will have a limited period of time following the
termination of service with us in which to exercise his or her
outstanding options for any shares for which those options are
exercisable at the time of such termination; and
- The compensation committee may structure one or more option grants so
that those options may be assigned during the optionee's lifetime to one
or more family members or to a trust established for such family members.
Upon the optionee's death while holding one or more options under the
plans, those options will be transferred in accordance with the
optionee's will or the laws of inheritance.
Change in Control. Effective upon the execution of the underwriting
agreement for this offering, each of the plans will be amended to include the
following change in control provisions that may result in the accelerated
vesting of outstanding option grants:
- If we are acquired by merger, sale of more than 50% or more of our
outstanding voting securities or sale of substantially all of our assets,
each option grant that is not to be assumed by the successor corporation
or otherwise continued in effect will immediately vest and become
exercisable for all the option shares;
- The compensation committee will have complete discretion to grant one or
more options that will vest and become exercisable for all the option
shares if those options are assumed in the acquisition or otherwise
continued in effect, but the optionee's service with us or the acquiring
entity is subsequently terminated within a designated period (not to
exceed 18 months) following such acquisition; and
- Options currently outstanding under all three of our option plans
immediately vest if we are acquired by merger or asset sale and the
options are not assumed by the acquiring entity.
Additional Provisions. The board may amend or modify any or all of the
three plans at any time, subject to any required stockholder approval. Each of
the plans will terminate no later than September 30, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board on , 1999 and approved by the stockholders in
1999. The plan will become effective immediately upon the signing
of the underwriting agreement for this offering. The plan is designed to allow
our eligible employees and the eligible employees of our participating
subsidiaries to purchase shares of common stock at semi-annual intervals with
accumulated payroll deductions.
Share Reserve. shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each calendar year, beginning 2001, by an amount equal to
percent ( %) of the total number of outstanding shares of our common
stock on the last trading day in December in the prior calendar year. In no
event will any such annual increase exceed shares.
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Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for this offering is signed
and will end on the last business day in October 2001. The next offering period
will start on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on the
start date or any semi-annual entry date within that period. Semi-annual entry
dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
total cash earnings through payroll deductions, and the accumulated deductions
will be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of April and October each
year. However, a participant may not purchase more than 1,000 shares on any
purchase date, and not more than 100,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately before
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately before the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plans:
- The plan will terminate no later than the last business day of October
2009.
- The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with our named executive
officers. The compensation and dates of employment under the employment
agreements are as follows:
In July 1998, we entered into an employment agreement with Marc Geiger, our
Chairman and Chief Executive Officer, pursuant to which Mr. Geiger is paid an
annual salary of $150,000 and a guaranteed annual bonus of $100,000. The initial
term of employment expires July 27, 2001, with automatic extensions for
successive one-year periods. In addition, the employment agreement provides for
the payment of salary and a guaranteed bonus for twelve months after the date of
termination if the termination was other than (1) due to a disability, (2) for
"cause" or (3) due to Mr. Geiger's death, or if he terminates his employment for
"good reason." Mr. Geiger is prohibited, for a period of the later of one year
after termination of employment, or the expiration of the agreement, from
competing with ARTISTdirect or attempting to hire any ARTISTdirect employee.
In July 1998, we entered into an employment agreement with Donald Muller,
the President of ARTISTdirect Agency and Kneeling Elephant Records, and one of
our directors, pursuant to which Mr. Muller is paid an annual salary of $150,000
and a guaranteed annual bonus of $100,000. The initial term of employment
expires July 27, 2001, with automatic extensions for successive one-year
periods. In addition, the employment agreement provides for the payment of
salary and a guaranteed bonus for
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<PAGE> 64
twelve months after the date of termination if the termination was other than
(1) due to a disability, (2) for "cause", or (3) due to Mr. Muller's death, or
if he terminates his employment for "good reason." Mr. Muller is prohibited, for
a period of the later of one year after termination of employment, or the
expiration of the agreement, from competing with ARTISTdirect or attempting to
hire any ARTISTdirect employee.
In January 1998, we entered into an employment agreement with Keith
Yokomoto, our President and Chief Operating Officer, pursuant to which Mr.
Yokomoto is paid an annual salary of $100,000 for the first five months of the
agreement and $150,000 thereafter, with a guaranteed bonus of $50,000 the second
year and $100,000 for each year thereafter. The initial term of employment
expires December 31, 2000, and ARTISTdirect has an option to extend the term for
two additional one-year periods. In addition, the employment agreement provides
for the payment of his salary and a guaranteed bonus for the lesser of (1)
twelve months after the date of termination, or (2) until the end of the
agreement, if he is terminated other than due to a disability, for "cause," or
upon his death. Mr. Yokomoto signed a separate agreement concurrently with his
employment agreement which prohibits him from competing with ARTISTdirect or
attempting to hire any ARTISTdirect employee for the later of one year after
termination of employment, or the expiration of the then-current period of the
term of the agreement.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act.
As permitted by Delaware law, our amended and restated certificate of
incorporation, which will become effective upon the closing of this offering,
includes a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware Law regarding unlawful dividends and
stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware Law, our amended and restated certificate of
incorporation and our amended and restated bylaws, which will become effective
upon the closing of this offering, provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware Law, so long as such person acted in good
faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of ARTISTdirect, and with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
- we are permitted to indemnify our other employees to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our amended and restated certificate of incorporation, our amended and
restated bylaws or other agreements;
- we are required to advance expenses to our directors and officers
incurred in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions;
and
- the rights conferred in our amended and restated bylaws are not
exclusive.
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<PAGE> 65
Before the closing of this offering, we intend to enter into indemnity
agreements with each of our current directors and officers to give such
directors and officers additional contractual assurances regarding the scope of
the indemnification set forth in our amended and restated certificate of
incorporation and our amended and restated bylaws and to provide additional
procedural protections. At present, there is no pending litigation or proceeding
involving any of our directors, officers or employees regarding which
indemnification is sought, nor are we aware of any threatened litigation that
may result in claims for indemnification.
We have obtained directors' and officers' liability insurance.
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<PAGE> 66
CERTAIN TRANSACTIONS
ISSUANCES OF INTERESTS IN PREDECESSOR
INITIAL ISSUANCES
In September 1996, Marc Geiger and Don Muller formed ARTISTdirect, LLC, our
predecessor, and each acquired 17,461,365 common units of its membership
interest. All information with respect to units of ARTISTdirect, LLC in this
section gives effect to a 35 to 1 forward unit split that occurred in May 1999
and does not give effect to the one-for-four reverse stock split of ARTISTdirect
effective upon the closing of this offering.
In 1998, as partial compensation for services rendered and to be rendered,
ARTISTdirect, LLC issued common units to Keith Yokomoto, our President and Chief
Operating Officer, Steve Rennie, President of the UBL, Robert Morse, our Vice
President and Treasurer and L&G Associates One. These common units entitled the
holders to share in the profits and losses of ARTISTdirect, LLC but limited the
holders' share of the capital of ARTISTdirect, LLC to increases in its fair
value after the issuance of the units. The value of the capital at the time of
these issuances remained the property of Messrs. Geiger and Muller. In January
1998, Mr. Yokomoto and L&G Associates One received 4,014,107 and 1,204,232
common units, respectively. Allen Lenard, one of our directors, is Managing
Partner of L&G Associates One and is also Managing Partner of Lenard & Gonzalez
LLP, one of our outside law firms. In June 1998, Messrs. Rennie and Morse
received 1,605,643 and 401,411 common units, respectively. In connection with
these issuances, Messrs. Geiger and Muller agreed that the percentages
represented by these common units would not be diluted for the first $5 million
in capital contributions made to ARTISTdirect, LLC by outside investors. To
effect this anti-dilution protection, Messrs. Geiger and Muller periodically
contributed common units to ARTISTdirect, LLC and ARTISTdirect, LLC issued the
same total number of common units to Messrs. Yokomoto, Rennie, Morse and L&G
Associates One for no additional consideration.
In July 1998, Messrs. Geiger and Muller contributed their interests in MGE,
LLC, another company they wholly-owned, to ARTISTdirect Holdings, L.L.C., a
newly-formed Delaware limited liability company, and then contributed their
interests in ARTISTdirect Holdings, L.L.C. to ARTISTdirect, LLC in exchange for
additional common units. As a result, ARTISTdirect Holdings, L.L.C. became a
wholly-owned subsidiary of ARTISTdirect, LLC.
In July 1997, ARTISTdirect New Media, LLC, one of our subsidiaries, or
ADNM, and American Recordings, Inc., or ARI, which was wholly-owned by Rick
Rubin, one of our directors, formed UBL, LLC. ARI contributed all of the assets
used in connection with the operation of the UBL Web site to UBL, LLC in
exchange for a membership interest in UBL, LLC. ADNM has controlled and funded
the operations of the UBL Web site since the formation of UBL, LLC.
ISSUANCES OF ARTISTDIRECT, LLC SERIES A PREFERRED UNITS
Between July 1998 and December 1998, ARTISTdirect, LLC sold a total of
9,458,340 of its Series A preferred units at a purchase price of approximately
$0.31 per unit to the following purchasers:
<TABLE>
<CAPTION>
AGGREGATE
SERIES A PREFERRED PURCHASE
PURCHASER UNITS PRICE
--------- -------------------- ----------
<S> <C> <C>
Constellation Venture Capital, L.P........................ 5,850,520 $1,800,000
Psilos Group Partners, L.P................................ 1,950,172 600,000
DreamMedia Internet Ventures, LLC......................... 1,462,632 450,000
Carl Kawabe............................................... 195,016 60,000
</TABLE>
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In January 1999, ARTISTdirect, LLC redeemed 780,068 of its Series A
preferred units from Psilos Group Partners, L.P. for a purchase price of
$240,080 and re-issued those units to CCP/Psilos ARTISTdirect, LLC for the same
price. Mr. Friedman, one of our directors, is the General Partner of
Constellation Venture Capital, L.P. and Mr. Krupa, one of our directors, is the
Managing Director of Psilos Group Managers, L.P.
ISSUANCES OF UBL, LLC UNITS
Between July 1998 and December 1998, UBL, LLC, sold an aggregate of
1,940,000 of its Series A preferred units, and 1,940,000 of its Series B
preferred units, at a purchase price of $1.00 per unit to the following
purchasers:
<TABLE>
<CAPTION>
AGGREGATE
SERIES A PREFERRED SERIES B PREFERRED PURCHASE
PURCHASER UNITS UNITS PRICE
--------- -------------------- -------------------- ----------
<S> <C> <C> <C>
Constellation Venture Capital,
L.P................................ 1,200,000 -- $1,200,000
Psilos Group Partners, L.P........... 400,000 -- 400,000
DreamMedia Internet Ventures, LLC.... 300,000 -- 300,000
Carl Kawabe.......................... 40,000 -- 40,000
ADNM................................. -- 1,940,000 1,940,000
</TABLE>
In January 1999, UBL, LLC redeemed 160,000 of its Series A preferred units
from Psilos Group Partners, L.P. for a purchase price of $160,000 and re-issued
those units to CCP/Psilos UBL, LLC for the same price.
In February 1999, UBL, LLC issued 392,134 of its common units to Scott
Blum, President of iMusic and our Vice President, Research and Development, in
consideration of his contribution of 540,000 shares of common stock of iMusic,
Inc. All information with respect to units of UBL, LLC in this section gives
effect to a 1,000-for-1 unit split that occurred in April 1999.
EXCHANGE TRANSACTION AND ISSUANCE OF ARTISTDIRECT, LLC SERIES B PREFERRED
UNITS
In May 1999, we completed an exchange transaction in which the holders of
common and/or Series A preferred units of UBL, LLC, other than ADNM exchanged a
total of 8,042,134 UBL, LLC common units and 1,940,000 UBL, LLC preferred units
for a total of 13,982,207 common units and 3,372,920 Series A preferred units of
ARTISTdirect, LLC. At the same time, ADNM distributed units in UBL, LLC to
ARTISTdirect, LLC and to ARTISTdirect Holdings LLC, so that after giving effect
to the exchange and distribution transactions, UBL, LLC was 99% owned by
ARTISTdirect, LLC and 1% owned by ARTISTdirect Holdings LLC. In connection with
this transaction, Messrs. Geiger and Muller contributed 491,467 and 995,819
common units, respectively, to the capital of ARTISTdirect, LLC. These units
were then reissued to Mr. Rubin.
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<PAGE> 68
In May 1999, ARTISTdirect, LLC also sold an aggregate of 15,000,000 of its
Series B preferred units at a purchase price of $1.00 per unit to the following
purchasers:
<TABLE>
<CAPTION>
SERIES B AGGREGATE
PREFERRED PURCHASE
PURCHASER UNITS PRICE
--------- --------------- ----------
<S> <C> <C>
Chase Capital Partners...................................... 4,800,000 $4,800,000
CCP/Psilos ARTISTdirect, LLC................................ 922,509 922,509
Flatiron Fund............................................... 200,000 200,000
Bowman Capital Management LLC............................... 4,000,000 4,000,000
Constellation Venture Capital, L.P.......................... 2,500,000 2,500,000
Psilos Group Partners, L.P.................................. 1,383,764 1,383,764
Cassandra/ARTISTdirect Partners, LLC........................ 1,000,000 1,000,000
Toronto Dominion Investments, Inc........................... 193,727 193,727
</TABLE>
In connection with this financing, the holders of Series A preferred units
in ARTISTdirect, LLC received 354,526 common units in ARTISTdirect, LLC and
$96,000 in exchange for accrued and unpaid preferred returns.
The preferred and common units of ARTISTdirect, LLC will be exchanged for
preferred and common stock in the merger of ARTISTdirect, LLC into ARTISTdirect,
Inc. in September 1999. All shares of preferred stock will convert into shares
of common stock on a one-for-one basis upon the closing of this offering. In
addition, shares of common stock will be issued as accrued but unpaid
dividends on the preferred stock. See the notes to the beneficial ownership
table in "Principal Stockholders" on page 70 for information relating to the
beneficial ownership of such shares.
OPTIONS ISSUED TO JAMES CARROLL
In May 1999, the board granted James Carroll, our Chief Financial Officer,
two options to purchase a total of 459,184 shares of common stock at an exercise
price of $3.60 per share. One-fourth of the 344,388 shares subject to the first
option became exercisable immediately, and the remaining option shares become
exercisable in three equal annual installments from the date of the grant. All
of these remaining option shares become immediately exercisable if a change of
control occurs.
One-half of the 114,796 shares underlying Mr. Carroll's second option
become exercisable upon the completion of this offering. The remaining shares
underlying this option become exercisable if the closing price of our common
stock on any two or more trading days during the month after this offering
exceeds 150% of the initial offering price.
DEBT TO EXECUTIVE OFFICERS AND DIRECTOR
In satisfaction of our obligations to make distributions triggered by the
merger of ARTISTdirect, LLC into ARTISTdirect, Inc. we will issue a note in the
principal amount of $275,000 to each of Messrs. Geiger and Muller and a note in
the principal amount of $190,714 to Mr. Rubin. Each of these notes will bear
interest at a rate of % per annum and will become due and payable upon the
closing of this offering.
DEFERRED COMPENSATION AGREEMENT
In January 1998, we entered into a deferred compensation agreement with
Keith Yokomoto, our President and Chief Operating Officer. The agreement grants
Mr. Yokomoto deferred compensation of
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up to $200,000, depending on the value of our company as of the payment date.
The compensation is due on the earlier to occur of:
- Mr. Yokomoto's sale of all of his shares of our common stock;
- the occurrence of specific capital events, including the sale of
substantially all of our assets and receipt of insurance proceeds from
the occurrence of an extraordinary event; or
- January 1, 2005.
Messrs. Geiger and Muller are obligated to contribute to ARTISTdirect the
amounts necessary to fund this obligation. We have recorded the $200,000
obligation as an expense for 1998.
TRANSACTIONS WITH SCOTT BLUM
In connection with UBL, LLC's acquisition of iMusic, we granted Scott Blum,
President of iMusic, and our Vice President, Research and Development, an option
to have all of his shares of our common stock redeemed for a redemption price of
up to $2.8 million. The redemption option is triggered by the occurrence of
specified events, including this offering. In addition, if Mr. Blum exercises
his option we are required to pay a total of $200,000 in bonuses to employees of
iMusic designated by Mr. Blum. If Mr. Blum decides not to exercise his option,
it will terminate on the closing of this offering.
In addition, UBL, LLC entered into a contingent loan agreement with Scott
Blum to make loans to pay federal and state tax liabilities that he may incur as
a result of (a) the liquidation of iMusic or a taxable disposition or other
transfer of iMusic common stock or (b) a distribution of property by UBL, LLC to
Mr. Blum not involving sufficient cash or marketable securities for him to pay
the resulting tax liability, in either case. Any advances to Mr. Blum under the
Contingent Loan Agreement will bear interest at the then lowest permissible rate
under the Internal Revenue Code and be secured by a pledge of a portion of Mr.
Blum's shares of our common stock.
Between 1996 and 1998, Mr. Blum periodically advanced iMusic funds for
various expenses. The largest amount outstanding at any one time during this
period was $66,000. During this period, iMusic leased its principal executive
office from Mr. Blum, for which Mr. Blum received annual rental payments of
$13,500.
REGISTRATION RIGHTS AGREEMENT
In May 1999, we entered into the Second Amended and Restated Registration
Rights Agreement with Rick Rubin, one of our directors, and the holders of our
Series A and Series B preferred stock. The Registration Rights Agreement
provides these stockholders with rights to require us to register their stock
with the Securities and Exchange Commission. The holders of these rights have
waived them as to this offering. The other registration rights will survive this
offering and will terminate no later than five years after the closing date of
this offering.
PAYMENTS TO LEGAL COUNSEL
In 1998, we paid Lenard & Gonzalez LLP $350,184 for legal services provided
to us. Allen Lenard, one of our directors, is Managing Partner of Lenard &
Gonzalez LLP.
OTHER EMPLOYMENT AGREEMENTS
In May 1999, we entered into an employment agreement with James Carroll,
our Chief Financial Officer, pursuant to which Mr. Carroll is paid an annual
salary of $150,000 and a guaranteed annual bonus of $50,000. The initial term of
employment expires May 23, 2001, and ARTISTdirect has an option to extend the
term for one additional year. In addition, the employment agreement provides
that if he is terminated other than due to a disability, for "cause," or upon
his death, he will be paid his base
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salary for the lesser of (1) six months, or (2) the remainder of the agreement.
Mr. Carroll is prohibited from competing with ARTISTdirect or attempting to hire
any ARTISTdirect employee for the later of (1) the then current period the term
is to expire, or (2) the actual date of termination.
In April 1998, UBL, LLC entered into an employment agreement with Steve
Rennie, President of the Ultimate Band List, pursuant to which Mr. Rennie is
paid an annual salary of $100,000 for the first year and $150,000 for the second
and third years, with a guaranteed bonus of $50,000 the second year and $100,000
the third year. The initial term of employment expires March 31, 2001. In
addition, Mr. Rennie's employment agreement provides for the payment of his
salary and a guaranteed bonus for the lesser of (1) twelve months after the date
of termination, or (3) the remaining period of the term. In June 1998, Mr.
Rennie entered into a separate agreement which prohibits him from competing with
UBL, LLC until March 31, 2001, or, in the event Mr. Rennie is terminated other
than for cause, the date of Mr. Rennie's termination. The agreement also
prohibits him from soliciting any customer of ARTISTdirect or attempting to hire
any ARTISTdirect employee until March 31, 2002.
For information on our employment agreement with our named executive
officers, please see "Management -- Employment Agreements" on page 62.
SETTLEMENT AGREEMENT
We entered into a settlement agreement with William Elson in connection
with the termination of his employment as our Chief Operating Officer in October
1997. Pursuant to this agreement, Mr. Elson received a severance payment of
$175,000 and an option to purchase the lesser of 100,000 shares of our common
stock, or 2.5% of the common stock issued in this offering at an exercise price
that will be set at the completion of this offering pursuant to the agreement.
Messrs. Geiger and Muller will each contribute half the shares of common stock
to be issued to Mr. Elson upon exercise of his option, in exchange for which we
will pay Messrs. Geiger and Muller the consideration we receive from Mr. Elson
for the exercise of the option. In addition, Mr. Elson loaned us $100,000 in
1996, which we repaid in 1997.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of August 31, 1999 and as adjusted to reflect
the sale of common stock in this offering for:
- each person or entity known by us to beneficially more than 5% of our
outstanding shares of common stock;
- each of our directors;
- each of the named executive officers; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
NUMBER OF OWNED
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
------------------------------------ ------------ -------- -----------
<S> <C> <C> <C>
Entities affiliated with Constellation Venture
Capital, L.P.(3).................................... 2,713,839 12.9%
575 Lexington Avenue
New York, New York 10022
Entities affiliated with Chase Capital Partners(4).... 1,496,347 7.1
380 Madison Avenue, 12th Floor
New York, New York 10017
Entities affiliated with Psilos Group Partners,
L.P.(5)............................................. 1,279,518 6.1
152 W. 57th Street, 33rd Floor
New York, New York 10019
Marc P. Geiger(6)(7)(8)............................... 3,335,820 15.9
Donald P. Muller(6)(7)(8)............................. 3,335,820 15.9
Keith K. Yokomoto(6)(8)............................... 1,983,102 9.4
Rick Rubin(6)......................................... 3,696,931 17.6
c/o Provident Financial Management
10345 Olympic Boulevard
Los Angeles, California 90064
Clifford H. Friedman(3)............................... 2,713,839 12.9
Stephen Krupa(5)...................................... 1,279,518 6.1
Allen D. Lenard(6)(9)................................. 378,264 1.8
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
All directors and executive officers as a group (9
persons)(10)........................................ 17,313,743 82.2
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Common stock subject to options or warrants
that are currently exercisable or exercisable within 60 days of August 31,
1999 are deemed to be outstanding and to be beneficially owned by the person
holding such options or warrants for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person. Unless otherwise
indicated, the address for each of the individuals listed in the table is
care of ARTISTdirect, Inc., 17835 Ventura Boulevard, Suite 310, Encino,
California. Unless otherwise indicated by footnote, the persons named in the
table have sole voting and sole investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to applicable
community property laws. Percentage of beneficial ownership is based on
20,985,883
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shares of common stock outstanding as of August 31, 1999, after giving
effect to the conversion of the preferred stock, and shares of
common stock issued and outstanding after completion of this offering.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes (a) 1,958,239 shares held by Constellation Venture Capital, L.P.;
and (b) 755,600 shares held by Constellation Ventures (BVI), Inc. Mr.
Friedman is President and Chief Executive Officer of Constellation Ventures
(BVI), Inc. and managing member of Constellation Ventures Management, LLC,
the general partners of Constellation Venture Capital, L.P. As such, Mr.
Friedman may be deemed to exercise voting and investment power over such
shares. Mr. Friedman disclaims beneficial ownership of such shares, except
to the extent of his proportionate interest therein. The number does not
include (a) 2,054,992 shares held by DreamMedia Interest Ventures, LLC and
(b) 272,292 shares held by Carl Kawabe. DreamMedia and Mr. Kawabe entered
into a voting agreement pursuant to which Mr. Friedman is entitled to vote
their shares of our common stock. The agreement automatically terminates
upon this offering; therefore, after the offering, Mr. Friedman will no
longer have any voting or dispositive power with respect to such shares.
(4) Includes 1,238,356 shares held by Chase Venture Capital Associates, L.P. and
257,991 shares held by Cassandra/ARTISTdirect Partners, LLC. Chase Capital
Partners is General Partner of Chase Venture Capital Associates, L.P. which
is the managing member of Cassandra/ARTISTdirect Partners, LLC. As such,
Chase Capital Partners is deemed to exercise voting and investment power
over such shares.
(5) Includes (a) 770,084 shares held by Psilos Group Partners, L.P.; (b) 437,140
shares held by CCP/ Psilos ARTISTdirect, LLC; and (c) 72,294 shares held by
CCP/Psilos UBL, LLC. Mr. Krupa is managing director of Psilos Group
Managers, LLC and a member of Psilos Group Investors, LLC. Psilos Group
Investors, LLC is the managing member of both CCP/Psilos ARTISTdirect, LLC
and CCP/Psilos UBL, LLC and is the general partner of Psilos Group Partners,
L.P. As such, Mr. Krupa may be deemed to exercise voting and investment
power over such shares. Mr. Krupa disclaims beneficial ownership of such
shares, except to the extent of his proportionate interest therein.
(6) Includes shares of common stock which will be held by ARTISTdirect
Investors, LLC for the benefit of the stockholder. In connection with the
merger of ARTISTdirect, LLC into ARTISTdirect, Inc., Messrs. Geiger, Muller,
Yokomoto, Rennie, Morse and Carroll and L&G Associates One intend to form
ARTISTdirect Investors, LLC to hold their shares of our common stock. Upon
the closing of this offering, ARTISTdirect Investors, LLC will distribute
the shares of common stock held by it to the stockholders and be dissolved.
ARTISTdirect Investors, LLC's operating agreement will provide each of its
members voting rights with respect to a specific number of shares of our
common stock held by ARTISTdirect Investors, LLC. The number of shares which
each member will be entitled to vote is different from the number of shares
each member will receive upon dissolution of ARTISTdirect Investors, LLC.
The actual number of shares of our
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common stock held by ARTISTdirect Investors, LLC that each stockholder will be
entitled to vote and receive upon dissolution of ARTISTdirect, Investors, LLC,
is as follows:
<TABLE>
<CAPTION>
SHARES ENTITLED ADDITIONAL SHARES TOTAL SHARES
STOCKHOLDER/MEMBER TO VOTE UPON DISTRIBUTION UPON DISTRIBUTION
------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
Marc P. Geiger............................ 3,335,820
Donald P. Muller.......................... 3,335,820
Rick Rubin................................ 3,696,931
Keith K. Yokomoto......................... 1,260,880
James B. Carroll..........................
Stephen P. Rennie......................... 504,352
Robert A. Morse........................... 126,088
L&G Associates One........................ 378,264
</TABLE>
After the dissolution of ARTISTdirect Investors, LLC, which will occur upon
the consummation of this offering, each stockholder will have sole voting
and dispositive power over the number of shares set forth under "Total
Shares Upon Distribution" above.
(7) Does not include the shares of common stock that will be
contributed by Marc Geiger and Don Muller to William Elson upon the closing
of this offering. Each of Messrs. Geiger and Muller will contribute half of
these shares. Please see "Certain Transactions -- Settlement Agreement" on
page 69 for more information on this transaction.
(8) Reflects 361,111 shares held by Keith Yokomoto as trustee of the Geiger
Children's Trust and 361,111 shares held by Keith Yokomoto as trustee of the
Muller Children's Trust. Mr. Yokomoto will have sole voting and dispositive
power over these shares upon the consummation of this offering.
(9) Represents all of the shares held by L&G Associates One. Mr. Lenard is
Managing Partner of L&G Associates One, and as such is deemed to exercise
voting and investment power over such shares. He disclaims beneficial
ownership of the shares held by this entity except to the extent of his
proportionate interest therein.
(10) Includes 86,097 shares subject to options held by James Carroll that are
currently exercisable or exercisable within 60 days of August 31, 1999.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately following the closing of this offering, our authorized capital
stock will consist of 150 million shares of common stock, $.01 par value per
share, and 5 million shares of preferred stock, $.01 par value per share. Upon
completion of this offering, based on the number of shares, options and warrants
outstanding as of August 31, 1999, there will be outstanding
shares of common stock, outstanding options to purchase shares of
common stock and outstanding warrants to purchase shares of
common stock.
COMMON STOCK
As of August 31, 1999, there were shares of common stock
outstanding and held of record by stockholders, assuming conversion of all
shares of preferred stock into common stock. Based on the number of shares
outstanding as of that date and giving effect to the issuance of the
shares of common stock offered by us hereby, there will be
shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option, upon the closing of the offering.
Holders of the common stock are entitled to one vote for each share held on
all matters submitted to a vote of the stockholders. Holders of common stock are
entitled to receive ratably any dividends that may be declared by the Board of
Directors out of legally available funds, subject to any preferential dividend
rights of any outstanding preferred stock. Upon our liquidation, dissolution or
winding up, the holders of common stock are entitled to receive ratably our net
assets available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. Holders of
common stock have no preemptive, subscription, redemption or conversion rights.
The outstanding shares of common stock are, and the shares offered by us in this
offering will be upon receipt of payment for such shares, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which we may designate and issue in the
future without further stockholder approval. Upon the closing of the offering,
there will be no shares of preferred stock outstanding.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our Series A
and Series B preferred stock will convert into shares of common stock.
Thereafter, the board of directors will be authorized without further
stockholder approval to issue from time to time up to an aggregate of 5 million
shares of preferred stock in one or more series and to fix or alter the
designations, preferences, rights, qualifications, limitations or restrictions
of the shares of each series, including the dividend rights, dividend rates,
conversion rights, voting rights, term of redemption including sinking fund
provisions, redemption price or prices, liquidation preferences and the number
of shares constituting any series or designations of such series without further
vote or action by the stockholders. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of our
management without further action by the stockholders and may adversely affect
the voting and other rights of the holders of common stock. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. We have no present plans to issue any shares of preferred
stock.
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ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Upon closing of this offering, we will be subject to the provisions of
Section 203 of the Delaware General Corporation Law regulating corporate
takeovers. Section 203 prevents Delaware corporations, including those that are
listed on the Nasdaq National Market, from engaging, under certain
circumstances, in a "business combination," which includes a merger or sale of
more than 10% of the corporation's assets, with any "interested stockholder,"
that is, a stockholder who owns 15% or more of the corporation's outstanding
voting stock, as well as affiliates and associates of any such person, for three
years following the date that such stockholder became an "interested
stockholder" unless:
- the transaction that resulted in the stockholder becoming an "interested
stockholder" was approved by the board of directors prior to the date the
"interested stockholder" attained such status;
- upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by (i)
persons who are directors as well as officers and (ii) employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
- on or subsequent to such date, the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."
A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. We
have not "opted out" of the provisions of the Anti-Takeover Law. This statute
could prohibit or delay mergers or other takeover or change-of-control attempts
with respect to ARTISTdirect and, accordingly, may discourage attempts to
acquire us.
CHARTER AND BYLAW PROVISIONS
Certain provisions of our amended and restated certificate of incorporation
and our amended and restated bylaws, which will become effective upon the
closing of this offering, may make it more difficult to acquire control of
ARTISTdirect by various means. These provisions could deprive the stockholders
of opportunities to realize a premium on the shares of common stock owned by
them. In addition, these provisions may adversely affect the prevailing market
price of the stock. These provisions are intended to:
- enhance the likelihood of continuity and stability in the composition of
the board and in the policies formulated by the board;
- discourage certain types of transactions which may involve an actual or
threatened change in control of ARTISTdirect;
- discourage certain tactics that may be used in proxy fights;
- encourage persons seeking to acquire control of ARTISTdirect to consult
first with the board of directors to negotiate the terms of any proposed
business combination or offer; and
- reduce our vulnerability to an unsolicited proposal for a takeover that
does not contemplate the acquisition of all outstanding shares of
ARTISTdirect or that is otherwise unfair to our stockholders.
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Classified Board of Directors; Removal; Filling Vacancies and
Amendment. The certificate and bylaws provide that upon the closing of this
offering the board shall be divided into three classes of directors serving
staggered, three-year terms. The classification of the board has the effect of
requiring at least two annual stockholder meetings, instead of one, to replace a
majority of members of the board. Subject to the rights of the holders of any
outstanding series of preferred stock, the certificate authorizes only the board
to fill vacancies, including newly created directorships. Accordingly, this
provision could prevent a stockholder from obtaining majority representation on
the board by enlarging the board of directors and filling the new directorships
with its own nominees. The certificate also provides that directors may be
removed by stockholders only for cause and only by the affirmative vote of
holders of two-thirds of the outstanding shares of voting stock.
Stockholder Action; Special Meeting of Stockholders. The certificate
provides that stockholders may not take action by written consent, but may only
take action at duly called annual or special meetings of stockholders. The
certificate further provides that special meetings of our stockholders may be
called only by the chairman of the board of directors or a majority of the board
of directors. This limitation on the right of stockholders to call a special
meeting could make it more difficult for stockholders to initiate actions that
are opposed by the board of directors. These actions could include the removal
of an incumbent director or the election of a stockholder nominee as a director.
They could also include the implementation of a rule requiring stockholder
ratification of specific defensive strategies that have been adopted by the
board of directors with respect to unsolicited takeover bids. In addition, the
limited ability of the stockholders to call a special meeting of stockholders
may make it more difficult to change the existing board and management.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 120 days
prior to the date of our annual meeting. The bylaws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.
Supermajority Vote to Amend Charter and Bylaws. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. Our
amended and restated certificate of incorporation imposes a 66 2/3% vote
requirement in connection with business combination transactions and the
amendment of certain provisions of our certificate of incorporation and bylaws,
including those provisions relating to the classified board of directors, action
by written consent, the ability of stockholders to call special meetings and the
ability of stockholders to bring business before an annual meeting or to
nominate directors. Following the completion of this offering, our present
directors and executive officers and their respective affiliates will
beneficially own approximately of our common stock. This gives
them veto power with respect to any stockholder action or approval requiring
either a two-thirds vote or a simple majority.
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REGISTRATION RIGHTS
We have provided purchasers of our Series A and Series B preferred
securities and Rick Rubin, one of our directors, with rights to require us to
register their securities under the Securities Act of 1933, as amended. Please
see "Certain Transactions -- Registration Rights Agreement" on page 68 for more
information on these rights.
WARRANTS
As of August 31, 1999 there were warrants outstanding to purchase a total
of 905,140 shares of our common stock at a price of $4.00 per share.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be ChaseMellon
Shareholder Services.
LISTING
Application has been made for listing the common stock on the Nasdaq
National Market under the trading symbol "ARTD."
RESCISSION OFFER
As of the date of this prospectus, we have issued options to purchase a
total of shares of our common stock to artists and their managers and
advisers. The issuance of these options and the sale of shares upon exercise may
have been issued or sold in violation of the registration requirements of the
Securities Act and California securities laws. Because of the number and nature
of persons who received the options, neither the private placement exemption nor
other applicable exemptions under the Securities Act may have been available for
issuance of the options and the sale of underlying shares. Beginning
approximately 180 days after the date of this prospectus, we intend to make a
rescission offer, or Rescission Offer, pursuant to a registration statement
filed under the Securities Act, or Registration Statement, and pursuant to
California securities law, covering all shares issued pursuant to these options.
Pursuant to the Rescission Offer, we will offer to repurchase all shares issued
pursuant to option exercises before the effectiveness of the Registration
Statement, at the exercise price paid for these shares plus interest at the rate
of 10% per annum from the date of issuance until the Rescission Offer expires.
The Rescission Offer will expire approximately 30 days after the effectiveness
of the Registration Statement. We could be required to pay up to $ plus
total amount of interest on that amount as described above based on the number
of shares which have been issued or issuable until the Rescission Offer period
expires. In addition, we will keep the Registration Statement, or another form
of registration statement available to us, in effect to cover the issuance of
all shares issuable upon exercise of the options until the last expiration date
of all of the options or until all of the options have been exercised, whichever
occurs first. Offerees who do not accept the Rescission Offer and persons who
exercise such options while the Registration Statement is in effect, will, for
purposes of applicable federal and state securities laws, be deemed to hold
registered shares, and those shares will be freely tradeable on the public
market as of the effective date of each registration statement covering such
shares. Some of these shares are subject to contractual vesting restrictions, to
which the holders have previously agreed. The Securities Act does not expressly
provide that a rescission offer will terminate a purchaser's right to rescind a
sale of stock, which was not registered under the Securities Act as required.
Accordingly, should any offerees reject the Rescission Offer, we may continue to
be contingently liable under the Securities Act for the purchase price of the
shares covered thereby in a total amount of up to $ plus interest.
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no market for our common stock, and a
significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial
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<PAGE> 78
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market after this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through the sale of our equity securities. Sales of substantial
amounts of our common stock in the public market could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, based on the number of shares outstanding
on August 31, 1999, we will have outstanding shares of common stock,
shares if the underwriters exercise their over-allotment option in
full, assuming no exercise of outstanding warrants and options. Of these shares,
shares, plus an additional shares if the underwriters
exercise their over-allotment option in full, of common stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act unless purchased by our affiliates.
LOCK-UP AGREEMENTS
Of the remaining shares, a total of approximately shares held by
our directors, executive officers and our existing stockholders are subject to
"lock-up" agreements generally providing that, these stockholders will not (1)
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, lend, file a registration statement, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock or such
other securities, in cash or otherwise, for a period of 180 days following the
date of the final prospectus for this offering without the prior written consent
of Morgan Stanley & Co. Incorporated. The restrictions described in this
paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advising in
writing;
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
- transfers by gift or distributions by a partnership to its partners, so
long as, in any such instance, such transferee executes a lock-up
agreement with terms identical to those described in this paragraph.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering, or;
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 also are subject to certain manner of sale
provisions and notice requirements and to the availability of current
public information about us. Under Rule 144(k), a person who is not
deemed to have been an affiliate of ARTISTdirect at any time during the
three months preceding a sale, and who has beneficially
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<PAGE> 79
owned the shares proposed to be sold for at least two years, including
the holding period of any prior owner except an affiliate, is entitled to
sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
RULE 701
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144,. Any employee, officer or director of or consultant to ARTISTdirect
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
such shares.
Following the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
subject to outstanding options under our stock option plans and nonstatutory
stock option agreements which are outside of these plans. Based on the number of
shares subject to outstanding options, the registration statement would cover
approximately shares. Such registration statement will automatically
become effective upon filing. Accordingly, subject to the exercise of such
options, shares registered under such registration statement will be available
for sale in the open market immediately after the 180-day lock-up period
expires.
REGISTRATION RIGHTS
In addition, some of our stockholders have registration rights with respect
to approximately shares of common stock. Registration of these securities
under the Securities Act would result in those shares becoming freely tradeable
without restriction under the Securities Act. See "Certain
Transactions -- Registration Rights Agreement" on page 68 for more information
on these rights.
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UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc. and Deutsche
Bank Securities Inc. are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, severally, the respective number
of shares of common stock indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Bear, Stearns & Co. Inc. ...................................
Deutsche Bank Securities Inc. ..............................
--------
Subtotal..........................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for the share covered
by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other underwriters or to
certain other dealers. After the initial offering of the shares of common stock,
the offering price and other selling terms may from time to time be varied by
the representatives.
The following table summarizes the per share and total underwriting
discounts and commissions we will pay to the underwriters.
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------
<S> <C> <C>
Per Share.......................................... $ $
Total.................................... $ $
</TABLE>
ARTISTdirect estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the initial public offering
price listed on the cover page of this prospectus, less underwriting discounts
and commissions. The underwriters may exercise this option solely for the
purpose of covering overallotments, if any, made in connection with the offering
of the shares of common stock offered by this prospectus. To the extent this
option is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the additional shares of
common stock as the number listed next to the underwriter's name in the
preceding table bears to the total number of shares of common stock listed next
to the names of all underwriters in the preceding table.
The underwriters have informed ARTISTdirect that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of common stock offered by them.
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ARTISTdirect has applied for quotation of its common stock on the Nasdaq
National Market under the symbol "ARTD."
Each of ARTISTdirect and the directors, executive officers and certain
other stockholders of ARTISTdirect has agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it
will not, during the period ending 180 days after the date of this prospectus:
- 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, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise. The restrictions described
in this paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by ARTISTdirect of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing; or
- transactions by any person other than the ARTISTdirect relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
ARTISTdirect and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
DIRECTED SHARE PROGRAM
At the request of ARTISTdirect, Morgan Stanley & Co. Incorporated reserved
for sale, at the initial offering price, up to shares offered in
this prospectus for directors, officers, employees, business associates, and
related persons of ARTISTdirect. The number of shares of common stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered in this prospectus.
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PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between ARTISTdirect and the representatives of the underwriters. Among the
factors to be considered in determining the initial public offering price will
be the future prospects of ARTISTdirect and its industry in general, sales,
earnings and certain other financial and operating information of ARTISTdirect
in recent periods, and the price-earnings ratios, price-sales ratios, market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of ARTISTdirect. The estimated
initial public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
ARTISTdirect by Brobeck, Phleger & Harrison LLP, Irvine, California. As of
September 1999, Brobeck, Phleger & Harrison LLP and certain individuals
affiliated with Brobeck, Phleger & Harrison LLP beneficially own 7,500 shares of
our common stock. Certain legal matters in connection with this offering will be
passed upon for the underwriters by O'Melveny & Myers LLP, Los Angeles,
California.
EXPERTS
The financial statements of ARTISTdirect, LLC and related companies as of
December 31, 1997 and 1998, and for the period from August 8, 1996 (inception)
through December 31, 1996 and the years ended December 31, 1997 and 1998, and
the financial statements of iMusic, Inc., as of December 31, 1997 and 1998 and
years ended December 31, 1997 and 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to us and our common stock, see
the registration statement and the exhibits thereto. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance
where a copy of such contract or other document has been filed as an exhibit to
the registration statement, reference is made to the copy so filed, each such
statement being qualified in all respects by such reference. Any document we
file may be read and copied at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Our filings with the Commission are also available
to the public from the Commission's Web site (http://www.sec.gov).
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
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Our principal executive offices are located at 17835 Ventura Boulevard,
Suite 310, Encino, California 91316, and our telephone number is (818) 758-8700.
Our fiscal year ends on December 31. We maintain a worldwide web site at
http://www.artistdirect.com. The reference to our worldwide web address does not
constitute incorporation by reference of the information contained at this site.
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ARTISTDIRECT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTISTdirect, LLC and Subsidiaries Consolidated Financial
Statements
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Changes in Members' and
Stockholders' Equity (Deficit)......................... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
iMusic, Inc. Financial Statements
Independent Auditors' Report.............................. F-24
Balance Sheets............................................ F-25
Statements of Operations.................................. F-26
Statement of Stockholders' Equity (Deficit)............... F-27
Statement of Cash Flows................................... F-28
Notes to Financial Statements............................. F-29
</TABLE>
F-1
<PAGE> 85
The Capital Reorganization and Reverse Stock Split as described in Note 1
to the consolidated financial statements have not been consummated at September
3, 1999. When these events have been consummated, we will be in a position to
render the following report.
/s/ KPMG LLP
We have audited the accompanying consolidated balance sheets of
ARTISTdirect, LLC and subsidiaries (the Company) as of December 31, 1997 and
1998 and the related consolidated statements of operations, changes in members'
and stockholders' equity (deficit) and cash flows for the period from August 8,
1996 (inception) through December 31, 1996 and 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 combined
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 financial position of ARTISTdirect, LLC and
subsidiaries as of December 31, 1997 and 1998 and the results of its operations
and its cash flows for the period from August 8, 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, in conformity
with generally accepted accounting principles.
Los Angeles, CA
September 3, 1999, except as to note 1
which is as of...
F-2
<PAGE> 86
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
REDEEMABLE
SECURITIES AND
DECEMBER 31, STOCKHOLDERS'
--------------- JUNE 30, EQUITY AT
1997 1998 1999 JUNE 30, 1999
----- ------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 167 $ 1,940 $ 10,830
Cash held for clients........................... 19 -- 329
Accounts receivable, net........................ 13 460 670
Prepaid expenses and other current assets....... 1 167 784
----- ------- --------
Total current assets......................... 200 2,567 12,613
Property and equipment, net....................... 87 175 657
Investments....................................... -- 373 273
Goodwill and intangibles, net..................... 16 45 15,000
Other assets, net................................. 11 27 749
----- ------- --------
$ 314 $ 3,187 $ 29,292
===== ======= ========
LIABILITIES, REDEEMABLE SECURITIES AND MEMBERS'
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Cash held for clients........................... $ 19 $ -- $ 329
Line of credit.................................. -- -- 5
Accounts payable................................ 104 507 1,594
Accrued expenses................................ 228 536 1,300
Due to employees................................ 175 288 294
Deferred revenue................................ 200 157 239
----- ------- --------
Total current liabilities.................... 726 1,488 3,761
Redeemable securities:
Series A redeemable preferred securities........ -- 5,021 4,909 --
Series B redeemable preferred securities........ -- -- 15,175 --
Redeemable common securities.................... -- -- 2,247 2,800
----- ------- -------- --------
Total redeemable securities.................. -- 5,021 22,331 2,800
----- ------- -------- --------
Members' and stockholders' equity:
Common stock ($.01 par value)................... 206
Additional paid-in-capital...................... 39,278
Members' interest............................... 76 3,986 19,953
Unearned compensation........................... -- (502) (1,903) (1,903)
Accumulated earnings (deficit).................. (488) (6,806) (14,850) (14,850)
----- ------- -------- --------
Total members' and stockholders' equity
(deficit).................................. (412) (3,322) 3,200 $ 22,731
----- ------- -------- ========
$ 314 $ 3,187 $ 29,292
===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 87
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
AUGUST 8, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO --------------------------- -------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
E-commerce, net................ $ -- $ 269 $ 1,548 $ 360 $ 2,335
Advertising.................... -- 95 502 156 724
Agency commissions............. -- 974 1,917 444 291
Record label................... -- 550 615 340 332
---- ------ ----------- ------- -----------
Total net revenue............ -- 1,888 4,582 1,300 3,682
Cost of revenue.................. -- 608 2,515 597 2,949
---- ------ ----------- ------- -----------
Gross profit................. -- 1,280 2,067 703 733
Operating expense:
Product development............ -- 78 589 237 631
Sales and marketing............ 10 196 1,395 373 2,537
General and administrative..... 13 1,442 2,545 1,208 3,237
Amortization of stock-based
compensation................. -- -- 3,828 1,288 1,769
Depreciation and
amortization................. 5 21 59 25 713
---- ------ ----------- ------- -----------
Loss from operations......... (28) (457) (6,349) (2,428) (8,154)
Income from equity
investment................... -- -- 2 -- 33
Interest income (expense),
net.......................... -- (3) 29 (15) 77
---- ------ ----------- ------- -----------
Net loss..................... $(28) $ (460) $ (6,318) $(2,443) $ (8,044)
==== ====== =========== ======= ===========
Pro forma net loss per share:.... $ (.44) $ (.45)
=========== ===========
Pro forma weighted average
shares basic and diluted..... 14,514,508 17,735,212
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 88
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS' UNEARNED ACCUMULATED TOTAL
INTEREST COMPENSATION DEFICIT EQUITY
-------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Balance at August 8, 1996 (inception)......... $ -- $ -- $ -- $ --
Contribution of members' interest........... 100 -- -- 100
Net loss.................................... -- -- (28) (28)
------- ------- -------- -------
Balance at December 31, 1996.................. 100 -- (28) 72
Distribution of members' interest........... (24) -- -- (24)
Net loss.................................... -- -- (460) (460)
------- ------- -------- -------
Balance at December 31, 1997.................. 76 -- (488) (412)
Distribution of members' interest........... (249) -- -- (249)
Profit interests............................ 4,330 (4,330) -- --
Amortization of unearned compensation....... -- 3,828 -- 3,828
Accrual of dividends to preferred members... (171) -- -- (171)
Net loss.................................... -- -- (6,318) (6,318)
------- ------- -------- -------
Balance at December 31, 1998.................. 3,986 (502) (6,806) (3,322)
Issuance of securities (unaudited).......... 12,984 -- -- 12,984
Issuance of options/warrants (unaudited).... 1,637 (1,637) -- --
Profit interests............................ 1,584 (1,584) -- --
Amortization of unearned compensation
(unaudited).............................. -- 1,820 -- 1,820
Payment of preferred dividend (unaudited)... (96) -- -- (96)
Conversion of preferred return to common
securities (unaudited)................... 355 -- -- 355
Accrual of dividends to preferred members
(unaudited).............................. (418) -- -- (418)
Accretion of redeemable stock............... (79) (79)
Net loss (unaudited)........................ -- -- (8,044) (8,044)
------- ------- -------- -------
Balance at June 30, 1999 (unaudited).......... $19,953 $(1,903) $(14,850) $ 3,200
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 89
ARTISTDIRECT, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 8, 1996
(INCEPTION) TO
DECEMBER 31, YEAR ENDED SIX MONTHS ENDED
1996 DECEMBER 31, JUNE 30,
-------------- --------------------------- ---------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (28) $(460) $(6,318) $(2,443) $(8,044)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization......... 5 21 59 25 713
Income from equity investment......... -- -- (2) -- (33)
Allowance for doubtful accounts....... -- 5 89 11 (26)
Amortization of unearned
compensation........................ -- -- 3,828 1,288 1,820
Changes in assets and liabilities:
Accounts receivable................. -- (18) (536) (164) (187)
Prepaid expenses and other current
assets........................... -- (2) (166) (66) (617)
Other assets........................ (86) 75 (15) (15) (722)
Accounts payable and accrued
expenses......................... -- 526 805 1,020 2,028
Deferred revenue.................... -- 200 (43) 63 82
----- ----- ------- ------- -------
Net cash (used in) provided by
operating activities........... (109) 347 (2,299) (281) (4,986)
----- ----- ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment..... (11) (101) (141) (80) (574)
Cash paid for acquisitions.............. -- -- -- -- (110)
Investments............................. -- -- (373) -- --
Investment in trademarks................ -- (16) (34) (34) (15)
----- ----- ------- ------- -------
Net cash used in investing
activities..................... (11) (117) (548) (114) (699)
----- ----- ------- ------- -------
Cash flows from financing activities:
Payment of loan payable................. -- (100) -- -- --
Payment of preferred dividend........... -- -- -- -- (96)
Contribution of members' interest....... 100 -- -- -- --
Distribution of members' interest....... -- (24) (249) -- --
Proceeds from loan payable.............. 100 -- -- 1,851 --
Proceeds from issuance of preferred
securities............................ -- -- 4,850 -- 15,000
----- ----- ------- ------- -------
Net cash provided by (used in)
financing activities........... 200 (124) 4,601 1,851 14,904
----- ----- ------- ------- -------
Net increase in cash and cash
equivalents.................... 80 106 1,754 1,456 9,219
Cash and cash equivalents at beginning of
period.................................. -- 80 186 186 1,940
----- ----- ------- ------- -------
Cash and cash equivalents at end of
period.................................. $ 80 $ 186 $ 1,940 $ 1,642 $11,159
===== ===== ======= ======= =======
Supplemental disclosure of cash flow
information -- cash paid during the
period for interest..................... $ -- $ 4 $ 50 $ 18 $ 4
===== ===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 90
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
1. BASIS OF PRESENTATION
ORGANIZATION
ARTISTdirect, LLC (the "Company") was organized as a California limited
liability company and commenced operations on August 8, 1996. The ARTISTdirect,
LLC controlling members were majority owners of the companies, except the
Ultimate Band List, LLC ("UBL, LLC"), described below. At the formation of the
joint venture in July 1997, the Company had effective control and fully funded
the operations of UBL, LLC. On May 18, 1999, ARTISTdirect, LLC entered into an
agreement with the owners of UBL, LLC in which common and preferred units in
ARTISTdirect, LLC were exchanged for all ownership interests in UBL, LLC that
ARTISTdirect, LLC did not own ("Exchange Transaction").
The accompanying consolidated financial statements for ARTISTdirect, LLC
include the operations of the following companies:
<TABLE>
<CAPTION>
CONSOLIDATED COMPANIES/AFFILIATES DESCRIPTION
--------------------------------- -----------
<S> <C>
ARTISTdirect, LLC, a California limited Engaged in providing various administrative
liability company services in support of the related
companies.
ARTISTdirect Agency, LLC, a California Engaged in booking music events for music
limited liability company artists.
Kneeling Elephant Records, LLC, a Engaged in the development of artists and
California limited liability company production and distribution of recorded
music.
The Ultimate Band List, LLC, a California Engaged in providing music-related Internet
limited liability company content and selling music-related
merchandise over the Internet.
ARTISTdirect New Media, LLC, a California Engaged in providing music-related Internet
limited liability company content and selling music-related
merchandise over the Internet.
iMusic, Inc., a Washington corporation Engaged in providing music-related Internet
content.
</TABLE>
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated for all periods presented.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of the Company as of June
30, 1999, and for the six months ended June 30, 1998 and 1999 have been prepared
on substantially the same basis as the audited financial statements, and in the
opinion of management reflect all adjustments necessary (consisting of those of
a normal recurring nature) for a fair presentation of such financial statements
in accordance with generally accepted accounting principles. The results of
operations for interim periods are not necessarily indicative of results for a
full year.
F-7
<PAGE> 91
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
CAPITAL REORGANIZATION AND REVERSE STOCK SPLIT
On , 1999, the Company converted to a C corporation ( the
"Capital Reorganization"). The common units and redeemable preferred units
outstanding immediately prior to the Capital Reorganization were converted into
common stock and redeemable preferred stock of the C corporation. Each common
and preferred unit converted into one share of common and preferred stock,
respectively.
On , 1999, the Company declared a 1 for 4 reverse stock
split (the "Reverse Stock Split"). The outstanding common securities, redeemable
securities, options and warrants have been retroactively adjusted to reflect the
Reverse Stock Split. All discussion of equity amounts in the following footnotes
reflect the effect of the Capital Reorganization and Reverse Stock Split.
LIQUIDITY
The Company has relied on various equity financings to fund its operations
in the past. The Company believes that its available cash resources combined
with the net proceeds from its planned initial public offering will be
sufficient to meet its short term capital requirements and to fund its expanded
operations. The Company also has considered several potential sources to provide
additional working capital whether through the issuance of additional equity or
bank financings or otherwise. There are, however, no assurances that the planned
initial public offering will be completed or that such other financing will be
obtained. In the event that additional working capital is not obtained or not
obtained in sufficient amounts, the Company's operations may be significantly
curtailed.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH HELD FOR CLIENTS
Cash held for clients consists of funds held on behalf of the Company's
clients for musical performances. The cash is restricted for payment to the
clients, and there is a corresponding amount due to clients.
DEPRECIATION
Depreciation is provided using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software................ 3 years
Furniture and fixtures......................... 7 years
</TABLE>
REVENUE RECOGNITION
Net E-commerce revenue, which consists primarily of revenue from recorded
music and merchandise sold via the Internet, includes shipping and handling
charges and is recognized when the products are shipped.
The Company generates revenue from the sale of advertisements under
short-term contracts. To date, the duration of the Company's advertising
commitments has generally averaged from one to three months. Advertising revenue
is generally recognized ratably in the period in which the advertisement is
displayed, provided that no significant obligations of the Company remain and
collection of the resulting receivable is probable. The Company's obligations
typically include the guarantee of a minimum number of "impressions" or times
that an advertisement appears in pages viewed by the users of the Company's
online properties. The Company records a reserve for contracts in which the
guarantee of a minimum
F-8
<PAGE> 92
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
number of impressions is not expected to be met. There were no such instances as
of December 31, 1997 and 1998 and June 30, 1998 and 1999.
Agency commission revenue is recognized in accordance with the terms of the
representation agreements between the Company and its clients. Revenue is
generally recorded upon payment for the performance of services or delivery of
materials created by the artists represented.
INVENTORIES
Inventories, included in prepaid expenses and other current assets, consist
of music-related merchandise and are stated at the lower of average cost or
market. Cost is determined using the first-in, first-out method.
INCOME TAXES
The Company is treated as a limited liability company for federal and state
income tax reporting purposes whereby income (or losses) of the company is
reported in the individual income tax returns of the Company's members, except
for iMusic, Inc., which accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. 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 No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date. The Capital Reorganization will not have an impact on the
deferred tax assets or liabilities of the Company.
The provision for income taxes for iMusic, Inc. is immaterial to the
accompanying financial statements.
PRODUCT DEVELOPMENT EXPENSE
Product development expense consists primarily of third-party development
costs and payroll and related expenses for in-house Web site development costs
incurred in the start-up and production of the Company's content and services.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred and totaled $24,000 and
$535,000, and $120,000 and $1,381,000 during the years ended December 31, 1997
and 1998 and the six months ended June 30, 1998 and 1999, respectively.
INTANGIBLE ASSETS
Goodwill and other intangible assets resulting from the acquisitions of
minority interests in The Ultimate Band List, LLC and iMusic, Inc. are amortized
on a straight-line basis over five years, the estimated period of benefit.
F-9
<PAGE> 93
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying amounts of long-lived assets
to determine whether current events or circumstances warrant adjustments to such
carrying amounts. An impairment adjustment is necessary in the event the net
book value of such long-lived assets exceeds the future undiscounted cash flows
attributable to such assets. In such an event, the loss is measured by the
amount that the carrying value of such assets exceeds their fair value.
Considerable management judgment is necessary to estimate the fair value of
assets; accordingly, actual results could vary significantly from such
estimates.
CONCENTRATION OF CREDIT RISK AND SUPPLIER RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable. The Company places its cash investments in high credit
quality instruments. Cash balances at certain financial institutions may exceed
the FDIC insurance limits. The Company performs ongoing credit evaluations of
its customers but does not require collateral. Exposure to losses on receivables
is principally dependent on each customer's financial condition. The Company
monitors its exposure to credit losses and maintains allowances for anticipated
losses.
The Company purchases a large percentage of its music-related merchandise
inventory from three suppliers. The Company is subject to risk in the event that
any of the suppliers is unable to fulfill customer orders.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, which include cash, cash
held for clients, accounts receivable, accounts payable and accrued expenses and
amounts due to employees, approximate fair value because of the short maturity
of these instruments.
LOSS PER COMMON SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 (SAB 98). SFAS No. 128 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as the income
or loss available to common shareholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to basic EPS
but presents the dilutive effect on a per share basis of potential common shares
(e.g. convertible securities, options, etc.) as if they had been converted at
the beginning of the periods presented. Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from diluted EPS. Prior to the Capital
Reorganization on (see Note 1), the Company was organized as a
limited liability company and had not issued common stock. Accordingly, no
historical loss per share information is included in the attached financial
statements.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
The pro forma net loss per share (unaudited) for the year ended December
31, 1998 and six months ended June 30, 1999 is computed using the weighted
average number of common shares outstanding giving pro forma effect to the
Exchange Transaction, Capital Reorganization and Reverse Stock Split of
F-10
<PAGE> 94
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
the Company, and the automatic conversion of the redeemable preferred securities
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such events occurred on January 1, 1998,
or at original issuance date, if later. In addition, the pro forma net loss does
not include an adjustment for the change in tax status due to the Capital
Reorganization. There was no pro forma effect on income tax expense. Pro forma
diluted loss per share excludes 356,718 and 2.4 million securities (after giving
effect to the Exchange Transaction, Capital Reorganization and Reverse Stock
Split) as of December 31, 1998 and June 30, 1999, respectively, since their
impact would be anti-dilutive.
The following table is a reconciliation of the shares and net loss amounts
used in the pro forma net loss per share calculation.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------------
<S> <C> <C>
Actual shares at beginning of the period.................... 13,260,023 16,568,192
Pro forma weighted average of shares issued during the
period.................................................... 1,254,485 1,167,020
----------- -----------
Pro forma basic and diluted weighted average shares at the
end of the period......................................... 14,514,508 17,735,212
=========== ===========
Actual basic and diluted net loss (in thousands)............ $ (6,318) $ (8,044)
=========== ===========
</TABLE>
PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of
Series A and Series B Redeemable Preferred Stock will automatically convert into
3.2 million and 3.8 million shares, respectively, of common stock (after giving
effect to the Capital Reorganization and Reverse Stock Split). The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying Pro Forma Stockholders' Equity at June 30, 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25, and
complies with the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense is recorded
based on the difference, if any, between the fair value of the Company's stock
and the exercise price on the measurement date. The Company accounts for stock
issued to non-employees in accordance with SFAS No. 123, which requires entities
to recognize as expense over the service period the fair value of all
stock-based awards on the date of grant.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentation of
F-11
<PAGE> 95
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in members' equity (except those
arising from transactions with members) and includes net income and net
unrealized gains (losses) on securities. There is no impact on the Company's
financial statements as a result of the implementation of SFAS No. 130.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the financial statements.
In April, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 for the year ended December 31, 1999. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's consolidated financial
statements.
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal years beginning after September 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities by requiring that all derivative instruments be reported as
assets or liabilities and measured at their fair values. Under SFAS 133, changes
in the fair values of derivative instruments are recognized immediately in
earnings unless those instruments qualify as hedges of the (1) fair values of
existing assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures on net investments
in foreign operations. As of June 30, 1999, the Company has not entered into any
derivative contracts nor does it hold any derivative financial instruments.
Therefore, SFAS 133 does not have a material impact on the Company's
consolidated results of operations, financial position, or cash flows.
F-12
<PAGE> 96
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
3. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Significant non-cash investing and financing activities are reflected in
the following table:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------------
1997 1998 1998 1999
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash paid for acquisitions:
Fair value of net assets acquired........ $ -- $ -- $ -- $ 2,463
Net liabilities assumed.................. -- -- -- (185)
Common units issued...................... -- -- -- (2,168)
-------- -------- -------- --------
Cash paid for acquisitions.......... $ -- $ -- $ -- $ 110
======== ======== ======== ========
Issuance of common securities for minority
interests in affiliated companies:
Issuance of common securities............ $ -- $ -- $ -- $ 13,922
Net assets acquired...................... -- -- -- (938)
-------- -------- -------- --------
Goodwill............................ $ -- $ -- $ -- $ 12,984
======== ======== ======== ========
Accrual of dividends on redeemable
preferred securities..................... $ -- $ 171 $ -- $ 418
Accretion on redeemable stock.............. $ -- $ -- $ -- $ 79
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
------------ JUNE 30,
1997 1998 1999
---- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment and software...................... $ 83 $220 $ 727
Furniture and fixtures............................... 28 33 80
---- ---- -----
111 253 807
Less accumulated depreciation........................ (24) (78) (150)
---- ---- -----
Property and equipment, net.......................... $ 87 $175 $ 657
==== ==== =====
</TABLE>
F-13
<PAGE> 97
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURN RESERVE
A summary of the activity of the allowance for doubtful accounts for the
periods indicated is reflected in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, ENDED JUNE 30,
------------ --------------
1997 1998 1998 1999
---- ---- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period..................... $ -- $ 5 $ 5 $ 94
Provision for doubtful accounts.................. 5 122 11 --
Amounts charged off.............................. -- (33) -- (26)
---- ---- ---- ----
Balance, end of period........................... $ 5 $ 94 $ 16 $ 68
==== ==== ==== ====
</TABLE>
A summary of the activity of the reserve for sales returns for the periods
indicated is reflected in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, ENDED JUNE 30,
------------ --------------
1997 1998 1998 1999
---- ---- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period....................... $-- $-- $-- $ 57
Provision for sales returns........................ -- 65 -- 51
Amounts charged off................................ -- (8) -- (12)
--- --- --- ----
Balance, end of period............................. $-- $57 $-- $ 96
=== === === ====
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses as of December 31, 1997 and 1998 and June 30, 1999 are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued professional fees............................ $153 $143 $ 303
Accrued compensation................................. 39 105 404
Accrued cost of sales................................ -- 134 514
Accrued advertising costs............................ -- 88 --
Other accrued expenses............................... 36 66 79
---- ---- ------
Total accrued expenses.......................... $228 $536 $1,300
==== ==== ======
</TABLE>
F-14
<PAGE> 98
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
7. INVESTMENTS
Investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
American Digital Network....................... $250 $250
iMusic, Inc.................................... 100 --
SnoCore, LLC................................... 23 23
---- ----
Total investments............................ $373 $273
==== ====
</TABLE>
The Company acquired a 1.7% ownership in American Digital Networks, which
is accounted for under the cost method. As of December 31, 1998, the Company had
an approximate 20% ownership in iMusic, Inc. The majority owner in iMusic, Inc.
had a 76% voting interest. As the Company was not able to exert significant
influence in the management of iMusic, Inc., the investment was accounted for
under the cost method.
The Company has a 30% ownership in SnoCore, LLC, and accounts for the
investment under the equity method. The Company recorded income of $2,000 and
$33,000 for this investment for the year ended December 31, 1998 and six months
ended June 30, 1999, respectively.
8. LINE OF CREDIT
In 1997, the Company obtained a $250,000 line of credit with a financial
institution. The line was increased to $500,000 during 1998, and to $2.0 million
in February 1999. The line of credit is guaranteed by certain officers and
members of the Company, and is due in November 1999. The credit line bears
interest, which is payable monthly, at a base rate as defined in the lending
agreement plus 1% (8.75% at June 30, 1999). The credit agreement contains
certain restrictions and financial covenants that must be maintained by the
Company. As of December 31, 1997 and 1998 and June 30, 1999, the Company was in
compliance with the covenants of the credit agreement. There was no balance
outstanding on the line of credit as of December 31, 1997 and 1998 and June 30,
1999, and the line of credit was terminated subsequent to June 30, 1999.
In 1996, iMusic, Inc. obtained a $10,000 line of credit with a financial
institution that is guaranteed by a member of the Company. The credit line bears
interest, which is payable monthly, at an index rate plus 1% (10% at June 30,
1999). The balance outstanding on the line of credit as of June 30, 1999 was
$5,000.
9. ACQUISITIONS
In February 1999, the Company acquired the remaining 80% of iMusic, Inc.
that it did not own. The consideration paid for the acquisition included
$110,000 in cash, redeemable common units of The Ultimate Band List, LLC equal
to 2% of its membership interests and the assumption of approximately $180,000
of liabilities. The value of the redeemable common units given was approximately
$2.2 million. The acquisition has been accounted for as a purchase and the
operations of iMusic, Inc. have been included from the date of acquisition.
F-15
<PAGE> 99
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
In May 1999 the Company acquired the minority interests in The Ultimate
Band List, LLC in exchange for common interests in ARTISTdirect, LLC. The value
of the consideration given was approximately $13.9 million and the transaction
has been accounted for as a purchase.
The pro forma results of operations assuming the above transactions had
occurred at the beginning of each of the respective periods are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues....................................... $4,842 $3,745
------ ------
Net loss....................................... $9,339 $9,215
------ ------
</TABLE>
10. SIGNIFICANT CONTRACTS
The Company entered into a settlement agreement with an employee in
connection with the termination of his employment in October 1997. Pursuant to
this agreement, the employee received a severance payment of $175,000, to be
paid out in eight quarterly installments. The amount due under this severance
arrangement was $175,000, $88,000 and $44,000 as of December 31, 1997 and 1998
and June 30, 1999, respectively. Additionally, this individual loaned the
Company $100,000 in 1996, the entire amount of which was repaid in 1997. As part
of the settlement agreement, the individual received an option to purchase the
lesser of 100,000 securities or 2.5% of the shares offered to the public upon an
initial public offering at an exercise price that will be set at the completion
of the initial public offering pursuant to the provision defined in the
settlement agreement. The excess of the fair value of the shares at the date of
grant over the consideration paid will be recorded as compensation expense.
In 1998 the Company entered into an employment agreement with an officer of
the Company under which deferred compensation of up to $200,000 was granted. The
value of the deferred compensation was determined based on the value of the
Company as of the payment date. The Company has accrued $200,000 in deferred
compensation.
The Company has an investment in American Digital Network (ADN), and also
entered into a software development agreement with ADN in 1997. The Company paid
ADN $250,000 for development of the software, and received a payment of $250,000
from ADN for the license to use the software. These transactions are shown net
in the financial statements.
In 1998, the Company incurred legal expenses of approximately $450,000 for
legal services provided by Lenard & Gonzalez LLP. Allen Lenard, one of the
Company's directors, is Managing Partner of Lenard & Gonzalez LLP.
Kneeling Elephant Records, LLC, a subsidiary of the Company, entered into
an agreement with RCA in January 1997. Kneeling Elephant is a record label
managed by the Company. Under the agreement, RCA provides all funding to the
Company for the label and owns the rights to all sound recordings made under
artist agreements during the initial three year term of the agreement. RCA has
an option to terminate its agreement with Kneeling Elephant after three years,
at which point, the assets and properties of Kneeling Elephant shall be divided
based on the terms of the operating agreement. The maximum term of the operating
agreement is six years. Under the operating agreement, RCA provided
F-16
<PAGE> 100
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
funding of $300,000 in January 1997, which has been recognized ratably over the
minimum three year operating term. Additionally, RCA has provided annual funding
of $450,000 to the Company for the operation of Kneeling Elephant under the
terms of the operating agreement. RCA shall provide additional funding based on
the occurrence of certain events in the future. The profits and losses of
Kneeling Elephant shall be divided based on the terms and conditions of the
operating agreement. The ownership structure is also subject to change based on
the achievement of certain financial guidelines. The amounts due from RCA as of
December 31, 1997 and 1998 and June 30, 1999 are $1,000, $4,000, and $31,000,
respectively.
In April 1999, the Company entered into an agreement with a merchandiser
for a term of four years. In exchange for merchandise fulfillment services, the
Company granted the merchandiser warrants to purchase 131,250 shares of common
stock (after giving effect to the Capital Reorganization and Reverse Stock
Split) upon the signing of the agreement. Additional warrants to purchase common
stock may be earned by the merchandiser based on the achievement of various
sales levels.
In June 1999, the Company entered into an agreement with a third party
which provides for the development of twenty new on-line artist stores. The
third-party shall pay $425,000 to the Company over the term of the agreement,
which expires on December 31, 1999, and deliver to the Company the artists for
the development of the on-line stores. The third-party shall receive a portion
of the profits from the on-line stores as specified in the agreement, as well as
a guaranteed number of advertising impressions on the Company's websites. The
Company has recorded $60,000 in revenues under the agreement during the six
months ended June 30, 1999.
In June 1999, the Company entered into an agreement with a merchandiser for
a three-year term. In exchange for merchandise fulfillment services over the
term of the agreement, the Company paid a deposit of $1.0 million which is being
amortized over the term of the agreement, and granted the merchandiser warrants
to purchase 228,426 shares of common stock (after giving effect to the Capital
Reorganization and Reverse Stock Split) upon the signing of the agreement.
Additional warrants to purchase common stock may be earned by the merchandiser
based on the achievement of various sales levels.
11. REDEEMABLE SECURITIES
From July through December 1998, the Company issued redeemable preferred
units for proceeds of $4.9 million. These preferred units were converted into
12.8 million Series A ARTISTdirect, LLC redeemable preferred securities pursuant
to the acquisition of minority interests of the consolidated companies, and were
converted into 3,207,815 shares of Series A Redeemable Preferred Stock (Series A
Preferred) pursuant to the Capital Reorganization and Reverse Stock Split. The
Series A Preferred shares carry a 10% cumulative annual dividend, and may be
converted into common shares at any time by the holder. Upon conversion, the
shareholders shall receive a cash payment of 25% of the accrued unpaid dividends
through the date of the Capital Reorganization. The number of common shares into
which the preferred shares may be converted is calculated as the initial capital
contribution divided by the current conversion price. The current conversion
price is $1.51 per preferred share (after giving effect to the Capital
Reorganization and Reverse Stock Split). The conversion price shall be updated
periodically based on the fair value of the Company. All Series A Preferred
shares shall be automatically converted to common shares upon an initial public
offering or the conversion of 95% of the shares initially issued. The
shareholders have the right to redeem the Series A Preferred shares upon a
management vacancy by one of the founders of the Company prior to July 28, 2003,
or at any time after July 28, 2003.
F-17
<PAGE> 101
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
The Series A Preferred shares have liquidation preference over all other classes
of shares except for the Series B Preferred shares. The redemption value of the
Series A Preferred shares was $5.0 million and $4.9 million, as of December 31,
1998 and June 30, 1999, respectively.
On February 17, 1999, the Company issued 170,443 redeemable common shares
(Redeemable Stock) (after giving effect to the Capital Reorganization and the
Reverse Stock Split) for the purchase of the remaining 80% of iMusic, Inc. The
holder of the Redeemable Stock shall have the right to redeem the Redeemable
Stock upon the earlier of an initial public offering or February 17, 2002. The
redemption value shall be $2.8 million. The Redeemable Stock was initially
recorded at its fair value which shall be accreted to the redemption value
through February 2002. The Redeemable Stock has liquidation preference over the
common shares. The accreted value of the Redeemable Stock was $2.2 million as of
June 30, 1999.
On May 18, 1999, the Company issued 3,750,000 Series B redeemable preferred
shares (Series B Preferred) (after giving effect to the Capital Reorganization
and Reverse Stock Split) for proceeds of $15 million. The Series B Preferred
shares have the same conversion and redemption terms as the Series A Preferred
shares. The Series B Preferred shares have liquidation preference over all other
classes of shares. The redemption value of the Series B Preferred shares was
$15.2 million as of June 30, 1999.
12. MEMBERS' EQUITY
MEMBER DISTRIBUTIONS
The Company made distributions to members of $24,000 and $249,000 in 1997
and 1998, respectively.
COMMON UNIT INTERESTS
During 1998, the Company issued common units to certain executive employees
and its outside legal counsel in connection with services rendered and to be
rendered. In January 1998, Keith Yokomoto and L&G Associates One, an affiliate
of Lenard & Gonzalez LLP, one of the Company's outside legal counsel, received
interests of 10.1% and 3.03%, respectively. In June 1998, Steve Rennie and
Robert Morse received interests of 4.04% and 1.01%, respectively. The units
provide for the holder to share in the profits and losses of the entity
consistent with the rights and limitations of the other equity holders. The
units represent a common unit but limit the holder to share in the capital of
the Company only to the extent of increases in the fair value of the Company
subsequent to the issuance of the units. The value of the common units at the
time of their issuance, which represents existing capital, will remain the
property of the founders. The common units issued to employees under these
agreements have been accounted for as stock appreciation rights. Accordingly the
value of these rights are adjusted upon changes in the estimated market value of
the Company. The Company has estimated the market value of the Company for the
periods presented and has recorded compensation expense of $3.8 million, $1.3
million and $1.8 million for the year ended December 31, 1998 and the six months
ended June 30, 1998 and 1999, respectively.
MERCHANDISER WARRANTS
In May and June 1999, the Company issued 359,676 warrants to purchase
common stock (after giving effect to the Capital Reorganization and Reverse
Stock Split). The value of the warrants is
F-18
<PAGE> 102
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
$864,000, of which $36,000 has been recognized as expense for the six months
ended June 30, 1999. The value of the warrants has been recorded as unearned
compensation in the statement of changes in members' equity, and will be
amortized over the term of the related merchandising agreements.
PREFERRED DIVIDENDS
On May 18, 1999, the Company paid to the Series A redeemable preferred
securities holders the accrued dividends to that date of $355,000 in the form of
88,632 common shares (after giving effect to the Capital Reorganization and
Reverse Stock Split), as well as a cash payment of $96,000.
13. OPTIONS
In July 1998, the Company implemented the 1998 Unit Option Plan, which
reserved 2,932,495 shares (after giving effect to the Capital Reorganization and
Reverse Stock Split) for purchase by plan participants. The options expire up to
ten years from the date of grant. The Company grants options at an exercise
price at the date of grant equal to or greater than the fair value of the
Company's stock as determined by the Board of Directors. The Company accounts
for its stock option plan in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
Summary stock option activity for Employee Plan options during the year
ended December 31, 1998 and six months ended June 30, 1999 is as follows (after
giving effect to the Capital Reorganization and Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Outstanding options at December 31, 1997........ -- $ --
Granted....................................... 356,718 1.52
Exercised..................................... -- --
Canceled...................................... -- --
--------- -----
Outstanding options at December 31, 1998........ 356,718 1.52
Granted....................................... 1,382,795 3.60
Exercised..................................... -- --
Canceled...................................... -- --
--------- -----
Outstanding options at June 30, 1999............ 1,739,513 $3.16
========= =====
</TABLE>
F-19
<PAGE> 103
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
If the Company had elected to recognize compensation cost based on the fair
value at the date of grant, consistent with the method as prescribed by SFAS No.
123, net loss for the year ended December 31, 1998 and the six months ended June
30, 1999 would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Net loss:
As reported.................................... $6,318 $8,044
Pro forma...................................... 6,334 8,113
====== ======
</TABLE>
The fair value of options granted during 1998 and 1999 was determined using
a minimum value pricing model with the following assumptions: risk-free interest
rate of 5.6% and an expected life of five years. The fair values of the options
on the date of grant were $.32 per share and $.84 per share for the options
granted in 1998 and during the six months ended June 30, 1999, respectively.
The following table summarizes information regarding options outstanding
and options exerciseable at June 30, 1999 (after giving effect to the Capital
Reorganization and Reverse Stock Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OF SHARES LIFE PRICE OF SHARES PRICE
- ----------- --------- ----------- -------- ------------ --------
<C> <C> <S> <C> <C> <C>
$ 1.24 261,746 9.08 years $1.24 130,814 $1.24
2.32 94,972 9.08 2.32 46,508 2.32
3.60 1,382,795 9.88 3.60 -- --
- ----------- --------- ---------- ----- ------- -----
$1.24-$3.60 1,739,513 9.72 years $3.16 177,322 $1.52
=========== ========= ========== ===== ======= =====
</TABLE>
In June 1999, the Company adopted the 1999 Artist and Artist Advisor Unit
Option Plan (the Plan). The Plan has reserved 375,000 shares (after giving
effect to the Capital Reorganization and Reverse Stock Split). No shares have
been granted under the Plan during the six months ended June 30, 1999.
In June 1999, the Company adopted the 1999 Artist Unit Option Plan (the
Artist Option Plan), which has reserved 2,391,500 shares (after giving effect to
the Capital Reorganization and Reverse Stock Split)for purchase by plan
participants, who are considered non-employees. The options expire seven years
from the date of grant. During the six months ended June 30, 1999, the Company
granted 283,750 options to artists. The exercise price for all of the options is
$4.00 per share.
The fair value of the options granted under the Artist Option Plan was
$2.72 per option, resulting in a total value for options granted of $773,000,
which has been recorded as unearned compensation in the statement of changes in
members' equity, and will be amortized over the service period of the related
artist agreements. Compensation expense recognized during the six months ended
June 30, 1999 was $15,000, and is recorded in cost of sales or operating expense
based on the services provided by the artist.
F-20
<PAGE> 104
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
The weighted average remaining contractual life of the artist options
granted during the six months ended June 30, 1999 is 6.9 years, and there are
currently 70,117 options exerciseable.
The estimated fair values of the options granted under the Artist Option
Plan was determined using the Black-Scholes model. The key assumptions used in
the model for the purpose of the calculation were: a risk free rate of 5.78%, a
volatility factor of 81% and an expected life of seven years.
14. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum lease payments under operating leases for facilities and
certain equipment, including leases entered into subsequent to December 31,
1998, are as follows as of the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................ $340
2000................................................ 259
2001................................................ 160
2002................................................ 89
2003................................................ 9
----
Total............................................. $857
====
</TABLE>
Rent expense under operating leases for the period from August 8, 1996
(inception) through December 31, 1996 and the years ended December 31, 1997 and
1998 and the six months ended June 30, 1998 and 1999 for the Company was $0,
$58,000, $109,000, $20,000, and $106,000, respectively.
EMPLOYMENT CONTRACTS
Future payments under employment contracts, including those entered into
subsequent to December 31, 1998, are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................ $1,437
2000................................................ 1,071
2001................................................ 548
2002................................................ 33
------
Total............................................. $3,089
======
</TABLE>
ADVERTISING COMMITMENTS
In February 1999 the Company entered into an agreement with an advertising
agency. Under the agreement, the Company shall engage the advertising agency for
an aggregate of $5 million in commissionable advertising and promotion services
through February 2000.
LITIGATION
The Company is subject to various pending and threatened legal actions,
which arise in the normal course of business. The Company's management believes
that the impact of such litigation will not have a material adverse impact on
its financial position or results of operations.
F-21
<PAGE> 105
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
15. REPORTABLE SEGMENTS
The Company provides integrated music entertainment products and services
through three reportable segments. The three reportable segments are
music-related Web site operations ("ARTISTdirect Network"), musical artist
booking operations ("Talent Agency") and record label operations ("Record
Label"). ARTISTdirect Network generates revenue primarily from the sale of
recorded music and music-related merchandise and from the sale of advertising on
our Web sites. The Talent Agency generates revenue from commissions based on the
income received by agency clients for live performances. The Record Label
generates revenue from advances under an agreement with RCA and from royalties
on sales of recorded music. The factors for determining reportable segments were
based on service and products. Each segment is responsible for executing a
unique marketing and business strategy. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss from
operations before income taxes. The following table summarizes the revenue, cost
and expenses, and operating income by segment for the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ------------------
1997 1998 1998 1999
------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Revenue:
ARTISTdirect Network.................. $ 364 $ 2,050 $ 516 $ 3,059
Talent Agency......................... 974 1,917 444 291
Record Label.......................... 550 615 340 332
------ ------- ------- -------
1,888 4,582 1,300 3,682
Income (Loss) from Operations:
ARTISTdirect Network.................. (740) (5,306) (1,623) (7,360)
Talent Agency......................... 197 (629) (478) (506)
Record Label.......................... 86 (414) (327) (288)
------ ------- ------- -------
(457) (6,349) (2,428) (8,154)
------- -------
Interest income (expense), net.......... (3) 29 (15) 77
Income from equity investment........... -- 2 -- 33
------ ------- ------- -------
Net Loss................................ $ (460) $(6,318) $(2,443) $(8,044)
====== ======= ======= =======
Depreciation and amortization:
ARTISTdirect Network.................. $ 4 $ 38 $ 15 $ 705
Talent Agency......................... 11 18 7 6
Record Label.......................... 6 3 3 2
------ ------- ------- -------
$ 21 $ 59 $ 25 $ 713
====== ======= ======= =======
Capital expenditures:
ARTISTdirect Network.................. $ 23 $ 123 $ 75 $ 466
Talent Agency......................... 57 15 3 69
Record Label.......................... 21 3 2 39
------ ------- ------- -------
$ 101 $ 141 $ 80 $ 574
====== ======= ======= =======
</TABLE>
F-22
<PAGE> 106
ARTISTDIRECT, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1999 IS UNAUDITED.)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ------------------
1997 1998 1998 1999
------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
ARTISTdirect Network.................. $ 63 $ 2,707 $ 1,558 $18,016
Talent Agency......................... 47 68 372 456
Record Label.......................... 83 9 22 36
Corporate............................. 121 403 140 10,784
------ ------- ------- -------
$ 314 $ 3,187 $ 2,092 $29,292
====== ======= ======= =======
</TABLE>
Assets by segment are those assets used in the Company operations in each
segment. Corporate assets are principally made up of cash and cash equivalents,
prepaid expenses, and computer equipment.
F-23
<PAGE> 107
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
iMusic, Inc.:
We have audited the accompanying balance sheets of iMusic, Inc. (the
"Company") as of December 31, 1997 and 1998 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. 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 financial position of iMusic, Inc. as of December
31, 1997 and 1998 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Los Angeles, CA
May 26, 1999
F-24
<PAGE> 108
IMUSIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2 $116
Accounts receivable....................................... 5 65
----- ----
Total current assets................................... 7 181
----- ----
Property and equipment, at cost:
Computer equipment........................................ -- 7
Less accumulated depreciation............................. -- (1)
----- ----
-- 6
----- ----
Total assets........................................... $ 7 $187
===== ====
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 11 $ 15
Accrued payroll taxes..................................... 12 27
Due to related party...................................... 52 66
Note payable.............................................. 5 --
----- ----
Total current liabilities.............................. 80 108
Line of credit.............................................. 7 6
----- ----
Total liabilities...................................... 87 114
----- ----
Shareholders' equity (deficit):
Series A convertible preferred stock, $.01 par value.
Authorized 200,000 shares; issued and outstanding
161,364 as of December 31, 1998. Liquidation value of
$100 as of December 31, 1998........................... -- 2
Common stock, $.01 par value. Authorized 1,000,000 shares;
issued and outstanding 545,455 shares as of December
31, 1997 and 1998...................................... 5 5
Additional paid-in capital................................ 15 113
Accumulated deficit....................................... (100) (47)
----- ----
Total shareholders' equity (deficit)................... (80) 73
----- ----
Total liabilities and shareholders' equity............. $ 7 $187
===== ====
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 109
IMUSIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Revenue, net................................................ $ 51 $260
Cost of revenue............................................. 52 115
---- ----
Gross profit.............................................. (1) 145
Operating expenses:
Sales and marketing....................................... 5 33
General and administrative................................ 39 57
---- ----
(Loss) income from operations............................. (45) 55
Interest expense, net....................................... 1 2
---- ----
Net (loss) income......................................... $(46) $ 53
==== ====
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 110
IMUSIC, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK TOTAL
---------------- ---------------- ADDITIONAL ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL DEFICIT EQUITY (DEFICIT)
------- ------ ------- ------ --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996....................... -- $-- 545,455 $ 5 $ 15 $ (54) $(34)
Net loss..................... -- -- -- -- -- (46) (46)
------- --- ------- --- ---- ----- ----
Balance at December 31,
1997....................... -- -- 545,455 5 15 (100) (80)
Net income................... -- -- -- -- -- 53 53
Issuance of preferred
stock...................... 161,364 2 -- -- 98 -- 100
------- --- ------- --- ---- ----- ----
Balance at December 31,
1998....................... 161,364 $ 2 545,455 $ 5 $113 $ (47) $ 73
======= === ======= === ==== ===== ====
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 111
IMUSIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(46) $ 53
---- ----
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation........................................... -- 1
Changes in assets and liabilities:
Accounts receivable.................................. 31 (60)
Accounts payable and accrued expenses................ (2) 19
---- ----
Net cash (used in) provided by operating
activities...................................... (17) 13
---- ----
Cash flows from investing activities -- purchase of
equipment................................................. -- (7)
---- ----
Cash flows from financing activities:
Change in due to related party............................ 13 14
Proceeds from (payment on) note payable................... 5 (5)
Payments on line of credit................................ (1) (1)
Issuance of preferred stock............................... -- 100
---- ----
Net cash provided by financing activities......... 17 108
---- ----
Net increase in cash and cash equivalents......... -- 114
Cash and cash equivalents at beginning of year.............. 2 2
---- ----
Cash and cash equivalents at end of year.................... $ 2 $116
==== ====
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 1 $ 2
==== ====
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 112
IMUSIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
iMusic, Inc. (the "Company") was incorporated as a Washington corporation
in October 1995. The Company operates an Internet Web site that provides
music-related content such as chats, message boards, news, music information and
live performances.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of temporary investments in short-term securities
with an original maturity date of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over a useful life of three years.
REVENUE RECOGNITION
The Company generates revenue from the sale of advertisements under
short-term contracts. To date, the duration of the Company's advertising
commitments has generally averaged from one to three months. Advertising revenue
is generally recognized ratably in the period in which the advertisement is
displayed, provided that no significant obligations of the Company remains and
collection of the resulting receivable is probable. The Company's obligations
typically include the guarantee of a minimum number of "impressions" or times
that an advertisement appears in pages viewed by the users of the Company's
online properties. The Company records a reserve for contracts in which the
guarantee of a minimum number of impressions is not expected to be met. There
were no such instances as of December 31, 1997 and 1998.
The Company also generates revenue from a "link" to the Web site of a third
party. Revenue is based on merchandise purchased on the third-party's Web site
by customers utilizing the "link" on the Company's Web site.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on historical experience and
management's evaluation of outstanding accounts receivable at the balance sheet
date. There was no allowance as of December 31, 1997 and 1998.
PRODUCT DEVELOPMENT EXPENSE
Product development expense consists primarily of third-party Internet
development costs and payroll and related expenses for in-house Web site
development costs incurred in the start-up and production of the Company's
content and services.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their
F-29
<PAGE> 113
IMUSIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respective tax bases. 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
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying amounts of long-lived assets
to determine whether current events or circumstances warrant adjustments to such
carrying amounts. An impairment adjustment is necessary in the event the net
book value of such long-lived assets exceeds the future undiscounted cash flows
attributable to such assets. In such an event, the loss is measured by the
amount that the carrying value of such assets exceeds their fair value.
Considerable management judgment is necessary to estimate the fair value of
assets, accordingly, actual results could vary significantly from such
estimates.
CONCENTRATION OF CREDIT RISK AND REVENUES FROM A SINGLE CUSTOMER
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable. The Company places its cash investments in high-credit
quality instruments and, by policy, limits the amount of credit exposure to any
one financial institution. Certain financial instruments potentially subject the
Company to credit risk. The Company performs ongoing credit evaluations of its
customers but does not require collateral. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses.
During the years ended December 31, 1997 and 1998, the Company derived
revenues from a single customer that comprised 50% and 65% of total revenues,
respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, which include cash, accounts
receivable, accounts payable and accrued expenses, lines of credit and due to
related party, approximate fair value because of the short maturity of these
instruments.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income," in June 1997. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in
shareholders' equity (except those arising from transactions with members) and
includes net income and net unrealized gains (losses) on securities. There is no
impact on the Company's financial statements as a result of the implementation
of SFAS No. 130.
F-30
<PAGE> 114
IMUSIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS No.
131 requires the use of the "management approach" for segment reporting, which
is based on the way the chief operating decision maker organizes segments within
a company for making operating decisions and assessing performance. The adoption
of this statement did not have a material impact on the Company's financial
statement.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The statement is effective for fiscal years beginning
after December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company is required to adopt
SOP 98-5 for the year ended December 31, 1999. The adoption of SOP 98-5 is not
expected to have a material impact on the Company's consolidated financial
statements.
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal years beginning after September 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities by requiring that all derivative instruments be reported as
assets or liabilities and measured at their fair values. Under SFAS 133, changes
in the fair values of derivative instruments are recognized immediately in
earnings unless those instruments qualify as hedges of the (1) fair values of
existing assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures on net investments
in foreign operations. As of December 31, 1997 and 1998, the Company has not
entered into any derivative contracts nor does it hold any derivative financial
instruments. Therefore, SFAS 133 does not have a material impact on the
Company's consolidated results of operations, financial position, or cash flows.
3. LINE OF CREDIT
In 1996, the Company obtained a $10,000 line of credit with a financial
institution which is guaranteed by the majority shareholder of the Company. The
credit line bears interest, which is payable monthly, at an index rate plus 1%
(10.25% and 10% at December 31, 1997 and 1998, respectively). The balance
outstanding on the line of credit as of December 31, 1997 and 1998 was $7,000
and $6,000, respectively. The unused balance under the line of credit as of
December 31, 1997 and 1998 was $3,000 and $4,000, respectively.
4. NOTE PAYABLE
In 1997, the Company issued a note payable in the amount of $5,000 that
bore interest at 10% and was repaid in 1998.
5. RELATED PARTY TRANSACTIONS
A shareholder of the Company has paid expenses on behalf of the Company
during 1996, 1997 and 1998. Additionally, the Company rents office space from
this shareholder. The facility is on a month-to-month lease, and the monthly
rent approximates a fair market rate. Lease payments for the facility for
F-31
<PAGE> 115
IMUSIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
each of the years ended 1997 and 1998 were $14,000. The amount due to the
shareholder as of December 31, 1997 and 1998 as a result of these transactions
was $52,000 and $66,000, respectively.
6. SHAREHOLDERS' EQUITY
In August 1998, the Company issued 161,364 shares of Series A convertible
preferred stock for proceeds of $100,000. The preferred shareholder may convert
the preferred shares into common shares at a ratio based on the issue price per
share plus any accrued and unpaid dividends. The preferred shares shall be
automatically converted to common shares upon an initial public offering or at
such time when 80% of the shares initially issued have been converted to common
shares. The liquidation value of the preferred shares shall be the initial issue
price plus any accrued and unpaid dividends. The preferred shareholder shall
have voting rights as if the preferred shares had been converted to common
shares.
7. INCOME TAXES
There was no income tax provision for the years ended December 31, 1997 and
1998. Income tax expense (benefit) differs from the amount computed by applying
the federal statutory tax rate of 34% to income before income taxes as shown
below. There is no corporate tax in the state of Washington.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Computed "expected" income tax expense (benefit)....... $(15) $ 18
Change in valuation allowance.......................... 15 (18)
---- ----
Income taxes......................................... $ -- $ --
==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, 1997 and 1998 are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 29 $ 28
Temporary differences -- accounts receivable and
accounts payable.................................. 1 (17)
Valuation allowance.................................. (30) (11)
---- ----
Net deferred tax assets........................... $ -- $ --
==== ====
</TABLE>
The Company has federal net operating loss carryforwards of $82,000 and
$84,000 as of December 31, 1997 and 1998, respectively, that begin to expire in
2003.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers historical and projected
future taxable income in making this assessment. Management has provided for a
full valuation allowance.
F-32
<PAGE> 116
IMUSIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
In February 1999, the Company entered into a lease agreement for its
facilities. Future minimum lease payments under this operating lease are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999.............................................. $24
2000.............................................. 26
2001.............................................. 26
2002.............................................. 2
---
$78
===
</TABLE>
9. SUBSEQUENT EVENTS
In February 1999, ARTISTdirect, which previously had a 20% ownership in the
Company, acquired all of the remaining outstanding capital stock of the Company.
The purchase consideration for the Company was approximately $2.5 million,
including $110,000 in cash, a redeemable put option valued at approximately $2.2
million and the assumption of approximately $185,000 in liabilities. The
acquisition was accounted for as a purchase. The purchase price has been largely
allocated to goodwill, which will be amortized over five years.
F-33
<PAGE> 117
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the securities being registered. All of the
amounts shown are estimated except the registration fee of the Commission and
the NASD and Nasdaq National Market filing fees.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
SEC registration fee........................................ $23,977.50
NASD filing fee............................................. 9,125
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
----------
Total............................................. *
==========
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ARTISTdirect, Inc. (the "Company") is a Delaware corporation. Article VI of
the Company's Bylaws provides that the Company may indemnify its officers and
Directors to the full extent permitted by law. Section 145 of the General
Corporation Law of the State of Delaware (the "GCL") provides that a Delaware
corporation has the power to indemnify its officers and directors in certain
circumstances.
Subsection (a) of Section 145 of the GCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided that
such director or officer acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such director or officer 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 action was brought shall determined that despite the
adjudication of liability such
II-1
<PAGE> 118
director or officer is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
Reference is made to the Form of Underwriting Agreement (to be filed as
Exhibit 1.1 to this Registration Statement) which provides for indemnification
by the Underwriters under certain circumstances of the directors and officers of
the Company signing the Registration Statement and certain controlling persons
of the Company against certain liabilities, including those arising under the
Securities Act.
The Company carries directors' and officers' liability insurance covering
its directors and officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by ARTISTdirect LLC,
predecessor to the Company since it was organized in August 1996, involving
sales of the Company's securities that were not registered under the Securities
Act. All of the numbers reflect the 35-for-1 forward unit split that occurred in
May 1999 with respect to common and preferred securities of ARTISTdirect, LLC,
but do not reflect the one-for-four reverse stock split of ARTISTdirect, Inc.
that will occur upon the closing of this offering.
(a) In September 1996, ARTISTdirect, LLC issued 17,461,365 common
securities to two of the three founders of the Company, Marc Geiger and
Don Muller, in connection with services rendered and to be rendered.
(b) In January 1998, ARTISTdirect, LLC issued 4,014,107 common securities
to the other founder of the Company, Keith Yokomoto, and 1,204,232
common securities to L&G Associates One, in connection with services
rendered and to be rendered. L&G Associates One is affiliated with
Allen Lenard, one of the Company's directors.
(c) In June 1998, ARTISTdirect, LLC issued 1,605,643 common securities to
Steve Rennie and 401,411 common securities to Robert Morse in
connection with services rendered and to be rendered. Mr. Rennie is an
executive officer of the Company.
(d) Throughout 1998, ARTISTdirect, LLC periodically issued additional
common securities, for no additional consideration, to Messrs.
Yokomoto, Rennie and Morse and L&G Associates One. In connection with
each of these issuances, Messrs. Geiger and Muller contributed the same
number of common securities to ARTISTdirect, LLC, for no consideration.
(e) In July 1998, we issued 200,705 shares of common securities to each of
Messrs. Geiger and Muller in exchange for their interests in
ARTISTdirect Holdings, L.L.C.
II-2
<PAGE> 119
(f) Between July 1998 and December 1998, ARTISTdirect, LLC issued a total
of 9,458,340 Series A preferred securities for an aggregate purchase
price of $2,910,000 to several outside investors.
(g) In May 1999, ARTISTdirect, LLC issued a total of 13,982,207 common
securities and 3,372,920 Series A preferred securities to the members
of UBL, LLC in exchange for the 8,042,134 common securities and
1,940,000 preferred securities of UBL held by such members.
(h) In May 1999, ARTISTdirect, LLC issued a total of 15,000,000 Series B
preferred securities for an aggregate purchase price of $15,000,000 to
several outside investors. In connection with this transaction, holders
of ARTISTdirect, LLC's Series A preferred securities received an
aggregate of 354,526 common securities of ARTISTdirect, LLC and $96,000
in exchange for accrued and unpaid preferred returns on their Series A
preferred securities.
From August 1998 to August 1999, we granted options to purchase an
aggregate of 2,619,200 shares of common stock to our directors, executive
officers, employees, artists and consultants at a weighted average exercise
price of $3.45. As of August 31, 1998, options to purchase 261,746 shares at an
exercise price of $1.24 per share, 94,972 shares at an exercise price of $2.32
per share, 2,287,935 shares at an exercise price of $3.60 per share and 879,686
shares at an exercise price of $4.00 per share were outstanding.
None of the foregoing transactions involved any public offering, and the
Company believes that at the time of each transaction, the transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant
to compensatory benefit plans and contracts relating to compensation as provided
under such rule. The recipients in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the share certificates and instruments, as applicable, issued in
such transactions. All recipients had adequate access, through their
relationships with the Company, to information about the Company. As set forth
on page 76 of the prospectus contained in this registration statement, the
Company intends to make a rescission offer with respect to certain shares of its
common stock issued pursuant to option exercises.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1* Incorporation and Exchange Agreement, dated as of May ,
1999, by and among the Registrant and the other signatories
hereto.
3.1* Certificate of Incorporation of the Registrant.
3.2* Amended and Restated Certificate of Incorporation of the
Registrant.
3.3* Bylaws of the Registrant.
3.4* Amended and Restated Bylaws of the Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1+* Agreement dated as of November 15, 1996, between the RCA
Records Label and the Registrant.
10.3+* BMI Music Performance Agreement for the UBL, dated October
9, 1998.
10.4+* AT&T Dedicated Hosting Service Agreement, dated April 16,
1999, between AT&T and the Registrant.
</TABLE>
II-3
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.5* Settlement Agreement and Mutual General Release, dated as of
October 23, 1997, between William Elson, on the one hand,
and the Registrant, MGE, LLC, Marc Geiger and Donald Muller,
on the other hand.
10.6+* Database, On-Line Internet Retail Store and Consumer Direct
Fulfillment Services Agreement, dated as of August 15, 1998,
between AEC One Stop Group, Inc. and the UBL.
10.7 Securities Purchase Agreement, dated July 28, 1998, among
the Registrant, the UBL, Constellation Venture Capital, L.P
and Constellation Ventures (BVI), Inc.
10.8* Second Amended and Restated Registration Rights Agreement,
dated as of May 18, 1999 by and among AD and the other
parties who are signatories thereto.
10.9 UBL Exchange, Contribution and Distribution Agreement, dated
May 18, 1999.
10.10 Exchange Agreement, dated February 17, 1999, by and among
the UBL, Scott Blum and Eric Benjamin.
10.11 Contingent Loan Agreement, dated February 17, 1999, by and
between the UBL and Scott Blum.
10.12 Letter Agreement, dated February 17, 1999, between the UBL
and Scott Blum regarding bonuses to cover interest
obligations under the Contingent Loan Agreement.
10.13 Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of September 1, 1996, between the Registrant and
Keith Yokomoto.
10.14 Issuance Agreement, dated as of January 1, 1998, between the
Registrant, Marc Geiger, Donald Muller, and L&G Associates
One.
10.15 Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of June 30, 1998, between the Registrant and Steve
Rennie.
10.16 Deferred Compensation Agreement, dated as of July 1, 1998
between Keith Yokomoto and the Registrant dated July 1,
1998.
10.17 Employment Agreement, dated as of January 1, 1998, between
Keith Yokomoto and the Registrant.
10.18 Employment Agreement, dated as of April 1, 1998, between
Steve Rennie and the UBL.
10.19 Employment Agreement, dated as of July 28, 1998, between
Marc Geiger and the Registrant.
10.20 Employment Agreement, dated as of July 28, 1998, between Don
Muller and the Registrant.
10.21* 1999 Employee Stock Purchase Plan.
10.22* 1999 Artist Stock Option Plan.
10.23* 1999 Stock Option Plan.
10.24* 1999 Artist and Artist Advisor Stock Option Plan.
10.25+* Form of Agreement to license Pandesic E-business Solution
Service between Pandesic LLC, AD and UBL.
10.26+* ADNM Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media, LLC.
10.27+* ADNM Merchandiser Agreement, dated as of June 7, 1999,
between Winterland Concessions Company and ARTISTdirect New
Media, LLC.
10.28+* UBL Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media, LLC.
21.1* Subsidiaries of ARTISTdirect, Inc.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
</TABLE>
II-4
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
23.2 Consent of KPMG LLP with respect to ARTISTdirect, LLC and
subsidiaries.
23.3 Consent of KPMG LLP with respect to iMusic, Inc.
24.1 Powers of Attorney (See page II-6).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
+ Confidential treatment is requested for certain confidential portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule
406, these confidential portions will be omitted from this exhibit and filed
separately with the Commission.
ITEM 17. UNDERTAKINGS
1. 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 Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
2. The undersigned Registrant hereby undertakes that:
(a) 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 the
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.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 21st day of September 1999.
ARTISTDIRECT, INC.
By: /s/ MARC P. GEIGER
------------------------------------
Marc P. Geiger
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Marc P. Geiger and James B. Carroll and each of
them, 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 such capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, as well as any
registration statement (or amendment thereto) related to this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to file the same, with all exhibits thereto, and all
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 and about the premises, 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
--------- ----- ----
<C> <S> <C>
/s/ MARC P. GEIGER Chief Executive Officer September 22, 1999
- ----------------------------------------------------- and Chairman of the Board
Marc P. Geiger (Principal Executive
Officer)
/s/ DONALD P. MULLER President, ARTISTdirect September 22, 1999
- ----------------------------------------------------- Agency and Kneeling
Donald P. Muller Elephant Records and
Director
</TABLE>
II-6
<PAGE> 123
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEITH YOKOMOTO Chief Operating Officer, September 22, 1999
- ----------------------------------------------------- President and Director
Keith Yokomoto
/s/ JAMES B. CARROLL Executive Vice President September 22, 1999
- ----------------------------------------------------- and Chief Financial
James B. Carroll Officer (Principal
Financial and Accounting
Officer)
/s/ ALLEN D. LENARD Director September 22, 1999
- -----------------------------------------------------
Allen D. Lenard
/s/ CLIFFORD H. FRIEDMAN Director September 22, 1999
- -----------------------------------------------------
Clifford H. Friedman
/s/ STEPHEN KRUPA Director September 22, 1999
- -----------------------------------------------------
Stephen Krupa
/s/ RICK RUBIN Director September 22, 1999
- -----------------------------------------------------
Rick Rubin
</TABLE>
II-7
<PAGE> 124
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement..............................
2.1* Incorporation and Exchange Agreement, dated as of May ,
1999, by and among the Registrant and the other signatories
hereto......................................................
3.1* Certificate of Incorporation of the Registrant..............
3.2* Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.3* Bylaws of the Registrant....................................
3.4* Amended and Restated Bylaws of the Registrant...............
5.1* Opinion of Brobeck, Phleger & Harrison LLP..................
10.1+* Agreement dated as of November 15, 1996, between the RCA
Records Label and the Registrant............................
10.3+* BMI Music Performance Agreement for the UBL, dated October
9, 1998.....................................................
10.4+* AT&T Dedicated Hosting Service Agreement, dated April 16,
1999, between AT&T and the Registrant.......................
10.5* Settlement Agreement and Mutual General Release, dated as of
October 23, 1997, between William Elson, on the one hand,
and the Registrant, MGE, LLC, Marc Geiger and Donald Muller,
on the other hand...........................................
10.6+* Database, On-Line Internet Retail Store and Consumer Direct
Fulfillment Services Agreement, dated as of August 15, 1998,
between AEC One Stop Group, Inc. and the UBL................
10.7 Securities Purchase Agreement, dated July 28, 1998, among
the Registrant, the UBL, Constellation Venture Capital, L.P
and Constellation Ventures (BVI), Inc.......................
10.8* Second Amended and Restated Registration Rights Agreement,
dated as of May 18, 1999 by and among AD and the other
parties who are signatories thereto.........................
10.9 UBL Exchange, Contribution and Distribution Agreement, dated
May 18, 1999................................................
10.10 Exchange Agreement, dated February 17, 1999, by and among
the UBL, Scott Blum and Eric Benjamin.......................
10.11 Contingent Loan Agreement, dated February 17, 1999, by and
between the UBL and Scott Blum..............................
10.12 Letter Agreement, dated February 17, 1999, between the UBL
and Scott Blum regarding bonuses to cover interest
obligations under the Contingent Loan Agreement.............
10.13 Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of September 1, 1996, between the Registrant and
Keith Yokomoto..............................................
10.14 Issuance Agreement, dated as of January 1, 1998, between the
Registrant, Marc Geiger, Donald Muller, and L&G Associates
One.........................................................
10.15 Issuance, Noncompetition and Nonsolicitation Agreement,
dated as of June 30, 1998, between the Registrant and Steve
Rennie......................................................
10.16 Deferred Compensation Agreement, dated as of July 1, 1998
between Keith Yokomoto and the Registrant dated July 1,
1998........................................................
</TABLE>
<PAGE> 125
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
10.17 Employment Agreement, dated as of January 1, 1998, between
Keith Yokomoto and the Registrant...........................
10.18 Employment Agreement, dated as of April 1, 1998, between
Steve Rennie and the UBL....................................
10.19 Employment Agreement, dated as of July 28, 1998, between
Marc Geiger and the Registrant..............................
10.20 Employment Agreement, dated as of July 28, 1998, between Don
Muller and the Registrant...................................
10.21* 1999 Employee Stock Purchase Plan...........................
10.22* 1999 Artist Stock Option Plan...............................
10.23* 1999 Stock Incentive Plan...................................
10.24* 1999 Artist and Artist Advisor Stock Option Plan............
10.25+* Form of Agreement to license Pandesic E-business Solution
Service between Pandesic LLC, AD and UBL....................
10.26+* ADNM Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media,
LLC.........................................................
10.27+* ADNM Merchandiser Agreement, dated as of June 7, 1999,
between Winterland Concessions Company and ARTISTdirect New
Media, LLC..................................................
10.28+* UBL Merchandiser Agreement, dated as of April 1, 1999,
between Giant Merchandising and ARTISTdirect New Media,
LLC.........................................................
21.1* Subsidiaries of ARTISTdirect, Inc...........................
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)................................................
23.2 Consent of KPMG LLP with respect to ARTISTdirect, LLC and
subsidiaries................................................
23.3 Consent of KPMG LLP with respect to iMusic, Inc.............
24.1 Powers of Attorney (See page II-6)..........................
27.1 Financial Data Schedule.....................................
</TABLE>
- -------------------------
* To be filed by amendment.
+ Confidential treatment is requested for certain confidential portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule
406, these confidential portions will be omitted from this exhibit and filed
separately with the Commission.
<PAGE> 1
EXHIBIT 10.7
- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
dated as of July 28, 1998
by and among
ARTISTdirect, LLC
and
The Ultimate Band List, LLC
and
Constellation Venture Capital, L.P.
and
Constellation Ventures (BVI), Inc.
- --------------------------------------------------------------------------------
<PAGE> 2
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT, dated as of July 28, 1998, by and among
ARTISTdirect, LLC, a California limited liability company ("AD"), The Ultimate
Band List, LLC, a California limited liability company ("UBL" and together with
AD, the "Companies"), and Constellation Venture Capital, L.P., a Delaware
limited partnership and Constellation Ventures (BVI), Inc., a British Virgin
Islands corporation (each a "Purchaser" and together "Purchasers"). Each of AD
and UBL are sometimes referred to herein individually as "Company."
W I T N E S S E T H :
WHEREAS, Purchasers have agreed to make capital contributions to UBL in
the amount of $1,200,000 and in exchange therefor, UBL has agreed to issue to
Purchasers, upon the terms and conditions provided in this Agreement and in the
UBL Operating Agreement, (i) an aggregate of 1,200 UBL Preferred Units, as
defined, and (ii) the UBL Option (as defined).
WHEREAS, Purchasers have agreed to make capital contributions to AD in
the amount of $1,800,000 and in exchange therefor, AD has agreed to issue to
Purchasers, upon the terms and conditions provided in this Agreement and in the
AD Operating Agreement, (i) an aggregate of 167,527.57 AD Preferred Units, as
defined, and (ii) the AD Option (as defined).
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Companies and
Purchasers hereby agree as follows:
I. DEFINITIONS
"Affiliate" shall (i) have the meaning specified by Rule 12b-2 under
the Exchange Act, (ii) be deemed to include any member or manager of a limited
liability company or any partner in any partnership or joint venture and (iii)
be deemed to include (when such term is used in reference to any Purchaser) the
partners of Constellation Venture Capital, LP and Constellation Venture Capital
Offshore, LP.
"AD" shall have the meaning set forth in the preamble to this
Agreement.
"ADNM" shall have the meaning set forth in Section 4.5.
"AD Common Units" shall mean the Common Units authorized under the AD
Operating Agreement or any class of Equity Securities issued in exchange
therefor in any merger, consolidation or recapitalization.
"AD Conversion Units" shall mean the AD Common Units into which the AD
Units are convertible, as adjusted from time to time in accordance with the
terms of the AD Operating Agreement.
<PAGE> 3
"AD Manager" shall mean the Board of Directors of AD appointed pursuant
to the AD Operating Agreement or any Person performing a similar function.
"AD Member" shall have the meaning set forth in Section 1.1 of the AD
Operating Agreement.
"AD Operating Agreement" shall mean the operating agreement of AD dated
as of September 1, 1996, as amended, and as amended and restated as of the date
hereof.
"AD Option" shall mean Purchasers' option to make an additional capital
contribution to AD of up to $600,000 (on the terms and conditions set forth in
this Agreement exercisable for a period of 30 days following the Closing
hereunder) for which Purchasers shall receive additional AD Preferred Units in
accordance with Section 3.3(c) of the AD Operating Agreement.
"AD Option Units" shall mean the number of AD Preferred Units for which
the AD Option is exercisable.
"AD Preferred Units" shall mean a series of Preferred Units to be
designated "Series A Preferred Units" which shall be convertible into AD Common
Units, in accordance with the terms of the AD Operating Agreement.
"AD Registration Rights Agreement" shall mean the Registration Rights
Agreement by and between AD and Purchasers, substantially in the form attached
hereto as EXHIBIT A-1, as such agreement may be amended, supplemented or
otherwise modified from time to time in accordance with the terms thereof.
"AD Units" shall mean (i) 167,527.57 AD Preferred Units sold to
Purchasers hereunder as adjusted from time to time in accordance with the terms
of the AD Operating Agreement and (ii) any AD Equity Securities purchased
pursuant to Section 3.8(d) of the AD Operating Agreement, in each case as
equitably adjusted or as a result of or in connection with any dividend, split
or reverse split (in respect of any AD Equity Securities) or any combination,
recapitalization, reclassification, merger or consolidation, exchange or
distribution.
"ARI" shall mean American Recordings, Inc., a New York corporation.
"Balance Sheet Date" shall have the meaning set forth in Section
4.7(b).
"Business Day" shall mean any day that is not a Saturday, a Sunday or a
day on which banks are required or permitted to be closed in the State of New
York or California.
"Common Units" shall mean the AD Common Units and the UBL Common Units.
"Constellation Voting Agreements and Irrevocable Proxys" shall mean the
agreements to be executed pursuant to Section 6.2(b).
-2-
<PAGE> 4
"Contract" shall mean any contract, agreement, indenture, note, bond,
loan, instrument, lease, conditional sale contract, mortgage, license,
franchise, insurance policy, commitment or other arrangement or agreement,
whether written or oral.
"Contribution Agreement" shall mean that certain Contribution Agreement
dated as of August 5, 1997 by and between UBL and ARI.
"Conversion Units" shall mean the AD Conversion Units and the UBL
Conversion Units.
"Employment Agreements" shall mean the employment agreements of Marc
Geiger and Donald Muller, substantially in the forms attached hereto as EXHIBIT
B-1 AND B-2, as such agreements may be amended, supplemented or otherwise
modified from time to time in accordance with the terms thereof.
"Environmental Law" means any and all federal, state, local, provincial
and foreign, civil and criminal laws, statutes, rules, ordinances, codes,
regulations, permits relating to the protection of health and the environment,
worker health and safety and or governing the use, handling, storage, discharge
or disposal of Hazardous Substances, including but not limited to the
Comprehensive Environmental Response, Compensation and Liability Act, 42 USC
Section 9601 et. seq., the Resource Conservation and Recovery Act, 42 USC
Section 6901 et. seq., the Occupational Health and Safety Act, 29 USC Section
651 et. seq., the Canadian Environmental Protection Act; and the state and
provincial analogues thereto, all as amended or superseded from time to time.
"Equity Securities" shall mean all shares, options, warrants, general
or limited partnership interests, limited liability company membership interest,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Exchange Act).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974
(or any successor legislation thereto), as amended from time to time and any
regulations promulgated thereunder.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all rules and regulations promulgated thereunder.
"Fiscal Year" shall mean the twelve month fiscal year of a Company.
"Founders Voting Agreement and Power of Attorney" shall have the
meaning set forth in Section 6.1(f).
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time.
"Governmental Authority" shall mean any nation or government, any state
or
-3-
<PAGE> 5
other political subdivision thereof, any court or arbitrator (public or
private), and any agency, department, instrumentality, authority or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Hazardous Material" means petroleum and petroleum products,
radioactive materials, asbestos-containing materials, radon, lead-based paint,
polychlorinated biphenyls, pesticides and any other chemicals, substances,
wastes or materials defined, listed or regulated by any Environmental Law.
"Indebtedness" of any Person shall mean (i) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services with respect to which a Person is liable, contingent or otherwise, as
obligor or otherwise (other than obligations to trade creditors incurred in the
ordinary course of business which are not more than 30 days past due), (ii) all
obligations evidenced by notes, bonds, debentures or similar instruments, (iii)
all indebtedness created or arising under any conditional sale or other title
retention agreements with respect to property acquired by such Person, (iv) any
commitment by which a Person assures a creditor against loss (including
contingent reimbursement obligations with respect to letters of credit), (v) any
obligations under capitalized leases with respect to which a Person is liable,
contingently or otherwise, (vi) any unsatisfied obligation for "withdrawal
liability" to a "multiemployer plan" as such terms are defined under ERISA or
for other liabilities under Title IV of ERISA, (vii) any indebtedness of another
described in (i) through (vi) above guaranteed in any manner by such Person
(including, without limitation, guarantees in the form of an agreement to
repurchase or reimburse) or which is secured by a lien or encumbrance on such
Person's assets to the extent of the indebtedness guaranteed or the assets
subject to such lien or encumbrance.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"IRS" shall mean the Internal Revenue Service, or any successor
thereto.
"Law" means any federal, state, local or foreign law (including common
law), statute, code, ordinance, rule, regulation or other requirement or
guideline.
"Lien" shall mean any lien, pledge, hypothecation, levy, mortgage, deed
of trust, security interest, claim, lease, charge, option, right of first
refusal, preemptive right easement, or other real estate declaration, covenant,
condition, restriction or servitude, transfer restriction under any shareholder
or similar agreement, encumbrance or any other restriction or limitation
whatsoever.
"Manager" shall mean the AD Manager and the UBL Manager.
"Member" shall mean the AD Members and the UBL Members.
"Material Adverse Effect" shall mean any material adverse effect on (i)
the business, assets, operations, prospects of the Company as listed on SCHEDULE
A or condition (financial or otherwise) of a Person or any of its subsidiaries
or (ii) the ability of a Person to enter into this Agreement, consummate the
transactions contemplated hereby or in the other Transaction Documents to which
such Person is a party or perform any of its obligations under
-4-
<PAGE> 6
this Agreement or the other Transaction Documents to which such Person is a
party.
"Non-Competition Agreements" shall mean the non-competition agreements
of Marc Geiger and Donald Muller contained in the Employment Agreements as well
as the non-competition agreements entered into with those individuals listed on
SCHEDULE 5.1 and substantially in the form of EXHIBIT C attached hereto.
"Operating Agreements" shall mean the AD Operating Agreement and the
UBL Operating Agreement.
"Options" shall mean the AD Option and the UBL Option.
"Option Conversion Units" shall mean the number of Common Units into
which Option Units are convertible.
"Option Units" shall mean the AD Option Units and the UBL Option Units.
"Person" shall mean any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including, any instrumentality, division, agency, body or department thereof).
"Public Market Sale" shall mean any sale of Common Stock after the QIPO
which is made pursuant to Rule 144 promulgated by the SEC under the Securities
Act or which is made pursuant to a registration statement filed with and
declared effective by the SEC.
"QIPO" shall mean a public offering of common stock of the corporate
successor to a Company at a price at least twice the then-current Conversion
Price (as defined in such Company's Operating Agreement) per share of such
common stock with net proceeds to such Company of no less than $15 million and
firmly underwritten by any of the underwriters listed on SCHEDULE B or any other
underwriter of comparable quality.
"Registration Rights Agreements" shall mean the AD Registration Rights
Agreement and the UBL Registration Rights Agreement.
"SEC" shall mean the U.S. Securities and Exchange Commission, or any
successor thereto.
"Securities" shall mean the Units, Conversion Units, Option Units and
Option Conversion Units.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
all rules and regulations promulgated thereunder.
"Subsidiaries" shall mean any Person more than 50% of the voting
interest of which is owned, directly or indirectly, by Company or any Subsidiary
of Company; provided, however, that UBL shall at all times be deemed a
"Subsidiary" of AD.
-5-
<PAGE> 7
"Transaction Documents" shall mean this Agreement, the Operating
Agreements, the Registration Rights Agreements, the Founders Voting Agreement
and Power of Attorney, Constellation Voting Agreements and Irrevocable Proxys,
the Employment Agreements and the Non-Competition Agreements.
"Transfer" shall have the meaning set forth in Section 1.1 of the UBL
Operating Agreement.
"UBL" shall have the meaning set forth in the preamble to this
Agreement.
"UBL Common Units" shall mean the Common Units authorized under the UBL
Operating Agreement or any class of Equity Securities issued in exchange
therefor in any merger, consolidation or recapitalization.
"UBL Conversion Units" shall mean the UBL Common Units into which the
UBL Units are convertible, as adjusted from time to time in accordance with the
terms of the UBL Operating Agreement.
"UBL Manager" shall mean the manager of UBL (which on the date hereof
shall be ADNM) or any successor(s) appointed pursuant to the UBL Operating
Agreement or any Person performing a similar function.
"UBL Member" shall have the meaning set forth in Section 1.1 of the UBL
Operating Agreement.
"UBL Operating Agreement" shall mean the amended and restated operating
agreement of UBL dated the date hereof.
"UBL Option" shall mean Purchasers' option to make an additional
capital contribution to UBL of up to $400,000 (on the terms and conditions set
forth in this Agreement exercisable for a period of 30 days following the
Closing hereunder) for which Purchasers shall receive additional UBL Preferred
Units in accordance with Section 3.3(c) of the UBL Operating Agreement.
"UBL Option Units" shall mean the number of UBL Preferred Units for
which the UBL Option is exercisable.
"UBL Preferred Units" shall mean a series of Preferred Units to be
designated "Series A Preferred Units" which shall be convertible into UBL Common
Units, in accordance with the terms of the UBL Operating Agreement.
"UBL Registration Rights Agreement" shall mean the Registration Rights
Agreement by and between UBL and Purchasers, substantially in the form attached
hereto as EXHIBIT A-2 as such agreement may be amended, supplemented or
otherwise modified from time to time in accordance with the terms thereof.
"UBL Units" shall mean (i) 1,200 UBL Preferred Units sold to Purchasers
-6-
<PAGE> 8
hereunder as adjusted from time to time in accordance with the terms of the UBL
Operating Agreement and (ii) any Equity Securities purchased pursuant to Section
3.8(d) of the UBL Operating Agreement, in each case as equitably adjusted or as
a result of or in connection with any dividend, split or reverse split (in
respect of any Equity Securities) or any combination, recapitalization,
reclassification, merger or consolidation, exchange or distribution.
"Units" shall mean the AD Units and the UBL Units.
References to this "Agreement" shall mean this Securities Purchase
Agreement, including all amendments, modifications and supplements and any
exhibits or schedules to any of the foregoing, and shall refer to the Agreement
as the same may be in effect at the time such reference becomes operative.
Any accounting term used in this Agreement shall have, unless otherwise
specifically provided herein, the meaning customarily given such term in
accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
consistently applied. That certain terms or computations are explicitly modified
by the phrase "in accordance with GAAP" shall in no way be construed to limit
the foregoing. The words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole, including the Exhibits and
Schedules hereto, as the same may from time to time be amended, modified or
supplemented, and not to any particular section, subsection or clause contained
in this Agreement. Any reference to an Article, Section or Exhibit means an
Article or Section of or Exhibit to this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, including the terms "Purchaser" and
"Purchasers," and pronouns stated in the masculine, feminine or neuter gender
shall include the masculine, the feminine and the neuter. The word "including"
shall mean "including, without limitation," whether or not so expressed.
II. THE PURCHASE OF SHARES AND OPTIONS; TRANSFERS
2.1. Purchase of Units. (a) Subject to the terms and conditions set
forth in this Agreement and in the AD Operating Agreement, upon execution of
this Agreement (the "Closing Date"), Purchasers agree to purchase from AD and AD
agrees to issue and sell to Purchasers, (i) the AD Units and (ii) the AD Option.
The aggregate purchase price for the AD Units and the AD Option is $1,800,000,
payable in full on the Closing Date in cash or immediately available funds.
(b) Subject to the terms and conditions set forth in this
Agreement and in the UBL Operating Agreement, on the Closing Date, Purchasers
agree to purchase from UBL and UBL agrees to issue and sell to Purchasers, (i)
the UBL Units and (ii) the UBL Option. The aggregate purchase price for the UBL
Units and the UBL Option is $1,200,000, payable in full on the Closing Date in
cash, immediately available funds or the cancellation of that certain
Subordinated Secured Convertible Bridge Note dated as of June 12, 1998.
2.2. Closing. The closing of the purchase and sale of the Units and the
Options (the "Closing") shall take place at the offices of Kramer, Levin,
Naftalis & Frankel or such other place as shall be mutually agreed to by the
parties hereto.
-7-
<PAGE> 9
2.3. Use of Proceeds. (a) AD shall use its proceeds as follows:
(i) $1,501,000 will be contributed to ADNM, $1,200,000 of which will be used to
purchase 1,200 Series B Preferred Units and the balance of which will be used to
launch the "ARTISTdirect Stores" and to provide for ADNM's general corporate
needs, including working capital and capital expenditures, (ii) $174,000 will be
used to make tax distributions pursuant to Section 8.5 of the AD Operating
Agreement to Geiger and Muller in respect of AD's 1997 Fiscal Year, (iii)
$75,000 will be used to return a capital contribution made by Geiger to AD, and
(iv) $50,000 will be paid to Geiger as compensation for the period commencing
January 1, 1998 through and including the Closing Date.
(b) UBL shall use the proceeds of the sale of the Units and the
Option to enhance its internet sites, launch the "UBL Store" and provide for its
general corporate needs, including working capital and capital expenditures.
III. PURCHASERS' REPRESENTATIONS
Each Purchaser severally makes the following representations and
warranties to each Company with respect to such Purchaser, each and all of which
shall survive the Closing hereunder:
3.1. Investment Intention. Purchaser is purchasing the Units for its
own account, for investment purposes and not with a view to the distribution
thereof. Purchaser will not, directly or indirectly, subdivide, offer or
Transfer any of the Units (or solicit any offers to buy, purchase, or otherwise
acquire any of the Units), except in compliance with the Securities Act.
3.2. Accredited Investor. Purchaser is an "accredited investor" (as
that term is defined in Rule 501 of Regulation D under the Securities Act) and
by reason of its business and financial experience, it has such knowledge,
sophistication and experience in business and financial matters as to be capable
of evaluating the merits and risks of the prospective investment, is able to
bear the economic risk of such investment and is able to afford a complete loss
of such investment.
3.3. Corporate Existence. Purchaser is a corporation or partnership, as
applicable, duly organized, validly existing and in good standing under the laws
of its jurisdiction of formation.
3.4. Power; Authorization; Enforceable Obligations. The execution,
delivery and performance by Purchaser of this Agreement and the other
Transaction Documents to which it is a party and the consummation of the
transactions contemplated by the foregoing: (i) are within Purchaser's power and
authority; (ii) have been duly authorized by all necessary or proper action;
(iii) are not in contravention (with or without the lapse of time or giving of
notice or both) of any provision of the limited partnership agreement or
Articles or By-Laws (as applicable) of Purchaser; and (iv) do not and will not
violate (with or without the lapse of time or giving of notice or both), any Law
or regulation, or any order or decree of any Governmental Authority. This
Agreement and the other Transaction Documents to which Purchaser is a party have
each been duly executed and delivered by Purchaser and (assuming the due
authorization, execution and delivery by the other parties hereto and thereto)
constitute the legal, valid and binding
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<PAGE> 10
obligations of Purchaser, enforceable against it in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally
and to general principles of equity (regardless of whether enforcement is sought
in a proceeding at law or in equity).
3.5 No Brokers. Purchaser does not have any liability or obligation to
pay any fees or commissions to any investment adviser, broker, finder, agent or
any other person with respect to the transactions contemplated by this
Agreement.
IV. COMPANY'S REPRESENTATIONS AND WARRANTIES
Each of the Companies, severally and not jointly, makes the following
representations and warranties to Purchasers, each and all of which shall
survive the Closing hereunder:
4.1. Capitalization. SCHEDULE 4.1 sets forth both prior to and after
giving effect to the Closing, the authorized equity capital of Company and each
of its Subsidiaries and the number of issued and outstanding securities of each
class of Equity Securities of Company and each of its Subsidiaries. All of the
issued and outstanding Equity Securities, including, the Units, are validly
issued, fully paid and non-assessable. SCHEDULE 4.1 hereto contains a complete
and correct list of all holders of Equity Securities of Company and each
Subsidiary and the number of securities owned by each. Except as set forth on
SCHEDULES 4.1 AND 4.9 or as contemplated by this Agreement or the agreements set
forth on such Schedules, there are (i) no existing options, warrants, calls,
commitments or other Contracts to which Company or any Subsidiary is a party
requiring, and no convertible securities of Company or any Subsidiary
outstanding which upon conversion would require, the issuance of any additional
Equity Securities of Company or any Subsidiary, or other securities convertible
into Equity Securities of Company or any Subsidiary, (ii) no Contracts to which
Company or any Subsidiary is a party or, to the knowledge of Company, to which
any holder of Equity Securities of Company or any Subsidiary is a party, with
respect to the voting or Transfer of such Equity Securities and (iii) no
shareholders' preemptive rights or rights of first refusal or other similar
rights with respect to the issuance of Equity Securities by Company or any
Subsidiary. True and correct copies of the Articles of Organization and the
Operating Agreement of Company and the organizational documents and operating
agreements of each Subsidiary have been delivered to Purchasers.
4.2. Authorization and Issuance of Units, Conversion Units and Options.
The issuance by Company of the Units and the Options have been duly authorized
by all necessary corporate action on the part of Company and, upon issuance in
accordance with the terms hereof, the Units will be validly issued, fully paid
and non-assessable, free and clear of all Liens. The issuance of the Conversion
Units of Company has been duly authorized by all necessary corporate action on
the part of Company and, when issued upon conversion in accordance with the
terms of the Operating Agreement of Company, such Conversion Units will have
been validly issued, fully paid and non-assessable, free and clear of all Liens.
The issuance of the Option Units and the Option Conversion Units of Company has
been duly authorized by all necessary corporate action on the part of Company
and, when issued (i) upon exercise of the Option (in the case of the Option
Units) or (ii) upon conversion (in the case of the Option Conversion Units) in
accordance with the terms of the Operating Agreement of Company, will have been
validly issued, fully paid and non-assessable, free and clear of all Liens.
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<PAGE> 11
4.3. Securities Laws. In reliance on the investment representations
contained in Sections 3.1 and 3.2, the offer, issuance, sale and delivery of the
Securities, as provided in this Agreement, are exempt from the registration
requirements of the Securities Act and all applicable state securities Laws, and
are otherwise in compliance with such Laws. Neither Company nor, to its best
knowledge after due inquiry, any Person acting on its behalf has taken or will
take any action which might subject the offering, issuance or sale of the
Securities to the registration requirements of Section 5 of the Securities Act.
4.4. Corporate Existence; Compliance with Law. Company and each of its
Subsidiaries (i) is a limited liability company duly organized, validly existing
and in good standing under the laws of the applicable jurisdiction of
organization; (ii) is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification (except for
jurisdictions in which the failure to so qualify or to be in good standing would
not have a Material Adverse Effect); (iii) has the requisite power and authority
and the legal right to own, pledge, mortgage or otherwise encumber and operate
its properties, to lease the property it operates under lease, and to conduct
its business as now being conducted; (iv) has all licenses, permits, consents or
approvals from or by, and has made all filings with, and has given all notices
to, all Governmental Authorities having jurisdiction, to the extent required for
such ownership, operation and conduct except where such failure would not have
or could not reasonably be expected to have, singly or in the aggregate, a
Material Adverse Effect; (v) is in compliance with its organizational documents
and operating agreements; and (vi) is in compliance with all applicable
provisions of Law, except for such noncompliance which would not have, or could
not reasonably be expected to have, a Material Adverse Effect.
4.5. Subsidiaries. (a) The sole Subsidiaries of AD and its Subsidiaries
(other than UBL) are ARTISTdirect New Media, LLC, ARTISTdirect Agency, LLC,
Kneeling Elephant Records, LLC, and ARTISTdirect Holdings, L.L.C. Except as
disclosed on SCHEDULE 4.5, neither AD nor any of its Subsidiaries (other than
UBL) holds any Equity Securities or other proprietary interest, directly or
indirectly, of any Person or has any agreement or arrangement to acquire any
Equity Securities or other proprietary interest other than the interests
described in this Section 4.5.
(b) There are no Subsidiaries of UBL. ARTISTdirect New Media, LLC
("ADNM") is the sole UBL Manager and the sole UBL Members are ADNM and ARI. ADNM
holds its membership interests in UBL free and clear of all Liens. Except as
disclosed on SCHEDULE 4.5, UBL does not hold any Equity Securities or other
proprietary interest, directly or indirectly, of any Person or have any
agreement or arrangement to acquire any Equity Securities or other proprietary
interest other than the interests described in this Section 4.5.
4.6. Corporate Power; Authorization; Enforceable Obligations. Except as
set forth in SCHEDULE 4.6 (a) the execution, delivery and performance by Company
of this Agreement, the other Transaction Documents to which it is a party and
all instruments and documents to be delivered by Company, the issuance and sale
by Company of the Securities and its Option and the consummation of the other
transactions contemplated by any of the foregoing: (i) are within Company's
power and authority; (ii) have been duly authorized by all necessary or proper
action; (iii) are not in contravention (with or without the lapse of time or
giving of notice
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<PAGE> 12
or both) of any provision of Company's or any Subsidiary's organizational
documents or operating agreements; (iv) do not and will not violate (with or
without the lapse of time or giving of notice or both) any Law, or any order or
decree of any Governmental Authority; (v) do not and will not (with or without
the lapse of time or giving of notice or both) conflict with or result in the
breach or termination of, constitute a default under, accelerate any performance
required by, give rise to any right to increase the obligations or otherwise
modify the terms under, any Contract to which Company or any of its Subsidiaries
is a party or by which Company, any of its Subsidiaries or any of their
respective assets or property is bound; (vi) do not and will not (with or
without the lapse of time or giving of notice or both) result in the creation or
imposition of any Lien upon any of the assets or property of Company or any of
its Subsidiaries; and (vii) do not require the consent or approval of, or any
filing with, any Governmental Authority or any other Person, except in the case
of (iv), (v), (vi) and (vii) for such violations, conflicts, breaches,
terminations, defaults, accelerations, rights, modifications, Liens, consents,
approvals or filings which, singly or in the aggregate, would not have or could
not reasonably be expected to have, a Material Adverse Effect. Each of this
Agreement and the other Transaction Documents to which Company is a party has
been duly executed and delivered by Company and (assuming the due authorization,
execution and delivery by the other parties hereto and thereto) each constitutes
a legal, valid and binding obligation of Company, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
(b) Except as set forth on SCHEDULE 4.6, neither Company nor any
Subsidiary is a party to any Contract or covenant limiting the freedom of
Company or any Subsidiary to compete in any line of business or with any Person
in any geographic region within or outside of the United States of America.
4.7. Financial Statements. (a) The unaudited consolidated balance sheet
of Company as at December 31, 1997 (the "Balance Sheet") and the related
unaudited consolidated statements of income, retained earnings and cash flows
for the year then ended, with the opinion thereon of Arthur Andersen & Co. and
the unaudited consolidated balance sheet of Company as at March 31, 1998 and the
related consolidated unaudited statements of income, retained earnings and cash
flows for the three months then ended (collectively, the "Financials"), copies
of which have previously been delivered to Purchasers, have been prepared in
good faith from the books and records of Company, are complete and correct in
all material respects, and have been prepared in conformity with practices
consistently applied by Company throughout the periods involved and present
fairly in all material respects the consolidated financial position of Company
as at the dates thereof, and the consolidated results of its operations and cash
flows for the periods then ended. The Financials have been prepared in
conformity with GAAP. The books and records of Company from which the Financials
have been prepared are complete and correct.
(b) Except as set forth on SCHEDULE 4.7, neither Company nor any
of its Subsidiaries has any material obligations, contingent or otherwise which
are not reflected in the Balance Sheet, other than those incurred since the end
of Company's most recent Fiscal Year (the "Balance Sheet Date"), in the ordinary
course of business.
(c) Except as set forth on SCHEDULE 4.7, no dividends or other
distributions have
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<PAGE> 13
been declared, paid or made upon any Equity Securities of Company, nor have any
Equity Securities of Company been redeemed, retired, purchased or otherwise
acquired for value by Company since the Balance Sheet Date.
4.8. Ownership of Property. (a) Neither Company nor any of its
Subsidiaries owns any real property. Each of Company and its Subsidiaries has
valid, marketable and insurable leasehold interests in the leases described in
SCHEDULE 4.8 hereto. All real property leased by Company and its Subsidiaries is
set forth on SCHEDULE 4.8. Each of such leases is valid and enforceable against
Company and, to Company's or any of its Subsidiary's knowledge, against the
other parties thereto in accordance with its terms and is in full force and
effect. Company has delivered to Purchaser true and complete copies of each of
such leases set forth on SCHEDULE 4.8 and all documents affecting the rights or
obligations of Company or any of its Subsidiaries.
(b) Except as disclosed on SCHEDULE 4.8, (i) neither Company nor
any of its Subsidiaries is obligated under or a party to, any option, right of
first refusal or any other contractual right to purchase, acquire, sell, assign
or dispose of any real property leased by Company or such Subsidiary and (ii) no
real property lease is subject to any lease, sublease, license or other Contract
granting to any other Person any right to the use, occupancy or enjoyment of the
real property lease or any part thereof.
(c) Each of Company and its Subsidiaries has good and marketable
title to, or valid leasehold interests in, all items of tangible personal
property owned or used by it, free and clear of all Liens, except for Liens (i)
for taxes that are not yet due and payable and that are not material to Company
or any Subsidiary and (ii) that would not have, or could not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Effect.
SCHEDULE 4.8 sets forth all leases of personal property involving annual
payments in excess of $25,000 relating to personal property used in the business
of Company or any Subsidiary or to which Company or any Subsidiary is a party or
by which Company, any Subsidiary or any of their respective properties or assets
is bound. Each of the personal property leases is in full force and effect and
is valid, binding and enforceable against Company and, to Company's or any of
its Subsidiary's knowledge, against the other parties thereto in accordance with
its terms. All items of tangible personal property which, individually or in the
aggregate, are material to the operation of the business of Company or any
Subsidiary are in good condition and in a state of good maintenance and repair
(ordinary wear and tear excepted) and are suitable for the purposes used for the
operation of the business of Company or such Subsidiary.
4.9. Material Contracts; Indebtedness. (a) Except as set forth on
SCHEDULE 4.9, neither Company nor any Subsidiary is a party to, nor are any of
their respective properties or assets bound by any (i) Contract not made in the
ordinary course of business; (ii) employment, consulting, management,
non-competition, severance, golden parachute or indemnification Contract
(including, in each case any Contract to which Company or any Subsidiary is a
party involving employees of Company or any Subsidiary); (iii) advertising,
public relations, franchise, distributorship or sales agency Contract; (iv)
Contract involving the commitment, payment or receipt in excess of $25,000 in
the aggregate or which extend for a term of more than one year from the date
hereof; (v) Contract granting a right of first refusal for the acquisition, sale
or lease of any assets or Equity Securities of Company; (vi) Contract with any
Person involving a sharing of profits; (vii) mortgage, pledge, conditional sales
contract, security
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<PAGE> 14
agreement, factoring agreement or other similar Contract with respect to any
real or tangible personal property of Company; (viii) loan agreement, credit
agreement, deed of trust, promissory note, guarantee, subordination agreement,
letter of credit or any other similar type of Contract; (ix) Contract with any
Governmental Body; (x) Contract with respect to the discharge, storage or
removal of Hazardous Materials; (xi) retainer Contract with attorneys,
accountants, actuaries, appraisers, investment bankers or other professional
advisers; (xii) joint venture, partnership or similar Contract; (xiii) Contracts
between Company or any of its Subsidiaries on the one hand, and any of their
respective Affiliates on the other hand; or (xiv) commitment or agreement to
enter into any of the foregoing (collectively, the "Material Contracts").
(b) Company has delivered to Purchasers true, correct and complete
copies of each of the Contracts listed on SCHEDULE 4.9 (or in the case of
unwritten contracts, oral summaries thereof as included in such Schedule),
together with all amendments, modifications, supplements or side letters
affecting the obligations of any party thereunder. Each Material Contract is a
valid and binding agreement of Company or its Subsidiaries (as the case may be)
enforceable against Company and, to Company's or any of its Subsidiary's
knowledge, against the other parties thereto in accordance with its terms.
Company and each of its Subsidiaries has fulfilled all obligations required
pursuant to the Material Contract to have been performed by Company or such
Subsidiary on its part except where the failure to fulfill such obligations
would not have, or could not reasonably be expected to have, singly or in the
aggregate, a Material Adverse Effect. Except as set forth in SCHEDULE 4.9,
neither Company nor any of its Subsidiaries is (with or without the lapse of
time or the giving of notice, or both) in default or breach, nor to Company's or
such Subsidiary's knowledge is any third party (with or without the lapse of
time or the giving of notice, or both) in default or breach under or with
respect to any Material Contract, except for such defaults or breaches as would
not have or could not reasonably be expected to have a Material Adverse Effect.
No previous or current party to any Material Contract has given notice of or
made a claim with respect to any breach or default thereunder, except for such
defaults or breaches as would not have or could not reasonably be expected to
have a Material Adverse Effect. Except as set forth on SCHEDULE 4.9, since the
Balance Sheet Date, neither Company nor any of its Subsidiaries has incurred any
Indebtedness other than in the ordinary course of business and consistent with
past practice.
4.10. Environmental Protection. (a) Company and each of its
Subsidiaries are in compliance with Environmental Laws and Company and each of
its Subsidiaries have obtained and are in compliance with all necessary permits,
licenses, approvals and authorizations required under applicable Environmental
Laws, except for such noncompliance which would not have, or could not
reasonably be expected to have, singly or in the aggregate, a Material Adverse
Effect.
(b) Company has not, and to its best knowledge after due inquiry,
no third party has released Hazardous Materials at, from, on, in, to or under
the any of the properties or assets owned, leased or operated (or formerly owned
or operated) by Company or its Subsidiaries, and there are no underground
storage tanks, polychlorinated biphenyl-containing equipment or
asbestos-containing material at any of the properties or assets owned, leased or
operated (or formerly owned or operated) by Company or its Subsidiaries.
(c) There are no past, pending or, to its best knowledge,
threatened, claims, notices of violation, investigations, litigation,
administrative proceedings, orders, judgments against Company or any of its
Subsidiaries relating to Hazardous Materials, Environmental Laws
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<PAGE> 15
or relating to any other location where Hazardous Materials from Company or any
of its Subsidiaries, or to the knowledge of Company or any of its Subsidiaries,
any of its predecessors have been transported, stored, handled, disposed,
treated or have otherwise come to be located ("Environmental Claims") and
neither Company nor any of its Subsidiaries is aware of any facts, events,
conditions or circumstances which could reasonably be expected to form the basis
of any Environmental Claims against Company, any of its Subsidiaries, or
Purchasers.
4.11. Labor Matters. (a) There are no strikes, work stoppages,
slowdowns or other labor disputes against Company or any of its Subsidiaries nor
is any such strike, work stoppage, slowdown or other dispute pending or, to
Company's or its Subsidiaries' knowledge, threatened. All payments due from
Company and each of its Subsidiaries on account of employee health and welfare
insurance have been paid or accrued as a liability on the books of Company or
such Subsidiary. There is no organizing activity involving Company or any of its
Subsidiaries pending or, to Company's or its Subsidiaries' knowledge, threatened
by any labor union or group of employees. There are no representation
proceedings pending or, to Company's or its Subsidiaries' knowledge, threatened
with the National Labor Relations Board, and no labor organization or group of
employees of Company or its Subsidiaries has made a pending demand for
recognition. There are no complaints or charges against Company or any of its
Subsidiaries pending or, to Company's or its Subsidiaries' knowledge, threatened
to be filed with any Governmental Authority based on, arising out of, in
connection with, or otherwise relating to the employment or termination of
employment by Company or any of its Subsidiaries of any individual. Neither
Company nor any Subsidiary has received notice of the intent of any Government
Authority responsible for the enforcement of labor or employment Laws to conduct
an investigation of Company or any Subsidiary, and to the knowledge of Company
or any Subsidiary, no such investigation is in progress.
(b) Neither Company nor any of its Subsidiaries is, or during the
five years preceding the date hereof was, a party to any labor or collective
bargaining agreement and there are no labor or collective bargaining agreements
which pertain to employees of Company or its Subsidiaries.
4.12. Investment Company. Company is not and, after giving effect to
the transactions contemplated by this Agreement and the other Transaction
Documents, will not be an "investment company" as defined in the Investment
Company Act of 1940.
4.13. Taxes. Except as set forth on SCHEDULE 4.13, all federal, state,
local and foreign tax returns, reports and statements required to be filed by
Company and its Subsidiaries have been timely filed with the appropriate
Governmental Authority and all such returns, reports and statements are true,
correct and complete in all material respects. All charges, Liens and other
impositions (including interest, penalties and other charges) due and payable by
the Company and its Subsidiaries for the periods covered by such returns,
reports and statements have been fully or adequately disclosed and fully
provided for in the books and financial statements of Company, except for such
charges, impositions and Liens which would not have, or could not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Effect. Proper
and accurate amounts have been withheld by Company and its Subsidiaries from its
employees for all periods in full compliance in all material respects with the
tax, social security and unemployment withholding provisions of applicable
federal, state, local and foreign law and such withholdings have been timely
paid to the respective governmental agencies.
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Neither Company nor any of its Subsidiaries has executed or filed with the IRS
or any other Governmental Authority any agreement or other document extending,
or having the effect of extending, the period for assessment or collection of
any charges. Neither the tax returns of Company nor any Subsidiary have been
audited by the IRS or other Governmental Authorities. Neither Company nor any
Subsidiary has received any notice that any tax audits or other administrative
or judicial proceedings are pending or threatened with regard to any charges for
which Company or any Subsidiary may be liable and, to its best knowledge, no
assessment of charges is proposed against Company or any Subsidiary. Neither
Company nor any of its Subsidiaries has agreed or has been requested to make any
adjustment under IRC Section 481(a) by reason of a change in accounting method
or otherwise. Neither Company nor any of its Subsidiaries has any obligation
under any written tax sharing agreement. The Company has consistently been
treated as a partnership for tax purposes, and no action has been taken or
election filed to the contrary.
4.14. No Litigation. Except as disclosed on SCHEDULE 4.14, no action,
claim or proceeding is now pending or, to the knowledge of Company or its
Subsidiaries, threatened against Company or any of its Subsidiaries, at law, in
equity or otherwise, before any court, board, commission, agency or
instrumentality of any Governmental Authority.
4.15. Brokers. Except as set forth on SCHEDULE 4.15, neither Company
nor any of its Subsidiaries has any liability or obligation to pay any fees
(other than legal fees) or commissions to any investment adviser, broker,
finder, agent or any other person with respect to the transactions contemplated
by this Agreement. Company is solely responsible for the payment of all such
finder's or brokerage fees.
4.16. Key-Man Life Insurance. Company has purchased key-man life
insurance policies for the benefit of Company on the lives of Marc Geiger
("Geiger") and Donald Muller ("Muller") in a face amount no less than $2,000,000
for each of them and such policies are in full force and effect. No party to any
such policy has given notice of or made a claim with respect to any breach or
default thereunder or has otherwise provided any notice to Company with respect
to the cancellation or termination of any such policy.
4.17. Patents, Trademarks, Copyrights and Licenses. Company and each of
its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use, free and clear of all Liens, all licenses, patents, patent
applications, copyrights, service marks, trademarks and registrations and
applications for registration thereof, trade names, common law trade names,
domain names, and all common law or statutory trade secrets, including know-how,
inventions, designs, processes and computer programs (including source codes)
necessary to continue to conduct its business as heretofore conducted by it and
now being conducted by it (collectively, "Intellectual Property"). Except as set
forth on SCHEDULE 4.17, to Company's knowledge, (a) Company and each of its
Subsidiaries conducts its businesses without infringement or claim of
infringement of any Intellectual Property of others, and neither Company nor any
Subsidiary has received notice (or has knowledge of any valid grounds) of any
such claim and (b) there is no infringement by others (including any employee or
former employee of Company) of any Intellectual Property of Company or any of
its Subsidiaries, except for such infringements or claims of infringement which
would not result in and could not reasonably be expected to result in a Material
Adverse Effect.
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<PAGE> 17
4.18. No Material Adverse Effect. Except as set forth on SCHEDULE 4.18,
no event has occurred since March 31, 1998 which has had or could reasonably be
expected to have a Material Adverse Effect.
4.19. ERISA. Except as disclosed on SCHEDULE 4.19, (a) neither Company
nor any ERISA Affiliate (as defined below) maintains any Employee Benefit Plans.
"Employee Benefit Plan" means any "employee benefit plan" as defined in Section
3(3) of ERISA and any other plan, policy, program, practice, agreement,
understanding or arrangement (whether written or oral) providing benefits to any
current or former director, employee or independent contractor (or to any
dependent or beneficiary thereof) of Company or any ERISA Affiliate, which are
now or have ever been maintained by Company or any ERISA Affiliate or under
which Company or any ERISA Affiliate has any obligation or liability, whether
actual or contingent, including all incentive, bonus, deferred compensation,
vacation, holiday, medical, disability, stock appreciation rights, stock option,
stock purchase or other similar plans, policies, programs, practices,
agreements, understandings or arrangements. "ERISA Affiliate" means any entity
(whether or not incorporated) other than Company that, together with Company, is
or was a member of (i) a controlled group of corporations within the meaning of
Section 414(b) of the IRC, (ii) a group of trades or businesses under common
control within the meaning of Section 414(c) of the IRC, or (iii) an affiliated
service group within the meaning of Section 414(m) of the IRC.
(b) Company has neither proposed nor agreed to (i) the creation of
any new Employee Benefit Plans or (ii) the amendment or other modification to
any option plan.
4.20. Registration Under Exchange Act; Registration Rights. Neither
Company nor any of its Subsidiaries has registered any class of its securities
pursuant to Section 12 of the Exchange Act, and no such registration is required
by the Exchange Act. Except as disclosed in the documents listed on SCHEDULE 4.9
hereto and as provided in the Registration Rights Agreement, neither Company nor
any of its Subsidiaries is under any obligation to register, under the
Securities Act, any of its presently outstanding securities or any securities
which may hereafter be issued.
4.21. No Undisclosed Liabilities. Except to the extent set forth in the
Financials, (i) neither Company nor any Subsidiary has any material liabilities
and (ii) to its knowledge there is no basis for the assertion of any claim or
material liability of any nature against Company, except obligations under
Contracts described on SCHEDULE 4.9 or under Contracts that are not required to
be disclosed thereon as a result of dollar thresholds specified in Section 4.9.
4.22. Insurance. All policies of insurance are in full force and effect
and are adequate to cover risks of such types and in such amounts as is
customary for the industry in which Company or its Subsidiaries compete. All
policies of such insurance are binding and effective upon the issuers thereof
(each of whom is reputable and creditworthy) in accordance with their respective
terms. Neither Company nor any of its Subsidiaries has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that does not have a Material
Adverse Effect.
4.23. Accounts Receivable. All accounts receivable of Company and its
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Subsidiaries as shown on the Balance Sheet and all such receivables which have
arisen thereafter are collectible in the ordinary course of business by Company
or such Subsidiary, net of reserves for bad debts shown on the Balance Sheet
and, as to the period after the Balance Sheet Date, net of reserves established
consistent with prior practice in amount and nature.
4.24. Minute Books. The minute books of Company, as previously made
available to Purchasers, accurately reflect all meetings and other corporate
actions of the Members and the Manager of Company. The minute books of each
Subsidiary, as previously made available to Purchasers, accurately reflect all
meetings and other actions of its members and managers.
4.25. Year 2000 Systems. Company's and each Subsidiary's computer
systems and software that are material to its respective business are able to
accurately process date data, including calculating, comparing and sequencing
from, into and between the twentieth century (through year 1999), the year 2000
and the twenty-first century, including leap year calculations.
4.26. Full Disclosure. No information contained in this Agreement, any
other Transaction Document, the Financial Statements or any written statement
furnished by or on behalf of Company or any Subsidiary pursuant to the terms of
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading in light of the circumstances under which made.
4.27. Contribution Agreement. As of the date hereof, ADNM has not
breached or otherwise violated that certain representation contained in
subparagraph (b)(ii) of Section 6 of the Contribution Agreement.
V. COVENANTS
5.1. Affirmative Covenants. Each Company, severally but not jointly,
covenants and agrees that from and after the date hereof (except as otherwise
provided herein, or unless Purchasers shall have given their prior written
consent):
(a) Books and Records. Company shall, and shall cause its
Subsidiaries to, keep adequate records and books of account with respect to
their business activities, in which proper entries, reflecting all of their
financial transactions, are made in accordance with GAAP.
(b) Financial Statements. Until the earlier of a QIPO or such time
as Purchasers together with their Affiliates own in the aggregate directly or
indirectly, Common Units and/or Units of Company (on an as converted basis) in
an amount less than 1% (the "Information Threshold") of the issued and
outstanding Common Units of such Company, such Company shall deliver to
Purchasers the following information; provided, however, that if the Information
Threshold is not then met at the time any of the information in Sections
5.1(b)(i) through (iv) is required to be delivered by Company and Company is
otherwise delivering such information to any other Member (other than any Member
that receives such information on a confidential basis in connection with the
provision of services to Company or any of its Subsidiaries), then such
information shall also be delivered to Purchasers:
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5..(i) Monthly Statements. As soon as available, and in
any event within thirty (30) days after the end of each month, copies of
the consolidated and consolidating balance sheets of Company and its
Subsidiaries as of the end of such month, and statements of income and
retained earnings and statements of cash flows of Company and its
Subsidiaries for such month and for the portion of the Fiscal Year
ending with such month, in each case setting forth in comparative form
the figures for the corresponding period of the preceding Fiscal Year,
all in reasonable detail, and certified by the chief financial officer
of Company as being true and correct and as having been prepared in
accordance with GAAP, subject to year-end audit adjustments;
5..(ii) Quarterly Statements. As soon as available, and in
any event within forty-five (45) days after the end of each respective
quarterly fiscal period (except the last) of each Fiscal Year of
Company, copies of the consolidated and consolidating balance sheets of
Company and its Subsidiaries as of the end of such quarterly fiscal
period, and the respective statements of income and retained earnings
and statements of cash flows of Company and its Subsidiaries for such
quarterly fiscal period and for the portion of the Fiscal Year ending
with such period, in each case setting forth in comparative form the
figures for the corresponding period of the preceding Fiscal Year, all
in reasonable detail, and certified by the chief financial officer of
Company, as appropriate, as being true and correct and as having been
prepared in accordance with GAAP, subject to year-end audit adjustments;
5..(iii) Annual Statements. As soon as available and in
any event within ninety (90) days after the close of each respective
Fiscal Year of Company, copies of the audited consolidated and
consolidating balance sheets of Company as of the close of such Fiscal
Year and the respective audited statements of income and retained
earnings and statements of cash flows of Company for such Fiscal Year,
in each case, setting forth in comparative form the figures for the
preceding Fiscal Year, all in reasonable detail and accompanied by an
opinion thereon (which shall not be qualified by reason of any
limitation imposed by Company) of a "Big Six" (or comparable)
independent public accounting firm selected by Company and reasonably
satisfactory to Purchasers to the effect that such financial statements
have been prepared in accordance with GAAP and fairly present the
financial conditions and results of operations of Company and that the
examination of such accounts in connection with such financial
statements has been made in accordance with generally accepted auditing
standards and, accordingly, includes such tests of the accounting
records and such other auditing procedures as were considered necessary
in the circumstances;
5..(iv) Audit Reports. Within five (5) days of receipt
thereof, one copy of each written report submitted to Company by
independent accountants in any annual, quarterly or special audit made.
5..(v) Annual Operating Plan and Projections. Company will
deliver to Board within 30 days prior to the beginning of each quarter
and each Fiscal Year an operating plan with respect to such quarter or
Fiscal Year, as the case may be (each, an "Operating Plan"), and each
Operating Plan shall include with respect to Company and its
Subsidiaries projected consolidated balance sheets, projected
consolidated cash flow
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statements, including summary details of cash disbursements (including
for capital expenditures), and projected consolidated income statements,
in each case for any Fiscal Year on a quarterly basis with appropriate
supporting details, and each Operating Plan shall have been approved by
the audit committee of the Manager. To the extent practicable, Company
shall, and shall cause each of its Subsidiaries to, conduct its business
and operations in a manner that is consistent with the Operating Plan
that relates to such quarter or Fiscal Year.
5..(vi) Other Information. If requested by any Purchaser,
Company will deliver to such Purchaser such other information respecting
Company's or any of its Subsidiaries' business, financial condition or
prospects as such Purchaser may, from time to time, reasonably request.
(c) Transfer Tax. Company shall pay all sales, transfer, excise or
similar taxes (not including income or franchise taxes) in connection with the
issuance, sale, delivery or transfer by such Company to Purchasers of the Units,
the Options, the Conversion Units, the Option Units and the Option Conversion
Units.
(d) Maintenance of Existence and Conduct of Business. Company
shall, and shall cause its Subsidiaries to: (i) maintain insurance coverages and
their books, accounts and records in the ordinary course of business and
consistent with past practice; (ii) use its commercially reasonable best efforts
to comply in all material respects with all Laws applicable to Company; (iii)
maintain and keep their material properties and equipment in good repair,
working order and condition, ordinary wear and tear excepted; (iv) maintain,
preserve and protect all of its Intellectual Property; (v) pay and discharge
when payable all taxes, assessments and charges imposed upon its properties or
assets or upon the income or profits therefrom (in each case before the same
becomes delinquent and before penalties accrue thereon) and (vi) perform in all
material respects their obligations under all Material Contracts and commitments
to which any of them is a party or by which any of them or their respective
property or assets is bound, except where the failure to so perform would not
have a Material Adverse Effect.
(e) Access. For so long as the Information Threshold is met,
Company shall permit representatives of any Purchaser to visit and inspect any
of the properties of such Company, to examine the corporate books and records
and make copies or extracts therefrom and to discuss the affairs, finances and
accounts of such Company with the officers, employees, counsel, accountants,
independent auditors or other representatives of such Company, all at such
reasonable times, upon reasonable notice and as often as such Purchaser may
reasonably request.
(f) Intentionally omitted.
(g) Intentionally omitted.
(h) Tag-Along Rights.
5..(i) If at any time prior to a QIPO (or thereafter with
respect to any Transfer not involving a Public Market Sale) Geiger or
Muller (with respect to AD) or ADNM (with respect to UBL) or any direct
or indirect successor, assignee, heir, devisee,
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donee, legatee or transferee of any of them (each a "Transferor"),
proposes alone or with others to Transfer (directly or indirectly) any
Equity Securities (each, a "Subject Interest") in such Company which
comprise five percent (5%) or more of all then outstanding securities of
the class of Equity Securities which includes the Subject Interest (the
"Subject Interest Class") in a single transaction or series of
transactions and the Securities include (at such time or upon exercise,
conversion or exchange) any Equity Securities of the Subject Interest
Class, the would-be Transferor shall provide holders of the Securities
with not less than thirty (30) days' prior written notice of such
proposed sale, which notice shall include all of the material terms and
conditions of such proposed sale and which shall identify such purchaser
(the "Sale Notice"), and each such holder shall have the option,
exercisable by written notice to the Transferor within twenty (20) days
after the receipt of the Sale Notice, to participate in such transaction
pro rata with the Transferor at the same time as, and upon the same
terms and conditions as (including all direct or indirect consideration)
the Transferor Transfers his or her Equity Securities in Company. Each
such holder may sell all or any portion of the Securities held by such
holder (or issuable to such holder upon exercise, conversion or exchange
of any Security) which are of the class of Equity Securities which
includes the Subject Interest Class (the "Holder's Securities") equal to
the product obtained by multiplying (i) the Subject Interest by (ii) a
fraction, the numerator of which is the Holder's Securities and the
denominator of which is the total number of Equity Securities of the
Subject Interest Class then owned by the Transferor and such holder. To
the extent that one or more of such holders exercises such rights of
participation, the number of Equity Securities that the Transferor may
Transfer in the transaction shall be correspondingly reduced.
5..(ii) If any holder fails to exercise its option (each,
a "Non-Participant") to participate in such transaction as set forth in
Section 5.1(h)(i) above, the would-be Transferor shall provide notice of
such failure to the holders of the Securities that did exercise their
option to participate (the "Participants"). The Participants shall have
ten (10) days from the date such notice was given to agree to sell their
Pro Rata Share of the unsold portion which all Non-Participants in the
aggregate were entitled to sell pursuant to the provisions of Section
5.1(h)(i) but elected not to sell. For the purposes of this Section
5.1(h)(ii), the term "Pro Rata Share" shall equal the product obtained
by multiplying (i) the unsold portion by (ii) a fraction, the numerator
of which is Holder's Securities and the denominator of which is the
total number of Securities held by all Participants (or issuable to such
Participants upon exercise, conversion or exchange of any Security)
which are of the class of Equity Securities which includes the Subject
Interest Class.
(i) Non-Competition Agreements. Each of Geiger, Muller and the
employees listed on SCHEDULE 5.1 shall enter into non-competition agreements or
agreement containing covenants not to compete substantially in the form of
EXHIBIT C hereto.
(j) Right of First Offer. A Purchaser desiring to make a Transfer
(a "Selling Purchaser") pursuant to Section 12.9(c) of the UBL Operating
Agreement with respect to any Transfer of Securities of UBL or pursuant to
Section 12.9(c) of the AD Operating Agreement with respect to any Securities of
AD, shall be required to give advance notice thereof (a "Transfer Notice") to
such Company including in such Transfer Notice the quantity and nature of the
Securities, the price and the other terms and conditions upon which it is
willing to sell such
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<PAGE> 22
Securities. Such Company shall have ten (10) Business Days from the date the
Transfer Notice is given (the "First Offer Exercise Period") to elect by notice
to the Selling Purchaser whether or not to purchase the entire quantity of
Securities so offered for the price and on the terms and conditions so
specified; provided, however, that if there is more than one Selling Purchaser,
the Company shall elect whether or not to purchase the entire quantity of
securities of all Selling Purchasers. In the event that Company elects to
purchase such Securities on the terms set forth in the Transfer Notices, Company
shall pay the price so specified on the terms so specified within ninety (90)
days of the date of the Transfer Notice(s), and the Selling Purchaser(s) shall
Transfer all such Securities to Company. If within the First Offer Exercise
Period Company does not give notice electing to purchase all of such Securities,
the Selling Purchaser(s) may Transfer all such Securities to any third party (an
"Outside Transferee") at any time after the expiration of the First Offer
Exercise Period, provided the purchase price for such Securities is no less than
the purchase price offered to Company, and the other terms offered to the
Outside Transferee are no more favorable than those set forth in the Transfer
Notice. If the Selling Purchaser(s), however, does not Transfer such Securities
as provided in the preceding sentence within 120 days after the expiration of
the First Offer Exercise Period, any Transfer by the Selling Purchaser(s) of its
Securities shall again be subject to the terms of this Section 5.1(j). Any
subsequent Transfer of Securities previously Transferred in accordance with the
provisions of this Section 5.1(j) shall not be subject to this Section 5.1(j).
(k) Conversion to C-Corporation. Upon the consummation of an
initial public offering of Company, such Company shall be combined (whether by
merger, consolidation, share exchange, transfer of assets or equity or
otherwise) with a newly formed Delaware corporation so as to convert such
Company into a Delaware corporation (in accordance with the provisions of such
Company's Operating Agreement) which shall be a Subchapter C corporation for
income tax purposes.
(l) Expenses. At the Closing, AD shall reimburse Purchasers for
the reasonable attorneys fees and expenses of Kramer, Levin, Naftalis and
Frankel in connection with negotiating and preparing the Transaction Documents
and consummating the transactions contemplated thereby up to an aggregate of
$35,000.
(m) Voting Agreements. Every eleven (11) months and from time to
time, upon the reasonable request of Purchasers, each of Geiger and Muller shall
execute and deliver (i) a new voting agreement and power of attorney in form and
substance substantially similar to Exhibit E hereto and (ii) such other
documents as may be necessary in the opinion of counsel to Purchasers to give
effect to the Founders Voting Agreement and Power of Attorney dated the date
hereof.
(n) Option Plans. Each of Purchasers shall be designated as "Other
Members" under (i) any option agreement (each of which agreement shall be
substantially in the form of the 1998 Unit Option Agreement attached to
Company's 1998 Unit Option Plan) entered into by Company pursuant to its 1998
Unit Option Plan or (ii) the respective Issuance, Noncompetition and
Nonsolicitation Agreements between AD and each of Keith Yokomoto, Steve Rennie
and Robert Morse. Company shall provide in any subsequent option plan or
agreement adopted by Company rights to Purchasers substantially similar to the
rights contemplated to be granted to Purchaser's as "Other Members" under the
form of 1998 Unit Option Agreement. The right of Purchasers to be so designated
"Other Members" pursuant to
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<PAGE> 23
this Section 5.1(n) shall terminate with respect to Company upon the date the
Purchasers shall no longer satisfy the "Preemptive Threshold" as defined in such
Company's Operating Agreement.
VI. DOCUMENTS TO BE DELIVERED UPON EXECUTION OF THIS AGREEMENT
6.1. Documents to be Delivered by Company. On the Closing Date, each
Company shall deliver, or cause to be delivered, to Purchasers, the following:
(a) An opinion of legal counsel to Company, substantially in the
form attached hereto as EXHIBIT D.
(b) Resolutions of the Manager of Company, certified by the
Secretary or Assistant Secretary of the Manager, as of the Closing Date, to be
duly adopted and in full force and effect on such date, authorizing (i) the
consummation of each of the transactions contemplated by this Agreement and (ii)
specific officers to execute and deliver this Agreement and each other
Transaction Document to which it is a party.
(c) Certificates of good standing showing that Company and each
Subsidiary is organized and in good standing in the jurisdiction of its
organization.
(d) Copies of the organizational documents of Company and each
Subsidiary, certified, as applicable, as of a recent date by the applicable
Secretary of State of the jurisdiction of organization and copies of Company's
and each Subsidiary's operating agreement, certified by the Secretary or
Assistant Secretary of Company or the Subsidiary, as applicable, as true and
correct as of the Closing Date.
(e) The Registration Rights Agreements, Employment Agreements and
Non-competition Agreements each duly executed by the parties thereto.
(f) A Founders Voting Agreement and Power of Attorney executed by
each of Geiger and Muller substantially in the form of EXHIBIT E hereto.
(g) Certificates of the Secretary or an Assistant Secretary of
Company, dated the Closing Date, as to the incumbency and signatures of the
officers of Company executing this Agreement, each other Transaction Document to
which it is a party and any other certificate or other document to be delivered
pursuant hereto or thereto, together with evidence of the incumbency of such
Secretary or Assistant Secretary.
6.2. Documents to be Delivered by Purchasers. (a) On the Closing Date,
each Purchaser shall deliver, or cause to be delivered, to each Company, the
following:
6..(i) Resolutions of Purchaser, certified by an executive
officer of Purchaser, or the general partner of Purchaser, certified by a
managing member of the general partner, (as applicable) as of the Closing Date,
to be duly adopted and in full force and effect on such date, authorizing (i)
the consummation of each of the transactions contemplated by this Agreement and
(ii) a specific officer to execute and deliver this Agreement and each other
Transaction Document to which Purchaser is a party.
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<PAGE> 24
6..(ii) Certificate of an executive officer of Purchaser, or
on officer of the managing member of the general partner (as applicable) dated
the Closing Date, as to the incumbency and signatures of the officer of
Purchaser or of the officer of the general partner of Purchaser (as applicable)
executing this Agreement on behalf of Purchaser, each other Transaction Document
to which Purchaser is a party and any other certificate or other document to be
delivered pursuant hereto or thereto, together with evidence of the incumbency
of the certifying officer.
6..(iii) Surrender of the cancelled Subordinated Secured
Convertible Bridge Note dated as of June 12, 1998 and UCC termination
statements.
(b) Upon exercise of the UBL Option and the AD Option by any Person
other than Constellation, Purchasers shall deliver to each Company a
Constellation Voting Agreement and Irrevocable Proxy substantially in the form
of EXHIBIT F hereto.
VII. SECURITIES LAW MATTERS
7.1. Legends. To the extent that any Securities are at any time held in
certificated form, each such certificate shall bear a legend substantially in
the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "ACT"). SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF
THE ACT. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES
AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION.
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VIII. INDEMNIFICATION AND LIABILITY.
8.1. Indemnity. (a) Each Company, and ADNM with respect to Section
4.27, agrees to indemnify and hold harmless each Purchaser, its respective
Subsidiaries, any Affiliate of any of them and their respective officers,
directors and employees (collectively, the "Indemnified Parties") from and
against any liabilities, obligations, losses, damages, amounts paid in
settlement, penalties, actions, judgments, fines, suits, claims, costs,
attorneys' fees, expenses and disbursements of any kind ("Losses") which may be
imposed upon, incurred by or asserted against any Indemnified Party in any
manner relating to or arising out of any untrue representation, breach of
warranty or failure to perform any covenants or agreement by such Company
contained herein, in any other Transaction Document or in any certificate or
document delivered pursuant hereto. Company shall also advance expenses as
incurred to the fullest extent permitted under applicable law; provided,
however, that the Indemnified Party provides an undertaking to repay such
advances to Company if it is ultimately determined that such Indemnified Party
is not entitled to indemnification. Purchasers and Company will cooperate in the
defense of any such matter. The rights of the Indemnified Parties to
indemnification under this Article IX shall be their sole and exclusive remedy
with respect to any breach of any representation or warranty contained in this
Agreement. Notwithstanding anything to the contrary contained in this Agreement,
the amount to which any Indemnified Party shall be entitled pursuant to this
Section 8.1 shall be limited to the Losses actually sustained by such
Indemnified Party, net of any tax benefits derived by such Indemnified Party in
respect of such Losses.
(b) Indemnification Procedures. Any Indemnified Party seeking
indemnification pursuant to Section 8.1 with respect to a claim, action, suit or
proceeding by a Person who is not a Indemnified Party shall give prompt written
notice to Company of the assertion of any claim, or the commencement of any
action, suit or proceeding, in respect of which indemnity may be sought
hereunder, provided that the failure to give such notice shall not affect the
Indemnified Party's rights to indemnification hereunder unless such failure
shall prejudice in any material respect Company's ability to defend such claim,
action, suit or proceeding. Company shall have the right to assume the defense
of any such action, suit or proceeding at its expense; provided, however, that
(i) such claim, action, suit or proceeding seeks only monetary damages and, in
the reasonable judgment of the Indemnified Party, Company has adequate financial
and other resources to undertake such defense and satisfy any indemnifiable
Losses arising from such action, suit or proceeding and (ii) the selection of
counsel is approved by the Indemnified Party (which approval shall not be
unreasonably withheld or delayed). If such claim, action, suit or proceeding
seeks relief other than or in addition to monetary damages or if the Indemnified
Party so determines that Company does not have adequate resources, or Company
shall elect not to assume the defense of any such action, suit or proceeding, or
fails to make such an election within twenty (20) days after it receives such
notice pursuant to the first sentence of this Section 8.2, the Indemnified Party
may assume such defense with counsel of its choice and at the expense of Company
and shall defend such claim, action, suit or proceeding diligently and in good
faith. The Indemnified Party shall have the right to participate in (but not
control) the defense of an action, suit or proceeding defended by Company
hereunder and to retain its own counsel in connection with such action, suit or
proceeding, but the fees and expenses of such counsel shall be at the
Indemnified Party's expense; provided, however, that Company shall bear the
expenses as incurred of counsel to the Indemnified Party if (i) Company
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and the Indemnified Party have mutually agreed in writing to the retention of
such counsel or (ii) the named parties in any such action, suit or proceeding
(including impleaded parties) include Company and the Indemnified Party, and
representation of Company and the Indemnified Party by the same counsel would,
in the opinion of counsel to the Indemnified Party, create a conflict; provided
further that, unless otherwise agreed by Company, if Company is obligated to pay
the fees and expenses of such counsel, Company shall be obligated to pay only
the fees and expenses associated with one attorney or law firm, as applicable,
for the Indemnified Party, as well as the fees and expenses associated with
local counsel. Company shall not be liable under Section 8.1 for any settlement
effected without its written consent, which consent will not be unreasonably
withheld or delayed, of any claim, action, suit or proceeding in respect of
which indemnity may be sought hereunder.
IX. EXPENSES
Except as provided in Section 5.1(l), the Companies and the Purchasers
shall each bear its own expenses incurred in connection with the negotiation and
execution of this Agreement and each other Transaction Document and the
transactions contemplated hereby and thereby.
X. MISCELLANEOUS. The Purchasers and each Company agree to the following
additional terms and provisions:
10.1. Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whenever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged (including by recognized overnight
courier service) or by registered or certified mail, return receipt requested,
postage prepaid, or by telecopy and confirmed by telecopy answerback addressed
as follows:
If to AD:
ARTISTdirect, LLC
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Telecopy Number: 818-758-8722
with copies to:
Allen D. Lenard, Esq.
Lenard & Gonzalez, LLP
1900 Avenue of The Stars
25th Floor
Los Angeles, CA 90067
Telecopy Number: (310) 552-0740
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If to UBL:
The Ultimate Band List, LLC
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Telecopy Number: (818) 758-8722
with copies to:
Allen D. Lenard, Esq.
Lenard & Gonzalez, LLP
1900 Avenue of The Stars
Los Angeles, CA 90067
Telecopy Number: (310) 552-0740
If to either Purchaser:
Clifford H. Friedman
Constellation Ventures Management LLC
575 Lexington Avenue
New York, NY 10022
Telecopy Number: (212) 272-7060
with a copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Howard J. Rothman, Esq.
Telecopy Number: (212) 715-8000
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback, or
three (3) Business Days after the same shall have been deposited with the United
States mail.
10.2. Binding Effect; Benefits. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties to
this Agreement and their respective successors and permitted assigns. Nothing in
this Agreement, express or implied, is intended or shall be construed to give
any Person other than the parties to this Agreement or their respective
successors or assigns any legal or equitable right, remedy or claim under or in
respect of any agreement or any provision contained herein. Company will require
any successor to Company or any permitted assignee thereof (each, a
"Successor"), whether direct or indirect, by purchase, merger, consolidation,
operation of law or otherwise, to expressly
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assume and agree to perform this Agreement in the same manner and to the same
extent that Company would be required to perform it if no such purchase,
succession or assignment had taken place. Upon any such purchase, succession or
assignment, the references in this Agreement to Company shall also apply to any
Successor unless the context otherwise requires. No such purchase, succession,
or assignment shall relieve Company of its obligations hereunder.
10.3. Amendment. No amendment or waiver of any provision of this
Agreement or any other Transaction Document nor consent to any departure by
Company therefrom shall in any event be effective unless the same shall be in
writing and signed by Company and Purchasers and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No action taken pursuant to this Agreement, including, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action, of compliance with any representations,
warranties, covenants or agreements contained herein. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any preceding or succeeding breach and no failure by
either party to exercise any right or privilege hereunder shall be deemed a
waiver of such party's rights or privileges hereunder or shall be deemed a
waiver of such party's rights to exercise the same at any subsequent time or
times hereunder.
10.4. Successors and Assigns; Assignability. Neither this Agreement nor
any right, remedy, obligation or liability arising hereunder or by reason hereof
shall be assignable by Company without the prior written consent of Purchasers.
Subject to compliance with Section 12.9 of the UBL Operating Agreement in the
case of UBL, or Section 12.9 of the AD Operating Agreement in the case of AD,
any right, remedy, obligation or liability arising hereunder or by reason hereof
(other than pursuant to Section 5.1(f)(1)) shall be assignable by either
Purchaser in connection with the Transfer of its Securities without the prior
written consent of Company; provided, however, that no such assignment shall
relieve such Purchaser of its obligations hereunder. The term "Purchaser" shall
refer to any (i) assignee of a Purchaser upon any assignment by such Purchaser
in accordance with this Section 10.4 and (ii) transferee of a Purchaser upon any
Transfer by such Purchaser of any Securities made in compliance with the
applicable provisions of the Operating Agreements.
10.5. Remedies. Except as provided in the penultimate sentence of
Section 8.1(a), (a) each Purchaser shall be entitled to specific performance,
injunctive relief or any other equitable remedy against Company, without the
posting of a bond, or proof of actual damages, in the event of breach or
threatened breach of any provision of this Agreement and (b) Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and hereby agrees
to waive the defense in any action for specific performance that a remedy at law
would be adequate. In any action or proceeding brought to enforce any provision
of this Agreement or where any provision hereof is validly asserted as a
defense, the successful party shall be entitled to recover reasonable attorneys
fees in addition to any other available remedy.
10.6. Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
10.7. Severability. In the event that any one or more of the provisions
contained
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in this Agreement shall be determined to be invalid, illegal or unenforceable in
any respect for any reason, the validity, legality and enforceability of any
such provision or provisions in every other respect and the remaining provisions
of this Agreement shall not be in any way impaired.
10.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
10.9. Publicity. Neither Purchasers nor Company shall issue any press
release or make any public disclosure regarding the transactions contemplated
hereby unless such press release or public disclosure is approved by the other
parties in advance. Notwithstanding the foregoing, each of the parties hereto
may, in documents required to be filed by it with the SEC or other regulatory
bodies, make such statements with respect to the transactions contemplated
hereby as each may be advised by counsel is legally necessary or advisable, and
may make such disclosure as it is advised by its counsel is required by law.
10.10. Governing Law. This Agreement shall be governed by, construed
and enforced in accordance with, the laws of the State of California without
regard to the principles thereof relating to conflict of laws. Each of the
parties hereby submits to personal jurisdiction and waives any objection as to
venue in the County of Los Angeles, State of California. Service of process on
the parties in any action arising out of or relating to this Agreement shall be
effective if mailed to the parties in accordance with Section 10.1 hereof. The
parties hereto waive all right to trial by jury in any action or proceeding to
enforce or defend any rights under this Agreement.
10.11. Obligations of Company. Whenever this Agreement requires any
Subsidiary of Company to take any action, such requirement shall be deemed to
include any agreement on the part of Company to cause such Subsidiary to take
such action.
10.12. Representations, Warranties and Agreements of Geiger and Muller.
Each of Geiger and Muller (each a "Shareholder") hereby represent and warrant
that the execution, delivery and performance by such Shareholder of the Sections
of this Agreement with respect to which such Shareholder has agreed to be bound
and the consummation of transactions contemplated by such Sections of the
Agreement: (i) do not and will not violate (with or without the lapse of time or
giving of notice or both) any Law, or any order or decree of any Governmental
Authority; (ii) do not and will not (with or without the lapse of time or giving
of notice or both) conflict with or result in the breach or termination of,
constitute a default under, accelerate any performance required by, give rise to
any right to increase the obligations or otherwise modify the terms under, any
Contract to which such Shareholder is a party or by which such Shareholder's
assets or property is bound; (vi) do not and will not (with or without the lapse
of time or giving of notice or both) result in the creation or imposition of any
Lien upon any of such Shareholder's assets or property; and (vii) do not require
the consent or approval of, or any filing with, any Governmental Authority or
any other Person, except for such violations, conflicts, breaches, terminations,
defaults, accelerations, rights, modifications, Liens, consents, approvals or
filings which, singly or in the aggregate, would not have or could not
reasonably be expected to have, a material adverse effect on such Shareholder's
ability to consummate the transactions contemplated by the Sections of this
Agreement by which
-28-
<PAGE> 30
such Shareholder has agreed to be bound. This Agreement (with respect to the
Sections of this Agreement by which such Shareholder has agreed to be bound) has
been duly executed and delivered by such Shareholder and (assuming the due
authorization, execution and delivery by the other parties hereto and thereto)
each constitutes a legal, valid and binding obligation of such Shareholder,
enforceable against such Shareholder in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity).
10.13. Representations, Warranties and Agreements of ADNM. The
execution, delivery and performance by ADNM of the Sections of this Agreement
with respect to which ADNM has agreed to be bound and the consummation of
transactions contemplated by such Sections of the Agreement: (i) are within
ADNM's power and authority; (ii) have been duly authorized by all necessary or
proper action; (iii) are not in contravention (with or without the lapse of time
or giving of notice or both) of any provision of ADNM's or any of its
Subsidiary's organizational documents or operating agreements; (iv) do not and
will not violate (with or without the lapse of time or giving of notice or both)
any Law, or any order or decree of any Governmental Authority; (v) do not and
will not (with or without the lapse of time or giving of notice or both)
conflict with or result in the breach or termination of, constitute a default
under, accelerate any performance required by, give rise to any right to
increase the obligations or otherwise modify the terms under, any Contract to
which ADNM or any of its Subsidiaries is a party or by which ADNM, any of its
Subsidiaries or any of their respective assets or property is bound; (vi) do not
and will not (with or without the lapse of time or giving of notice or both)
result in the creation or imposition of any Lien upon any of the assets or
property of ADNM or any of its Subsidiaries; and (vii) do not require the
consent or approval of, or any filing with, any Governmental Authority or any
other Person, except in the case of (iv), (v), (vi) and (vii) for such
violations, conflicts, breaches, terminations, defaults, accelerations, rights,
modifications, Liens, consents, approvals or filings which, singly or in the
aggregate, would not have or could not reasonably be expected to have, a
material adverse effect on ADNM's ability to consummate the transactions
contemplated by the Sections of this Agreement by which ADNM has agreed to be
bound.. This Agreement (with respect to the Sections of this Agreement by which
ADNM has agreed to be bound) has been duly executed and delivered by ADNM and
(assuming the due authorization, execution and delivery by the other parties
hereto and thereto) each constitutes a legal, valid and binding obligation of
ADNM, enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and to general principles of equity
(regardless of whether enforcement is sought in a proceeding at law or in
equity).
-29-
<PAGE> 31
IN WITNESS WHEREOF, each of the parties listed below has executed this
Agreement as of the day and year first above written.
ARTISTdirect, LLC
By:________________________________
Name:
Title:
THE ULTIMATE BAND LIST, LLC
By:________________________________
Name:
Title:
CONSTELLATION VENTURE CAPITAL, L.P.
By: Constellation Ventures Management LLC,
as General Partner
By:________________________________
Clifford H. Friedman
Member
CONSTELLATION VENTURES (BVI), INC.
By:________________________________
Clifford H. Friedman
President and Chief Executive Officer
<PAGE> 32
ARTISTdirect New Media, LLC hereby agrees to be bound by the provisions
of Section 4.27, Section 5.1(f) and (h), Section 8.1 and Article X of this
Agreement.
ARTISTdirect New Media, LLC
By: ARTISTdirect, LLC
By:________________________________
Name: Marc P. Geiger
Title: Member
By:________________________________
Name: Donald P. Muller
Title: Member
<PAGE> 33
Marc Geiger and Donald Muller each hereby agrees to be bound by the
provisions of Section 5.1(h) and (m) and Article X of this Agreement.
MARC GEIGER
________________________________
DONALD MULLER
________________________________
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. DEFINITIONS..........................................................................1
II. THE PURCHASE OF SHARES AND OPTIONS; TRANSFERS........................................7
2.1. Purchase of Units. ..........................................................7
2.2. Closing.......................................................................8
2.3. Use of Proceeds...............................................................8
III. PURCHASERS' REPRESENTATIONS..........................................................8
3.1. Investment Intention..........................................................8
3.2. Accredited Investor...........................................................8
3.3. Corporate Existence...........................................................9
3.4. Power; Authorization; Enforceable Obligations.................................9
IV. COMPANY'S REPRESENTATIONS AND WARRANTIES............................................9
4.1. Capitalization................................................................9
4.2. Authorization and Issuance of Units, Conversion Units and Options............10
4.3. Securities Laws..............................................................10
4.4. Corporate Existence; Compliance with Law.....................................10
4.5. Subsidiaries.................................................................11
4.6. Corporate Power; Authorization; Enforceable Obligations......................11
4.7. Financial Statements.........................................................12
4.8. Ownership of Property........................................................12
4.9. Material Contracts; Indebtedness.............................................13
4.10. Environmental Protection.....................................................14
4.11. Labor Matters................................................................14
4.12. Investment Company...........................................................15
4.13. Taxes........................................................................15
4.14. No Litigation................................................................15
4.15. Brokers......................................................................16
4.16. Key-Man Life Insurance.......................................................16
4.17. Patents, Trademarks, Copyrights and Licenses.................................16
4.18. No Material Adverse Effect...................................................16
4.19. ERISA........................................................................16
4.20. Registration Under Exchange Act; Registration Rights.........................17
4.21. No Undisclosed Liabilities...................................................17
4.22. Insurance....................................................................17
4.23. Accounts Receivable..........................................................17
4.24. Minute Books.................................................................18
4.25. Year 2000 Systems............................................................18
4.26. Full Disclosure..............................................................18
V. COVENANTS...........................................................................18
5.1. Affirmative Covenants.........................................................18
</TABLE>
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<PAGE> 35
<TABLE>
<S> <C>
(a) Books and Records.......................................................18
(b) Financial Statements....................................................18
(c) Transfer Tax............................................................20
(d) Maintenance of Existence and Conduct of Business........................20
(e) Access..................................................................20
(f) Appointment of Manager; Board Representation............................21
(g) Intentionally omitted...................................................21
(h) Tag-Along Rights........................................................21
(i) Non-Competition Agreements..............................................22
(j) Right of First Offer....................................................22
(k) Conversion to C-Corporation..............................................23
(l) Expenses................................................................23
(m) Voting Agreements........................................................23
(n) Option Plans............................................................23
VI. DOCUMENTS TO BE DELIVERED UPON EXECUTION OF THIS AGREEMENT..........................24
6.1. Documents to be Delivered by Company..........................................24
6.2. Documents to be Delivered by Purchasers.......................................24
VII. SECURITIES LAW MATTERS..............................................................25
7.1. Legends.......................................................................25
VIII. INDEMNIFICATION AND LIABILITY........................................................25
8.1. Indemnity.....................................................................25
(a) Indemnification Procedures............................................26
IX. EXPENSES............................................................................26
X. MISCELLANEOUS.......................................................................27
10.1. Notices......................................................................27
10.2. Binding Effect; Benefits.....................................................28
10.3. Amendment....................................................................28
10.4. Successors and Assigns; Assignability........................................29
10.5. Remedies.....................................................................29
10.6. Section and Other Headings...................................................29
10.7. Severability.................................................................29
10.8. Counterparts.................................................................30
10.9. Publicity....................................................................30
10.10. Governing Law...............................................................30
10.11. Obligations of Company......................................................30
10.12. Representations, Warranties and Agreements of Geiger and Muller.............30
10.13. Representations, Warranties and Agreements of ADNM..........................31
</TABLE>
-ii-
<PAGE> 1
EXHIBIT 10.9
THE ULTIMATE BAND LIST, LLC/ARTISTDIRECT, LLC
EXCHANGE, CONTRIBUTION AND DISTRIBUTION AGREEMENT
This Exchange, Contribution and Distribution Agreement (the "Agreement")
is made as of May 18, 1999 by and among ARTISTdirect, LLC, a California limited
liability company ("AD"), ARTISTdirect New Media, LLC, a California limited
liability company and indirectly wholly-owned subsidiary of AD ("ADNM"), The
Ultimate Band List, LLC, a California limited liability company (the "UBL"),
Marc Geiger ("Geiger"), Don Muller ("Muller") and each of the unitholders of the
UBL (other than ADNM) listed on the signature pages hereto (individually, a
"Unitholder," and collectively, the "Unitholders").
W I T N E S S E T H:
WHEREAS, each of AD, ADNM and the Unitholders have agreed that it is in
the best interests of all that (i) each of the Unitholders exchange their Common
Units ("UBL Common Units") and/or Series A Preferred Units ("UBL Series A
Preferred Units"), and all accrued and unpaid Preferred Return thereon, as
applicable, in the UBL (collectively, the "UBL Units") for Common Units ("AD
Common Units") and/or Series A Preferred Units ("AD Series A Preferred Units")
in AD (collectively, the "AD Units"), and an identical amount of accrued and
unpaid Preferred Return thereon, and (ii) ADNM convert its Series B Preferred
Units in the UBL ("UBL Series B Preferred Units") into UBL Common Units, and
then distribute such UBL Common Units, as well as its other UBL Common Units, to
AD and to ARTISTdirect Holdings, LLC, a California limited liability company and
direct wholly-owned subsidiary of AD ("AD Holdings"), such that upon
consummation of such distribution, AD and AD Holdings will hold a 99% and 1%
interest in the UBL, respectively, each of such transactions to occur on the
terms and conditions outlined in this Agreement; and
WHEREAS, to effect the foregoing, (i) the Unitholders have agreed to make
an aggregate capital contribution to AD in the form of 8,042,134.01 UBL Common
Units and 1,940,000 UBL Series A Preferred Units, and in exchange therefor, AD
has agreed to issue to the Unitholders, upon the terms and conditions provided
in this Agreement and in that certain Second Amended and Restated Operating
Agreement of ARTISTdirect, LLC to be entered into in connection herewith (as so
amended, the "Operating Agreement"), an aggregate of 15,469,494 AD Common Units
and an aggregate of 3,372,921 AD Series A Preferred Units, all as specified
further on the signature pages to this Agreement, (ii) in connection therewith,
all accrued and unpaid Preferred Return on such UBL Series A Preferred Units
shall become an identical amount of accrued and unpaid Preferred Return on the
AD Series A Preferred Units issued in exchange therefor, (iii) in order to
induce Rick Rubin ("Rubin") to exchange UBL Common Units for AD Common Units
hereunder and to cause the equalization of the ownership of Rubin, Geiger and
Muller, Geiger has agreed to contribute 491,467 AD Common Units to the capital
of AD, Muller has agreed to contribute 995,819 AD Common Units to the capital of
AD, and Rubin will receive an aggregate of 1,487,286 AD Common Units (which is
in excess of the number of AD Common Units which
<PAGE> 2
it would have otherwise received pursuant to the terms of this Agreement based
upon its proportionate ownership of its UBL Common Units otherwise to be
exchanged for AD Common Units), and (iv) ADNM has agreed to make an aggregate
distribution of 9,281,452 UBL Common Units to AD and 93,752 UBL Common Units to
AD Holdings.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Unitholders, AD, ADNM and the
UBL hereby agree as follows:
A G R E E M E N T:
Terms used herein which are not defined shall have such definitions as
are given to them in the Operating Agreement.
SECTION 1
The Exchange, Contribution and Distribution Transactions
1.1 Exchange Transaction. Subject to the terms and conditions set forth
in this Agreement and in the Operating Agreement, upon execution of this
Agreement, (a) each Unitholder agrees to exchange that number of UBL Common
Units and UBL Series A Preferred Units set forth after such Unitholder's name on
the signature pages to this Agreement in return for that portion of the AD
Common Units and AD Series A Preferred Units listed thereat, and AD agrees to
issue such AD Units to the Unitholders in exchange for such UBL Units, all as
specified further on the signature pages to this Agreement, and (b) in
connection with such exchange, the accrued and unpaid, Preferred Return on such
UBL Series A Preferred Units set forth after such Unitholder's name on the
signature pages to this Agreement shall become an identical amount of accrued
and unpaid Preferred Return on the AD Series A Preferred Units issued in
exchange therefor, and such UBL Units and the accrued and unpaid Preferred
Return on such UBL Series A Preferred Units shall be deemed cancelled.
1.2 Contribution Transaction. Subject to the terms and conditions set
forth in this Agreement and in the Operating Agreement, upon execution of this
Agreement, Geiger shall contribute 491,467 AD Common Units to the capital of AD,
Muller shall contribute 995,819 AD Common Units to the capital of AD, and Rubin
will receive an aggregate of 1,487,286 AD Common Units (which in excess of the
number of AD Common Units which he would have otherwise received pursuant to the
terms of this Agreement based upon his proportionate ownership of UBL Common
Units otherwise to be exchanged for AD Common Units) as set forth on the
signature pages to this Agreement, in order that the percentage ownership in AD
of each of Rubin, Geiger and Muller will be equal after giving effect to such
contribution and issuance and the other transactions contemplated by this
Agreement.
2.
<PAGE> 3
1.3 Distribution Transaction. Subject to the terms and conditions set
forth in this Agreement and in the Operating Agreement, upon execution of this
Agreement, ADNM agrees to convert all of its UBL Series B Preferred Units, and
all accrued and unpaid Preferred Return thereon, into UBL Common Units, and to
distribute such UBL Common Units, along with the 7,350,000 UBL Common Units that
it already owns, to AD and AD Holdings, as follows: ADNM will distribute
9,281,452 of such UBL Common Units to AD, and will distribute 93,752 of such UBL
Common Units to AD Holdings, so that after giving effect to such distributions,
AD and AD Holdings will hold a 99% and 1% interest in ADNM, respectively.
SECTION 2
Closing, Payment and Delivery
2.1 Closing Date and Place of Closing. The closing (the "Closing") shall
be held on May 18, 1999 (the "Closing Date") and shall be held at the offices of
Riordan & McKinzie, 300 S. Grand Avenue, 29th Floor, Los Angeles, California
90071-3109 or on such other date and at such other place as shall be mutually
agreed to by the parties hereto.
2.2 Payment and Delivery. At the Closing, AD will deliver to each
Unitholder a fully executed copy of the Operating Agreement, whereby such
Unitholder shall become the holder of that number of AD Units set forth next to
such Unitholder's name on the signature pages hereto.
SECTION 3
Representations and Warranties of AD
AD hereby represents and warrants to the Unitholders that, except as set
forth on the "Schedule of Exceptions" attached as Exhibit A hereto which refers
specifically to the representations and warranties in this Agreement and which
reasonably identifies the basis for an exception thereto:
3.1 Capitalization. Exhibit A sets forth both prior to and after giving
effect to the Closing, the authorized equity capital of AD and the number of
issued and outstanding securities of each class of securities of AD. All of the
issued and outstanding securities, including the AD Units to be issued pursuant
to the terms of this Agreement, are validly issued, fully paid and
non-assessable. Except as set forth in the Operating Agreement or on Exhibit A,
there are (i) no existing options, warrants, calls, commitments or other
contracts to which AD is a party requiring, and no convertible securities of AD
outstanding which upon conversion would require, the issuance of any additional
securities of AD, or other securities convertible into securities of AD, (ii) no
contracts to which AD is a party, with respect to the voting or Transfer of such
securities and (iii) no shareholders' preemptive rights or rights of first
refusal or other similar
3.
<PAGE> 4
rights with respect to the issuance of securities by AD. True and correct copies
of the Articles of Organization of AD and the Operating Agreement have been
delivered to the Unitholders.
3.2 Authorization and Issuance of Units. The issuance by AD of the AD
Units has been duly authorized by all necessary action on the part of AD and,
upon issuance in accordance with the terms hereof, the AD Units will be validly
issued, fully paid and non-assessable, free and clear of all liens.
3.3 Securities Laws. In reliance on the investment representations
contained in Section 4.4 of this Agreement, and assuming that each of the
Unitholders resides at the address listed in Section 12.4 of this Agreement, the
offer, issuance, sale and delivery of the AD Units, as provided in this
Agreement, are exempt from the registration requirements of the Securities Act
and all California state securities laws, and are otherwise in compliance with
such laws. Neither AD nor any Person acting on its behalf has taken or will take
any action which might subject the offering, issuance or sale of the AD Units to
the registration requirements of Section 5 of the Securities Act.
3.4 Existence; Compliance with Law. AD (i) is a limited liability company
duly organized, validly existing and in good standing under the laws of its
applicable jurisdiction of organization; (ii) is duly qualified as a foreign
entity and in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business requires such
qualification (except for jurisdictions in which the failure to so qualify or to
be in good standing would not have a material adverse effect on the properties,
business, condition (financial or otherwise) or results of operations (a
"Material Adverse Effect") of AD; (iii) has the requisite power and authority
and the legal right to own, pledge, mortgage or otherwise encumber and operate
its properties, to lease the property it operates under lease, and to conduct
its business as now being conducted; (iv) has all licenses, permits, consents or
approvals from or by, and has made all filings with, and has given all notices
to, all governmental authorities having jurisdiction, to the extent required for
such ownership, operation and conduct except where such failure would not have
or could not reasonably be expected to have, singly or in the aggregate, a
Material Adverse Effect on AD; (v) is in compliance with its organizational
documents and operating agreements; and (vi) is in compliance with all
applicable provisions of law, except for such noncompliance which would not
have, or could not reasonably be expected to have, a Material Adverse Effect on
AD.
3.5 Subsidiaries. Except as disclosed on Exhibit A, there are no
subsidiaries of AD, and AD does not hold any securities or other proprietary
interest, directly or indirectly, of any Person or have any agreement or
arrangement to acquire any securities or other proprietary interest other than
the interests described in Exhibit A.
3.6 Power, Authorization; Enforceable Obligations. Except as set forth in
Exhibit A (a) the execution, delivery and performance by AD of this Agreement
and all agreements to be executed and delivered in connection herewith (the
"Ancillary Agreements") to which it is a party and all other instruments and
documents to be delivered by AD, the issuance by AD of the
4.
<PAGE> 5
AD Units and the consummation of the other transactions contemplated by any of
the foregoing: (i) are within AD's power and authority; (ii) have been duly
authorized by all necessary or proper action; (iii) are not in contravention
(with or without the lapse of time or giving of notice or both) of any provision
of AD's organizational documents or Operating Agreement; (iv) do not and will
not violate (with or without the lapse of time or giving of notice or both) any
law, or any order or decree of any governmental authority; (v) do not and will
not (with or without the lapse of time or giving of notice or both) conflict
with or result in the breach or termination of, constitute a default under,
accelerate any performance required by, give rise to any right to increase the
obligations or otherwise modify the terms under, any contract to which AD is a
party or by which AD or any of its assets or property is bound; (vi) do not and
will not (with or without the lapse of time or giving of notice or both) result
in the creation or imposition of any lien upon any of the assets or property of
AD; and (vii) do not require the consent or approval of, or any filing with, any
governmental authority or any other Person, except in the case of (iv), (v),
(vi) and (vii) for such violations, conflicts, breaches, terminations, defaults,
accelerations, rights, modifications, liens, consents, approvals or filings
which, singly or in the aggregate, would not have or could not reasonably be
expected to have, a Material Adverse Effect on AD. Each of this Agreement and
the other Ancillary Agreements to which AD is a party has been duly executed and
delivered by AD and, assuming the due authorization, execution and delivery by
the other parties hereto and thereto, each constitutes a legal, valid and
binding obligation of AD, enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity).
3.7 Securities Act. It is acquiring the UBL Units for investment and not
with the current view to, or for resale in connection with, any distribution
thereof, other than in compliance with Federal and State securities laws. It is
an "accredited investor" within the meaning of the Securities Act and the rules
thereunder, and understands that the UBL Units have not been registered under
the Securities Act nor qualified under any State blue sky law by reason of
specified exemptions therefrom which depend upon, among other things, the bona
fide nature of the investment intent expressed herein. It acknowledges that the
UBL Units must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available.
3.8 Disclosure. The representations and warranties of AD contained in (i)
this Agreement and the exhibits attached hereto and (ii) any certificate
furnished or to be furnished to the Unitholders at the Closing, when read
together, do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made.
3.9 Investment Company. AD is not and, after giving effect to the
transactions contemplated by this Agreement and the Ancillary Agreements, will
not be an "investment company" as defined in the Investment Company Act of 1940.
5.
<PAGE> 6
SECTION 4
Representations and Warranties of Unitholders
Each Unitholder hereby represents and warrants to AD, individually and
not collectively, that:
4.1 Existence; Power and Authority. If not an individual, it (i) is a
limited liability company, partnership or corporation duly organized, validly
existing and in good standing under the laws of its applicable jurisdiction of
organization or formation, and (ii) is duly qualified as a foreign entity and in
good standing under the laws of each jurisdiction where its ownership or lease
of property or the conduct of its business requires such qualification (except
for jurisdictions in which the failure to so qualify or to be in good standing
would not have a Material Adverse Effect on such entity). Whether or not it is
an individual, it has all requisite power, authority and capacity to enter into
this Agreement and the Ancillary Agreements to which it is a party and all other
documents to be executed and delivered by it pursuant to the terms hereof, to
exchange the UBL Units to be exchanged by it, and to carry out and perform its
other obligations under such agreements and other documents
4.2 Authorization; No Conflicts. All action on the part of it necessary
for the authorization, execution, delivery and performance by it of this
Agreement and the Ancillary Agreements to which it is a party, and for the
consummation of the transactions contemplated herein, has been taken. This
Agreement and the Ancillary Agreements to which it is a party have been duly
executed and delivered by it, and assuming the due authorization, execution and
delivery by the other parties hereto, will be a valid and binding obligation of
it, enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally and to general principles of equity (regardless of
whether enforcement is sought in a proceeding at law or in equity). The
execution, delivery and performance by it of this Agreement and the Ancillary
Agreements to which it is a party and compliance therewith will not result in
any violation of and will not conflict with, or result in a breach of any of the
terms of, or constitute a default under, or require any consent under, (i) any
provision of state or federal law to which it is subject, or (ii) any mortgage,
indenture, agreement, instrument, judgment, decree, order, or, to the best
knowledge of it, any rule or regulation or other restriction to which it is a
party or by which it or any of its assets are bound.
4.3 Representations Regarding Exchange of UBL Units.
(a) It has good and valid title to the UBL Units being exchanged
by it pursuant to this Agreement, free and clear of all liens, encumbrances,
security interests and claims whatsoever;
6.
<PAGE> 7
(b) Upon exchange of its portion of the UBL Units, as provided
herein, at the Closing, it will convey to AD good and valid title to such UBL
Units, free and clear of all liens, encumbrances and security interests of any
kind; and
(c) No actions, suits or proceedings before or by any court or
governmental agency, body or authority, or arbitrator are pending or threatened
or contemplated, seeking to prevent the exchange of the UBL Units or the
consummation of the transactions contemplated by this Agreement.
4.4 Representations Regarding Receipt of AD Units. It:
(a) is acquiring the AD Units for its own account, for investment
purposes and not with a current view to the distribution thereof, and will not,
directly or indirectly, subdivide, offer or Transfer any of the AD Units (or
solicit any offers to buy, purchase, or otherwise acquire any of the AD Units),
other than in compliance with Federal and State securities laws and the terms of
the Operating Agreement and the Securities Purchase Agreement (as defined in
Section 11);
(b) is an "accredited investor" within the meaning of the
Securities Act and the rules thereunder, and understands that the AD Units have
not been registered under the Securities Act nor qualified under any State blue
sky law by reason of specified exemptions therefrom which depend upon, among
other things, the bona fide nature of the investment intent expressed herein;
(c) subject to the provisions of the Operating Agreement and the
Securities Purchase Agreement, acknowledges that the AD Units must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available; and
(d) is aware that AD has a short operating history, and that an
investment in the AD Units is highly speculative.
4.5 Disclosure. The representations and warranties of it contained in (i)
this Agreement and the exhibits attached hereto and (ii) any certificate
furnished or to be furnished to AD at the Closing, when read together, do not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
7.
<PAGE> 8
SECTION 5
Intentionally Omitted
SECTION 6
Conditions to Obligations of AD
The obligation of AD to issue the AD Units in exchange for the UBL Units,
and to consummate the other transactions contemplated by this Agreement and the
Ancillary Agreements, is subject to the fulfillment on or prior to the Closing
Date of each of the following conditions:
6.1 Representations and Warranties. The representations and warranties of
each of the Unitholders shall be true and correct in all respects on the Closing
Date.
6.2 Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with by the Unitholders on or prior
to the Closing Date shall have been performed or complied with in all respects.
6.3 Legal Issuance. At the time of the Closing, the exchange of the UBL
Units for the AD Units shall be legally permitted by all laws and regulations to
which the parties to this Agreement are subject.
6.4 Qualification. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and exchange of the UBL Units for the AD Units pursuant
to this Agreement shall have been duly obtained and shall be effective on and as
of the Closing.
6.5 Deliveries at Closing. At the Closing, the Unitholders will deliver
to AD, as applicable, the following documents:
(i) the Operating Agreement, in substantially the form attached
hereto as Exhibit B, duly executed by each Unitholder; and
(ii) the Amended and Restated Registration Rights Agreement of
AD, in substantially the form attached hereto as Exhibit C (the "Registration
Rights Agreement"), duly executed by each Unitholder that is a party thereto.
8.
<PAGE> 9
SECTION 7
Conditions to Obligations of the Unitholders
The obligations of the Unitholders to exchange their UBL Units for AD
Units, and to consummate the other transactions contemplated by this Agreement
and the Ancillary Agreements, is subject to the fulfillment on or prior to the
Closing Date of each of the following conditions:
7.1 Representations and Warranties. The representations and warranties
made by AD shall be true and correct in all respects on the Closing Date.
7.2 Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with by AD on or prior to the Closing
Date shall have been performed or complied with in all respects.
7.3 Legal Issuance. At the time of the Closing, the exchange of the UBL
Units for the AD Units shall be legally permitted by all laws and regulations to
which the parties to this Agreement are subject.
7.4 Qualification. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and exchange of the UBL Units for the AD Units pursuant
to this Agreement shall have been duly obtained and shall be effect on and as of
the Closing.
7.5 Deliveries at Closing. At the Closing, AD will deliver to the
Unitholders, as applicable, the following documents:
(i) the Operating Agreement, duly executed by AD;
(ii) the Registration Rights Agreement, duly executed by AD;
(iii) a long form certificate of good standing (with tax) showing
that AD is organized and in good standing in its jurisdiction of organization;
(iv) copies of the organizational documents of AD, certified as
of a recent date by the Secretary of State of the jurisdiction of its
organization; and
(v) a certificate or certificates executed by duly elected
officers of AD certifying that the representations and warranties of such entity
are true and correct in all respects on the Closing Date, that all covenants,
agreements and conditions contained in this Agreement to be performed or
complied with by it on or before the Closing Date shall have been so performed
or complied with, certifying the organizational documents of AD specified in
9.
<PAGE> 10
(iv) above, and further certifying the names and signatures of such individuals
authorized to sign this Agreement and such certificate and the Ancillary
Agreements.
SECTION 8
Intentionally Omitted
SECTION 9
Indemnification and Liability
9.1 Indemnity.
(a) Each Unitholder agrees, individually and not collectively, to
indemnify and hold harmless AD, its Affiliates and their respective officers,
directors and employees from and against any liabilities, obligations, losses,
damages, amounts paid in settlement, penalties, actions, judgments, fines,
suits, claims, costs, attorneys' fees, expenses and disbursements of any kind
("Losses") which may be imposed upon, incurred by or asserted against any such
party in any manner relating to or arising out of any untrue representation,
breach of warranty or failure to perform any covenants or agreement by such
party contained herein, in any other Ancillary Agreement or in any certificate
or document delivered pursuant hereto or thereto.
(b) AD agrees to indemnify and hold harmless the Unitholders from
and against any Losses which may be imposed upon, incurred by or asserted
against them in any manner relating to or arising out of any untrue
representation, breach of warranty or failure to perform any covenants or
agreement by AD contained herein or in any certificate or document delivered
pursuant hereto or thereto.
(c) Each indemnifying party (an "Indemnifying Party") also agrees
to advance expenses as incurred to the fullest extent permitted under applicable
law; provided, however, that the party being indemnified (the "Indemnified
Party") provides an undertaking to repay such advances to such party if it is
ultimately determined that such Indemnified Party is not entitled to
indemnification. Each of the Unitholders and AD will cooperate in the defense of
any such matter. The rights of the Indemnified Parties to indemnification under
this Section 9 shall be their sole and exclusive remedy with respect to any
breach of any representation or warranty contained in this Agreement.
Notwithstanding anything to the contrary contained in this Agreement, the amount
to which any Indemnified Party shall be entitled pursuant to this Section 9.1
shall be limited to the Losses actually sustained by such Indemnified Party, net
of any tax benefits derived by such Indemnified Party in respect of such Losses.
9.2 Indemnification Procedures. Any Indemnified Party seeking
indemnification pursuant to Section 9.1 with respect to a claim, action, suit or
proceeding by a Person who is not
10.
<PAGE> 11
a Indemnified Party shall give prompt written notice to the Indemnifying Party
of the assertion of any claim, or the commencement of any action, suit or
proceeding, in respect of which indemnity may be sought hereunder, provided that
the failure to give such notice shall not affect the Indemnified Party's rights
to indemnification hereunder unless such failure shall prejudice in any material
respect the ability of the Indemnifying Party to defend such claim, action, suit
or proceeding. The Indemnifying Party shall have the right to assume the defense
of any such action, suit or proceeding at its expense; provided, however, that
(i) such claim, action, suit or proceeding seeks only monetary damages and, in
the reasonable judgment of the Indemnified Party, the Indemnifying Party has
adequate financial and other resources to undertake such defense and satisfy any
indemnifiable Losses arising from such action, suit or proceeding and (ii) the
selection of counsel is approved by the Indemnified Party (which approval shall
not be unreasonably withheld or delayed). If such claim, action, suit or
proceeding seeks relief other than or in addition to monetary damages or if the
Indemnified Party so determines that the Indemnifying Party does not have
adequate resources, or the Indemnifying Party shall elect not to assume the
defense of any such action, suit or proceeding, or fails to make such an
election within twenty (20) days after it receives such notice pursuant to the
first sentence of this Section 9.2, the Indemnified Party may assume such
defense with counsel of its choice and at the expense of the Indemnifying Party
and shall defend such claim, action, suit or proceeding diligently and in good
faith. The Indemnified Party shall have the right to participate in (but not
control) the defense of an action, suit or proceeding defended by the
Indemnifying Party hereunder and to retain its own counsel in connection with
such action, suit or proceeding, but the fees and expenses of such counsel shall
be at the Indemnified Party's expense; provided, however, that the Indemnifying
Party shall bear the expenses as incurred of counsel to the Indemnified Party if
(i) the Indemnifying Party and the Indemnified Party have mutually agreed in
writing to the retention of such counsel or (ii) the named parties in any such
action, suit or proceeding (including impleaded parties) include the
Indemnifying Party and the Indemnified Party, and representation of the
Indemnifying Party and the Indemnified Party by the same counsel would, in the
opinion of counsel to the Indemnified Party, create a conflict; provided further
that, unless otherwise agreed by the Indemnifying Party, if the Indemnifying
Party is obligated to pay the fees and expenses of such counsel, the
Indemnifying Party shall be obligated to pay only the fees and expenses
associated with one attorney or law firm, as applicable, for the Indemnified
Party, as well as the fees and expenses associated with local counsel. The
Indemnifying Party shall not be liable under Section 9.1 for any settlement
effected without its written consent, which consent will not be unreasonably
withheld or delayed, of any claim, action, suit or proceeding in respect of
which indemnity may be sought hereunder.
SECTION 10
Expenses
AD, ADNM, the UBL and the Unitholders shall each bear their own legal and
other expenses and costs incurred in connection with the negotiation and
execution of this Agreement and each other Ancillary Agreement and the
transactions contemplated hereby and thereby.
11.
<PAGE> 12
SECTION 11
Consent to Termination of Certain Agreements; Waivers of Rights
By execution of this Agreement, each of Geiger, Muller, ADNM, the UBL and
the Unitholders that are parties to such documents hereby consents to and agrees
that, concurrent with the Closing, (i) that certain Amended and Restated
Registration Rights Agreement dated as of October, 1998 by and among the UBL,
Constellation Venture Capital, L.P., Constellation Ventures (BVI), Inc.
(collectively, "Constellation") and Rubin, (ii) that certain Voting Agreement
and Irrevocable Proxy dated August 12, 1998 by and among Psilos Group Partners,
L.P. ("Psilos Group"), Constellation, Geiger and Muller, (iii) that certain
Voting Agreement and Irrevocable Proxy dated October 1, 1998, by and among
DreamMedia Internet Ventures, LLC ("Dream Media"), Constellation, Geiger and
Muller, (iii) that certain Voting Agreement and Irrevocable Proxy dated December
1, 1998, by and among Carl Kawabe ("Kawabe"), Constellation, Geiger and Muller
and (iv) that certain Voting Agreement and Irrevocable Proxy dated December 1,
1998, by and among CCP/Psilos UBL, LLC ("CCP", and together with Psilos Group,
"Psilos"), Constellation, Geiger and Muller, shall terminate and be of no
further force and effect. In addition, each of Geiger, Muller, ADNM, the UBL and
the Unitholders that may have certain rights, in connection with the
transactions contemplated by this Agreement, pursuant to (i) Section 5.1(h) and
Section 5.1(j) of that certain Securities Purchase Agreement dated as of July
28, 1998 by and among AD, the UBL and Constellation (as amended, the "Securities
Purchase Agreement"), (ii) Section 12 of that certain Amended and Restated
Operating Agreement of the UBL dated as of July 28, 1998, as amended, and (iii)
Section 3.8(d)(i) and Section 12 of the Amended and Restated Operating Agreement
of AD, as amended, hereby consents to and agrees to waive such rights solely in
connection with the transactions contemplated by this Agreement.
SECTION 12
Miscellaneous
12.1 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with, the laws of the State of California without regard
to the principles thereof relating to conflict of laws. Each of the parties
hereby submits to personal jurisdiction and waives any objection as to venue in
the County of Los Angeles, State of California. Service of process on the
parties in any action arising out of or relating to this Agreement shall be
effective if mailed to the parties in accordance with Section 12.4 hereof. The
parties hereto waive all right to trial by jury in any action or proceeding to
enforce or defend any rights under this Agreement.
12.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of and be binding upon
the successors and assigns of the parties.
12.
<PAGE> 13
12.3 Entire Agreement. This Agreement (including any Exhibits hereto) and
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
12.4 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whenever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged (including by recognized overnight
courier service) or by registered or certified mail, return receipt requested,
postage prepaid, or by telecopy and confirmed by telecopy answerback addressed
as follows:
If to the UBL, AD, ARTISTdirect, LLC
ADNM, Geiger or The Ultimate Band List, LLC
Muller: ARTISTdirect New Media, LLC
17835 Ventura Boulevard, Suite 310
Encino, California 91316
Attention: Robert Morse
Telecopy: (818) 758-8722
Telephone: (818) 758-8700
in each case with copies to: Thomas M. Cleary, Esq.
Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071-3109
Telecopy: (213) 229-8550
Telephone: (213) 229-8529
and to: Allen D. Lenard, Esq.
Lenard & Gonzalez LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, California 90067
Telecopy: (310) 552-0740
Telephone: (310) 282-8980
If to Rubin: Rick Rubin
c/o Alan S. Halfon
Alan S. Halfon & Company
9595 Wilshire Boulevard, Suite 505
Beverly Hills, CA 90212
Telephone: (310) 385-1341
Telecopy: (310) 388-9516
13.
<PAGE> 14
with copies to: Mitch Tenzer, Esq.
Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars, 32nd Floor
Los Angeles, California 90067
Telecopy: (310) 553-7068
and to: David L. Gersh, Esq.
Paul, Hastings, Janofsky & Walker
555 S. Flower Street, 23rd Floor
Los Angeles, California 90071-2371
Telecopy: (213) 617-0705
If to Constellation: Constellation Venture Capital, L.P. and
Constellation Venture (BVI), Inc.
c/o Constellation Ventures Management LLC
575 Lexington Avenue
New York, New York 10022
Attention: Clifford H. Friedman
Telecopy: (212) 272-7060
with a copy to: Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Howard J. Rothman, Esq.
Telecopy: (212) 715-8000
Telephone: (212) 715-9100
If to Kawabe: Carl Kawabe
Donaldson, Lufkin & Jenrette
Securities Corporation
2121 Avenue of the Stars, 30th Floor
Los Angeles, California 90067
Telecopy: (310) 282-6178
If to Psilos Group: Psilos Group Partners, L.P.
or CCP/Psilos UBL, LLC
c/o Psilos Group
152 W. 57th Street, 33rd Floor
New York, New York 10019
Attention: Albert Waxman, Ph.D.
Telecopy: (212) 957-2013
14.
<PAGE> 15
with a copy to: Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Howard J. Rothman, Esq.
Telecopy: (212) 715-8000
Telephone: (212) 715-9100
If to DreamMedia: DreamMedia Internet Ventures, LLC
108 5th Street S.E., Suite 304
Charlottesville, Virginia 22902
Attention: Chet Lyons
with a copy to: Foley Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
Attention: Bruce Kinn, Esq.
Telecopy: (617) 832-7000
Telephone: (617) 832-1137
If to Blum: Scott Blum
Imusic, Inc.
516 East Harrison
Seattle, Washington 98102
Telecopy: (206) 720-0101
Telephone: (206) 720-0100
with copies to: Paul Norris
Anderson Godwin de Regt
3930 Two Union Square
601 Union Street
Seattle, Washington 98101
Telecopy: (206) 628-3049
Telephone: (206) 625-0707
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback, or
three (3) business days after the same shall have been deposited with the United
States mail.
12.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of another party under this Agreement, shall impair any such right,
power or remedy of such party nor shall it be construed to be a waiver of any
such breach or default, or an acquiescence therein, or of or in any
15.
<PAGE> 16
similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring.
12.6 Severability. In case any provision of this Agreement is held to be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not be affected or impaired thereby and such
remaining provisions shall be given effect, as nearly as may be, to carry out
the intent of the parties.
12.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
12.8 Amendment. No amendment or waiver of any provision of this Agreement
shall in any event be effective unless the same shall be in writing and signed
by AD and the Unitholders, and then such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, that Dream Media, Kawabe, Scott Blum and Psilos hereby grant to
Constellation a limited irrevocable power of attorney to act as the agent and
attorney-in-fact for such Unitholder, without power of substitution, for the
sole purpose of approving any amendments to or waivers of this Agreement on
behalf of such Unitholder, but other than an amendment or waiver pertaining to
this Agreement which would amend the liability of such Unitholder for breaches
of representations and warranties under this Agreement, or the AD Units to be
issued to such Unitholder as specified on the signature page to this Agreement,
it being expressly understood and agreed that this limited, irrevocable power of
attorney is coupled with an interest. No action taken pursuant to this
Agreement, including, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action, of compliance
with any representations, warranties, covenants or agreements contained herein.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any preceding or succeeding
breach, and no failure by any party to exercise any right or privilege hereunder
shall be deemed a waiver of such party's rights or privileges hereunder or shall
be deemed a waiver of such party's rights to exercise the same at any subsequent
time or times hereunder.
12.9 Remedies. Except as provided in the penultimate sentence of Section
9.1, (a) AD and the Unitholders shall be entitled to specific performance,
injunctive relief or any other equitable remedy against the other, as
applicable, without the posting of a bond, or proof of actual damages, in the
event of breach or threatened breach of any provision of this Agreement and (b)
each of the parties to this Agreement agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement, and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate. In any
action or proceeding brought to enforce any provision of this Agreement or where
any provision hereof is validly asserted as a defense, the successful party
shall be entitled to recover reasonable attorneys fees in addition to any other
available remedy.
16.
<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first written above.
AD:
ARTISTdirect, LLC
a California limited liability company
By: _________________________________
Marc Geiger,
Co-Chief Executive Officer
UBL:
The Ultimate Band List, LLC,
a California limited liability company
By: _________________________________
Marc Geiger,
Co-Chief Executive Officer
ADNM:
ARTISTdirect New Media, LLC,
a California limited liability company
By: _________________________________
Name:
Title:
GEIGER:
---------------------------------------
Marc Geiger
MULLER:
---------------------------------------
Donald Muller
17.
<PAGE> 18
<TABLE>
<CAPTION>
Number of Amount of Number of
AD Series A Number of Accrued and UBL Series A Number of
Preferred AD Common Unpaid Preferred UBL Common
Units to Units to Preferred Units to be Units to be
be Issued be Issued Return Exchanged Exchanged Name and Signature
- ----------- --------- ----------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
0 14,787,722 0 0 7,650,000 RUBIN:
Rick Rubin
1,439,577 0 $66,786.42 828,000 0 Constellation Venture Capital, L.P.
By: Constellation Ventures Management
LLC,
as General Partner
By: __________________________
Clifford H. Friedman,
Member
646,766 0 $30,005.49 372,000 0 Constellation Ventures (BVI), Inc.
By: __________________________
Clifford H. Friedman,
President and Chief Executive Officer
521,586 0 $18,666.66 300,000 0 DreamMedia Internet Ventures, L.L.C.
By: __________________________
Name:
Title:
69,545 0 $1,808.21 40,000 0
----------------------------------
Carl Kawabe
278,179 0 $5,865.94 160,000 0 CCP/Psilos UBL, LLC
By: Psilos Group Investors, LLC
Its: Managing Member
By: __________________________
Albert S. Waxman, Ph.D.
Senior Managing Director
</TABLE>
18.
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C>
417,269 0 $18,262.06 240,000 0 Psilos Group Partners, L.P.
By: __________________________
Albert S. Waxman, Ph.D.
Senior Managing Director
0 681,772 0 0 392,134.01
---------------------------------
Scott Blum
</TABLE>
19.
<PAGE> 20
EXHIBIT INDEX
EXHIBIT A Schedule of Exceptions (AD)
EXHIBIT B Operating Agreement
EXHIBIT C Registration Rights Agreement
<PAGE> 21
EXHIBIT A
SCHEDULE OF EXCEPTIONS
(AD)
<PAGE> 22
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
See Tab 6
<PAGE> 23
EXHIBIT B
OPERATING AGREEMENT
See Tab 4
<PAGE> 1
EXHIBIT 10.10
THE ULTIMATE BAND LIST, LLC/ IMUSIC, INC.
EXCHANGE AGREEMENT
This Exchange Agreement (the "Agreement") is made as of February __, 1999
by and among Mr. Scott Blum, an individual ("Blum"), Mr. Eric Benjamin, an
individual ("Benjamin", and collectively with Blum, the "Shareholders") and The
Ultimate Band List, LLC, a California limited liability company (the "UBL").
W I T N E S S E T H:
WHEREAS, the Shareholders have agreed to make an aggregate capital
contribution to the UBL in the form of 545,455 shares (collectively, the
"Shares") of the issued and outstanding common stock, $.01 par value (the
"Common Stock"), of Imusic, Inc., a Washington corporation (the "Corporation"),
and in exchange therefore, the UBL has agreed to issue to the Shareholders, upon
the terms and conditions provided in this Agreement and in the Amended and
Restated Operating Agreement of the UBL made as of July 28, 1998 (as amended,
the "Operating Agreement"), (i) an aggregate of 392.13 UBL Common Units (the
"Units"), and (ii) $110,000 in cash (collectively, the "Consideration"), all as
specified further on the signature pages to this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Shareholders and the UBL hereby
agree as follows:
A G R E E M E N T:
Terms used herein which are not defined shall have such definitions as
are given to them in the Operating Agreement.
SECTION 1
The Exchange Transaction
Subject to the terms and conditions set forth in this Agreement and in
the Operating Agreement, upon execution of this Agreement, each Shareholder
agrees to exchange the number of Shares set forth after such Shareholder's name
on the signature pages to this Agreement in return for that portion of the
Consideration listed thereat, and the UBL agrees to issue the Units and/or pay
the other portion of the Consideration to the Shareholders in exchange for such
Shares, all as specified further on the signature pages to this Agreement.
<PAGE> 2
SECTION 2
Closing, Payment and Delivery
2.1 Closing Date and Place of Closing. The closing (the "Closing") shall
be held on February __, 1999 (the "Closing Date") and shall be held at the
offices of Riordan & McKinzie, 300 S. Grand Avenue, 29th Floor, Los Angeles,
California 90071-3109 or on such other date and at such other place as shall be
mutually agreed to by the parties hereto.
2.2 Payment and Delivery.
(a) At the Closing, the UBL will (i) pay to each Shareholder, by
certified or bank check or wire funds transfer, the amount of cash set forth
next to such Shareholder's name on the signature pages hereto, and (ii) deliver
to Blum a fully executed copy of the Third Amendment (as defined), whereby such
Shareholder shall become the holder of that number of Units set forth next to
such Shareholder's name on the signature pages hereto.
(b) At the Closing, the Shareholders shall deliver to the UBL one
or more certificates representing the Shares being transferred by the
Shareholders pursuant to the terms of this Agreement, duly endorsed for
transfer, or with appropriate stock powers attached and properly signed; and
free and clear of any claims, liens, security interests, restrictions, pledges
and encumbrances of any kind (except for such restrictions on transfer as may
exist generally under applicable Federal and State securities laws).
SECTION 3
Representations and Warranties of Blum
Blum hereby represents and warrants to the UBL that, except as set forth
on the "Schedule of Exceptions" attached as Exhibit A hereto which refers
specifically to the representations and warranties in this Agreement and which
reasonably identifies the basis for an exception thereto:
3.1 Organization and Standing; Charter and Bylaws.
(a) The Corporation is duly organized, validly existing and in
good standing under the laws of its jurisdiction of formation. The Corporation
has all requisite corporate power and authority to own the properties owned by
it and to conduct the business as now being and as proposed to be conducted by
it.
(b) The Corporation is in good standing under the laws of, and is
qualified to do business in, the State of Washington, and in each other
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
2.
<PAGE> 3
(c) The Corporation has made available to the UBL and its counsel
true, correct and complete copies of its Articles of Incorporation and Bylaws
and all amendments thereto to date.
3.2 Power and Authority. Blum has all requisite power, authority and
capacity to enter into this Agreement and all agreements to be executed and
delivered by him pursuant to the terms hereof (collectively, the "Ancillary
Agreements"), to exchange the Shares, and to carry out and perform his other
obligations under such agreements, in each case as applicable.
3.3 Subsidiaries. The Corporation does not own of record or beneficially
any capital stock or equity interest or investment in any corporation,
partnership, association or other entity.
3.4 Capitalization. The Corporation's authorized capital stock consists
of 1,000,000 shares of Common Stock of which 545,455 shares are currently issued
and outstanding and held by the Shareholders, and 200,000 shares of Preferred
Stock, $.01 par value, of which 161,364 have been classified as Series A
Convertible Preferred Stock and are currently issued and outstanding and held by
the UBL (the "Series A Preferred Stock"). All such shares of capital stock have
been duly authorized and validly issued and are fully paid and non-assessable.
There are no outstanding preemptive, first refusal, conversion or other rights,
options, warrants or agreements granted or issued by or binding upon the
Corporation or the Shareholders for the purchase or acquisition of any shares of
the Corporation's capital stock, other than 100,000 shares of Common Stock
reserved by the Corporation for issuance under its Nonstatutory Stock Option
Plan, none of which are currently subject to outstanding options.
3.5 Authorization; No Conflicts. All action on the part of Blum necessary
for the authorization, execution, delivery and performance by him of this
Agreement and the Ancillary Agreements, and for the consummation of the
transactions contemplated herein and therein, has been taken. This Agreement and
the Ancillary Agreements have each been duly executed and delivered by the
signatories thereto, and assuming the due authorization, execution and delivery
by the other parties hereto and thereto, are valid and binding obligations of
such parties, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity). Except as set forth on Exhibit A, the execution, delivery and
performance by Blum of this Agreement and the Ancillary Agreements and
compliance therewith will not result in any violation of and will not conflict
with, or result in a breach of any of the terms of, or constitute a default
under, or require any consent under, (i) any provision of state or federal law
to which the Corporation or Blum is subject, (ii) the Corporation's Articles of
Incorporation, as amended, or Bylaws, as amended, or (iii) any mortgage,
indenture, agreement, instrument, judgment, decree, order, or, to the best
knowledge of Blum, any rule or regulation or other restriction to which the
Corporation or he is a party or by which the Corporation or he or any of his
assets are bound, or (iv) result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the assets of the Corporation pursuant to any
such item, except, with respect to (iii) and (iv) above, such violations,
conflicts, breaches, defaults,
3.
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consents, mortgages, pledges, liens, encumbrances and charges which, singly or
in the aggregate, would not have or could not reasonably be expected to have a
material adverse effect on the properties, business, condition (financial or
otherwise), prospects or results of operations (a "Material Adverse Effect") on
the Corporation.
3.6 Financial Information. The Corporation has delivered to the UBL its
unaudited financial statements (profit and loss and balance sheet) as of and for
the nine months ended September 30, 1998, copies of which are also attached
hereto at Exhibit A. Such financial statements (the "Financial Statements")
fairly present the financial information contained therein as of the date
thereof. Except as set forth in the Financial Statements, the Corporation has no
material liabilities of any nature (matured or unmatured, fixed or contingent)
except those incurred in the ordinary course of business since the date of the
Financial Statements and obligations under the terms of the contracts,
agreements or leases set forth in Exhibit A.
3.7 Schedule of Contracts and Leases. The Corporation has not entered
into any material contract, agreement or lease other than those set forth in
Exhibit A hereto. The Corporation has made available to the UBL true and
complete copies of all such contracts, agreements and leases. All parties to the
contracts, agreements and leases set forth in Exhibit A are in material
compliance therewith and none are in default thereunder. Without limiting the
generality of the foregoing provisions of this Section, except as set forth in
Exhibit A, the Corporation is not, directly or indirectly, a party to or
otherwise bound by or obligated under, any agreement, obligation or commitment
of any kind or character providing for aggregate payments to or by the
Corporation in excess of $10,000: (a) to lease, rent, license or otherwise
occupy any plant, office space or other real property; (b) for personal
services; (c) for the distribution or sale of any products; (d) for advertising
or promotion; (e) for the purchase of equipment or capital goods; (f) for the
payment of any royalty, license fee, commission or other fee or compensation;
(g) granting or otherwise creating any license, right, title or interest in or
to any patent, trade secret or other asset of the Corporation; (h) for any loan
to or by the Corporation or the guarantee by the Corporation of any loan; or (i)
any lien or encumbrance upon any asset of the Corporation.
3.8 Material Liabilities; Absence of Changes. Except as set forth in the
Financial Statements and except for liabilities incurred in the ordinary course
of business since the date thereof, the Corporation has no material liability or
obligation, absolute or contingent (individually or in the aggregate), except
for the Corporation's obligations under the terms of the contracts, agreements
or leases set forth in Exhibit A. There has been no material adverse change in
the properties, business, condition (financial or otherwise), prospects or
results of operations of the Corporation since December 31, 1997, and there is
no existing condition, event or series of events which can reasonably be
expected to adversely affect the properties, business, condition (financial or
otherwise), prospects or results of operations of the Corporation, including but
not limited to (i) any loans made to any employee, officer or director of the
Corporation other than advances of expenses made in the ordinary course of
business; (ii) any material change in any compensation arrangement or agreement
with any key employee or executive officer of the Corporation or any material
change in the rate of pay of its existing employees as a group; or
4.
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(iii) any change or amendment to any material contract or arrangement by which
the Corporation is bound or to which it or any of its assets are subject.
3.9 Representations Regarding Exchange of Common Stock.
(a) Blum has good and valid title to the Shares being exchanged
by him pursuant to this Agreement, free and clear of all liens, encumbrances,
security interests and claims whatsoever;
(b) Upon exchange of his portion of the Shares, as provided
herein, at the Closing, Blum will convey to the UBL good and valid title to such
shares of Common Stock, free and clear of all liens, encumbrances and security
interests of any kind; and
(c) No actions, suits or proceedings before or by any court or
governmental agency, body or authority, or arbitrator are pending or threatened
or contemplated, seeking to prevent the exchange of the Shares or the
consummation of the transactions contemplated by this Agreement.
3.10 Representations Regarding Receipt of UBL Common Units. Blum,
(a) is acquiring the Units for his own account, for investment
purposes and not with a current view to the distribution thereof, and will not,
directly or indirectly, subdivide, offer or Transfer any of the Units (or
solicit any offers to buy, purchase, or otherwise acquire any of the Units),
other than in compliance with Federal and State securities laws and the terms of
the Operating Agreement;
(b) is an "accredited investor" within the meaning of the
Securities Act and the rules thereunder, and understands that such Units have
not been registered under the Securities Act nor qualified under any State blue
sky law by reason of specified exemptions therefrom which depend upon, among
other things, the bona fide nature of the investment intent expressed herein;
(c) subject to the provisions of Section 3.13 of the Operating
Agreement, acknowledges that the Units must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available; and
(d) is aware that the UBL has a short operating history, and that
an investment in the Units is highly speculative.
3.11 Title to Properties; Liens and Encumbrances. The Corporation has
good and marketable title to all its properties and assets, free from all
mortgages, pledges, liens, security interests, conditional sale agreements,
encumbrances or charges.
5.
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3.12 Litigation. There are no legal actions, suits, arbitrations, or
other legal, administrative or other governmental proceedings pending or
threatened against the Corporation, its properties, assets or business, and Blum
is not aware of any facts which might result in or form the basis for any such
action, suit or other proceeding. The Corporation is not in default with respect
to any judgment, order or decree of any court of any government agency or
instrumentality. Without limiting the generality of the foregoing, Blum has no
knowledge or belief that there is pending or threatened any claim or litigation
against or affecting the Corporation contesting its right to provide services,
or to sell or use any product planned to be sold or used by the Corporation in
connection with the operations of the Corporation.
3.13 Intangible Assets. To the best knowledge of Blum, after reasonable
inquiry, the Corporation (i) owns or has the right to use, free and clear of all
liens, claims and restrictions, all patents, trademarks, service marks, trade
names, copyrights, licenses and rights with respect to the foregoing, to be used
in the conduct of its business, without infringing upon or otherwise acting
adversely to the right or claimed right of any person under or with respect to
any of the foregoing, and (ii) is not obligated or under any liability
whatsoever to make any payments by way of royalties, fees or otherwise to any
owner of, licensor of, or other claimant to, any patent, trademark, trade name,
copyright or other intangible asset with respect to the use thereof or in
connection with the conduct of its business or otherwise. Neither the
Corporation nor Blum has received any communications alleging that the
Corporation has violated, or by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity.
3.14 Year 2000 Systems. The computer systems and software of the
Corporation that are material to its business are able to accurately process
date data, including calculating, comparing and sequencing from, into and
between the twentieth century (through year 1999), the year 2000 and the
twenty-first century, including leap year calculations, except for such
inabilities to process such data that are fixable by normal, ongoing
maintenance.
3.15 Compliance with Other Instruments. The Corporation is not in
violation of any term of its Articles of Incorporation, as amended, or Bylaws,
as amended. The Corporation is not in violation of any term of any mortgage,
indenture, contract, agreement, instrument, judgment, decree, order, or, to the
best knowledge of Blum, any statute, rule or regulation to which the Corporation
is subject, and a violation of which would have a Material Adverse Effect on the
Corporation.
3.16 Employees. To the best knowledge of Blum, no employee of the
Corporation is, or is now expected to be, in violation of any term of any
employment contract, invention assignment or non-disclosure agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant relating to the right of any such employee to be employed by the
Corporation because of the nature of the business conducted or proposed to be
conducted by the Corporation or to the use of trade secrets or proprietary
information of others, and the employment of the Corporation's employees does
not subject the Corporation or the UBL to any
6.
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liability arising by reason of any such contract, agreement or restrictive
covenant or by reason of trade secret or unfair competition laws.
3.17 Licenses. To the best knowledge of Blum, the Corporation possesses
from the appropriate agency, commission, board and governmental body and
authority, whether state, local or federal, all licenses, permits,
authorizations, approvals, franchises and rights as are necessary for the
Corporation to engage in the business proposed to be conducted by it, and to the
best knowledge of Blum, all such licenses, permits, authorizations and rights
have been lawfully and validly issued, are in full force and effect, and will
not be revoked, canceled, withdrawn, terminated or suspended.
3.18 Registration Rights. Except as provided with respect to its Series A
Preferred Stock, the Corporation is not under any obligation to register any of
its securities under the Securities Act.
3.19 Disclosure. The representations and warranties of Blum contained in
(i) this Agreement and the exhibits attached hereto and (ii) any certificate
furnished or to be furnished to the UBL at the Closing, when read together, do
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
3.20 No Conflict of Interest. Except as disclosed in Exhibit A, the
Corporation is not indebted, directly or indirectly, to any officer, director or
stockholder of the Corporation or to his or her respective spouse or children,
in any amount whatsoever; none of said officers, directors or stockholders, or
any members of their immediate families, is indebted to the Corporation or has
any direct or indirect ownership interest in any firm or corporation with which
the Corporation is affiliated or with which the Corporation has a business
relationship, or any firm or corporation that competes with the Corporation,
except that officers, directors and/or stockholders of the Corporation may own
stock in publicly-traded companies that may have a business relationship with or
compete with the Corporation. To the best knowledge of Blum, other than as set
forth in or contemplated by this Agreement and the Ancillary Agreements, no such
officer, director or stockholder, or any member of his or her immediate family,
is, directly or indirectly, interested in any material contract with the
Corporation. The Corporation is not a guarantor or indemnitor of any
indebtedness.
3.21 Minute Books. The minutes of the proceedings of the stockholders and
directors of the Corporation, copies of which have been made available to the
UBL, are correct and complete and reflect all such proceedings to the date
thereof.
3.22 Labor Agreements and Actions. The Corporation is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of Blum,
has sought to represent any of the employees, representatives or agents of the
Corporation.
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3.23 Employee Benefit Plans. The Corporation does not have any Employee
Benefit Plan as described in Section 3(2)(a) or Section 3(2)(b) of the Employee
Retirement Income Security Act of 1974.
3.24 Voting Agreements. The Corporation is not a party or subject to any
agreement or understanding, and to the knowledge of Blum, there are no
outstanding agreements, voting trusts, proxies or other arrangements or
understandings among any persons and/or entities, which affect or relate to the
voting or giving of written consents with respect to any security, or by a
director, of the Corporation.
3.25 Tax Returns and Payments. The Corporation has filed all tax returns
and reports as required by law. These returns and reports are true and correct
in all material respects. The Corporation has paid all taxes and other
assessments due prior to the time material penalties would accrue thereon. The
provisions for taxes of the Corporation, if any, as shown in the Financial
Statements are adequate for taxes due or accrued as of each date thereof. None
of the Corporation's federal income tax returns and none of its state income or
franchise tax or sales or use tax returns has ever been audited by governmental
authorities. The Corporation has withheld or collected from each payment made to
each of its employees, the amount of all taxes (including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes) required to be withheld or collected therefrom, and
has paid the same to the proper tax receiving officers or authorized
depositories to the extent such are now payable.
SECTION 4
Representations and Warranties of Benjamin
Benjamin hereby represents and warrants to the UBL that, except as set
forth on the "Schedule of Exceptions" attached as Exhibit B hereto which refers
specifically to the representations and warranties in this Agreement and which
reasonably identifies the basis for an exception thereto:
4.1 Power and Authority. Benjamin has all requisite power, authority and
capacity to enter into this Agreement and all other documents to be executed and
delivered by him pursuant to the terms hereof, to exchange the Shares, and to
carry out and perform his other obligations under such agreements and other
documents
4.2 Authorization; No Conflicts. All action on the part of Benjamin
necessary for the authorization, execution, delivery and performance by him of
this Agreement, and for the consummation of the transactions contemplated
herein, has been taken. This Agreement has been duly executed and delivered by
Benjamin, and assuming the due authorization, execution and delivery by the
other parties hereto, will be a valid and binding obligation of Benjamin,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency,
8.
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reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity). Except as set forth
on Exhibit B, the execution, delivery and performance by Benjamin of this
Agreement and compliance therewith will not result in any violation of and will
not conflict with, or result in a breach of any of the terms of, or constitute a
default under, or require any consent under, (i) any provision of state or
federal law to which Benjamin is subject, or (ii) any mortgage, indenture,
agreement, instrument, judgment, decree, order, or, to the best knowledge of
Benjamin, any rule or regulation or other restriction to which he is a party or
by which he or any of his assets are bound.
4.3 Representations Regarding Exchange of Common Stock.
(a) Benjamin has good and valid title to the Shares being
exchanged by him pursuant to this Agreement, free and clear of all liens,
encumbrances, security interests and claims whatsoever;
(b) Upon exchange of his portion of the Shares, as provided
herein, at the Closing, Benjamin will convey to the UBL good and valid title to
such shares of Common Stock, free and clear of all liens, encumbrances and
security interests of any kind; and
(c) No actions, suits or proceedings before or by any court or
governmental agency, body or authority, or arbitrator are pending or threatened
or contemplated, seeking to prevent the exchange of the Shares or the
consummation of the transactions contemplated by this Agreement.
SECTION 5
Representations and Warranties of the UBL
The UBL hereby represents and warrants to the Shareholders that, except
as set forth on the "Schedule of Exceptions" attached as Exhibit C hereto which
refers specifically to the representations and warranties in this Agreement and
which reasonably identifies the basis for an exception thereto:
5.1 Capitalization. Exhibit C sets forth both prior to and after giving
effect to the Closing, the authorized equity capital of the UBL and the number
of issued and outstanding securities of each class of securities of the UBL. All
of the issued and outstanding securities, including the Units to be issued
pursuant to the terms of this Agreement, are validly issued, fully paid and
non-assessable. Except as set forth on Exhibit C, there are (i) no existing
options, warrants, calls, commitments or other contracts to which the UBL is a
party requiring, and no convertible securities of the UBL outstanding which upon
conversion would require, the issuance of any additional securities of the UBL,
or other securities convertible into securities of the UBL, (ii) no contracts to
which the UBL is a party, with respect to the voting or Transfer of such
9.
<PAGE> 10
securities and (iii) no shareholders' preemptive rights or rights of first
refusal or other similar rights with respect to the issuance of securities by
the UBL. True and correct copies of the Articles of Organization and the
Operating Agreement of the UBL have been delivered to the Shareholders.
5.2 Authorization and Issuance of Units. The issuance by the UBL of the
Units has been duly authorized by all necessary action on the part of the UBL
and, upon issuance in accordance with the terms hereof, the Units will be
validly issued, fully paid and non-assessable, free and clear of all liens.
5.3 Securities Laws. In reliance on the investment representations
contained in Section 3.10 of this Agreement, and assuming that Blum resides at
the address listed on the signature pages to this Agreement, the offer,
issuance, sale and delivery of the Units, as provided in this Agreement, are
exempt from the registration requirements of the Securities Act and all
California state securities laws, and are otherwise in compliance with such
laws. Neither the UBL nor any Person acting on its behalf has taken or will take
any action which might subject the offering, issuance or sale of the Units to
the registration requirements of Section 5 of the Securities Act.
5.4 Existence; Compliance with Law. The UBL (i) is a limited liability
company duly organized, validly existing and in good standing under the laws of
its applicable jurisdiction of organization; (ii) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business requires such
qualification (except for jurisdictions in which the failure to so qualify or to
be in good standing would not have a Material Adverse Effect on the UBL; (iii)
has the requisite power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the property
it operates under lease, and to conduct its business as now being conducted;
(iv) has all licenses, permits, consents or approvals from or by, and has made
all filings with, and has given all notices to, all governmental authorities
having jurisdiction, to the extent required for such ownership, operation and
conduct except where such failure would not have or could not reasonably be
expected to have, singly or in the aggregate, a Material Adverse Effect on the
UBL; (v) is in compliance with its organizational documents and operating
agreements; and (vi) is in compliance with all applicable provisions of law,
except for such noncompliance which would not have, or could not reasonably be
expected to have, a Material Adverse Effect on the UBL.
5.5 Subsidiaries. There are no subsidiaries of the UBL. ARTISTdirect New
Media, LLC ("ADNM") is the sole UBL Manager. Except as disclosed on Exhibit C,
and except for the shares of the Series A Preferred Stock, the UBL does not hold
any securities or other proprietary interest, directly or indirectly, of any
Person or have any agreement or arrangement to acquire any securities or other
proprietary interest other than the interests described in this Section 5.5.
5.6 Power, Authorization; Enforceable Obligations. Except as set forth in
Exhibit C (a) the execution, delivery and performance by the UBL of this
Agreement, the other Ancillary
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Agreements to which it is a party and all instruments and documents to be
delivered by the UBL, the issuance by the UBL of the Units and the consummation
of the other transactions contemplated by any of the foregoing: (i) are within
the UBL's power and authority; (ii) have been duly authorized by all necessary
or proper action; (iii) are not in contravention (with or without the lapse of
time or giving of notice or both) of any provision of the UBL's organizational
documents or Operating Agreement; (iv) do not and will not violate (with or
without the lapse of time or giving of notice or both) any law, or any order or
decree of any governmental authority; (v) do not and will not (with or without
the lapse of time or giving of notice or both) conflict with or result in the
breach or termination of, constitute a default under, accelerate any performance
required by, give rise to any right to increase the obligations or otherwise
modify the terms under, any contract to which the UBL is a party or by which the
UBL or any of its assets or property is bound; (vi) do not and will not (with or
without the lapse of time or giving of notice or both) result in the creation or
imposition of any lien upon any of the assets or property of the UBL; and (vii)
do not require the consent or approval of, or any filing with, any governmental
authority or any other Person, except in the case of (iv), (v), (vi) and (vii)
for such violations, conflicts, breaches, terminations, defaults, accelerations,
rights, modifications, liens, consents, approvals or filings which, singly or in
the aggregate, would not have or could not reasonably be expected to have, a
Material Adverse Effect on the UBL. Each of this Agreement and the other
Ancillary Agreements to which the UBL is a party has been duly executed and
delivered by the UBL and, assuming the due authorization, execution and delivery
by the other parties hereto and thereto, each constitutes a legal, valid and
binding obligation of the UBL, enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and to
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity).
5.7 Securities Act. It is acquiring the Shares for investment and not
with the current view to, or for resale in connection with, any distribution
thereof, other than in compliance with Federal and State securities laws. It is
an "accredited investor" within the meaning of the Securities Act and the rules
thereunder, and understands that the Shares have not been registered under the
Securities Act nor qualified under any State blue sky law by reason of specified
exemptions therefrom which depend upon, among other things, the bona fide nature
of the investment intent expressed herein. It acknowledges that the Shares must
be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available.
5.8 Speculative Investment. It is aware that the Corporation has a short
operating history, and that its possession of the Shares is highly speculative.
5.9 Disclosure. The representations and warranties of the UBL contained
in (i) this Agreement and the exhibits attached hereto and (ii) any certificate
furnished or to be furnished to the Shareholders at the Closing, when read
together, do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made.
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5.10 Investment Company. The UBL is not and, after giving effect to the
transactions contemplated by this Agreement and the Ancillary Agreements, will
not be an "investment company" as defined in the Investment Company Act of 1940.
SECTION 6
Conditions to Obligations of the UBL
The obligation of the UBL to issue the Units and pay the other portion of
the Consideration in exchange for the Shares, and to consummate the other
transactions contemplated by this Agreement and the Ancillary Agreements, is
subject to the fulfillment on or prior to the Closing Date of each of the
following conditions:
6.1 Representations and Warranties. The representations and warranties of
the Shareholders shall be true and correct in all respects on the Closing Date.
6.2 Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with by the Shareholders on or prior
to the Closing Date shall have been performed or complied with in all respects.
6.3 Legal Issuance. At the time of the Closing, the exchange of the
Shares for the Units and the other portion of the Consideration shall be legally
permitted by all laws and regulations to which the parties to this Agreement and
the Corporation are subject.
6.4 Qualification. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and exchange of the Shares for the Units pursuant to
this Agreement shall have been duly obtained and shall be effective on and as of
the Closing.
6.5 Due Diligence, Proceedings and Documents. The UBL shall have had a
reasonable opportunity to complete its examination of the affairs of the
Corporation, including verifying current website traffic and estimating website
hosting requirements and cost, and shall be satisfied with the results thereof.
All corporate and other proceedings in connection with the transactions
contemplated hereby and all documents and instruments incident to such
transactions shall be satisfactory in form and substance to the UBL and its
counsel.
6.6 Deliveries at Closing. At the Closing, the Shareholders will deliver
to the UBL, as applicable, the following documents:
(i) the Contingent (Tax) Loan Agreement in substantially the form
attached hereto as Exhibit D (the "Loan Agreement"), duly executed by Blum;
12.
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(ii) the Employment Agreement to be entered into by and between
the Corporation and Scott Blum in substantially the form attached hereto as
Exhibit E (the "Blum Employment Agreement"), duly executed by Blum;
(iii) the Employment Agreement to be entered into by and between
the Corporation and Robert Scheu in substantially the form attached hereto as
Exhibit F (the "Scheu Employment Agreement"), duly executed by Robert Scheu;
(iv) the Third Amendment to the Operating Agreement of the UBL in
substantially the form attached hereto as Exhibit G (the "Third Amendment"),
duly executed by Blum;
(v) an executed copy of the Amendment to the Amended and Restated
Articles of Incorporation of the Corporation in substantially the form attached
hereto as Exhibit H, certified as filed as of the date of this Agreement by the
Secretary of State of the State of Washington (the "Amended Articles");
(vi) certificates representing the Shares, duly endorsed for
transfer, or with appropriate stock powers attached and properly signed, and
other good and sufficient instruments of transfer reasonably satisfactory in
form and substance to the UBL as shall be effective to vest in the UBL all of
the Shareholders' right, title and interest in and to such Shares, free and
clear of all claims, liens, security interests, restrictions, pledges and
encumbrances of any kind;
(vii) certificates of good standing (with tax) showing that the
Corporation is organized and in good standing in its jurisdiction of
organization;
(viii) copies of the organizational documents of the Corporation
certified by the Secretary of State of the State of Washington (and including
the Amended Articles);
(ix) a certificate or certificates executed by the Shareholders,
certifying that the representations and warranties of such individuals are true
and correct in all respects on the Closing Date, that all covenants, agreements
and conditions contained in this Agreement to be performed or complied with by
each on or before the Closing Date shall have been so performed or complied
with, certifying the organizational documents of the Corporation specified in
(viii) above, and further certifying the names and signatures of such
individuals authorized to sign this Agreement and such certificate and the
Ancillary Agreements;
(x) copies of the release of claims statements (in each case with
executed receipts), each in the form attached hereto as Exhibit I, duly executed
by each of Dave Allen, Tyrone Noble, Alex Mayer, Molly Sullivan and Robert
Scheu; and
(xi) executed copies of receipts evidencing each of such
Shareholder's receipt from the UBL of that amount of cash set forth next to such
Shareholder's name on the signature page hereto.
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SECTION 7
Conditions to Obligations of the Shareholders
The obligations of the Shareholders to exchange the Shares for the
Consideration, and to consummate the other transactions contemplated by this
Agreement and the Ancillary Agreements, is subject to the fulfillment on or
prior to the Closing Date of each of the following conditions:
7.1 Representations and Warranties. The representations and warranties
made by the UBL shall be true and correct in all respects on the Closing Date,.
7.2 Performance. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with by the UBL on or prior to the
Closing Date shall have been performed or complied with in all respects.
7.3 Legal Issuance. At the time of the Closing, the exchange of the
Shares for the Units and the other portion of the Consideration shall be legally
permitted by all laws and regulations to which the parties to this Agreement and
the Corporation are subject.
7.4 Qualification. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and exchange of the Shares for the Units pursuant to
this Agreement shall have been duly obtained and shall be effect on and as of
the Closing.
7.5 Deliveries at Closing. At the Closing, the UBL will deliver to the
Shareholders, as applicable, the following documents:
(i) the Loan Agreement, duly executed by the UBL;
(ii) the Blum Employment Agreement, duly executed by the
Corporation;
(iii) the Scheu Employment Agreement, duly executed by the
Corporation;
(iv) the Third Amendment, duly executed by the UBL and all other
parties thereto;
(v) the cash portion of the Consideration, by bank or cashier's
check or wire funds transfer;
(vi) long form certificates of good standing (with tax) showing
that the UBL is organized and in good standing in its jurisdiction of
organization;
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(vii) copies of the organizational documents of the UBL certified
as of a recent date by the Secretary of State of the jurisdiction of its
organization; and
(viii) a certificate or certificates executed by duly elected
officers of the UBL certifying that the representations and warranties of such
entity are true and correct in all respects on the Closing Date, that all
covenants, agreements and conditions contained in this Agreement to be performed
or complied with by it on or before the Closing Date shall have been so
performed or complied with, certifying the organizational documents of the UBL
specified in (vii) above, and further certifying the names and signatures of
such individuals authorized to sign this Agreement and such certificate and the
Ancillary Agreements.
SECTION 8
Covenant to Pay Employee Bonuses
The UBL hereby covenants that, in the event that Blum elects to exercise
the Blum Redemption Right contained in Section 3.13 of the Operating Agreement,
then, the UBL will cause the Corporation to pay out, simultaneously with the
UBL's payment to Blum of the Blum Redemption Price, an aggregate of $200,000 in
bonus compensation to one or more employees of the Corporation, such employees
to be mutually agreed to by Blum and the UBL. Notwithstanding the foregoing, the
UBL hereby agrees that Robert Scheu will be eligible for all or a portion of
such bonus compensation, in any event in the sole discretion of Blum, and
whether or not Blum or Scheu is an employee of the Corporation at the time such
bonus is to be paid.
SECTION 9
Indemnification and Liability
9.1 Indemnity.
(a) Blum agrees to indemnify and hold harmless the UBL, its
Affiliates and their respective officers, directors and employees from and
against any liabilities, obligations, losses, damages, amounts paid in
settlement, penalties, actions, judgments, fines, suits, claims, costs,
attorneys' fees, expenses and disbursements of any kind ("Losses") which may be
imposed upon, incurred by or asserted against any such party in any manner
relating to or arising out of (i) any untrue representation, breach of warranty
or failure to perform any covenants or agreement by such party contained herein,
in any other Ancillary Agreement or in any certificate or document delivered
pursuant hereto or thereto or (ii) any and all claims, actions, suits or other
proceedings brought by or on behalf of any former employee or shareholder of the
Corporation, or any other person, which are related to the transactions
contemplated by this Agreement and the Ancillary Agreements.
15.
<PAGE> 16
(b) Benjamin agrees to indemnify and hold harmless the UBL, its
Affiliates and their respective officers, directors and employees from and
against any Losses which may be imposed upon, incurred by or asserted against
any such party in any manner relating to or arising out of any untrue
representation, breach of warranty or failure to perform any covenants or
agreement by such party contained herein, in any other Ancillary Agreement or in
any certificate or document delivered pursuant hereto or thereto.
(c) The UBL agrees to indemnify and hold harmless the
Shareholders from and against any Losses which may be imposed upon, incurred by
or asserted against them in any manner relating to or arising out of any untrue
representation, breach of warranty or failure to perform any covenants or
agreement by the UBL contained herein or in any certificate or document
delivered pursuant hereto or thereto.
(d) Each indemnifying party (an "Indemnifying Party") also agrees
to advance expenses as incurred to the fullest extent permitted under applicable
law; provided, however, that the party being indemnified (the "Indemnified
Party") provides an undertaking to repay such advances to such party if it is
ultimately determined that such Indemnified Party is not entitled to
indemnification. Each of Blum, Benjamin and the UBL will cooperate in the
defense of any such matter. The rights of the Indemnified Parties to
indemnification under this Section 9 shall be their sole and exclusive remedy
with respect to any breach of any representation or warranty contained in this
Agreement. Notwithstanding anything to the contrary contained in this Agreement,
the amount to which any Indemnified Party shall be entitled pursuant to this
Section 9.1 shall be limited to the Losses actually sustained by such
Indemnified Party, net of any tax benefits derived by such Indemnified Party in
respect of such Losses.
9.2 Indemnification Procedures. Any Indemnified Party seeking
indemnification pursuant to Section 9.1 with respect to a claim, action, suit or
proceeding by a Person who is not a Indemnified Party shall give prompt written
notice to the Indemnifying Party of the assertion of any claim, or the
commencement of any action, suit or proceeding, in respect of which indemnity
may be sought hereunder, provided that the failure to give such notice shall not
affect the Indemnified Party's rights to indemnification hereunder unless such
failure shall prejudice in any material respect the ability of the Indemnifying
Party to defend such claim, action, suit or proceeding. The Indemnifying Party
shall have the right to assume the defense of any such action, suit or
proceeding at its expense; provided, however, that (i) such claim, action, suit
or proceeding seeks only monetary damages and, in the reasonable judgment of the
Indemnified Party, the Indemnifying Party has adequate financial and other
resources to undertake such defense and satisfy any indemnifiable Losses arising
from such action, suit or proceeding and (ii) the selection of counsel is
approved by the Indemnified Party (which approval shall not be unreasonably
withheld or delayed). If such claim, action, suit or proceeding seeks relief
other than or in addition to monetary damages or if the Indemnified Party so
determines that the Indemnifying Party does not have adequate resources, or the
Indemnifying Party shall elect not to assume the defense of any such action,
suit or proceeding, or fails to make such an election within twenty (20) days
after it receives such notice pursuant to the first sentence of this Section
9.2, the Indemnified Party may assume such defense with counsel of its choice
and at the
16.
<PAGE> 17
expense of the Indemnifying Party and shall defend such claim, action, suit or
proceeding diligently and in good faith. The Indemnified Party shall have the
right to participate in (but not control) the defense of an action, suit or
proceeding defended by the Indemnifying Party hereunder and to retain its own
counsel in connection with such action, suit or proceeding, but the fees and
expenses of such counsel shall be at the Indemnified Party's expense; provided,
however, that the Indemnifying Party shall bear the expenses as incurred of
counsel to the Indemnified Party if (i) the Indemnifying Party and the
Indemnified Party have mutually agreed in writing to the retention of such
counsel or (ii) the named parties in any such action, suit or proceeding
(including impleaded parties) include the Indemnifying Party and the Indemnified
Party, and representation of the Indemnifying Party and the Indemnified Party by
the same counsel would, in the opinion of counsel to the Indemnified Party,
create a conflict; provided further that, unless otherwise agreed by the
Indemnifying Party, if the Indemnifying Party is obligated to pay the fees and
expenses of such counsel, the Indemnifying Party shall be obligated to pay only
the fees and expenses associated with one attorney or law firm, as applicable,
for the Indemnified Party, as well as the fees and expenses associated with
local counsel. The Indemnifying Party shall not be liable under Section 9.1 for
any settlement effected without its written consent, which consent will not be
unreasonably withheld or delayed, of any claim, action, suit or proceeding in
respect of which indemnity may be sought hereunder.
SECTION 10
Expenses
The UBL and the Shareholders shall each bear their own legal and other
expenses and costs incurred in connection with the negotiation and execution of
this Agreement and each other Ancillary Agreement and the transactions
contemplated hereby and thereby; provided, that the Corporation may reimburse
the Shareholders for up to $15,000 of such expenses and costs.
SECTION 11
Consent to Transaction
By execution of this Agreement, each of the Shareholders and the UBL
hereby consents to the transaction contemplated by this Agreement and the
Amended Articles pursuant to Sections 23B.07.040 and 23B.08.210 of the
Washington Business Corporation Act.
17.
<PAGE> 18
SECTION 12
Miscellaneous
12.1 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with, the laws of the State of California without regard
to the principles thereof relating to conflict of laws. Each of the parties
hereby submits to personal jurisdiction and waives any objection as to venue in
the County of Los Angeles, State of California. Service of process on the
parties in any action arising out of or relating to this Agreement shall be
effective if mailed to the parties in accordance with Section 12.4 hereof. The
parties hereto waive all right to trial by jury in any action or proceeding to
enforce or defend any rights under this Agreement.
12.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of and be binding upon
the successors and assigns of the parties.
12.3 Entire Agreement. This Agreement (including any Exhibits hereto) and
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
12.4 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any of the parties by another, or whenever any of the
parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged (including by recognized overnight
courier service) or by registered or certified mail, return receipt requested,
postage prepaid, or by telecopy and confirmed by telecopy answerback addressed
as follows:
If to the Corporation or Blum:
Scott Blum
Imusic, Inc.
516 East Harrison
Seattle, Washington 98102
Telecopy: (206) 720-0101
Telephone: (206) 720-0100
18.
<PAGE> 19
with copies to:
Paul Norris
Anderson Godwin de Regt
3930 Two Union Square
601 Union Street
Seattle, Washington 98101
Telecopy: (206) 628-3049
Telephone: (206) 625-0707
If to Benjamin:
Eric Benjamin
3719 BC Grant Road
Baldwin, Georgia 30511
Telecopy: (706) 778-1930
Telephone: (706) 776-2566
with copies to:
Gary Lisker, Esq.
337 Herrington Drive
Atlanta, Georgia 30342
Telecopy: (404) 255-4309
Telephone: (404) 256-4284
If to the UBL:
The Ultimate Band List, LLC
17835 Ventura Boulevard, Suite 310
Encino, California 91316
Attention: Robert Morse
Telecopy: (818) 758-8722
Telephone: (818) 758-8700
with copies to:
Thomas M. Cleary, Esq.
Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071-3109
Telecopy: (213) 229-8550
Telephone: (213) 229-8529
19.
<PAGE> 20
and to:
Adam M. Klotz, Esq.
Lenard & Gonzalez LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, California 90067
Telecopy: (310) 552-0740
Telephone: (310) 282-8980
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback, or
three (3) business days after the same shall have been deposited with the United
States mail.
12.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of another party under this Agreement, shall impair any such right,
power or remedy of such party nor shall it be construed to be a waiver of any
such breach or default, or an acquiescence therein, or of or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring.
12.6 Severability. In case any provision of this Agreement is held to be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not be affected or impaired thereby and such
remaining provisions shall be given effect, as nearly as may be, to carry out
the intent of the parties.
12.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
12.8 Amendment. No amendment or waiver of any provision of this Agreement
shall in any event be effective unless the same shall be in writing and signed
by the UBL and the Shareholders, and then such amendment, waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, that Benjamin hereby grants to Blum a limited
irrevocable power of attorney to act as the agent and attorney-in-fact for such
Shareholder, without power of substitution, for the sole purpose of approving
any amendments to or waivers of this Agreement on behalf of such Shareholder,
but other than an amendment or waiver pertaining to this Agreement which would
amend the liability of such Shareholder for breaches of representations and
warranties under this Agreement, or the Consideration to be paid to such
Shareholder as specified on the signature page to this Agreement, it being
expressly understood and agreed that this limited, irrevocable power of attorney
is coupled with an interest. No action taken pursuant to this Agreement,
including, any investigation by or on behalf of any party, shall be deemed to
constitute a waiver by the party taking such action, of compliance with
20.
<PAGE> 21
any representations, warranties, covenants or agreements contained herein. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any preceding or succeeding breach,
and no failure by any party to exercise any right or privilege hereunder shall
be deemed a waiver of such party's rights or privileges hereunder or shall be
deemed a waiver of such party's rights to exercise the same at any subsequent
time or times hereunder.
12.9 Remedies. Except as provided in the penultimate sentence of Section
9.1, (a) the UBL and the Shareholders shall be entitled to specific performance,
injunctive relief or any other equitable remedy against the other, as
applicable, without the posting of a bond, or proof of actual damages, in the
event of breach or threatened breach of any provision of this Agreement and (b)
each of the parties to this Agreement agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement, and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate. In any
action or proceeding brought to enforce any provision of this Agreement or where
any provision hereof is validly asserted as a defense, the successful party
shall be entitled to recover reasonable attorneys fees in addition to any other
available remedy.
21.
<PAGE> 22
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first written above.
UBL:
THE ULTIMATE BAND LIST, LLC,
a California limited liability company
By:
---------------------------------------
Marc Geiger, Co-Chief Executive Officer
<TABLE>
<CAPTION>
Number Cash Shares
of Units Consideration Exchanged Signature, Name and Address
- --------- ------------- --------- ---------------------------
<S> <C> <C> <C>
392.13 $70,000 540,000 BLUM:
--------------------------------------
Scott Blum
Imusic, Inc.
516 East Harrison
Seattle, Washington 98102
None $40,000 5,455 BENJAMIN:
--------------------------------------
Eric Benjamin
3719 BC Grant Road
Baldwin, Georgia 30511
</TABLE>
22.
<PAGE> 23
EXHIBIT INDEX
EXHIBIT A Schedule of Exceptions (Blum)/Financial Information
EXHIBIT B Schedule of Exceptions (Benjamin)
EXHIBIT C Schedule of Exceptions (UBL)
EXHIBIT D Loan Agreement
EXHIBIT E Blum Employment Agreement
EXHIBIT F Scheu Employment Agreement
EXHIBIT G Third Amendment
EXHIBIT H Amended Articles
EXHIBIT I Release Statements
<PAGE> 24
EXHIBIT A
SCHEDULE OF EXCEPTIONS
(BLUM)
3.6 Financial Information. See Section 3.19 of this Schedule of
Exceptions. In addition, the Corporation has certain contractual
responsibilities, obligations and rights in connection with the following:
(a) a $10,000 line of credit with U.S. Bank of Washington
(approximately $7,000 outstanding and payable as of the date hereof);
(b) contracts with ASCAP, BMI, ADAUCTION.COM and FLYCAST; and
(c) letters of intent and other agreements with TVMV AD SALES and
CDNOW.
3.7 Contracts and Leases. See Sections 3.6 and 3.19 of this
Schedule of Exceptions.
3.8 Material Liabilities; Absence of Changes. See Sections 3.6 and
3.19 of this Schedule of Exceptions. In addition:
(a) the Corporation may have certain contingent liability to its
former law firm for legal services, the amount of which liability is currently
unknown (but is not anticipated to exceed $30,000.00).
(b) the Corporation is in the process of negotiating and
executing a three year lease (with option to renew for one year) for
approximately 2,180 square feet of office space in Seattle, Washington,
approximately $16.30 per square foot plus parking and maintenance charges.
3.20 No Conflict of Interest. As disclosed in its financial statements,
the Corporation's founding shareholder, Scott Blum, has made certain loans to
the Corporation in the approximate aggregate principal amount of $50,000.
24.
<PAGE> 25
EXHIBIT B
SCHEDULE OF EXCEPTIONS
(BENJAMIN)
None.
25.
<PAGE> 1
EXHIBIT 10.11
CONTINGENT LOAN AGREEMENT
THIS CONTINGENT LOAN AGREEMENT (this "Agreement") is made as of
February __, 1999 by and between Scott Blum (the "Borrower") and The Ultimate
Band List, LLC, a California limited liability company (the "Lender").
R E C I T A L S:
A. Borrower desires to make an aggregate capital contribution to
Lender in the form of shares of the issued and outstanding common stock, $.01
par value (the "Common Stock"), of Imusic, Inc., a Washington corporation
("Imusic"), in exchange for 392.13 common units of Lender (the "Units") pursuant
to that certain Exchange Agreement made on even date herewith by and among
Borrower, Lender and others (the "Exchange Agreement").
B. In order to induce Borrower to enter into the Exchange Agreement,
Lender has agreed to make loans (the "Loan") on the terms and conditions set
forth in this Agreement for the purpose of helping Borrower to pay his federal
and state income tax liabilities which may be incurred as a result of the
allocation of taxable income to Borrower (the "Certain Tax Liabilities") under
either (i) Section 704(c) of the Internal Revenue Code of 1986, as amended (the
"Code"), in connection with the liquidation of Imusic or taxable disposition or
other transfer of the Common Stock or (ii) Section 737 of the Code in connection
with a distribution of property by Lender to Borrower, which does not involve
the distribution of sufficient cash or marketable securities not subject to
restrictions on sale for Borrower to pay such federal and state income tax
liabilities thereon.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing and the
agreements, representations, warranties and covenants set forth herein, the
parties hereto agree as follows:
1. Commitment. Under the terms and conditions of the Loan described
herein, Lender agrees to make loans at an annual interest rate equal to the
lowest applicable federal rate in effect for purposes of Section 1274(d) of the
Code as of the effective date of each such loan, up to an aggregate principal
amount of Borrower's Certain Tax Liabilities less aggregate Distributions (as
such term is hereinafter defined) made to Borrower through the date of such
loan. Such loans shall be made from time to time as requested by Borrower to
provide funds as needed to pay the Certain Tax Liabilities (each such loan or
advance, an "Advance"), on any business day during the period from the date
hereof until the Maturity Date (as such term is hereinafter defined) of the
Loan. For purposes of this Agreement, the term "Maturity Date" shall be the
earlier of the date that (a) Borrower exercises his redemption right pursuant to
Section 3.13 of that certain Amended and Restated Operating Agreement made as of
July 28, 1998, as amended (the "Operating Agreement"), (b) except with respect
to any sale of Units pursuant to Section 12.10 of the Operating Agreement,
<PAGE> 2
Borrower sells, transfers or otherwise disposes of all or any portion of his
Units, (c) Borrower sells all (or the remaining portion) of his Units pursuant
to Section 12.10 of the Operating Agreement, or (d) Lender makes aggregate
Distributions (as such term is hereinafter defined) to Borrower sufficient in
amount to pay the Certain Tax Liabilities of Borrower on the taxable disposition
of the Common Stock. For purposes of this Agreement, the term "Distributions"
shall mean the aggregate amount of all distributions of cash or marketable
securities not subject to restrictions on sale with respect to the Units in
excess of the amount of distributions with respect to the Units which are
necessary to pay all federal and state income taxes imposed upon Borrower as a
result of all income allocated or to be allocated by Lender with respect to the
Units through the date of the Advance (other than with respect to the Certain
Tax Liabilities).
2. Use of Proceeds; Timing. The proceeds of each Advance will be
used by Borrower only for the purpose of paying the Certain Tax Liabilities of
Borrower. Each Advance shall be made by Lender no earlier than ten (10) days
from the due date of the Certain Tax Liabilities underlying Borrower's request
for such Advance.
3. Conditions Precedent to Advances. The obligation of Lender to
make any Advance shall be subject to the following conditions precedent: (a)
receipt by Lender of a Secured Promissory Note (each, a "Note"), in the form of
Exhibit A, in like amount dated as of the expected date of the Advance and duly
executed by Borrower and in full force and effect; (b) the pledge of the Units
prescribed in Section 4 below has been duly executed by Borrower and remains in
full force and effect; and (c) upon the request of Lender, Borrower shall
provide Lender with all documentation reasonably necessary to substantiate the
Certain Tax Liabilities for which such Advance shall be used to pay and the
amount of federal and state income taxes imposed upon Borrower as a result of
income allocated or to be allocated by Lender with respect to the Units through
the date of the Advance.
4. Security for Performance. Borrower and Lender hereby acknowledge
and agree that:
(a) prior to the first Advance and until the Notes and all
other payment obligations of Borrower hereunder are paid in full, Borrower will
pledge 196.07 Units (the "Collateral Units") to secure the payment of all
obligations existing under the Notes whether for principal, interest, fees,
expenses or otherwise and/or to ensure Borrower's compliance with the terms and
conditions of this Agreement and the Unit Pledge Agreement, in the form of
Exhibit B (the "Pledge Agreement"), and
(b) that in connection with such pledge, Borrower shall enter
into the Pledge Agreement as of the date of the first Advance hereunder
requiring that Collateral Units be held by Lender as security for the payment of
all obligations existing under the Notes, whether for principal, interest, fees,
expenses or otherwise, and for Borrower's compliance with the terms and
conditions of this Agreement and the Pledge Agreement. The Notes and the Pledge
Agreement are hereinafter sometimes referred to collectively as the "Loan
Documents."
2
<PAGE> 3
5. Repayment of Notes. Borrower shall pay Lender the outstanding
principal balance, plus any other amounts (including, without limitation,
interest) owed by Borrower, under any outstanding Note on or before the Maturity
Date. Upon a sale of Units pursuant to Section 12.10 of the Operating Agreement,
Borrower shall immediately prepay an amount of the principal, plus any accrued
and unpaid interest thereon, due under the Notes equal to the proceeds of such
sale. Borrower may prepay any amount of the principal due under the Notes
without penalty. Each such payment shall be made in U.S. Dollars at the address
of Lender set forth in Section 11(b) below or in such other manner and at such
location as Lender shall designate in writing.
6. Offset. Borrower hereby acknowledges and agrees that the amount
of principal, interest, fees, and expenses otherwise payable to Lender may be
offset, deducted and withheld from any amounts due and payable to Borrower under
the Operating Agreement with respect to the Units or under the Exchange
Agreement, including, without limitation, the Redemption Price (as such term is
defined in the Operating Agreement) payable in connection with the redemption of
the Units.
7. Events of Default. The occurrence of any one or more of the
following events, acts or occurrences shall constitute an event of default (an
"Event of Default") hereunder:
(a) Failure to Make Payments. Borrower shall fail to pay (i)
when due any principal, any interest or premium outstanding under any Note, or
(ii) after the date when due under any Note, if applicable, or, after five (5)
business days' notice to Borrower, any fees, costs, expenses or other amounts
payable hereunder;
(b) Breach of Covenants. Borrower shall fail duly and
punctually to perform, comply with or observe any agreement, covenant or
obligation to be performed, observed or complied with by Borrower under this
Agreement or the other Loan Documents;
(c) Breach of Warranty. Any representation or warranty or
certification made or furnished by Borrower under this Agreement, any other Loan
Document, or any agreement, instrument or document contemplated hereby or
thereby, or otherwise in connection with the transactions contemplated by this
Agreement or the other Loan Documents shall, at any time, prove to have been
false or incorrect in any material respect when made; or
(d) Bankruptcy; Appointment of Receiver, Etc. The filing by
Borrower of a voluntary petition in bankruptcy; the commencement of a bankruptcy
or insolvency proceeding against Borrower (unless stayed or dismissed within
forty-five (45) days); the filing by Borrower of an assignment for the benefit
of creditors; or the attachment, execution or judicial seizure, whether by
enforcement of money judgment, writ or warrant of attachment or any other
process, of all or substantially all of the assets of Borrower which is not
released within sixty (60) days after such action.
3
<PAGE> 4
8. Remedies. Upon the occurrence of an Event of Default or, if such
default is of a nature that is curable within thirty (30) days, upon failure by
Borrower to cure such default within thirty (30) days following delivery of
written notice from Lender of the Event of Default, Lender may declare the
unpaid principal amount of a Note to be, and the same shall thereupon become,
due and payable together with the accrued interest thereon, without presentment,
demand, protest, any additional notice whatsoever or other requirements of any
kind (all of which are hereby expressly waived by Borrower, except as otherwise
provided in this Agreement or by applicable law), and Lender may exercise any
rights or remedies under this Agreement and under any other Loan Document.
9. Expenses. Lender and Borrower shall each pay or cause to be paid
its respective expenses relating to the transactions contemplated hereby;
provided, however, that Borrower shall pay on demand by Lender any and all costs
and expenses (including, without limitation, reasonable attorneys' fees and
disbursements and out-of-pocket costs of settlement) incurred by Lender in any
workout, restructuring or similar arrangements or after an Event of Default in
connection with the protection, preservation, exercise or enforcement of any of
the terms hereof or of Lender's rights hereunder or under any other Loan
Document and instruments contemplated hereby and thereby or in connection with
any foreclosure, collection or bankruptcy proceedings.
10. Further Assurances. At any time or from time to time upon the
request of the Lender, Borrower covenants and agrees to, from the effective date
hereof until the Notes and all other payment obligations of Borrower hereunder
are paid in full, execute such further documents and do such other acts as
Lender may reasonably request in order to effect fully the purposes of this
Agreement and the other Loan Documents and to provide for payment of the Notes
and all other amounts owing to Lender under this Agreement.
11. Miscellaneous.
(a) Waivers; Written Modifications.
(i) The rights and remedies provided for under this Agreement
and in the other Loan Documents are cumulative and are not exclusive of any
rights and remedies that may be available to Lender at law, in equity, or
otherwise. No amendment, modification, supplement, termination, consent or
waiver of this Agreement or any other Loan Document to which Borrower is a party
shall in any event be effective unless the same shall be in writing and signed
by Lender.
(ii) Any waiver of any provision of this Agreement or any
other Loan Document to which Borrower is a party shall be effective only in the
specific instance and for the specific purpose for which given. No notice to or
demand on Borrower in any case shall entitle Borrower to any other or further
notice or demand in similar or other circumstances.
(b) Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any
4
<PAGE> 5
of the parties by another, or whenever any of the parties desires to give or
serve upon another any such communication with respect to this Agreement, each
such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and either shall be delivered in person with
receipt acknowledged (including by recognized overnight courier service) or by
registered or certified mail, return receipt requested, postage prepaid, or by
telecopy and confirmed by telecopy answer back addressed as follows:
If to Borrower: Scott Blum
c/o Imusic, Inc.
516 East Harrison
Seattle, Washington 98102
Telecopy: (206) 720-0101
Telephone: (206) 720-0100
with copies to: Paul Norris
Anderson Godwin de Regt
3930 Two Union Square
601 Union Street
Seattle, Washington 98101
Telecopy: (206) 628-3049
Telephone: (206) 625-0707
If to Lender: The Ultimate Band List, LLC
17835 Ventura Boulevard, Suite 310
Encino, California 91316
Attention: Robert Morse
Telecopy: (818) 758-8722
Telephone: (818) 758-8700
with copies to: Thomas M. Cleary, Esq.
Riordan & McKinzie
300 S. Grand Avenue, 29th Floor
Los Angeles, California 90071-3109
Telecopy: (213) 229-8550
Telephone: (213) 229-8529
and to: Allen D. Lenard, Esq.
Lenard & Gonzalez LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, California 90067
Telecopy: (310) 552-0740
Telephone: (310) 282-8990
5
<PAGE> 6
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answer back, or
three (3) business days after the same shall have been deposited with the United
States mail.
(c) Assignment by Borrower. Borrower may not assign or grant a
participation in its rights or obligations under this Agreement or any of the
other Loan Documents without the prior written consent of Lender.
(d) Severability of Provisions. Any provision of this Agreement that
is illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such illegality,
invalidity, prohibition or unenforceability without invalidating or impairing
the remaining provisions hereof or affecting the validity or enforceability of
such provision in any other jurisdiction.
(e) Limitation of Liability. Neither Lender nor any of its
affiliates, employees, agents or attorneys shall be liable to Borrower, for any
action taken, or omitted to be taken, by it or them or any of them under any
Loan Document or in connection therewith.
(f) Amendments Must Be Written. No modification, amendment or waiver
of any provisions of this Agreement and no consent to any departure by Borrower
herefrom, shall be effective unless the same shall be in writing and signed by
Borrower and Lender.
(g) Survival of Agreements, Representations and Warranties. All
agreements, representations, and warranties made herein shall survive the
execution and delivery of this Agreement, the execution and delivery of any Note
and the making of the Loan evidenced thereby, and shall continue until one year
after repayment of all of the Notes.
(h) Headings. Section headings used in this Agreement are for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose or affect the construction of this Agreement.
(i) Construction. Unless the context of this Agreement clearly
requires otherwise, references herein to the plural include the singular, the
singular includes the plural, the part includes the whole, and the word
"including" is not limiting. The words "hereof," "herein" and "hereby," refer to
this Agreement as a whole and not to any particular provision of this Agreement.
Section, subsection, and exhibit references are to this Agreement unless
otherwise specified.
(j) Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which counterparts, when
6
<PAGE> 7
so executed and delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same Agreement.
(k) Complete Agreement. This Agreement, together with the exhibits
to this Agreement, together with the other Loan Documents, is intended by the
parties as a final expression of their agreement.
(l) Exhibits. All of the exhibits attached to this Agreement shall
be deemed incorporated herein by reference.
(m) Governing Law; Venue and Jurisdiction. The validity of this
Agreement and the other Loan Documents, the construction, interpretation and
enforcement hereof and thereof and the rights of the parties hereto and thereto
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California, without giving effect to conflict of
laws principles thereof.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the date first set forth above.
"Borrower"
--------------------------------------------------
Scott Blum
"Lender" THE ULTIMATE BAND LIST, LLC, a California limited
liability company
By:
--------------------------------------------
Name:
--------------------------------------------
Its: Co-Chief Executive Officer
8
<PAGE> 9
EXHIBIT 2.02A
UNSECURED PROMISSORY NOTE
Los Angeles, California
$________________ _________, 1999
FOR VALUE RECEIVED, the undersigned ARTISTdirect, Inc. ("Borrower")
hereby promises to pay to the order of Rick Rubin, an individual ("Payee"), the
principal sum of [the Rubin Preferred Return (net of the sum of the Rubin Common
Capital Bond and any Distributions made to Rubin in excess of the Rubin Common
Capital Bond in respect of the Rubin Preferred Return)] ($__________) together
with interest on the unpaid balance of such principal amount from the date
hereof at the rate of interest equal to the [lowest applicable federal rate for
this Note in effect for purposes of Section 1274(d) of the Internal Revenue Code
of 1986, as amended (the "Code"), as of the effective date hereof per annum
(computed on a basis of a 365-day year).] Accrued interest to be paid on this
Unsecured Promissory Note (this "Promissory Note") shall be payable annually in
arrears commencing on the last day of the first December subsequent to the date
hereof and continuing on the last day of each succeeding December thereafter
until paid in full.
The principal balance of, and all accrued and unpaid interest on,
this Promissory Note shall be payable in full by Borrower to Payee on [To come].
Payments of principal and interest on this Promissory Note shall be
made in legal tender of the United States of America and shall be made at such
place as Payee shall have designated to Borrower. If the date set for any
payment of principal or interest on this Promissory Note is a Saturday, Sunday
or legal holiday, then such payment shall be due on the next succeeding business
day.
The principal balance of, and accrued and unpaid interest on, this
Promissory Note may be prepaid at any time, in whole or in part, without premium
or penalty. Upon [to come], Borrower shall immediately prepay the principal
balance, plus any accrued and unpaid interest thereon, under this Note. [Any
such prepayment shall be first applied to the payment of any accrued and unpaid
interest and then to the unpaid balance of the principal amount.]
The occurrence of any one or more of the following events, acts or
occurrences shall constitute an event of default (an "Event of Default")
hereunder: (a) Borrower shall fail to pay (i) when due any principal, any
interest or premium outstanding under this Promissory Note, or (ii) after the
date when due under this Promissory Note, if applicable, or, after five (5)
business days' notice to Borrower, any fees, costs, expenses or other amounts
payable hereunder; or (b) the filing by Borrower of a voluntary petition in
bankruptcy; the commencement of a bankruptcy or insolvency
A-1
<PAGE> 10
proceeding against Borrower (unless stayed or dismissed within forty-five (45)
days); the filing by Borrower of an assignment for the benefit of creditors; or
the attachment, executing or judicial seizure, whether by enforcement of money
judgment, writ or warrant of attachment or any other process, of all or
substantially all of the assets of Borrower which is not released within sixty
(60) days after such action.
Upon the occurrence of any Event of Default, Payee may accelerate
this Promissory Note and declare the entire unpaid principal amount of this
Promissory Note and all accrued and unpaid interest hereon to be immediately due
and payable and, thereupon, the unpaid principal amount and all such accrued and
unpaid interest shall become and be immediately due and payable, without notice
of default, presentment or demand for payment, protest or notice of nonpayment
or dishonor, or other notices or demands of any kind (all of which are hereby
expressly waived by Borrower). The failure of Payee to accelerate this
Promissory Note shall not constitute a waiver of any of Payee's rights under
this Promissory Note as long as Borrower's default under this Promissory Note
continues.
The provisions of this Promissory Note shall be governed by and
construed in accordance with the laws of the State of California without regard
to the conflicts of law rules thereof. In the event that Payee is required to
take any action to collect or otherwise enforce payment of this Promissory Note,
Borrower agrees to pay such reasonable attorneys' fees, court costs and other
expenses as Payee may incur as a result thereof, whether or not suit is
commenced.
The terms and provisions of this Promissory Note shall be binding
upon the parties hereto and their respective successors and assigns and shall
inure to the benefit of the parties hereto and the successors and assigns of
Payee and any assignee or transferee of this Promissory Note. In the event of
such transfer or assignment, the rights and privileges conferred upon Payee
shall automatically extend to and be vested in such assignee or transferee, all
subject to the terms and conditions hereof. Borrower's obligations, rights or
any interest hereunder may not be delegated or assigned without the written
consent of Payee.
All notices, requests, demands or other communications under this
Promissory Note shall or may be given to or served upon any of the parties by
another, or whenever any of the parties desires to give or serve upon another
any such communication with respect to this Promissory Note, each such notice,
demand, request, or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged (including by recognized overnight
courier service) or by registered or certified mail, return receipt requested,
postage prepaid, or by telecopy and confirmed by telecopy answer back addressed
as follows:
A-2
<PAGE> 11
If to Borrower: ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, CA 91316
Telecopy: (818) 758-8700
Telephone: (818) 758-8722
with copies to: Thomas M. Cleary, Esq.
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, CA 90071
Telecopy: (213) 229-8550
Telephone: (213) 229-8529
and to: Allen D. Lenard, Esq.
Lenard & Gonzalez LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, CA 90067
Telecopy: (310) 552-0740
Telephone: (310) 282-8900
If to Rubin: Rick Rubin
c/o American Recordings, Inc.
c/o Provident Financial Management
10345 Olympic Boulevard
Los Angeles, California 90064
Attention: Michael S. Harris
Telecopy: (310) 282-5178
Telephone: _______________
with copies to: Mitch Tenzer, Esq.
Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars, 32nd Floor
Los Angeles, California 90067
Telecopy: (310) 553-7068
Telephone: _______________
and to: David L. Gersh, Esq.
Paul, Hastings, Janofsky & Walker
555 S. Flower Street, 23rd Floor
Los Angeles, California 90071-2371
Telecopy: (213) 617-0705
Telephone: _______________
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice.
A-3
<PAGE> 12
Every notice, demand, request, or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answer back, or
three (3) business days after the same shall have been deposited with the United
States mail.
A-4
<PAGE> 13
IN WITNESS WHEREOF, this Promissory Note has been duly executed and
delivered by Borrower on the date first above written.
ARTISTdirect, Inc.
-----------------------------------------
Marc P. Geiger,
Co-Chief Executive Officer
A-5
<PAGE> 14
EXHIBIT 2.02B
UNSECURED PROMISSORY NOTE
Los Angeles, California
$________________ _________, 1999
FOR VALUE RECEIVED, the undersigned ARTISTdirect, Inc. ("Borrower")
hereby promises to pay to the order of Marc P. Geiger, an individual ("Payee"),
the principal sum of [Two Hundred Seventy-Five Thousand Dollars (net of any
Distributions made to Geiger pursuant to Section 8.4(b) of the Operating
Agreement.)] ($__________) together with interest on the unpaid balance of such
principal amount from the date hereof at the rate of interest equal to the
[lowest applicable federal rate for this Note in effect for purposes of Section
1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), as of the
effective date hereof per annum (computed on a basis of a 365-day year).]
Accrued interest to be paid on this Unsecured Promissory Note (this "Promissory
Note") shall be payable annually in arrears commencing on the last day of the
first December subsequent to the date hereof and continuing on the last day of
each succeeding December thereafter until paid in full.
The principal balance of, and all accrued and unpaid interest on,
this Promissory Note shall be payable in full by Borrower to Payee on [To come].
Payments of principal and interest on this Promissory Note shall be
made in legal tender of the United States of America and shall be made at such
place as Payee shall have designated to Borrower. If the date set for any
payment of principal or interest on this Promissory Note is a Saturday, Sunday
or legal holiday, then such payment shall be due on the next succeeding business
day.
The principal balance of, and accrued and unpaid interest on, this
Promissory Note may be prepaid at any time, in whole or in part, without premium
or penalty. Upon [to come], Borrower shall immediately prepay the principal
balance, plus any accrued and unpaid interest thereon, under this Note. [Any
such prepayment shall be first applied to the payment of any accrued and unpaid
interest and then to the unpaid balance of the principal amount.]
The occurrence of any one or more of the following events, acts or
occurrences shall constitute an event of default (an "Event of Default")
hereunder: (a) Borrower shall fail to pay (i) when due any principal, any
interest or premium outstanding under this Promissory Note, or (ii) after the
date when due under this Promissory Note, if applicable, or, after five (5)
business days' notice to Borrower, any fees, costs, expenses or other amounts
payable hereunder; or (b) the filing by Borrower of a voluntary petition in
bankruptcy; the commencement of a bankruptcy or insolvency
B-1
<PAGE> 15
proceeding against Borrower (unless stayed or dismissed within forty-five (45)
days); the filing by Borrower of an assignment for the benefit of creditors; or
the attachment, executing or judicial seizure, whether by enforcement of money
judgment, writ or warrant of attachment or any other process, of all or
substantially all of the assets of Borrower which is not released within sixty
(60) days after such action.
Upon the occurrence of any Event of Default, Payee may accelerate
this Promissory Note and declare the entire unpaid principal amount of this
Promissory Note and all accrued and unpaid interest hereon to be immediately due
and payable and, thereupon, the unpaid principal amount and all such accrued and
unpaid interest shall become and be immediately due and payable, without notice
of default, presentment or demand for payment, protest or notice of nonpayment
or dishonor, or other notices or demands of any kind (all of which are hereby
expressly waived by Borrower). The failure of Payee to accelerate this
Promissory Note shall not constitute a waiver of any of Payee's rights under
this Promissory Note as long as Borrower's default under this Promissory Note
continues.
The provisions of this Promissory Note shall be governed by and
construed in accordance with the laws of the State of California without regard
to the conflicts of law rules thereof. In the event that Payee is required to
take any action to collect or otherwise enforce payment of this Promissory Note,
Borrower agrees to pay such reasonable attorneys' fees, court costs and other
expenses as Payee may incur as a result thereof, whether or not suit is
commenced.
The terms and provisions of this Promissory Note shall be binding
upon the parties hereto and their respective successors and assigns and shall
inure to the benefit of the parties hereto and the successors and assigns of
Payee and any assignee or transferee of this Promissory Note. In the event of
such transfer or assignment, the rights and privileges conferred upon Payee
shall automatically extend to and be vested in such assignee or transferee, all
subject to the terms and conditions hereof. Borrower's obligations, rights or
any interest hereunder may not be delegated or assigned without the written
consent of Payee.
All notices, requests, demands or other communications under this
Promissory Note shall or may be given to or served upon any of the parties by
another, or whenever any of the parties desires to give or serve upon another
any such communication with respect to this Promissory Note, each such notice,
demand, request, or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged (including by recognized overnight
courier service) or by registered or certified mail, return receipt requested,
postage prepaid, or by telecopy and confirmed by telecopy answer back addressed
as follows:
B-2
<PAGE> 16
If to Borrower: ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, CA 91316
Telecopy: (818) 758-8700
Telephone: (818) 758-8722
with copies to: Thomas M. Cleary, Esq.
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, CA 90071
Telecopy: (213) 229-8550
Telephone: (213) 229-8529
and to: Allen D. Lenard, Esq.
Lenard & Gonzalez LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, CA 90067
Telecopy: (310) 552-0740
Telephone: (310) 282-8900
If to Geiger: Marc P. Geiger
c/o ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, CA 91316
Telecopy: (818) 758-8700
Telephone: (818) 758-8722
with copies to: Mitch Tenzer, Esq.
Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars, 32nd Floor
Los Angeles, California 90067
Telecopy: (310) 553-7068
Telephone: _______________
and to: David L. Gersh, Esq.
Paul, Hastings, Janofsky & Walker
555 S. Flower Street, 23rd Floor
Los Angeles, California 90071-2371
Telecopy: (213) 617-0705
Telephone: _______________
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request, or
other communication hereunder shall be deemed to have been duly given or served
on the date on which personally delivered, with receipt acknowledged, telecopied
B-3
<PAGE> 17
and confirmed by telecopy answer back, or three (3) business days after the same
shall have been deposited with the United States mail.
B-4
<PAGE> 18
IN WITNESS WHEREOF, this Promissory Note has been duly executed and
delivered by Borrower on the date first above written.
ARTISTdirect, Inc.
-----------------------------------------
David P. Muller,
Co-Chief Executive Officer
B-5
<PAGE> 19
EXHIBIT 2.02C
UNSECURED PROMISSORY NOTE
Los Angeles, California
$________________ _________, 1999
FOR VALUE RECEIVED, the undersigned ARTISTdirect, Inc. ("Borrower")
hereby promises to pay to the order of Donald P. Muller, an individual
("Payee"), the principal sum of [Two Hundred Seventy-Five Thousand Dollars (net
of any Distributions made to Geiger pursuant to Section 8.4(b) of the Operating
Agreement.)] ($__________) together with interest on the unpaid balance of such
principal amount from the date hereof at the rate of interest equal to the
[lowest applicable federal rate for this Note in effect for purposes of Section
1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), as of the
effective date hereof per annum (computed on a basis of a 365-day year).]
Accrued interest to be paid on this Unsecured Promissory Note (this "Promissory
Note") shall be payable annually in arrears commencing on the last day of the
first December subsequent to the date hereof and continuing on the last day of
each succeeding December thereafter until paid in full.
The principal balance of, and all accrued and unpaid interest on,
this Promissory Note shall be payable in full by Borrower to Payee on [To come].
Payments of principal and interest on this Promissory Note shall be
made in legal tender of the United States of America and shall be made at such
place as Payee shall have designated to Borrower. If the date set for any
payment of principal or interest on this Promissory Note is a Saturday, Sunday
or legal holiday, then such payment shall be due on the next succeeding business
day.
The principal balance of, and accrued and unpaid interest on, this
Promissory Note may be prepaid at any time, in whole or in part, without premium
or penalty. Upon [to come], Borrower shall immediately prepay the principal
balance, plus any accrued and unpaid interest thereon, under this Note. [Any
such prepayment shall be first applied to the payment of any accrued and unpaid
interest and then to the unpaid balance of the principal amount.]
The occurrence of any one or more of the following events, acts or
occurrences shall constitute an event of default (an "Event of Default")
hereunder: (a) Borrower shall fail to pay (i) when due any principal, any
interest or premium outstanding under this Promissory Note, or (ii) after the
date when due under this Promissory Note, if applicable, or, after five (5)
business days' notice to Borrower, any fees, costs, expenses or other amounts
payable hereunder; or (b) the filing by Borrower of a voluntary petition in
bankruptcy; the commencement of a bankruptcy or insolvency
C-1
<PAGE> 20
proceeding against Borrower (unless stayed or dismissed within forty-five (45)
days); the filing by Borrower of an assignment for the benefit of creditors; or
the attachment, executing or judicial seizure, whether by enforcement of money
judgment, writ or warrant of attachment or any other process, of all or
substantially all of the assets of Borrower which is not released within sixty
(60) days after such action.
Upon the occurrence of any Event of Default, Payee may accelerate
this Promissory Note and declare the entire unpaid principal amount of this
Promissory Note and all accrued and unpaid interest hereon to be immediately due
and payable and, thereupon, the unpaid principal amount and all such accrued and
unpaid interest shall become and be immediately due and payable, without notice
of default, presentment or demand for payment, protest or notice of nonpayment
or dishonor, or other notices or demands of any kind (all of which are hereby
expressly waived by Borrower). The failure of Payee to accelerate this
Promissory Note shall not constitute a waiver of any of Payee's rights under
this Promissory Note as long as Borrower's default under this Promissory Note
continues.
The provisions of this Promissory Note shall be governed by and
construed in accordance with the laws of the State of California without regard
to the conflicts of law rules thereof. In the event that Payee is required to
take any action to collect or otherwise enforce payment of this Promissory Note,
Borrower agrees to pay such reasonable attorneys' fees, court costs and other
expenses as Payee may incur as a result thereof, whether or not suit is
commenced.
The terms and provisions of this Promissory Note shall be binding
upon the parties hereto and their respective successors and assigns and shall
inure to the benefit of the parties hereto and the successors and assigns of
Payee and any assignee or transferee of this Promissory Note. In the event of
such transfer or assignment, the rights and privileges conferred upon Payee
shall automatically extend to and be vested in such assignee or transferee, all
subject to the terms and conditions hereof. Borrower's obligations, rights or
any interest hereunder may not be delegated or assigned without the written
consent of Payee.
All notices, requests, demands or other communications under this
Promissory Note shall or may be given to or served upon any of the parties by
another, or whenever any of the parties desires to give or serve upon another
any such communication with respect to this Promissory Note, each such notice,
demand, request, or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged (including by recognized overnight
courier service) or by registered or certified mail, return receipt requested,
postage prepaid, or by telecopy and confirmed by telecopy answer back addressed
as follows:
C-2
<PAGE> 21
If to Borrower: ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, CA 91316
Telecopy: (818) 758-8700
Telephone: (818) 758-8722
with copies to: Thomas M. Cleary, Esq.
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, CA 90071
Telecopy: (213) 229-8550
Telephone: (213) 229-8529
and to: Allen D. Lenard, Esq.
Lenard & Gonzalez LLP
1900 Avenue of the Stars, 25th Floor
Los Angeles, CA 90067
Telecopy: (310) 552-0740
Telephone: (310) 282-8900
If to Muller: David P. Muller
c/o ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, CA 91316
Telecopy: (818) 758-8700
Telephone: (818) 758-8722
with copies to: Mitch Tenzer, Esq.
Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars, 32nd Floor
Los Angeles, California 90067
Telecopy: (310) 553-7068
Telephone: _______________
and to: David L. Gersh, Esq.
Paul, Hastings, Janofsky & Walker
555 S. Flower Street, 23rd Floor
Los Angeles, California 90071-2371
Telecopy: (213) 617-0705
Telephone: _______________
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request, or
other communication hereunder shall be deemed to have been duly given or served
on the date on which personally delivered, with receipt acknowledged, telecopied
C-3
<PAGE> 22
and confirmed by telecopy answer back, or three (3) business days after the same
shall have been deposited with the United States mail.
C-4
<PAGE> 23
IN WITNESS WHEREOF, this Promissory Note has been duly executed and
delivered by Borrower on the date first above written.
ARTISTdirect, Inc.
-----------------------------------------
Marc C. Geiger
Co-Chief Executive Officer
C-5
<PAGE> 1
EXHIBIT 10.12
February 17, 1999
Mr. Scott Blum
c/o Imusic, Inc.
516 East Harrison
Seattle, Washington 98102
Re: Bonus Agreement
Dear Scott:
Effective as of the date of this letter, you have entered into that
certain Employment Agreement ("Employment Agreement") with Imusic, Inc., a
Washington corporation ("Imusic"), which sets forth the terms and conditions
pursuant to which you will provide your employment services to Imusic and The
Ultimate Band List, LLC, a California limited liability company ("UBL"). In
order to induce you to enter into the Employment Agreement, UBL hereby agrees to
pay cash payments (the "Bonus Payments") in an amount equal to the quotient of
(i) any accrued interest with respect to one or more Secured Promissory Notes
(each, a "Note") executed by you in connection with that certain Contingent Loan
Agreement (the "Loan Agreement") made as of February __, 1999, by and between
you and UBL divided by (ii) one less the sum of (A) your marginal federal income
tax rate (expressed as a decimal) in the tax year of such interest payment plus
(B) your marginal state income tax rate (expressed as a decimal) then in effect,
net of any tax benefit received from the deductibility of such state tax
liability against your federal income tax liability, if any. UBL shall deduct
and withhold all required federal and state income and employment taxes from
each Bonus Payment.
The Bonus Payments shall be made no earlier than ten (10) days from the
due date of the applicable interest payment as provided in each Note. UBL, at
its option, may offset the Bonus Payments against any interest payments due and
payable to UBL or the then current holder under each Note.
Notwithstanding the foregoing, so long as there shall exist an Event of
Default (as such term is defined in the Loan Agreement), UBL shall not be
obligated to make any Bonus
<PAGE> 2
Mr. Scott Blum
February __, 1999
Page 2
Payment, provided, however, UBL's failure to pay any Bonus Payment hereunder
shall not constitute an Event of Default pursuant to Section 7(a)(i) of the Loan
Agreement.
You hereby acknowledge and agree that your employment with Imusic is
governed by the Employment Agreement, and this letter shall not confer upon you
any right to employment or continuance of the performance of services for UBL
or Imusic or any affiliated entity. Accordingly, the provisions of the
Employment Agreement shall remain in full force and effect, unmodified hereby.
If you agree to the foregoing, please counter-execute this letter below and
return the same to the undersigned, whereupon this letter shall be binding upon
you and UBL. No right or obligation referred to herein or created herein shall
be assignable. This letter may be executed in counterparts, each of which shall
be an original and all of which taken together shall constitute one and the same
letter.
Sincerely,
THE ULTIMATE BAND LIST, LLC, a
California limited liability company
By:
--------------------------------------
Name:
------------------------------------
Its: Co-Chief Executive Officer
AGREED AND ACCEPTED:
Dated: February __, 1999
- ----------------------------
Scott Blum
<PAGE> 1
EXHIBIT 10.13
ISSUANCE, NONCOMPETITION AND NONSOLICITATION AGREEMENT
This ISSUANCE, NONCOMPETITION AND NONSOLICITATION AGREEMENT (this
"Agreement") is made as of January 1, 1998 (the "Effective Date") between
ARTISTdirect, LLC, a California limited liability company (the "Company"), and
Keith Yokomoto ("Yokomoto"). Any capitalized term used but not defined herein
shall have the meaning ascribed to it in that certain Operating Agreement of the
Company dated as of September 1, 1996 (the "Operating Agreement").
R E C I T A L S
WHEREAS, Yokomoto is an employee of the Company pursuant to an employment
agreement dated July 28, 1998 (the "Employment Agreement");
WHEREAS, as partial compensation for the services rendered and to be
rendered by Yokomoto pursuant to the Employment Agreement, the Company wishes to
issue to Yokomoto 114,942.53 Units (the "Issued Units"), representing a 10.10%
Percentage as of the Effective Date, and Yokomoto wishes to be issued the Issued
Units, pursuant to the terms hereof;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby expressly acknowledged, the Company and Yokomoto
hereby agree as follows:
A G R E E M E N T
1. Issuance of the Issued Units. The Company hereby issues the Issued Units to
Yokomoto, subject to the conditions and restrictions contained in this
Agreement. Yokomoto shall be considered a Member of the Company as of the
Effective Date. The Issued Units shall entitle Yokomoto to a share of the
profits and losses of the Company after the Effective Date, and all
distributions made with respect thereto, but shall not entitle Yokomoto to any
interest in the capital of the Company as of the Effective Date, which capital
Yokomoto and the Company hereby agree has a fair market value equal to One
Million Nine Hundred Eighty Thousand Dollars ($1,980,000) as of the Effective
Date.
2. Antidilution Protection. The Percentage represented by the Issued Units shall
not be diluted below 10% with respect to: (a) any issuance of Units by the
Company to the person hired to serve as the chief financial officer of the
Company; (b) any issuance of Units by the Company to the person hired to serve
as president of The Ultimate Band List, LLC (the "UBL"); or (c) the first Five
Million Dollars ($5,000,000) of additional capital contributions made following
the Effective Date to the Company or any of its subsidiaries, including, without
limitation, the UBL; provided that such additional capital contributions (other
than by Intel Corporation) are made either (i) based upon a valuation of the
applicable entity that is no less than the valuation upon which any prior
capital contribution was made, or (ii) pursuant to the exercise of an option or
warrant the exercise price of which on the date of grant was not based upon a
valuation of the applicable entity that was less than the valuation upon which
any capital contribution prior to the date of the grant was made.
<PAGE> 2
3. Noncompetition. In recognition of the considerations described herein,
Yokomoto agrees that for so long as Yokomoto is employed by the Company, and
until the "Noncompetition Expiration Date" (as defined below), Yokomoto shall
not, directly or indirectly:
(a) enter into the employ of, or render any services to, any person, firm
or business entity engaged in any "Competitive Business," which shall mean any
Internet business that at that time is competitive with the business of the
Company or any of its subsidiaries or affiliates (each, a Subsidiary"), and
which shall include, without limitation, any internet business that, anywhere in
the world: (i) operates a meta-music index or search engine on the World Wide
Web; or (ii) sells or offers to sell through a World Wide Web site music-related
products or services, including, without limitation, any devices or other means,
whether utilizing technology existing as of the date hereof or devised
hereafter, on or by which sound may be recorded, transmitted or reproduced, with
or without a visual reproduction, primarily for home and/or consumer use,
including, without limitation, analog disc records, analog tape cassettes,
compact discs, mini-discs, digital audio tapes, video cassettes, laser discs,
and downloading via the Internet;
(b) engage in any Competitive Business for Yokomoto's own account;
(c) become interested in any Competitive Business as an individual,
partner, shareholder (other than as described below), creditor, director,
officer, principal, agent, employee, trustee, consultant, advisor, franchisee or
in any other relationship or capacity; or
(d) authorize his name or reputation to be used by any Competitive
Business;
provided, however, that nothing contained in this Section 3 shall be deemed to
prohibit Yokomoto from acquiring or holding, solely for investment, publicly
traded securities of any corporation some of the activities of which are
competitive with the business of the Company so long as such securities, in the
aggregate, constitute less than five percent (5%) of any class or series of
outstanding securities of such corporation. Notwithstanding anything to the
contrary contained herein, the prohibition contained in Section 3(a) above shall
not apply if the function performed by Yokomoto does not substantially and
directly involve the development, maintenance or operation of a Competitive
Business. For purposes of this Section 3, the "Noncompetition Expiration Date"
shall mean the date of expiration of the full duration of the then current
period of the term of Yokomoto's employment with the Company under the
Employment Agreement; provided, however, that in the case of the Company's
termination of Yokomoto's employment other than for "Cause" (as defined in the
Employment Agreement), the "Noncompetition Expiration Date" shall mean the
effective date of the termination of Yokomoto's employment.
4. Nonsolicitation. In recognition of the considerations described herein,
Yokomoto agrees that for so long as Yokomoto is employed by the Company, and
until the "Nonsolicitation Expiration Date" (as defined below), Yokomoto shall
not, directly or indirectly:
(a) contact or solicit, or attempt to contact or solicit, for Yokomoto's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity that was a client or customer of the Company or any
Subsidiary within the six (6)-month period preceding the effective date of the
termination of Yokomoto's employment;
2
<PAGE> 3
(b) contact or solicit, or attempt to contact or solicit, for Yokomoto's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity that has been contacted, orally or in writing, by the
Company or any affiliated entity of the Company as a potential customer or
client within the six (6)-month period preceding the effective date of the
termination of Yokomoto's employment; or
(c) hire, subcontract, employ or engage, or contact or solicit, or attempt
to contact or solicit, for the purpose of hiring, contracting, employing or
engaging, for Yokomoto`s own account or any account other than that of the
Company or any Subsidiary, any person or entity (other than Yokomoto's personal
assistant) who was an employee or exclusive subcontractor of the Company or any
affiliated entity of the Company at any time during the six (6)-month period
preceding the effective date of the termination of Yokomoto's employment.
For purposes of this Section 4, the "Nonsolicitation Expiration Date" shall mean
the date one (1) year following the expiration of the full duration of the then
current period of the term of Yokomoto's employment with the Company under the
Employment Agreement.
6. Drag Along Obligation. If the Founders find a third party buyer for all or
any portion of their Units (whether such sale is by way of purchase of assets or
Units, merger, recapitalization or other form of transaction), then, at the
request of the Founders, Yokomoto shall sell the same percentage of the Units
then held by him to such third party on the same terms and conditions as apply
to the sale by the Founders. Yokomoto agrees timely to take such other actions
as the Founders may reasonably request in connection with the approval of the
consummation of such sale, including, without limitation, voting all Units in
favor of such sale and waiving any dissenters' rights, executing such
agreements, powers of attorney, voting proxies or other documents and
instruments as may be necessary or desirable to consummate such sale, and, in
the event that such sale is structured as a recapitalization, transferring and
retaining such percentages of Units as may be requested by the Founders. The
foregoing obligation shall survive the Company's initial public offering.
7. Investment Representations.
(a) The Company represents and warrants to Yokomoto that the issuance of
the Issued Units has been duly and validly authorized and will not violate the
terms of any agreement to which the Company is a party.
(b) Yokomoto represents and warrants to the Company as follows:
(i) Yokomoto is acquiring the Issued Units for Yokomoto's own
account and not with a view to or for sale in connection with any distribution
thereof.
(ii) Yokomoto (A) is familiar with the business of the Company, (B)
has had an opportunity to discuss with representatives of the Company the
condition of and prospects for the continued operation and financing of the
Company and such other matters as Yokomoto has deemed appropriate in considering
whether to invest in the Issued Units, and (C) has been provided access to all
available information about the Company requested by Yokomoto.
(iii) Yokomoto understands that the Issued Units have not been
registered under the Securities Act of 1933 (the "Act") or registered or
qualified under the securities laws of any state and that Yokomoto may not sell,
assign, dispose, or otherwise transfer the Issued
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<PAGE> 4
Units unless they are subsequently registered under the Act and registered or
qualified under applicable state securities laws, or unless an exemption from
such registration and qualification is available.
(iv) Yokomoto has the right to enter into this Agreement and to
grant the rights granted by him herein.
(v) The provisions of this Agreement do not violate any other
contracts or agreements to which Yokomoto is a party and that would adversely
affect his ability to perform his obligations hereunder.
8. Condition Precedent to Issuance. The issuance of the Issued Units shall not
be effective until Yokomoto shall have agreed to be bound by the terms of the
Operating Agreement.
9. Covenants Reasonable as to Time and Territory. Yokomoto and the Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the rights and remedies conferred upon the Company under this
Agreement, and hereby acknowledge and agree that (i) the same are reasonable in
time and territory (ii) and that the consideration provided to Yokomoto
hereunder is sufficient to compensate Yokomoto for the restrictions contained in
this Agreement.
10. Remedies. Any material breach, violation or evasion by Employee of the terms
of this Agreement, including specifically, but not limited to, Sections 3 and 4
above, would result in immediate and irreparable injury and harm to the Company,
and would cause damage to the Company in amounts difficult to ascertain and for
which Company's remedies and defenses at law would be inadequate. Accordingly,
in the event of any such breach or threatened breach, the Company shall be
entitled to, and Employee hereby consents to the entry of, the remedies or
injunction and specific performance, or either of such remedies, as well as all
other remedies to which the Company may be entitled, at law, in equity or
otherwise.
11. Entire Agreement. This Agreement, the Employment Agreement and the Operating
Agreement together constitute the entire agreement and understanding among the
parties pertaining to the subject matter hereof and supersede any and all prior
agreements, whether written or oral, relating thereto.
12. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal substantive laws (and not the laws of
choice of laws) of the State of California.
13. Costs. If either party brings any legal action against the other to enforce
its rights under this Agreement, the prevailing party in such dispute shall be
entitled to recover from the other party all reasonable fees, costs and expenses
actually incurred in enforcing its rights under this Agreement including,
without limitation, the reasonable fees and expenses of attorneys, accountants
and expert witnesses, which shall include, without limitation, all fees, costs
and expenses of appeals and of enforcement.
14. Amendments. This Agreement may be amended only by a written agreement
executed by all of the parties hereto.
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<PAGE> 5
15. Assignment. This Agreement and the rights and obligations of the Company and
Yokomoto hereunder are not assignable without the written consent of the other
party.
16. Counterparts. This Agreement may be executed in any number of counterparts,
each of which, when executed and delivered, shall be an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above-written.
"YOKOMOTO" "COMPANY"
ARTISTdirect, LLC
- ------------------------------
Keith Yokomoto
By:
--------------------------------
Marc Geiger
Its: Member
By:
--------------------------------
Donald Muller
Its: Member
5
<PAGE> 1
EXHIBIT 10.14
ISSUANCE AGREEMENT
This ISSUANCE AGREEMENT (this "Agreement") is made as of January 1,
1998 (the "Effective Date") by and among ARTISTdirect, LLC, a California limited
liability company (the "Company"), Marc Geiger, an individual ("Geiger"), Donald
Muller ("Muller") and L&G Associates, a California general partnership ("L&G").
Any capitalized term used but not defined herein shall have the meaning ascribed
to it in that certain Operating Agreement of the Company dated as of September
1, 1996 (the "Operating Agreement").
R E C I T A L S
WHEREAS, Geiger and Muller are the sole Members of the Company;
WHEREAS, L&G is a provider of consulting services to the Company and
its affiliates, including, without limitation, Geiger and Muller;
WHEREAS, to compensate L&G for the services rendered and to be rendered
to the Company and its affiliates, the Company wishes to issue to L&G 34,482.76
Units (the "Issued Units"), representing a 3.03% Percentage as of the Effective
Date, and L&G wishes to be issued the Issued Units, pursuant to the terms
hereof;
WHEREAS, the Company, Geiger and Muller wish for Geiger to bear the
dilution suffered as a result of the issuance of 11,494.25 of the Issued Units
to L&G (the "Assigned Units");
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby expressly acknowledged, the parties hereto hereby
agree as follows:
A G R E E M E N T
1. Contribution of Units Held by Geiger. As of the Effective Date, Geiger shall
contribute 11,494.25 of the Units held by Geiger to the Company. Accordingly,
immediately after such contribution, there shall be 11,494.25 fewer Units
outstanding.
2. Issuance of the Issued Units. As of the Effective Date, effective immediately
following the contribution described in Section 1 above, the Company shall issue
the Issued Units to L&G, subject to the conditions and restrictions contained in
this Agreement. L&G shall be considered a Member of the Company as of the
Effective Date. The Issued Units shall entitle L&G to a share of the profits and
losses of the Company after the Effective Date, and all distributions made with
respect thereto, but shall not entitle L&G to any interest in the capital of the
Company as of the Effective Date, which capital L&G and the Company hereby agree
has a fair market value equal to One Million Nine Hundred Eighty Thousand
Dollars ($1,980,000) as of the Effective Date.
3. Antidilution Protection. The Percentage represented by the Issued Units shall
not be diluted below 3% with respect to: (a) any issuance of Units by the
Company to the person hired to serve as the chief financial officer of the
Company; (b) any issuance of Units by the Company to the person hired to serve
as president of The Ultimate Band List, LLC (the "UBL"); or (c) the first Five
Million Dollars ($5,000,000) of additional capital contributions made following
the Effective Date to the Company or any of its subsidiaries, including, without
limitation, the UBL; provided that such additional capital contributions (other
than by Intel Corporation) are made either (i) based upon a valuation of the
applicable entity that is no less than the valuation upon which any prior
capital contribution was made, or (ii) pursuant to the exercise of an option
<PAGE> 2
or warrant the exercise price of which on the date of grant was not based upon a
valuation of the applicable entity that was less than the valuation upon which
any capital contribution prior to the date of the grant was made.
4. Drag Along Obligation. If the Founders find a third party buyer for all or
any portion of their Units (whether such sale is by way of purchase of assets or
Units, merger, recapitalization or other form of transaction), then, at the
request of the Founders, L&G shall sell the same percentage of the Units then
held by it to such third party on the same terms and conditions as apply to the
sale by the Founders. L&G agrees timely to take such other actions as the
Founders may reasonably request in connection with the approval of the
consummation of such sale, including, without limitation, voting all Units in
favor of such sale and waiving any dissenters' rights, executing such
agreements, powers of attorney, voting proxies or other documents and
instruments as may be necessary or desirable to consummate such sale, and, in
the event that such sale is structured as a recapitalization, transferring and
retaining such percentages of Units as may be requested by the Founders. The
foregoing obligation shall survive the Company's initial public offering.
5. Investment Representations.
(a) The Company represents and warrants to L&G that the issuance of the
Issued Units has been duly and validly authorized and will not violate the terms
of any agreement to which the Company is a party.
(b) L&G represents and warrants to the Company as follows:
(i) L&G is acquiring the Issued Units for L&G's own account and not
with a view to or for sale in connection with any distribution thereof.
(ii) L&G (A) is familiar with the business of the Company, (B) has
had an opportunity to discuss with representatives of the Company the condition
of and prospects for the continued operation and financing of the Company and
such other matters as L&G has deemed appropriate in considering whether to
invest in the Issued Units, and (C) has been provided access to all available
information about the Company requested by L&G.
(iii) L&G understands that the Issued Units have not been
registered under the Securities Act of 1933 (the "Act") or registered or
qualified under the securities laws of any state and that L&G may not sell,
assign, dispose, or otherwise transfer the Issued Units or the Assigned Units
unless they are subsequently registered under the Act and registered or
qualified under applicable state securities laws, or unless an exemption from
such registration and qualification is available.
(iv) L&G has the right to enter into this Agreement and to grant
the rights granted by L&G herein.
6. Condition Precedent to Issuance. The issuance of the Issued Units shall not
be effective until L&G shall have agreed to be bound by the terms of the
Operating Agreement.
7. Entire Agreement. This Agreement and the Operating Agreement together
constitute the entire agreement and understanding among the parties pertaining
to the subject matter hereof and supersede any and all prior agreements, whether
written or oral, relating thereto.
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<PAGE> 3
8. Governing Law. This Agreement shall be governed by and construed and enforced
in accordance with the internal substantive laws (and not the laws of choice of
laws) of the State of California.
9. Costs. If either party brings any legal action against the other to enforce
its rights under this Agreement, the prevailing party in such dispute shall be
entitled to recover from the other party all reasonable fees, costs and expenses
actually incurred in enforcing its rights under this Agreement including,
without limitation, the reasonable fees and expenses of attorneys, accountants
and expert witnesses, which shall include, without limitation, all fees, costs
and expenses of appeals and of enforcement.
10. Amendments. This Agreement may be amended only by a written agreement
executed by all of the parties hereto.
11. Governing Law. This Agreement shall be interpreted, construed and governed
by the laws of the State of California, excluding its laws and principles
relating to the conflict of laws.
12. Assignment. This Agreement and the rights and obligations of the Company and
L&G hereunder are not assignable without the written consent of the other
parties.
13. Counterparts. This Agreement may be executed in any number of counterparts,
each of which, when executed and delivered, shall be an original, but all of
which together shall constitute one and the same instrument.
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<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above-written.
"L&G" "COMPANY"
L&G Associates ARTISTdirect, LLC
By: ___________________________ By:___________________________
Allen D. Lenard Marc Geiger
Its: Member
"GEIGER"
_______________________________ By:___________________________
Marc Geiger Donald Muller
Its: Member
"MULLER"
_______________________________
Donald Muller
<PAGE> 1
EXHIBIT 10.15
ISSUANCE, NONCOMPETITION AND NONSOLICITATION AGREEMENT
This ISSUANCE, NONCOMPETITION AND NONSOLICITATION AGREEMENT (this
"Agreement") is made as of June 30, 1998 (the "Effective Date") between
ARTISTdirect, LLC, a California limited liability company (the "Company"), and
Steve Rennie ("Rennie"). Any capitalized term used but not defined herein shall
have the meaning ascribed to it in that certain Operating Agreement of the
Company dated as of September 1, 1996, as amended (the "Operating Agreement").
R E C I T A L S
WHEREAS, Rennie is an employee of The Ultimate Band List, LLC, an
indirect subsidiary of the Company (the "UBL"), pursuant to an employment
agreement dated as of April 1, 1998 (the "Employment Agreement");
WHEREAS, as partial compensation for the services rendered and to be
rendered by Rennie pursuant to the Employment Agreement, the Company wishes to
issue to Rennie 45,977.01 Units (the "Issued Units"), representing a 4.04%
Percentage as of the Effective Date, and Rennie wishes to be issued the Issued
Units, pursuant to the terms hereof;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby expressly acknowledged, the Company and Rennie
hereby agree as follows:
A G R E E M E N T
1. Issuance of the Issued Units. The Company hereby issues the Issued Units to
Rennie, subject to the conditions and restrictions contained in this Agreement.
Rennie shall be considered a Member of the Company as of the Effective Date. The
Issued Units shall entitle Rennie to a share of the profits and losses of the
Company after the Effective Date, and all distributions made with respect
thereto, but shall not entitle Rennie to any interest in the capital of the
Company as of the Effective Date, which capital Rennie and the Company hereby
agree has a fair market value equal to Twelve Million, Two Hundred Twenty-six
Thousand Five Hundred Dollars ($12,226,500) as of the Effective Date.
2. Antidilution Protection. The Percentage represented by the Issued Units shall
not be diluted below 4% with respect to: (a) any issuance of Units by the
Company to the person hired to serve as the chief financial officer of the
Company; or (b) the first Five Million Dollars ($5,000,000) of additional
capital contributions made following the Effective Date to the Company or any of
its subsidiaries, including, without limitation, the UBL; provided that such
additional capital contributions (other than by Intel Corporation) are made
either (i) based upon a valuation of the applicable entity that is no less than
the valuation upon which any prior capital contribution was made, or (ii)
pursuant to the exercise of an option or warrant the exercise price of which on
the date of grant was not based upon a valuation of the applicable entity that
was less than the valuation upon which any capital contribution prior to the
date of the grant was made.
<PAGE> 2
3. Noncompetition. In recognition of the considerations described herein, Rennie
agrees that for so long as Rennie is employed by the UBL, and until the
"Noncompetition Expiration Date" (as defined below), Rennie shall not, directly
or indirectly:
(a) enter into the employ of, or render any services to, any person,
firm or business entity engaged in any "Competitive Business," which shall mean
any Internet business that at that time is competitive with the business of the
UBL or any of its subsidiaries (each, a "Subsidiary"), and which shall include,
without limitation, any internet business that, anywhere in the world: (i)
operates a meta-music index or search engine on the World Wide Web; or (ii)
sells or offers to sell through a World Wide Web site music-related products or
services, including, without limitation, any devices or other means, whether
utilizing technology existing as of the date hereof or devised hereafter, on or
by which sound may be recorded, transmitted or reproduced, with or without a
visual reproduction, primarily for home and/or consumer use, including, without
limitation, analog disc records, analog tape cassettes, compact discs,
mini-discs, digital audio tapes, video cassettes, laser discs, and downloading
via the Internet;
(b) engage in any Competitive Business for Rennie's own account;
(c) become interested in any Competitive Business as an individual,
partner, shareholder (other than as described below), creditor, director,
officer, principal, agent, employee, trustee, consultant, advisor, franchisee or
in any other relationship or capacity; or
(d) authorize his name or reputation to be used by any Competitive
Business; provided, however, that nothing contained in this Section 3 shall be
deemed to prohibit Rennie from acquiring or holding, solely for investment,
publicly traded securities of any corporation some of the activities of which
are competitive with the business of the Company so long as such securities, in
the aggregate, constitute less than five percent (5%) of any class or series of
outstanding securities of such corporation. Notwithstanding anything to the
contrary contained herein, the prohibition contained in Section 3(a) above shall
not apply if the function performed by Rennie does not substantially and
directly involve the development, maintenance or operation of a Competitive
Business. For purposes of this Section 3, the "Noncompetition Expiration Date"
shall mean March 31, 2001; provided, however, that in the case of the UBL's
termination of Rennie's employment other than for "Cause" (as defined in the
Employment Agreement), the "Noncompetition Expiration Date" shall mean the
effective date of the termination of Rennie's employment.
4. Nonsolicitation. In recognition of the considerations described herein,
Rennie agrees that for so long as Rennie is employed by the UBL, and until the
"Nonsolicitation Expiration Date" (as defined below), Rennie shall not, directly
or indirectly:
(a) contact or solicit, or attempt to contact or solicit, for Rennie's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity that was a client or customer of the Company or any
Subsidiary within the six (6)-month period preceding the effective date of the
termination of Rennie's employment;
(b) contact or solicit, or attempt to contact or solicit, for Rennie's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity that has been contacted, orally or in writing, by the
Company or any affiliated entity of the Company
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<PAGE> 3
as a potential customer or client within the six (6)-month period preceding the
effective date of the termination of Rennie's employment; or
(c) hire, subcontract, employ or engage, or contact or solicit, or
attempt to contact or solicit, for the purpose of hiring, contracting, employing
or engaging, for Rennie's own account or any account other than that of the
Company or any Subsidiary, any person or entity (other than Rennie's personal
assistant) who was an employee or exclusive subcontractor of the Company or any
affiliated entity of the Company at any time during the six (6)-month period
preceding the effective date of the termination of Rennie's employment.
For purposes of this Section 4, the "Nonsolicitation Expiration Date" shall mean
March 31, 2002.
5. Possible Divestiture of the Issued Units. The Issued Units shall be subject
to divestiture in accordance with the following terms and conditions:
(a) 100% of the Issued Units shall be subject to divestiture if
Rennie's employment is terminated prior to March 31, 1999 by the UBL for "Cause"
(as defined in the Employment Agreement) or by Rennie (any such termination, a
"Covered Termination").
(b) 50% of the Issued Units shall be subject to divestiture upon the
occurrence of a Covered Termination prior to the earlier of (i) March 31, 2000
or (ii) UBL's having received, during any twelve (12)-month period, Five Million
Dollars ($5,000,000) or more in gross revenues (excluding sales taxes and credit
card fees) in respect of sales of product through or in connection with its
Internet web site located at www.ubl.com.
Any divestiture of the Issued Units contemplated above shall occur automatically
upon the occurrence of a Covered Termination, and the effectiveness of such
divestiture shall not depend upon any further action by either the Company or
Rennie. Rennie agrees to execute any and all documents reasonably requested by
the Company to evidence such divestiture. Such divestiture shall be made without
any payment whatsoever to Rennie, and shall be effective for all purposes from
the date of the event giving rise to such divestiture. In no event shall such
divestiture be deemed a "forfeiture," but rather the possibility of such
divestiture is part of the bargained-for consideration to the Company in
entering into this Agreement and to the UBL in entering into the Employment
Agreement; it being understood and acknowledged that Rennie's satisfactory
performance of services pursuant to, and for the term of, the Employment
Agreement is the consideration to be provided by Rennie to the Company for the
Issued Units.
6. Call Option upon Termination.
(a) In the event of a Covered Termination prior to March 31, 2001, the
UBL shall notify Marc Geiger and Donald Muller (the "Founders"), the Company and
each "Other Member" (as defined below) of such termination within thirty (30)
days. The Founders shall each have the right, but not the obligation (a "Founder
Right"), to purchase one half of all of the Units held by Rennie (the "Subject
Units") at the price and on the terms specified in this Section 6. Within sixty
(60) days after the date of such termination, each Founder shall notify Rennie,
the Company and all Other Members whether and to what extent such Founder
intends to exercise his Founder Right (a "Founder Notice"). If either Founder
fails to exercise his Founder Right as to all of his one-half share of the
Subject Units, then the other Founder shall have the
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<PAGE> 4
right to purchase the Subject Units that such other Founder has elected not to
purchase by amending his Founder Notice within five (5) days after the date that
he receives notice that the other Founder has so declined to exercise his
Founder Right in full. Failure to deliver a Founder Notice within the applicable
periods shall constitute a waiver of the applicable Founder Right.
(b) In the event that the Founders do not exercise the Founder Rights
as to all of the Subject Units, the Company, to the extent permitted by law,
shall have the right, but not the obligation (the "Company Right"), to purchase
all of the Subject Units that the Founders did not elect to purchase, at the
same price and on the terms that the Founders could have purchased such Subject
Units pursuant to Section 6(a), by notifying Rennie, the Founders and all Other
Members in writing (the "Company Notice") within thirty (30) days after the date
of the last timely Founder Notice, including any timely amendment thereto (or,
if there should be no such notice, then within ninety (90) days after the date
of termination), whether and to what extent the Company intends to exercise the
Company Right (the "Company Notice"). Failure to deliver the Company Notice
within such period shall constitute a waiver of the Company Right.
(c) In the event that the Founders and the Company do not exercise the
Founder Rights and the Company Right as to all of the Subject Units, each other
Member designated from time to time by Company, in its sole discretion (an
"Other Member"), shall have the right, but not the obligation (the "Other Member
Right"), to purchase such Other Member's pro rata share of all of the Subject
Units that neither the Founders nor the Company elected to purchase, at the same
price and on the terms that the Founders could have purchased such Subject Units
pursuant to Section 6(a) above, by notifying Rennie, the Founders, the Company
and the Other Members in writing (the "Other Member Notice") within thirty (30)
days after the date of the Company Notice (or, if there should be no such
notice, then within one hundred twenty (120) days after the date of
termination), whether and to what extent such Other Member intends to exercise
the Other Member Right. For purposes of this Section 6(c), "pro rata share"
shall mean the product obtained by multiplying (i) the unpurchased portion by
(ii) a fraction, the numerator of which is the applicable Other Member's
Percentage and the denominator of which is the aggregate of all Other Members'
Percentages who did elect to purchase a portion of the Subject Units. If any
Other Member fails to exercise the Other Member Right as to all of its pro rata
share of the Subject Units, then any of the Other Members shall have the right
to purchase the Subject Units that such Other Member has elected not to purchase
by amending its respective Other Member Notice within five (5) days after the
date that it receives notice that any Other Member has so declined to exercise
the Other Member Right in full. Failure to deliver the Other Member Notice
within the applicable periods shall constitute a waiver of such Other Member's
purchase right as to the Subject Units.
(d) The price for the Subject Units to be purchased pursuant to this
Section 6 shall be their "Fair Market Value" as of the effective date of the
termination of Rennie's employment, which shall mean the value that would be
obtained in an arm's length transaction for ownership of the Subject Units for
cash between an informed and willing seller and an informed and willing
purchaser, each with an adequate understanding of the facts and under no
compulsion to buy or sell. The Fair Market Value of the Subject Units shall be
determined by an independent appraiser mutually approved by the Company and
Rennie. If the Company and Rennie are unable to agree upon a single appraiser,
they shall each select an appraiser. If one appraisal is less than (or equal to)
ten percent (10%) higher than the other appraisal, the Fair Market Value shall
be the average of each of the appraisals. If one appraisal is more than ten
percent (10%) higher than the other appraisal, those two appraisers shall
appoint a third appraiser, and the Fair Market Value shall be equal to the value
determined by the third appraiser. The fees of all
4
<PAGE> 5
such appraisers shall be borne by the Company. The Company and Rennie shall use
sound business practice to ensure that the fees of any appraiser to be retained
are appropriate and competitively priced. The Purchase Price shall be paid in
cash, in immediately available funds, or such other consideration as Rennie and
the applicable purchaser(s) may agree.
(e) If the Founders, the Company and/or the Other Members shall not
purchase all of the Subject Units, this Section 6 shall not apply. Unless Rennie
and the applicable Founder(s), the Company and/or the Other Members, as the case
may be, agree otherwise, the closing for any purchase of the Subject Units by
the Founder(s), the Company and/or any Other Members pursuant to this Section 6
shall occur no later than the one hundred eightieth (180th) day after the date
of the date of the termination of Rennie's employment, or the Founder Rights,
the Company Right and any Other Member Right shall each be deemed to have
expired.
(f) The call option set forth in this Section 6 does not apply in
connection with, and terminates upon the occurrence of, the Company's initial
public offering.
7. Drag Along Obligation. If the Founders find a third party buyer for all or
any portion of their Units (whether such sale is by way of purchase of assets or
Units, merger, recapitalization or other form of transaction), then, at the
request of the Founders, Rennie shall sell the same percentage of the Units then
held by him to such third party on the same terms and conditions as apply to the
sale by the Founders. Rennie agrees timely to take such other actions as the
Founders may reasonably request in connection with the approval of the
consummation of such sale, including, without limitation, voting all Units in
favor of such sale and waiving any dissenters' rights, executing such
agreements, powers of attorney, voting proxies or other documents and
instruments as may be necessary or desirable to consummate such sale, and, in
the event that such sale is structured as a recapitalization, transferring and
retaining such percentages of Units as may be requested by the Founders. The
foregoing obligation shall survive the Company's initial public offering.
8. Investment Representations.
(a) The Company represents and warrants to Rennie that the issuance of
the Issued Units has been duly and validly authorized and will not violate the
terms of any agreement to which the Company is a party.
(b) Rennie represents and warrants to the Company as follows:
(i) Rennie is acquiring the Issued Units for Rennie's own account
and not with a view to or for sale in connection with any distribution thereof.
(ii) Rennie (A) is familiar with the business of the Company, (B)
has had an opportunity to discuss with representatives of the Company the
condition of and prospects for the continued operation and financing of the
Company and such other matters as Rennie has deemed appropriate in considering
whether to invest in the Issued Units, and (C) has been provided access to all
available information about the Company requested by Rennie.
(iii) Rennie understands that the Issued Units have not been
registered under the Securities Act of 1933 (the "Act") or registered or
qualified under the securities laws of any state and that Rennie may not sell,
assign, dispose, or otherwise transfer the Issued Units unless they are
subsequently registered under the Act and registered or qualified under
5
<PAGE> 6
applicable state securities laws, or unless an exemption from such registration
and qualification is available.
(iv) Rennie has the right to enter into this Agreement and to grant
the rights granted by him herein.
(v) The provisions of this Agreement do not violate any other
contracts or agreements to which Rennie is a party and that would adversely
affect his ability to perform his obligations hereunder.
9. Condition Precedent to Issuance. The issuance of the Issued Units shall not
be effective until Rennie shall have agreed to be bound by the terms of the
Operating Agreement.
10. Covenants Reasonable as to Time and Territory. Rennie and the Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the rights and remedies conferred upon the Company under this
Agreement, and hereby acknowledge and agree that (i) the same are reasonable in
time and territory (ii) and that the consideration provided to Rennie hereunder
is sufficient to compensate Rennie for the restrictions contained in this
Agreement.
11. Remedies. Any material breach, violation or evasion by Employee of the terms
of this Agreement, including specifically, but not limited to, Sections 3 and 4
above, would result in immediate and irreparable injury and harm to the Company,
and would cause damage to the Company in amounts difficult to ascertain and for
which Company's remedies and defenses at law would be inadequate. Accordingly,
in the event of any such breach or threatened breach, the Company shall be
entitled to, and Employee hereby consents to the entry of, the remedies or
injunction and specific performance, or either of such remedies, as well as all
other remedies to which the Company may be entitled, at law, in equity or
otherwise.
12. Entire Agreement. This Agreement, the Employment Agreement and the Operating
Agreement together constitute the entire agreement and understanding among the
parties pertaining to the subject matter hereof and supersede any and all prior
agreements, whether written or oral, relating thereto.
13. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal substantive laws (and not the laws of
choice of laws) of the State of California.
14. Costs. If either party brings any legal action against the other to enforce
its rights under this Agreement, the prevailing party in such dispute shall be
entitled to recover from the other party all reasonable fees, costs and expenses
actually incurred in enforcing its rights under this Agreement including,
without limitation, the reasonable fees and expenses of attorneys, accountants
and expert witnesses, which shall include, without limitation, all fees, costs
and expenses of appeals and of enforcement.
15. Amendments. This Agreement may be amended only by a written agreement
executed by all of the parties hereto.
16. Assignment. This Agreement and the rights and obligations of the Company and
Rennie hereunder are not assignable without the written consent of the other
party.
6
<PAGE> 7
17. Counterparts. This Agreement may be executed in any number of counterparts,
each of which, when executed and delivered, shall be an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above-written.
"RENNIE" "COMPANY"
ARTISTdirect, LLC
_______________________________ By:___________________________
Steve Rennie Marc Geiger
Its: Member
By:___________________________
Donald Muller
Its: Member
7
<PAGE> 1
EXHIBIT 10.16
Deferred Compensation Agreement
This Agreement is made as of the 1st day of April, 1998 between ArtistDirect,
LLC, a California limited liability company (the "Company") and Keith Yokomoto
("Employee").
WHEREAS, the Company is operated under the terms and provisions of its
Operating Agreement (the "Operating Agreement"), as the same may be modified or
amended by its Members (the "Members") in accordance therewith;
WHEREAS, the Company believes that the services of Employee will be
instrumental in stabilizing and increasing the value of the Company;
WHEREAS, the Company believes that in order to induce Employee to
continue to provide services to the Company, additional variable compensation is
necessary;
WHEREAS, the Company desires to make a special one-time payment to
Employee of this additional variable compensation (the "Compensation") in the
amount, at the time, and upon the terms and conditions set forth in this
Agreement for the services of Employee to the Company and to defer the payment
of such amount as described herein; and
WHEREAS, certain Members are willing to have their capital account (the
"Capital Account") determined under the Operating Agreement charged with the
payment of the Compensation.
1.
<PAGE> 2
NOW, THEREFORE, the parties agree as follows:
1. (a) Subject to the provisions of this Agreement, the amount of
the Compensation to be paid hereunder shall be equal to the product of (i) a
fraction, the numerator of which is the Fair Market Value (as defined below) of
the Company on the applicable Payment Date (as defined below) and the
denominator of which is $1,980,000 and (ii) $200,000; provided, however, that
the amount of the Compensation shall not exceed $200,000.
(b) "Fair Market Value" means the value that would be obtained
for the assets of the Company, taking into account all liabilities and
restrictions against those assets, if those assets were available for sale on
the open market in an arm's length transaction for cash between an informed and
willing seller and an informed and willing purchaser, each with an adequate
understanding of the facts and under no compulsion to buy or sell. For purposes
hereof, Fair Market Value shall be determined as of the applicable Payment Date
(as defined below) by the Company, acting in good faith, taking into account all
relevant facts and circumstances, including any current appraisals. Fair Market
Value shall not give effect to the Compensation due hereunder or under other
similar agreements with Employees. Notwithstanding anything to the contrary
herein, upon the occurrence of a Capital Event (as defined below) with respect
to all or a portion of the assets of the Company, Fair Market Value shall not
exceed the amount of proceeds received by the Company from such Capital Event
(including the amount of any assumed liabilities) less a proportionate share of
the unassumed liabilities of the Company.
2.
<PAGE> 3
2. The payment to Employee of the Compensation shall be made upon the
first to occur of the following events (the "Payment Date");
(a) Sale or redemption of Employee's entire membership interest
in the Company; provided that in the event of a sale or other disposition to a
party other than the Company (including a disposition to a corporation formed to
operate the business of the Company), Employee may sell or dispose of a
membership interest in the Company which includes a right, under the Operating
Agreement, of the transferee to a Capital Account equal to the then fair market
value of such membership interest, if, in such sale or other disposition, the
portion of the consideration which does not represent the amount of Capital
Account of such membership interest of Employee (up to the amount of the
Compensation due hereunder) shall be deemed paid first to the Company for the
benefit of the Members agreeing herein to have their Capital Accounts charged
for the Compensation hereunder, and then next being deemed paid as the
Compensation to Employee under the terms of this Agreement;
(b) The occurrence of a Capital Event (as hereinafter defined);
or
(c) On or after the seventh anniversary of this Agreement,
provided that Employee shall request payment at such time, and the Company shall
then consent to make such payment, which consent shall be in the sole discretion
of the Company.
(d) As used herein, "Capital Event" shall mean an event giving
rise to the distribution to Members of proceeds received by the Company from the
following sources: (i) insurance proceeds or damage recoveries with respect to
the damage of destruction or
3.
<PAGE> 4
condemnation of all or substantially all of the assets of the Company; (ii)
financing or refinancing proceeds for any indebtedness secured by any assets of
the Company; or (iii) proceeds from the sale or any exchange, transfer,
assignment or other disposition of all or substantially all of the assets of the
Company.
3. In the event that payment of the Compensation is made pursuant to
Section 2(b), above, but the operations of the Company continue and subsequently
there is one or more additional Capital Events, or Employee's interest is
purchased or redeemed upon one of the events specified in Section 2(a), above,
additional payments of the Compensation shall be made to Employee hereunder. The
amount to be paid shall be equal to the applicable amount of the Compensation
determined in accordance with Section 1, above, with respect to such Capital
Event, sale or redemption (determined on an event-by-event basis), but in no
case shall the total aggregate amounts received hereunder for all such events
exceed the amount of the Compensation determined under Section 1 hereof as of
the respective Payment Date:
4. (a) The deduction in determining Net Profit and Net Loss under
the Operating Agreement (as defined under such Operating Agreement) for payment
of the Compensation or deemed payment under Section 1 shall be specially
allocated to the Members set forth on the signature page hereto as agreeing to
have their Capital Accounts so charged in the amounts and percentages as
indicated.
(b) The Compensation shall be paid in cash, except other forms of
consideration may be used by the Company if such form of consideration is used
in the sale or
4.
<PAGE> 5
redemption or a Capital Event, as the case may be. All payments shall be
delivered in person or mailed to the last address of Employee (or, in the case
of the death of Employee, to that of Employee's estate or of Employee's
designated beneficiary, whichever is applicable). Employee shall be responsible
for furnishing the Company with his or her current address and that of his
beneficiary (if applicable).
(c) Notwithstanding any other provision in this Agreement to the
contrary, no payment of the Compensation shall be made if such payment would
conflict with, or result in a breach of, any terms, conditions, restrictions, or
provisions of, or would constitute a default under, any bond, note, or other
evidence of indebtedness or any contract, lease, loan agreement or other credit
agreement or instrument to which the Company is a party or by which the Company
may be bound. In addition, the Company has the right to defer the date on which
any amount is payable or to modify the time or manner of the payment of the
amount as it deems necessary because of its operations (e.g., cash flow needs),
provided that any such determination shall be made in good faith by the Company.
(d) Any amount of the Compensation payable under this Agreement
shall not be deemed salary or other compensation to Employee for the purpose of
computing benefits to which Employee may be entitled under any vacation,
disability, profit sharing, pension plan or other arrangement of the Company for
the benefit of its employees.
5. In the event of Employee's death, all amounts which shall become due
hereunder to Employee shall be paid to the executors or administrators of his
estate.
5.
<PAGE> 6
6. Payments of the Compensation made or deemed made by Company
hereunder are subject to withholding or payroll taxes and to such other
deductions as shall, at the time of such payment, be required under any income
tax or other law, whether of the United States or any other jurisdiction, and
the amount of the Compensation paid shall be so reduced by such withholding,
payroll taxes or other deductions. In the case of payments to the executors or
administrators of the estate of Employee, payment of the Compensation is subject
to the delivery to the Company of all necessary tax waivers, letters
testamentary and other documents
7. Nothing contained herein shall require the Company to continue
Employee in its employ, or require Employee to continue in the employ of the
Company.
8. The sole interest of Employee hereunder shall be to receive the
benefits provided herein as and when the same shall become due and payable in
accordance with the terms hereof, and neither Employee nor the executors or
administrators of his estate shall have any right, title or interest in or to
any of the assets of the Company.
9. All amounts payable hereunder with respect to Employee shall be
unfunded deferred compensation payable, when due, solely from the general assets
of the Company and no member of the Company shall be liable for the payment
thereof. The Company shall not maintain any legally separate fund or account to
provide any benefits provided hereunder.
10. This Agreement shall inure to the benefit of, and be enforceable
only by the
6.
<PAGE> 7
parties hereto, their heirs, executors, administrators, legal representatives,
successors and permitted assigns. The rights of Employee pursuant to this
Agreement shall not be assigned, transferred, pledged or hypothecated in any way
(whether by operation of law or otherwise) and any attempted disposition
contrary to the terms hereof shall be null and void and without effect. The
Company may assign its rights, together with its obligations, hereunder in
connection with any sale, transfer or other disposition of all or a substantial
portion of the assets of the Company.
11. This Agreement shall be governed by and construed in accordance
with the laws of California.
12. No modification, amendment, extension or alleged waiver of this
Agreement or any provision thereof will be binding upon Employee or the Company
unless in writing and signed by Employee and the Company; provided that any
amendment to Section 4(a) or the signature page hereof shall require the
approval of all Members. This Agreement constitutes the entire Agreement between
Employee and the Company relating to the subject matter hereof and, except as
otherwise specifically provided herein, supersedes and replaces any and all
prior agreements and understandings, written or oral, relative to such matters.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first set forth above.
"EMPLOYEE"
________________________________________
Keith Yokomoto
7.
<PAGE> 8
"COMPANY"
ARTISTdirect, LLC
By: ___________________________________
Marc P. Geiger
Its: Member
By: ___________________________________
Donald P. Muller
Its: Member
8.
<PAGE> 9
Charges to Capital Accounts of Other Members
<TABLE>
<CAPTION>
Maximum Amount Percentage of
of Compensation Compensation
Name to be Charged to be charged Accepted and Agreed
---- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Marc P. Geiger $100,000 50% _____________________
Marc P. Geiger
Donald P. Muller $100,000 50% _____________________
Donald P. Muller
</TABLE>
9.
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of January 1,
1998 (the "Effective Date") and is entered into between ARTISTdirect, LLC, a
California limited liability company (the "Company") and Keith Yokomoto
("Employee").
R E C I T A L S
WHEREAS, the Company desires to employ Employee to serve the Company and
its subsidiaries and Employee desires to be so employed by the Company, on the
terms and subject to the conditions hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, the parties hereto have agreed, and do hereby mutually
agree, as follows:
1. Employment and Duties. Subject to the other terms and conditions set
forth herein, the Company hereby employs Employee, and Employee agrees to be
employed by the Company, as Chief Operating Officer and Vice President, Business
Development of the Company and all of its subsidiaries, including, without
limitation, The Ultimate Band List, LLC. Employee shall report to Marc Geiger,
Donald Muller, and/or such other executives of the Company and/or its
subsidiaries as the Company may designate from time to time.
2. Devotion. During the Term, Employee shall faithfully perform to the
best of his ability and in a satisfactory manner all services and acts necessary
or advisable as both (i) are consistent with his title and position and (ii) may
reasonably be assigned to him by any of the persons described in Section 1
above. In addition, during the Term, Employee shall devote his business time,
skill and energies exclusively to the business of the Company and its
subsidiaries and affiliates from time to time (the "Subsidiaries").
3. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of the Company in the Los Angeles
area; provided, however, it is agreed that Employee will be expected to travel
from time to time at the Company's expense in accordance with the provisions of
Section 6(c) below.
4. Term. The term of Employee's employment (the "Term") shall commence
on the Effective Date and continue until December 31, 2000, unless terminated
sooner as provided in Section 7 below (the "Initial Period"). The Company shall
have the option (the "First Option"), exercisable by written notice to Employee
at any time prior to the date sixty (60) days prior to the end of the Initial
Period, to extend the Term for an additional one (1) year period (the "First
Option Period"), subject to earlier termination in accordance with Section 7
below. If the Company exercises the First Option, the Company shall have an
additional option, exercisable by written notice to Employee at any time prior
to the date sixty (60) days prior to the end of the First Option Period, to
extend the Term for an additional one (1) year period (the "Second Option
Period), subject to earlier termination in accordance with Section 7 below.
<PAGE> 2
5. Compensation. For all services to be rendered by Employee hereunder,
and for all rights granted the Company hereunder, Employee shall be paid by the
Company the amounts set forth in this Section 5.
(a) Base Salary. The Company shall pay Employee a base salary at
the annual rate of: (i) ONE HUNDRED THOUSAND DOLLARS ($100,000) for the first
five (5) months of the Term, (ii) ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000)
for the balance of the first twelve (12)-month period of the Term and (iii) ONE
HUNDRED FIFTY THOUSAND DOLLARS ($150,000) for the second, third, fourth (if any)
and fifth (if any) twelve (12)-month periods of the Term, in each case prorated
for any portion thereof and payable in accordance with the Company's standard
payment schedule for employees.
(b) Guaranteed Bonuses. The Company shall pay Employee the following
guaranteed bonuses: (a) FIFTY THOUSAND DOLLARS ($50,000) for the second twelve
(12)-month period of the Term; (b) ONE HUNDRED THOUSAND DOLLARS ($100,000) for
each of the third, fourth (if any) and fifth (if any) twelve (12)-month periods
of the Term, in each case prorated for any portion thereof and payable in
arrears at the end of each three (3)-month period during the applicable twelve
(12)-month period of the Term.
Amounts payable to Employee pursuant to this Section 5 shall be subject to
required withholdings and reviewed for any increases annually by the
compensation committee of the Board of Directors of the Company (the "Company
Board") or, if none, the Company Board (the "Committee"), provided that any
adjustments shall be in the sole discretion of the Committee.
6. Employee Benefits; Reimbursement for Expenses.
(a) Employee shall be entitled to participate in such Company
retirement, profit sharing and pension plans and life and other insurance
programs, as well as other benefits programs, which are available to other
similarly situated employees of the Company, subject to the Company's policies
with respect to all of such benefits or insurance programs or plans; provided,
however, that notwithstanding anything herein to the contrary, the Company shall
not be obligated to institute or maintain any particular benefit or insurance
program or plan or aspect thereof.
(b) Employee shall be entitled to not less than three (3) weeks
vacation during each year of the Term hereof to be scheduled at mutually
agreeable times and accrued and taken in accordance with Company policy.
(c) During the Term, the Company agrees to reimburse Employee for
such reasonable, ordinary, necessary and authorized actual out-of-pocket
expenses incurred by Employee in the performing of assigned duties subject to
approval by the Company or the Company's designated agent, including but not
limited to for business-related travel, hotel, meals, telephone calls and
entertainment. As an additional condition to the reimbursement of such expenses
by the Company to Employee, Employee shall provide the Company with copies of
all available invoices and receipts, and otherwise account to the Company in
sufficient detail and with adequate documentation to allow the Company to
confirm the business nature of the expenses and claim an income tax deduction
for such paid items, if such items are deductible. The obligations of the
Company to make the reimbursements specified hereunder shall survive any
termination of the Term.
2
<PAGE> 3
7. Termination.
(a) The Company may terminate Employee's employment hereunder
after the occurrence and during the continuance of any "Disability" (as defined
below) of Employee, upon thirty (30) days' prior written notice to Employee. For
purposes of this Agreement, "Disability" means Employee's incapacity to perform
substantially all of his then current duties as required hereunder for one
hundred eighty (180) days or more within any period of three hundred sixty-five
(365) consecutive days because of mental or physical condition, illness or
injury, consistent with applicable state and federal law. In the event of any
dispute regarding the existence of Employee's Disability, the matter will be
resolved by the determination of a physician qualified to practice medicine in
the State of California, selected by the Company and reasonably approved by
Employee. For this purpose, Employee will submit to appropriate medical
examinations.
(b) The Company may terminate Employee's employment hereunder for
"Cause." For the purposes of this Agreement, "Cause" shall mean Employee shall
have (i) committed fraud, embezzlement or material dishonesty against the
Company or any of its Subsidiaries or an act of moral turpitude; (ii) engaged in
gross negligence or willful misconduct in the performance of Employee's duties
hereunder; (iii) been convicted of, or pleaded nolo contendere to, any felony;
(iv) breached any material provision hereof or failed to perform any material
duty assigned to Employee; or (v) materially misappropriated for his own purpose
and benefit any property or opportunity of the Company, or any Subsidiary or
other affiliated entity of Company. Notwithstanding anything to the contrary
contained herein, none of the foregoing events or circumstances (other than
clause (iii) above) shall constitute "Cause" for purposes of this Agreement
unless the Company gives Employee written notice delineating the claimed event
or circumstance and setting forth the Company's intention to terminate
Employee's employment if such claimed event or circumstance is not capable of
remedy or is not duly remedied within thirty (30) days following such notice, if
capable of remedy, and Employee fails to remedy such event or circumstance
within such thirty (30)-day period.
(c) The employment of Employee hereunder shall be automatically
terminated on the date of Employee's death.
(d) If Employee's employment is terminated pursuant to this
Section 7, Employee shall be entitled to, and the Company's obligation hereunder
shall be limited to, (i) the payment of the compensation (including, without
limitation, guaranteed bonus) accrued under Section 5 above to the effective
date of such termination; (ii) any approved unreimbursed expenses and other
accrued employee benefits (as described above) through the date of termination;
and (iii) the additional compensation provided in Section 7(e) below, if any.
(e) If Employee's employment is terminated:
(i) by the Company pursuant to 7(a) above, Employee will
receive the benefit of any Company disability plans; or
(ii) by the Company other than pursuant to Sections 7(a),
7(b) or 7(c) above, the Company shall continue to pay to Employee Employee's
salary in equal monthly installments, and Employee's guaranteed bonuses in equal
quarterly installments, in each case at the annualized levels being paid to
Employee pursuant to Section 5 above at the time of such termination, less
required withholdings, and for a period (the "Payment Period") equal to the
lesser of (A) twelve (12) consecutive months after the effective date of such
termination and (B) the
3
<PAGE> 4
number of months (rounded to the nearest whole number) remaining in the
applicable period of the Term (i.e., the Initial Period, the First Option Period
or the Second Option Period) during which such termination occurs. In addition,
during the Payment Period, Employee shall be entitled to continued participation
in all of the Company's employee benefit plans, including, without limitation,
continued accrual for retirement benefits and continued coverage under any
Company medical, hospitalization, or life insurance plan; provided, however,
that the Company may, at its option, in lieu of continuing Employee's
participation in any or all such benefit plans, pay Employee a lump sum equal to
the aggregate cost to the Company of Employee's participation in the benefit
plan in which Employee shall no longer participate, which lump sum shall be
calculated based upon the cost to the Company of Employee's participation in
such benefit plan immediately prior to the termination of Employee's employment.
Amounts payable by the Company pursuant to this Section 7(e)(ii) shall be
subject to Employee's duty to mitigate his damages by using reasonable efforts
to seek other comparable employment. Compensation (in whatever form) payable to
Employee on account of other employment during the unexpired Term shall reduce
Company's obligations hereunder. Employee shall promptly notify the Company of
such other employment and the terms thereof. The parties hereto agree that the
payments set forth in this Section 7(e)(ii) constitute fair compensation and the
sole remedy for damages for any termination by the Company other than pursuant
to Section 7(a), 7(b) or 7(c) above.
(f) Nothing in this Agreement shall be deemed a release or waiver
of right to any medical or other employee benefits available to Employee on or
after the effective date of termination of the executive's employment by the
Company under any federal, state or local law that provides for the continuation
of any medical or other employee benefits after employment.
8. Rights to Works. In return for the consideration described herein,
Employee agrees as follows:
(a) All programs, inventions, recordings and work product of any
nature made pursuant to this Agreement or otherwise in the course of Employee's
services and Employee's contributions thereto (hereinafter referred to as
"Works") shall belong solely and exclusively to the Company. The Company shall
have the perpetual and exclusive right to use, exhibit, distribute, or license
throughout the universe, any Work or part thereof in which Employee's services
are utilized by all forms of audio, visual, textual, digital, electronic or
other distribution that are now known or may hereafter exist, and otherwise
exploit such Works in such media, forums and for such uses throughout the
universe as it deems appropriate; provided, however, that no likeness or quote
of Employee shall be used without Employee's written consent. All revenues
derived by the Company from the use, exhibition, distribution, licensing, or
other exploitation of such Works shall be the sole and exclusive property of the
Company.
(b) To the extent that the Works are considered: (i)
contributions to collective works and/or (ii) as parts or components of
audiovisual works, the parties hereby expressly agree that the Works shall be
considered "works made for hire" under the United States Copyright Act of 1976,
as amended (17 U.S.C. Section 101 et seq.). In accordance therewith, the sole
right of copyright in and to the Works shall belong exclusively to the Company
in perpetuity. To the extent that the Works are deemed works other than
contributions to collective works and/or parts or components of audiovisual
works, Employee hereby assigns to the Company all rights, title and interest in
and to the copyrights of such Works and all renewals and extensions of the
copyrights that may be secured under the laws now or hereafter in force and
effect in the United States of America or any other country or countries. At the
Company's reasonable written request and sole expense, Employee shall execute,
verify, acknowledge, deliver and file any and all formal assignments,
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<PAGE> 5
recordations and any and all other documents that the Company may prepare and
reasonably call for to give effect to the provisions of this Agreement. If
Employee fails to execute any such document or instrument, or perform any such
act, within ten (10) business days, Employee shall be deemed to have irrevocably
constituted and appointed the Company, with full power of substitution, to be
Employee's true and lawful attorney, in Employee's name, place, and stead, to
execute, acknowledge, swear to, and file all instruments, conveyances,
certificates, agreements, and other documents, and to take any action which may
be necessary or appropriate to effect the provisions of this Section 8. The
powers of attorney granted herein shall be deemed to be coupled with an interest
and shall be irrevocable.
(c) It is understood that the rights granted to the Company in
this Section 8 shall continue in effect after the termination or expiration of
this Agreement to the extent necessary for the Company's full enjoyment of such
rights.
(d) All provisions of this Agreement relating to the assignment
by Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872. In accordance with Section
2870 of the California Labor Code, the obligation to assign as provided in this
Agreement does not apply to an invention or innovation that Employee developed
entirely on his own time without using the Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to either (A) the business of the Company or any of its Subsidiaries
at the time of conception or reduction to practice of the invention, or (B)
actual or demonstrably anticipated research or development of the Company or any
of its Subsidiaries; or (ii) result from any work performed by Employee for the
Company or any of its Subsidiaries.
(e) Employee shall disclose all inventions and innovations to the
Company, even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
9. Trade Secrets. During the term of this Agreement and at all times
thereafter, Employee shall hold in secrecy all trade secrets and confidential
information relating to the Company's (and its affiliates') business and affairs
that may come to his knowledge or have come to his knowledge while employed by
the Company (excluding information that is or becomes publicly known or
available for use through no fault of Employee), including but not limited to:
(a) matters of a business nature, such as confidential information about costs,
profits, markets, sales, lists of customers, lists of clients and other
information of a similar nature, (b) confidential plans or strategies for
development of the business of the Company and (c) confidential matters of a
technical nature. Except as required in the performance of his duties to the
Company under this Agreement, Employee shall not use for his own benefit or
disclose to any person, directly or indirectly, such matters unless such use or
disclosure has been specifically authorized in writing by the Company in
advance.
10. Employee's Representations. Employee hereby represents and warrants
that: (a) he has the right to enter into this Agreement and to grant the rights
granted by him herein, (b) the provisions of this Agreement do not violate any
other contracts or agreements to which he is a party and that would adversely
affect his ability to perform his obligations hereunder, and (c) he
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<PAGE> 6
will comply with all policies of the Company of which he has notice, provided
they are consistent with applicable laws.
11. The Company's Representations. The Company hereby represents and
warrants that: (a) it has the right, power and authority to enter into this
Agreement and to incur the obligations incurred by it herein, (b) this Agreement
has been duly and validly authorized by the Company, and (c) the provisions of
this Agreement do not violate any other contracts or agreements to which it is a
party that would adversely affect its ability to perform its obligations
hereunder.
12. Indemnification. The Company agrees that Employee shall be entitled
to indemnification and payment or reimbursement of expenses (including, without
limitation, attorneys' fees and expenses) to the fullest extent provided to
employees in the Company's Operating Agreement, as in effect on the date hereof,
and as it may be amended (but in no event on terms less favorable to Employee
than those in effect on the date hereof), for all damages, losses and expenses
incurred by Employee in connection with any third-party claim, action, suit or
proceeding that arises from Employee's services and/or activities (other than
Employee's gross negligence or willful misconduct) as an officer and/or employee
of the Company or any affiliate thereof. This Section 12 shall survive any
termination of the Term.
13. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal substantive laws (and not the laws of
choice of laws) of the State of California.
14. Entire Agreement. This Agreement constitutes the whole agreement of
the parties hereto in reference to any employment of Employee by the Company and
in reference to the subject matter hereof, and all prior agreements, promises,
representations and understandings relative thereto are merged herein.
15. Assignability.
(a) The services to be performed by Employee hereunder are
personal in nature and, accordingly, Employee may not, without the prior consent
of the Company, assign or transfer this Agreement or any rights or obligations
hereunder.
(b) Nothing expressed or implied herein is intended or shall be
construed to confer upon or give to any person, other than the parties hereto,
any right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition hereof.
16. Remedies. Any material breach, violation or evasion by Employee of
the terms of this Agreement, including specifically, but not limited to,
Sections 8 and 9 above, would result in immediate and irreparable injury and
harm to the Company, and will cause damage to the Company in amounts difficult
to ascertain and for which Company's remedies and defenses at law would be
inadequate. Accordingly, in the event of any such breach or threatened breach,
the Company shall be entitled to, and Employee hereby consents to the entry of,
the remedies or injunction and specific performance, or either of such remedies,
as well as all other remedies to which the Company may be entitled, at law, in
equity or otherwise.
17. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived only by a
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written instrument executed by the parties hereto or, in the case of a waiver,
by the party waiving compliance. Any amendment to a material term of this
Agreement shall require the approval of the Committee. The failure of any party
at any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by any
party of the breach of any term or provision contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
18. Notice. All notices, consents, requests and other communications
hereunder shall be in writing and, if given by personal delivery, shall be
deemed to have been validly served, given or delivered upon actual delivery and,
if mailed or delivered by overnight courier, shall be deemed to have been
validly served, given or delivered when deposited in the United States mail, as
registered or certified mail, with proper postage prepaid, or when deposited
with the courier service, and addressed to the party or parties to be notified,
at the following addresses (or such other address(es) as a party may designate
for itself by like notice):
If to Employee: Keith Yokomoto
1746 Havemeyer Lane
Redondo Beach, CA 90278
If to the Company: ARTISTdirect, LLC
17835 Ventura Blvd.
Suite 310
Encino, California 91316
With a copy to: Lenard & Gonzalez LLP
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
19. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent that a
restrictive covenant contained herein may, at any time, be more restrictive than
permitted under the laws of any jurisdiction where this Agreement may be subject
to review and interpretation, the terms of such restrictive covenant shall be
those allowed by law and the covenant shall be deemed to have been revised
accordingly. Each and every term of this Agreement shall be enforced to the
fullest extent permitted by law.
20. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed an original and both of which together shall be
deemed one Agreement.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
ARTISTdirect, LLC
- --------------------
Keith Yokomoto
By: _________________
Marc Geiger
Its: Member
By: _________________
Donald Muller
Its: Member
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of April 1, 1998
(the "Effective Date") and is entered into between The Ultimate Band List, LLC,
a California limited liability company (the "Company") and Steve Rennie
("Employee").
R E C I T A L S
WHEREAS, the Company desires to employ Employee to serve the Company and
its subsidiaries and Employee desires to be so employed by the Company, on the
terms and subject to the conditions hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, the parties hereto have agreed, and do hereby mutually
agree, as follows:
1. Employment and Duties. Subject to the other terms and conditions set forth
herein, the Company hereby employs Employee, and Employee agrees to be employed
by the Company, as the President of the Company. Employee shall report to Marc
Geiger, Donald Muller, and/or such other executives of the Company or
ARTISTdirect New Media, LLC, the Manager of the Company ("ADNM") as the Company
may designate from time to time. Subject to supervision by such persons,
Employee shall have responsibility over the day-to-day operations of the
Company.
2. Devotion.
(a) Subject to the terms of Section 2(b) below, during the Term, Employee
shall faithfully perform to the best of his ability and in a satisfactory manner
all services and acts necessary or advisable as both (i) are consistent with his
title and position and (ii) may reasonably be assigned to him by any of the
persons described in Section 1 above. In addition, during the Term, Employee
shall devote his business time, skill and energies exclusively to the business
of the Company and its subsidiaries and affiliates from time to time (the
"Subsidiaries").
(b) Provided his so doing does not materially interfere with the
fulfillment of Employee's obligations to Company under this Agreement, Employee
shall be entitled to spend a reasonable amount of time co-managing the recording
artist professionally known as "Incubus." Employee shall be entitled to retain
for his own account the proceeds earned by Employee from such co-management.
3. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of the Company in the Los Angeles
area; provided, however, it is agreed that Employee will be expected to travel
from time to time at the Company's expense in accordance with the provisions of
Section 6(c) below.
4. Term. The term of Employee's employment (the "Term") shall commence on the
Effective Date and continue until March 31, 2001, unless terminated sooner in
accordance with Section 7 below.
<PAGE> 2
5. Compensation. For all services to be rendered by Employee hereunder, and for
all rights granted the Company hereunder, Employee shall be paid by the Company
the amounts set forth in this Section 5.
(a) Base Salary. The Company shall pay Employee a base salary at the
annual rate of: (a) ONE HUNDRED THOUSAND DOLLARS ($100,000) for the first twelve
(12)-month period of the Term; (b) ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000)
for the second and third twelve (12)-month periods of the Term, in each case
prorated for any portion thereof and payable in accordance with the Company's
standard payment schedule for employees.
(b) Guaranteed Bonuses. The Company shall pay Employee the following
guaranteed bonuses: (a) FIFTY THOUSAND DOLLARS ($50,000) for the second twelve
(12)-month period of the Term; and (b) ONE HUNDRED THOUSAND DOLLARS ($100,000)
for the third (12)-month period of the Term, in each case prorated for any
portion thereof and payable in arrears at the end of each three (3)-month period
during the applicable twelve (12)-month period of the Term.
Amounts payable to Employee pursuant to this Section 5 shall be subject
to required withholdings and reviewed for any increases annually by the Company,
provided that any adjustments shall be in the sole discretion of the Company.
6. Employee Benefits; Reimbursement for Expenses.
(a) Employee shall be entitled to participate in such Company
retirement, profit sharing and pension plans and life and other insurance
programs, as well as other benefits programs, which are available to other
similarly situated employees of the Company, subject to the Company's policies
with respect to all of such benefits or insurance programs or plans; provided,
however, that notwithstanding anything herein to the contrary, the Company shall
not be obligated to institute or maintain any particular benefit or insurance
program or plan or aspect thereof.
(b) Employee shall be entitled to not less than three (3) weeks vacation
during each year of the Term hereof to be scheduled at mutually agreeable times
and accrued and taken in accordance with Company policy.
(c) During the Term, the Company agrees to reimburse Employee for such
reasonable, ordinary, necessary and authorized actual out-of-pocket expenses
incurred by Employee in the performing of assigned duties subject to approval by
the Company or the Company's designated agent, including but not limited to for
business-related travel, hotel, meals, telephone calls and entertainment. As an
additional condition to the reimbursement of such expenses by the Company to
Employee, Employee shall provide the Company with copies of all available
invoices and receipts, and otherwise account to the Company in sufficient detail
and with adequate documentation to allow the Company to confirm the business
nature of the expenses and claim an income tax deduction for such paid items, if
such items are deductible. The obligations of the Company to make the
reimbursements specified hereunder shall survive any termination of the Term.
7. Termination.
(a) The Company may terminate Employee's employment hereunder after the
occurrence and during the continuance of any "Disability" (as defined below) of
Employee, upon
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<PAGE> 3
thirty (30) days' prior written notice to Employee. For purposes
of this Agreement, "Disability" means Employee's incapacity to perform
substantially all of his then current duties as required hereunder for one
hundred eighty (180) days or more within any period of three hundred sixty-five
(365) consecutive days because of mental or physical condition, illness or
injury, consistent with applicable state and federal law. In the event of any
dispute regarding the existence of Employee's Disability, the matter will be
resolved by the determination of a physician qualified to practice medicine in
the State of California, selected by the Company and reasonably approved by
Employee. For this purpose, Employee will submit to appropriate medical
examinations.
(b) The Company may terminate Employee's employment hereunder for
"Cause." For the purposes of this Agreement, "Cause" shall mean Employee shall
have (i) committed fraud, embezzlement or material dishonesty against the
Company or any of its Subsidiaries or an act of moral turpitude; (ii) engaged in
gross negligence or willful misconduct in the performance of Employee's duties
hereunder; (iii) been convicted of, or pleaded nolo contendere to, any felony;
(iv) breached any material provision hereof or failed to perform any material
duty assigned to Employee; or (v) materially misappropriated for his own purpose
and benefit any property or opportunity of the Company, or any Subsidiary or
other affiliated entity of Company. Notwithstanding anything to the contrary
contained herein, none of the foregoing events or circumstances (other than
clause (iii) above) shall constitute "Cause" for purposes of this Agreement
unless the Company gives Employee written notice delineating the claimed event
or circumstance and setting forth the Company's intention to terminate
Employee's employment if such claimed event or circumstance is not capable of
remedy or is not duly remedied within thirty (30) days following such notice, if
capable of remedy, and Employee fails to remedy such event or circumstance
within such thirty (30)-day period.
(c) The employment of Employee hereunder shall be automatically
terminated on the date of Employee's death.
(d) If Employee's employment is terminated pursuant to this Section 7,
Employee shall be entitled to, and the Company's obligation hereunder shall be
limited to, (i) the payment of the compensation (including, without limitation,
guaranteed bonus) accrued under Section 5 above to the effective date of such
termination; (ii) any approved unreimbursed expenses and other accrued employee
benefits (as described above) through the date of termination; and (iii) the
additional compensation provided in Section 7(e) below, if any.
(e) If Employee's employment is terminated:
(i) by the Company pursuant to 7(a) above, Employee will receive
the benefit of any Company disability plans; or
(ii) by the Company other than pursuant to Sections 7(a), 7(b) or
7(c) above, the Company shall continue to pay to Employee Employee's salary in
equal monthly installments, and Employee's guaranteed bonuses in equal quarterly
installments, in each case at the annualized levels being paid to Employee
pursuant to Section 5 above at the time of such termination, less required
withholdings, and for a period (the "Payment Period") equal to the lesser of (A)
twelve (12) consecutive months after the effective date of such termination and
(B) the number of months (rounded to the nearest whole number) remaining in the
Term. In addition, during the Payment Period, Employee shall be entitled to
continued participation in all of the Company's employee benefit plans,
including, without limitation, continued accrual for retirement benefits and
continued coverage under any Company medical, hospitalization, or life insurance
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<PAGE> 4
plan; provided, however, that the Company may, at its option, in lieu of
continuing Employee's participation in any or all such benefit plans, pay
Employee a lump sum equal to the aggregate cost to the Company of Employee's
participation in the benefit plan in which Employee shall no longer participate,
which lump sum shall be calculated based upon the cost to the Company of
Employee's participation in such benefit plan immediately prior to the
termination of Employee's employment. Amounts payable by the Company pursuant to
this Section 7(e)(ii) shall be subject to Employee's duty to mitigate his
damages by using reasonable efforts to seek other comparable employment.
Compensation (in whatever form) payable to Employee on account of other
employment during the unexpired Term shall reduce Company's obligations
hereunder. Employee shall promptly notify the Company of such other employment
and the terms thereof. The parties hereto agree that the payments set forth in
this Section 7(e)(ii) constitute fair compensation and the sole remedy for
damages for any termination by the Company other than pursuant to Section 7(a),
7(b) or 7(c) above.
(f) Nothing in this Agreement shall be deemed a release or waiver of
right to any medical or other employee benefits available to Employee on or
after the effective date of termination of the executive's employment by the
Company under any federal, state or local law that provides for the continuation
of any medical or other employee benefits after employment.
8. Rights to Works. In return for the consideration described
herein, Employee agrees as follows:
(a) All programs, inventions, recordings and work product of any nature
made pursuant to this Agreement or otherwise in the course of Employee's
services and Employee's contributions thereto (hereinafter referred to as
"Works") shall belong solely and exclusively to the Company. The Company shall
have the perpetual and exclusive right to use, exhibit, distribute, or license
throughout the universe, any Work or part thereof in which Employee's services
are utilized by all forms of audio, visual, textual, digital, electronic or
other distribution that are now known or may hereafter exist, and otherwise
exploit such Works in such media, forums and for such uses throughout the
universe as it deems appropriate; provided, however, that no likeness or quote
of Employee shall be used without Employee's written consent. All revenues
derived by the Company from the use, exhibition, distribution, licensing, or
other exploitation of such Works shall be the sole and exclusive property of the
Company.
(b) To the extent that the Works are considered: (i) contributions to
collective works and/or (ii) as parts or components of audiovisual works, the
parties hereby expressly agree that the Works shall be considered "works made
for hire" under the United States Copyright Act of 1976, as amended (17 U.S.C.
Section 101 et seq.). In accordance therewith, the sole right of copyright in
and to the Works shall belong exclusively to the Company in perpetuity. To the
extent that the Works are deemed works other than contributions to collective
works and/or parts or components of audiovisual works, Employee hereby assigns
to the Company all rights, title and interest in and to the copyrights of such
Works and all renewals and extensions of the copyrights that may be secured
under the laws now or hereafter in force and effect in the United States of
America or any other country or countries. At the Company's reasonable written
request and sole expense, Employee shall execute, verify, acknowledge, deliver
and file any and all formal assignments, recordations and any and all other
documents that the Company may prepare and reasonably call for to give effect to
the provisions of this Agreement. If Employee fails to execute any such document
or instrument, or perform any such act, within ten (10) business days, Employee
shall be deemed to have irrevocably constituted and appointed the Company, with
full power of substitution, to be Employee's true and lawful attorney, in
Employee's name, place, and stead, to
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<PAGE> 5
execute, acknowledge, swear to, and file all instruments, conveyances,
certificates, agreements, and other documents, and to take any action which may
be necessary or appropriate to effect the provisions of this Section 8. The
powers of attorney granted herein shall be deemed to be coupled with an interest
and shall be irrevocable.
(c) It is understood that the rights granted to the Company in this
Section 8 shall continue in effect after the termination or expiration of this
Agreement to the extent necessary for the Company's full enjoyment of such
rights.
(d) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872. In accordance with Section
2870 of the California Labor Code, the obligation to assign as provided in this
Agreement does not apply to an invention or innovation that Employee developed
entirely on his own time without using the Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to either (A) the business of the Company or any of its Subsidiaries
at the time of conception or reduction to practice of the invention, or (B)
actual or demonstrably anticipated research or development of the Company or any
of its Subsidiaries; or (ii) result from any work performed by Employee for the
Company or any of its Subsidiaries.
(e) Employee shall disclose all inventions and innovations to the
Company, even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
9. Trade Secrets. During the term of this Agreement and at all times
thereafter, Employee shall hold in secrecy all trade secrets and confidential
information relating to the Company's (and its affiliates') business and affairs
that may come to his knowledge or have come to his knowledge while employed by
the Company (excluding information that is or becomes publicly known or
available for use through no fault of Employee), including but not limited to:
(a) matters of a business nature, such as confidential information about costs,
profits, markets, sales, lists of customers, lists of clients and other
information of a similar nature, (b) confidential plans or strategies for
development of the business of the Company and (c) confidential matters of a
technical nature. Except as required in the performance of his duties to the
Company under this Agreement, Employee shall not use for his own benefit or
disclose to any person, directly or indirectly, such matters unless such use or
disclosure has been specifically authorized in writing by the Company in
advance.
10. Employee's Representations. Employee hereby represents and warrants
that: (a) he has the right to enter into this Agreement and to grant the rights
granted by him herein, (b) the provisions of this Agreement do not violate any
other contracts or agreements to which he is a party and that would adversely
affect his ability to perform his obligations hereunder, and (c) he will comply
with all policies of the Company of which he has notice, provided they are
consistent with applicable laws.
11. The Company's Representations. The Company hereby represents and
warrants that: (a) it has the right, power and authority to enter into this
Agreement and to incur the obligations incurred by it herein, (b) this Agreement
has been duly and validly authorized by the Company,
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<PAGE> 6
and (c) the provisions of this Agreement do not violate any other contracts or
agreements to which it is a party that would adversely affect its ability to
perform its obligations hereunder.
12. Indemnification. The Company agrees that Employee shall be entitled to
indemnification and payment or reimbursement of expenses (including, without
limitation, attorneys' fees and expenses) to the fullest extent provided to
employees in the Company's Operating Agreement, as in effect on the date hereof,
and as it may be amended (but in no event on terms less favorable to Employee
than those in effect on the date hereof), for all damages, losses and expenses
incurred by Employee in connection with any third-party claim, action, suit or
proceeding that arises from Employee's services and/or activities (other than
Employee's gross negligence or willful misconduct) as an officer and/or employee
of the Company or any affiliate thereof. This Section 12 shall survive any
termination of the Term.
13. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal substantive laws (and not the laws of
choice of laws) of the State of California.
14. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of Employee by the Company and in
reference to the subject matter hereof, and all prior agreements, promises,
representations and understandings relative thereto are merged herein.
16. Assignability.
(a) The services to be performed by Employee hereunder are personal in
nature and, accordingly, Employee may not, without the prior consent of the
Company, assign or transfer this Agreement or any rights or obligations
hereunder.
(b) Nothing expressed or implied herein is intended or shall be
construed to confer upon or give to any person, other than the parties hereto,
any right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition hereof.
17. Remedies. Any material breach, violation or evasion by Employee of the
terms of this Agreement, including specifically, but not limited to, Sections 8
and 9 above, would result in immediate and irreparable injury and harm to the
Company, and will cause damage to the Company in amounts difficult to ascertain
and for which Company's remedies and defenses at law would be inadequate.
Accordingly, in the event of any such breach or threatened breach, the Company
shall be entitled to, and Employee hereby consents to the entry of, the remedies
or injunction and specific performance, or either of such remedies, as well as
all other remedies to which the Company may be entitled, at law, in equity or
otherwise.
18. Amendments; Waivers. This Agreement may be amended, modified,
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived only by a written instrument executed by the parties hereto or, in the
case of a waiver, by the party waiving compliance. The failure of any party at
any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by any
party of the breach of any term or provision contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
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<PAGE> 7
19. Notice. All notices, consents, requests and other communications
hereunder shall be in writing and, if given by personal delivery, shall be
deemed to have been validly served, given or delivered upon actual delivery and,
if mailed or delivered by overnight courier, shall be deemed to have been
validly served, given or delivered when deposited in the United States mail, as
registered or certified mail, with proper postage prepaid, or when deposited
with the courier service, and addressed to the party or parties to be notified,
at the following addresses (or such other address(es) as a party may designate
for itself by like notice):
If to Employee: Steve Rennie
1125 Coldwater Canyon
Beverly Hills, California 90210
With a copy to: David Wohlberg, Esq.
Troy & Gould Professional Corporation
1801 Century Park East
16th Floor
Los Angeles, California 90067
If to the Company: The Ultimate Band List, LLC
17835 Ventura Blvd.
Suite 310
Encino, California 91316
With a copy to: Lenard & Gonzalez LLP
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
20. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent that a
restrictive covenant contained herein may, at any time, be more restrictive than
permitted under the laws of any jurisdiction where this Agreement may be subject
to review and interpretation, the terms of such restrictive covenant shall be
those allowed by law and the covenant shall be deemed to have been revised
accordingly. Each and every term of this Agreement shall be enforced to the
fullest extent permitted by law.
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<PAGE> 8
21. Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed an original and both of which together shall be deemed
one Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
THE ULTIMATE BAND LIST, LLC
- --------------------
Steve Rennie
By: ARTISTdirect New Media, LLC
Its: Manager
By: ARTISTdirect, LLC
Its: Member
By:
-------------------------
Marc Geiger
Its: Member
By:
-------------------------
Donald Muller
Its: Member
8
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of July 28,
1998 (the "Effective Date") and is entered into between ARTISTdirect, LLC a
California limited liability company (the "Company") and Marc Geiger
("Employee").
R E C I T A L S
WHEREAS, the Company desires to employ Employee to serve the Company and
its subsidiaries, and Employee desires to be so employed by the Company, on the
terms and subject to the conditions hereinafter set forth.
WHEREAS, the execution of this Agreement is a condition to the closing
of the transactions contemplated in that certain Securities Purchase Agreement
dated of even date herewith by and among the Company, The Ultimate Band List,
LLC, a California limited liability company (the "UBL"), Constellation Venture
Capital, L.P., a Delaware limited partnership, and Constellation Ventures (BVI),
Inc., a British Virgin Islands corporation.
A G R E E M E N T
NOW, THEREFORE, the parties hereto have agreed, and do hereby mutually
agree, as follows:
1. Employment and Duties. Subject to the other terms and conditions set forth
herein, the Company hereby employs Employee, and Employee agrees to be employed
by the Company, as Co-Chief Executive Officer of the Company and all of its
subsidiaries, including, without limitation, the UBL. As long as there is
another Co-Chief Executive Officer of the Company or a particular subsidiary of
the Company, Employee and such other Co-Chief Executive Officer shall be the
most senior executives of the Company or such subsidiary, as applicable. At all
times during the Term, if there is no other Co-Chief Executive Officer of the
Company or a particular subsidiary of the Company, then Employee, alone, shall
be the most senior executive of the Company or such subsidiary of the Company,
as applicable. Employee shall report solely and directly to the "Company Board"
(as defined below). For purposes of this Agreement, "Company Board" shall mean
the Board of Directors of the Company, or, if none, the members of the Company.
Subject to supervision by the Company Board and to the provisions of the
Operating Agreement of the Company dated of even date herewith, as the same may
be amended from time to time, Employee and the other Co-Chief Executive Officer
of the Company shall have full authority over the day-to-day operations of the
Company and all of its subsidiaries and over all officers and employees of the
Company and/or its subsidiaries (other than the other Co- Chief Executive
Officer of the Company and its subsidiaries) including the power to hire and,
subject to contractual commitments and/or any required approvals of the
compensation committee of the Company Board, or, if none, the Company Board (the
"Committee"), fire employees.
2. Devotion. During the Term, Employee shall faithfully perform to the best of
his ability and in a satisfactory manner all services and acts necessary or
advisable as both (i) are consistent with his title and position and (ii) may
reasonably be assigned to him by the Company Board. In addition, during the
Term, Employee shall devote his business time, skill and energies exclusively to
the business of the Company and its subsidiaries and affiliates from time to
time (the "Subsidiaries").
<PAGE> 2
3. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of the Company in the Los Angeles
area; provided, however, it is agreed that Employee will be expected to travel
from time to time at the Company's expense in accordance with the provisions of
Section 6(c) below.
4. Term. The term of Employee's employment (the "Term") shall commence on the
Effective Date and continue for an initial period until July 27, 2001 (the
"Initial Period"), unless terminated sooner as provided in Section 7 below.
Beginning July 28, 2001 and upon each successive one (1) year anniversary
thereof, the Term shall extend automatically for an additional one (1)-year
period unless either the Company gives Employee or Employee gives Company
written notice not less than ninety (90) and not more than one hundred twenty
(120) days prior to the end of the then-current period of its or his intention
not to extend the Term; provided, however, that the Term may terminate earlier
as provided in Section 7 below.
5. Compensation. For all services to be rendered by Employee hereunder, and for
all rights granted the Company hereunder, Employee shall be paid by the Company
the amounts set forth in this Section 5.
(a) Base Salary. The Company shall pay Employee a base salary at the
annual rate of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000) for each twelve
(12)-month period of the Term, prorated for any portion thereof, payable in
accordance with the Company's standard payment schedule for employees.
(b) Guaranteed Bonuses. During each twelve (12)-month period of the
Term, the Company shall pay Employee a guaranteed bonus in an amount equal to
ONE HUNDRED THOUSAND DOLLARS ($100,000), prorated for any portion thereof,
payable in arrears at the end of each three (3)-month period during such twelve
(12)-month period of the Term.
Amounts payable to Employee pursuant to this Section 5 shall be subject to
required withholdings and reviewed for any increases annually by the Committee,
provided that any adjustments shall be in the sole discretion of the Committee.
6. Employee Benefits; Reimbursement for Expenses.
(a) Employee shall be entitled to participate in such Company
retirement, profit sharing and pension plans and life and other insurance
programs, as well as other benefits programs, which are available to other
similarly situated employees of the Company at not less than the level generally
afforded to the other most senior executives of the Company, subject to the
Company's policies with respect to all of such benefits or insurance programs or
plans; provided, however, that notwithstanding anything herein to the contrary,
the Company shall not be obligated to institute or maintain any particular
benefit or insurance program or plan or aspect thereof.
(b) Employee shall be entitled to not less than three (3) weeks vacation
during each year of the Term hereof to be scheduled at mutually agreeable times
and accrued and taken in accordance with Company policy.
(c) During the Term, the Company agrees to reimburse Employee for such
reasonable, ordinary, necessary and authorized actual out-of-pocket expenses
incurred by Employee in the performing of assigned duties subject to approval by
the Company or the Company's designated agent, including but not limited to for
business-related travel (business class, or, if unavailable, first class),
hotel, meals, automobile allowance of $750 per month
<PAGE> 3
before taxes, telephone calls, buy-sell insurance premiums and entertainment. As
an additional condition to the reimbursement of such expenses by the Company to
Employee, Employee shall provide the Company with copies of all available
invoices and receipts, and otherwise account to the Company in sufficient detail
and with adequate documentation to allow the Company to confirm the business
nature of the expenses and claim an income tax deduction for such paid items, if
such items are deductible. The obligations of the Company to make the
reimbursements specified hereunder shall survive any termination of the Term.
7. Termination.
(a) The Company may terminate Employee's employment hereunder after the
occurrence and during the continuance of any "Disability" (as defined below) of
Employee, upon thirty (30) days' prior written notice to Employee. For purposes
of this Agreement, "Disability" means Employee's incapacity to perform
substantially all of his then current duties as required hereunder for one
hundred eighty (180) days or more within any period of three hundred sixty-five
(365) consecutive days because of mental or physical condition, illness or
injury, consistent with applicable state and federal law. In the event of any
dispute regarding the existence of Employee's Disability, the matter will be
resolved by the determination of a physician qualified to practice medicine in
the State of California, selected by Employee and reasonably approved by the
Company, or, failing such approval, by a majority of three physicians qualified
to practice medicine in the State of California, one to be selected by the
Company, one to be selected by Employee and the third to be selected by the two
designated physicians. For this purpose, Employee will submit to appropriate
medical examinations.
(b) The Company may terminate Employee's employment hereunder for
"Cause." For the purposes of this Agreement, "Cause" shall mean Employee shall
have (i) committed fraud, embezzlement or material dishonesty against the
Company or any of its Subsidiaries or an act of moral turpitude; (ii) engaged in
gross negligence or willful misconduct in the performance of Employee's duties
hereunder; (iii) been convicted of, or pleaded nolo contendere to, any felony;
(iv) breached any material provision hereof or failed to perform any material
duty assigned to Employee in accordance with the terms hereof; or (v) materially
misappropriated for his own purpose and benefit any property or opportunity of
the Company, or any Subsidiary or other affiliated entity of Company.
Notwithstanding anything to the contrary contained herein, none of the foregoing
events or circumstances (other than clause (iii) above) shall constitute "Cause"
for purposes of this Agreement unless the Company gives Employee written notice
delineating the claimed event or circumstance and setting forth the Company's
intention to terminate Employee's employment if such claimed event or
circumstance is not capable of remedy or is not duly remedied within a
reasonable period following such notice (not to exceed sixty (60) days), if
capable of remedy, and Employee fails to remedy such event or circumstance
within such reasonable period.
(c) The employment of Employee hereunder shall be automatically
terminated on the date of Employee's death.
(d) Employee may terminate his employment hereunder forthwith at any
time for "Good Reason" (as hereinafter defined) upon written notice to the
Company. For purposes of this Section 7(d), "Good Reason" shall mean the
occurrence of any of the following: (i) a material reduction or adverse change
in, or a change that is materially inconsistent with, Employee's
responsibilities, duties, authority, reporting, power, functions, title, working
conditions or status; (ii) a reassignment of Employee to a geographic location
in excess of thirty-five (35) miles from the Company's current principal
offices; or (iii) a material breach by the Company of any of its obligations to
Employee hereunder. Notwithstanding anything to the
<PAGE> 4
contrary contained herein, none of the foregoing events or circumstances) shall
constitute "Good Reason" for purposes of this Agreement unless the Employee
gives Company written notice delineating the claimed event or circumstance and
setting forth the Employee's intention to terminate Employee's employment if
such claimed event or circumstance is not capable of remedy or is not duly
remedied within a reasonable period following such notice (not to exceed sixty
(60) days), if capable of remedy, and Company fails to remedy such event or
circumstance within such reasonable period.
(e) If Employee's employment is terminated pursuant to this Section 7,
Employee shall be entitled to, and the Company's obligation hereunder shall be
limited to, (i) the payment of the compensation (including, without limitation,
guaranteed bonus) accrued under Section 5 above to the effective date of such
termination and (for any termination other than pursuant to Section 7(b) above)
a pro rata portion of (A) any bonuses or incentive compensation payable with
respect to any period commencing prior to the termination date but not expired
as of the termination date, or (B) if no such bonuses or incentive compensation
is payable with respect to such period, so long as the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") during the fiscal year
of the Company prior to the fiscal year in which the termination occurs was not
more than 150% higher than the EBITDA of the Company during the fiscal year in
which the termination occurs, any bonus or incentive compensation paid to
Employee with respect to the prior Contract Year; (ii) any approved unreimbursed
expenses and other accrued employee benefits (as described above) through the
date of termination; and (iii) the additional compensation provided in Section
7(f) below, if any.
(f) If Employee's employment is terminated:
(i) by the Company pursuant to 7(a) above, Employee will receive the
benefit of any Company disability plans; or
(ii) (A) by the Company other than pursuant to Sections 7(a), 7(b)
or 7(c) above, or (B) by Employee pursuant to Section 7(d) above, the Company
shall continue to pay to Employee Employee's salary in equal monthly
installments, and Employee's guaranteed bonuses in equal quarterly installments,
in each case at the annualized levels being paid to Employee pursuant to Section
5 above at the time of such termination, for a period of twelve (12) consecutive
months after the effective date of such termination, and less required
withholdings. In addition, during such twelve (12)-month period, Employee shall
be entitled to continued participation in all of the Company's employee benefit
plans, including, without limitation, continued accrual for retirement benefits
and continued coverage under any Company medical, hospitalization, or life
insurance plan; provided, however, that the Company may, at its option, in lieu
of continuing Employee's participation in any or all such benefit plans, pay
Employee a lump sum equal to the aggregate cost to the Company of Employee's
participation in the benefit plan in which Employee shall no longer participate,
which lump sum shall be calculated based upon the cost to the Company of
Employee's participation in such benefit plan immediately prior to the
termination of Employee's employment. The parties hereto agree that the payments
set forth in this Section 7(f)(ii) constitute fair compensation and the sole
remedy for damages for any termination by the Company other than pursuant to
Section 7(a), 7(b) or 7(c) above, or by Employee pursuant to Section 7(d) above.
(g) Employee shall have no duty of mitigation and shall not be subject
to any right of offset with respect to any compensation received by Employee on
or after the termination of his employment.
<PAGE> 5
(h) Nothing in this Agreement shall be deemed a release or waiver of
right to any medical or other employee benefits available to Employee on or
after the effective date of termination of the executive's employment by the
Company under any federal, state or local law that provides for the continuation
of any medical or other employee benefits after employment.
8. Rights to Works. In return for the consideration described herein, Employee
agrees as follows:
(a) All programs, inventions, recordings and work product of any nature
made pursuant to this Agreement or otherwise in the course of Employee's
services and Employee's contributions thereto (hereinafter referred to as
"Works") shall belong solely and exclusively to the Company. The Company shall
have the perpetual and exclusive right to use, exhibit, distribute, or license
throughout the universe, any Work or part thereof in which Employee's services
are utilized by all forms of audio, visual, textual, digital, electronic or
other distribution that are now known or may hereafter exist, and otherwise
exploit such Works in such media, forums and for such uses throughout the
universe as it deems appropriate; provided, however, that no likeness or quote
of Employee shall be used without Employee's written consent. All revenues
derived by the Company from the use, exhibition, distribution, licensing, or
other exploitation of such Works shall be the sole and exclusive property of the
Company.
(b) To the extent that the Works are considered: (i) contributions to
collective works and/or (ii) as parts or components of audiovisual works, the
parties hereby expressly agree that the Works shall be considered "works made
for hire" under the United States Copyright Act of 1976, as amended (17 U.S.C.
Section 101 et seq.). In accordance therewith, the sole right of copyright in
and to the Works shall belong exclusively to the Company in perpetuity. To the
extent that the Works are deemed works other than contributions to collective
works and/or parts or components of audiovisual works, Employee hereby assigns
to the Company all rights, title and interest in and to the copyrights of such
Works and all renewals and extensions of the copyrights that may be secured
under the laws now or hereafter in force and effect in the United States of
America or any other country or countries. At the Company's reasonable written
request and sole expense, Employee shall execute, verify, acknowledge, deliver
and file any and all formal assignments, recordations and any and all other
documents that the Company may prepare and reasonably call for to give effect to
the provisions of this Agreement. If Employee fails to execute any such document
or instrument, or perform any such act, within ten (10) business days, Employee
shall be deemed to have irrevocably constituted and appointed the Company, with
full power of substitution, to be Employee's true and lawful attorney, in
Employee's name, place, and stead, to execute, acknowledge, swear to, and file
all instruments, conveyances, certificates, agreements, and other documents, and
to take any action which may be necessary or appropriate to effect the
provisions of this Section 8. The powers of attorney granted herein shall be
deemed to be coupled with an interest and shall be irrevocable.
(c) It is understood that the rights granted to the Company in this
Section 8 shall continue in effect after the termination or expiration of this
Agreement to the extent necessary for the Company's full enjoyment of such
rights.
(d) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872. In accordance with Section
2870 of the California Labor Code, the obligation to assign as provided in this
Agreement does not apply to an invention or innovation that Employee developed
entirely on his own time without using the Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to
<PAGE> 6
either (A) the business of the Company or any of its Subsidiaries at the time of
conception or reduction to practice of the invention, or (B) actual or
demonstrably anticipated research or development of the Company or any of its
Subsidiaries; or (ii) result from any work performed by Employee for the Company
or any of its Subsidiaries.
(e) Employee shall disclose all inventions and innovations to the
Company, even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
9. Noncompetition; Nonsolicitation. In recognition of the considerations
described herein, Employee agrees that for so long as Employee is employed by
the Company, and until the "Expiration Date" (as defined below), Employee will
not, directly or indirectly, without the prior written consent of the Company:
(a) enter into the employ of, or render any services to, any person,
firm or business entity engaged in any business that at that time is competitive
with the business of the Company or any Subsidiary (a "Competitive Business"),
including, without limitation, any business that:
(i) anywhere in the world: (A) operates a meta-music index or search
engine on the World Wide Web; or (B) sells or offers to sell through a World
Wide Web site music-related products or services, including, without limitation,
any devices or other means, whether utilizing technology existing as of the date
hereof or devised hereafter, on or by which sound may be recorded, transmitted
or reproduced, with or without a visual reproduction, primarily for home and/or
consumer use, including, without limitation, analog disc records, analog tape
cassettes, compact discs, mini-discs, digital audio tapes, video cassettes,
laser discs, and downloading via the internet ("Records"); or
(b) within a fifty (50) mile radius of the principal office of the
Company or the relevant Subsidiary: (A) plans, develops, produces, and/or
promotes live musical or new media events; (B) represents musical artists for
personal appearance tours and live concerts, and/or clients involved in new
media endeavors; or (B) engages in the creation, distribution, marketing and/or
promotion of Records;
(c) engage in any Competitive Business for Employee's own account;
(d) become interested in any Competitive Business as an individual,
partner, shareholder (other than as described below), creditor, director,
officer, principal, agent, employee, trustee, consultant, advisor, franchisee or
in any other relationship or capacity;
(e) authorize his name or reputation to be used by any Competitive
Business;
(f) contact or solicit, or attempt to contact or solicit, for Employee's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity that was a client or customer of the Company or any
Subsidiary within the six (6)-month period preceding the effective date of the
termination of Employee's employment;
(g) contact or solicit, or attempt to contact or solicit, for Employee's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity
<PAGE> 7
that has been contacted, orally or in writing, by the Company or any affiliated
entity of the Company as a potential customer or client within the six (6)-month
period preceding the effective date of the termination of Employee's employment;
or
(h) hire, subcontract, employ or engage, or contact or solicit, or
attempt to contact or solicit, for the purpose of hiring, contracting, employing
or engaging, for Employee's own account or any account other than that of the
Company or any Subsidiary, any person or entity (other than Employee's personal
assistant) who was an employee or exclusive subcontractor of the Company or any
affiliated entity of the Company at any time during the six (6)-month period
preceding the effective date of the termination of Employee's employment;
provided, however, that nothing contained in this Section 9 shall be deemed to
prohibit Employee from acquiring or holding, solely for investment, publicly
traded securities of any corporation some of the activities of which are
competitive with the business of the Company so long as such securities, in the
aggregate, constitute less than five percent (5%) of any class or series of
outstanding securities of such corporation. For purposes of this Section 9, the
"Expiration Date" shall mean the later of (i) the expiration of the then current
period of the Term and (ii) the date one (1) year after the effective date of
the termination of Employee's employment pursuant to Section 7 above; provided,
however, that in the case of either the Company's termination of Employee's
employment other than pursuant to Sections 7(a) or 7(b) above or Employee's
voluntary resignation pursuant to Section 7(d) above, the "Expiration Date"
shall mean the effective date of the termination of Employee's employment.
10. Trade Secrets. During the term of this Agreement and at all times
thereafter, Employee shall hold in secrecy all trade secrets and confidential
information relating to the Company's (and its affiliates') business and affairs
that may come to his knowledge or have come to his knowledge while employed by
the Company (excluding information that is or becomes publicly known or
available for use through no fault of Employee), including but not limited to:
(a) matters of a business nature, such as confidential information about costs,
profits, markets, sales, lists of customers, lists of clients and other
information of a similar nature, (b) confidential plans or strategies for
development of the business of the Company and (c) confidential matters of a
technical nature. Except as required in the performance of his duties to the
Company under this Agreement, Employee shall not use for his own benefit or
disclose to any person, directly or indirectly, such matters unless such use or
disclosure has been specifically authorized in writing by the Company in
advance.
11. Employee's Representations. Employee hereby represents and warrants that:
(a) he has the right to enter into this Agreement and to grant the rights
granted by him herein, (b) the provisions of this Agreement do not violate any
other contracts or agreements to which he is a party and that would adversely
affect his ability to perform his obligations hereunder, and (c) he will comply
with all policies of the Company of which he has notice, provided they are
consistent with applicable laws.
12. The Company's Representations. The Company hereby represents and warrants
that: (a) it has the right, power and authority to enter into this Agreement and
to incur the obligations incurred by it herein, (b) this Agreement has been duly
and validly authorized by the Company, and (c) the provisions of this Agreement
do not violate any other contracts or agreements to which it is a party that
would adversely affect its ability to perform its obligations hereunder.
13. Indemnification. The Company agrees that Employee shall be entitled to
indemnification and payment or reimbursement of expenses (including, without
limitation, attorneys' fees and expenses) to the fullest extent provided to
employees in the Company's Operating Agreement,
<PAGE> 8
as in effect on the date hereof, and as it may be amended (but in no event on
terms less favorable to Employee than those in effect on the date hereof), for
all damages, losses and expenses incurred by Employee in connection with any
third-party claim, action, suit or proceeding that arises from Employee's
services and/or activities (other than Employee's gross negligence or willful
misconduct) as an officer and/or employee of the Company or any affiliate
thereof. This Section 13 shall survive any termination of the Term.
14. Voting Agreement. In consideration of the Company's execution and delivery
of this Agreement, Employee shall execute and deliver a Voting Agreement and
Power of Attorney substantially in the form attached hereto as Exhibit A.
15. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal substantive laws (and not the laws of
choice of laws) of the State of California.
16. Costs. If either party brings any legal action against the other to enforce
its rights under this Agreement, the prevailing party in such dispute shall be
entitled to recover from the other party all reasonable fees, costs and expenses
actually incurred in enforcing its rights under this Agreement including,
without limitation, the reasonable fees and expenses of attorneys, accountants
and expert witnesses, which shall include, without limitation, all fees, costs
and expenses of appeals and of enforcement.
17. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of Employee by the Company and in
reference to the subject matter hereof, and all prior agreements, promises,
representations and understandings relative thereto are merged herein.
18. Assignability.
(a) In the event that the Company shall merge or consolidate with any
other corporation, partnership or business entity or all or substantially all
the Company's business or assets shall be transferred in any manner to any other
corporation, partnership or business entity, such successor shall thereupon
succeed to, and be subject to, all rights, interests, duties and obligations of,
and shall thereafter be deemed for all purposes hereof to be, the Company
hereunder and the Company shall obtain a written assumption agreement from such
successor prior to completion of any such merger, consolidation or sale of
assets.
(b) This Agreement is personal in nature and neither of the parties
hereto shall, without the written consent of the other party hereto, assign or
transfer this Agreement or any rights or obligations hereunder, except by
operation of law or pursuant to the terms of Section 18(a) above.
(c) Nothing expressed or implied herein is intended or shall be
construed to confer upon or give to any person, other than the parties hereto,
any right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition hereof.
19. Remedies. Any material breach, violation or evasion by Employee of the terms
of this Agreement, including specifically, but not limited to, Sections 8, 9 and
10 above, would result in immediate and irreparable injury and harm to the
Company, and would cause damage to the Company in amounts difficult to ascertain
and for which Company's remedies and defenses at law would be inadequate.
Accordingly, in the event of any such breach or threatened breach, the Company
shall be entitled to, and Employee hereby consents to the entry of, the remedies
<PAGE> 9
or injunction and specific performance, or either of such remedies, as well as
all other remedies to which the Company may be entitled, at law, in equity or
otherwise.
20. Covenants Reasonable as to Time and Territory. Employee and the Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the rights and remedies conferred upon the Company under this
Agreement, and hereby acknowledge and agree that (i) the same are reasonable in
time and territory (ii) and that the consideration provided to the Employee
hereunder is sufficient to compensate the Employee for the restrictions
contained in this Agreement.
21. Amendments; Waivers. This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived
only by a written instrument executed by the parties hereto or, in the case of a
waiver, by the party waiving compliance. Any amendment to a material term of
this Agreement shall require the approval of the Committee. The failure of any
party at any time or times to require performance of any provision hereof shall
in no manner affect the right at a later time to enforce the same. No waiver by
any party of the breach of any term or provision contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
22. Notice. All notices, consents, requests and other communications hereunder
shall be in writing and, if given by personal delivery, shall be deemed to have
been validly served, given or delivered upon actual delivery and, if mailed or
delivered by overnight courier, shall be deemed to have been validly served,
given or delivered when deposited in the United States mail, as registered or
certified mail, with proper postage prepaid, or when deposited with the courier
<PAGE> 10
service, and addressed to the party or parties to be notified, at the following
addresses (or such other address(es) as a party may designate for itself by like
notice):
If to Employee: Marc Geiger
3378 Alginet Drive
Encino, California 91436-4122
If to the Company: Artist Direct, LLC
17835 Ventura Blvd.
Suite 310
Encino, California 91316
With a copy to: Lenard & Gonzalez LLP
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
23. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent that a
restrictive covenant contained herein may, at any time, be more restrictive than
permitted under the laws of any jurisdiction where this Agreement may be subject
to review and interpretation, the terms of such restrictive covenant shall be
those allowed by law and the covenant shall be deemed to have been revised
accordingly. Each and every term of this Agreement shall be enforced to the
fullest extent permitted by law.
24. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed an original and both of which together shall be deemed one
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EMPLOYEE" "COMPANY"
ARTISTdirect, LLC
- ------------------------------
Marc Geiger
By: ________________
Its: Member
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of July 28, 1998
(the "Effective Date") and is entered into between ARTISTdirect, LLC a
California limited liability company (the "Company") and Donald Muller
("Employee").
R E C I T A L S
WHEREAS, the Company desires to employ Employee to serve the Company and
its subsidiaries, and Employee desires to be so employed by the Company, on the
terms and subject to the conditions hereinafter set forth.
WHEREAS, the execution of this Agreement is a condition to the closing of
the transactions contemplated in that certain Securities Purchase Agreement
dated of even date herewith by and among the Company, The Ultimate Band List,
LLC, a California limited liability company (the "UBL"), Constellation Venture
Capital, L.P., a Delaware limited partnership, and Constellation Ventures (BVI),
Inc., a British Virgin Islands corporation.
A G R E E M E N T
NOW, THEREFORE, the parties hereto have agreed, and do hereby mutually
agree, as follows:
1. Employment and Duties. Subject to the other terms and conditions set forth
herein, the Company hereby employs Employee, and Employee agrees to be employed
by the Company, as Co-Chief Executive Officer of the Company and all of its
subsidiaries, including, without limitation, the UBL. As long as there is
another Co-Chief Executive Officer of the Company or a particular subsidiary of
the Company, Employee and such other Co-Chief Executive Officer shall be the
most senior executives of the Company or such subsidiary, as applicable. At all
times during the Term, if there is no other Co-Chief Executive Officer of the
Company or a particular subsidiary of the Company, then Employee, alone, shall
be the most senior executive of the Company or such subsidiary of the Company,
as applicable. Employee shall report solely and directly to the "Company Board"
(as defined below). For purposes of this Agreement, "Company Board" shall mean
the Board of Directors of the Company, or, if none, the members of the Company.
Subject to supervision by the Company Board and to the provisions of the
Operating Agreement of the Company dated of even date herewith, as the same may
be amended from time to time, Employee and the other Co-Chief Executive Officer
of the Company shall have full authority over the day-to-day operations of the
Company and all of its subsidiaries and over all officers and employees of the
Company and/or its subsidiaries (other than the other Co- Chief Executive
Officer of the Company and its subsidiaries) including the power to hire and,
subject to contractual commitments and/or any required approvals of the
compensation committee of the Company Board, or, if none, the Company Board (the
"Committee"), fire employees.
2. Devotion. During the Term, Employee shall faithfully perform to the best of
his ability and in a satisfactory manner all services and acts necessary or
advisable as both (i) are consistent with his title and position and (ii) may be
reasonably assigned to him by the Company Board. In addition, during the Term,
Employee shall devote his business time, skill and energies exclusively to the
business of the Company and its subsidiaries and affiliates from time to time
(the "Subsidiaries").
<PAGE> 2
3. Principal Place of Employment. During the Term, Employee's place of
employment shall be at the principal offices of the Company in the Los Angeles
area; provided, however, it is agreed that Employee will be expected to travel
from time to time at the Company's expense in accordance with the provisions of
Section 6(c) below.
4. Term. The term of Employee's employment (the "Term") shall commence on the
Effective Date and continue for an initial period until July 27, 2001 (the
"Initial Period"), unless terminated sooner as provided in Section 7 below.
Beginning July 28, 2001 and upon each successive one (1) year anniversary
thereof, the Term shall extend automatically for an additional one (1)-year
period unless either the Company gives Employee or Employee gives Company
written notice not less than ninety (90) and not more than one hundred twenty
(120) days prior to the end of the then-current period of its or his intention
not to extend the Term; provided, however, that the Term may terminate earlier
as provided in Section 7 below.
5. Compensation. For all services to be rendered by Employee hereunder, and for
all rights granted the Company hereunder, Employee shall be paid by the Company
the amounts set forth in this Section 5.
(a) Base Salary. The Company shall pay Employee a base salary at the
annual rate of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000) for each twelve
(12)-month period of the Term, prorated for any portion thereof, payable in
accordance with the Company's standard payment schedule for employees.
(b) Guaranteed Bonuses. During each twelve (12)-month period of the Term,
the Company shall pay Employee a guaranteed bonus in an amount equal to ONE
HUNDRED THOUSAND DOLLARS ($100,000), prorated for any portion thereof, payable
in arrears at the end of each three (3)-month period during such twelve
(12)-month period of the Term.
Amounts payable to Employee pursuant to this Section 5 shall be subject to
required withholdings and reviewed for any increases annually by the Committee,
provided that any adjustments shall be in the sole discretion of the Committee.
6. Employee Benefits; Reimbursement for Expenses.
(a) Employee shall be entitled to participate in such Company retirement,
profit sharing and pension plans and life and other insurance programs, as well
as other benefits programs, which are available to other similarly situated
employees of the Company at not less than the level generally afforded to the
other most senior executives of the Company, subject to the Company's policies
with respect to all of such benefits or insurance programs or plans; provided,
however, that notwithstanding anything herein to the contrary, the Company shall
not be obligated to institute or maintain any particular benefit or insurance
program or plan or aspect thereof.
(b) Employee shall be entitled to not less than three (3) weeks vacation
during each year of the Term hereof to be scheduled at mutually agreeable times
and accrued and taken in accordance with Company policy.
(c) During the Term, the Company agrees to reimburse Employee for such
reasonable, ordinary, necessary and authorized actual out-of-pocket expenses
incurred by Employee in the performing of assigned duties subject to approval by
the Company or the Company's designated agent, including but not limited to for
business-related travel (business class, or, if unavailable, first class),
hotel, meals, automobile allowance of $750 per month
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<PAGE> 3
before taxes, telephone calls, buy-sell insurance premiums and entertainment. As
an additional condition to the reimbursement of such expenses by the Company to
Employee, Employee shall provide the Company with copies of all available
invoices and receipts, and otherwise account to the Company in sufficient detail
and with adequate documentation to allow the Company to confirm the business
nature of the expenses and claim an income tax deduction for such paid items, if
such items are deductible. The obligations of the Company to make the
reimbursements specified hereunder shall survive any termination of the Term.
7. Termination.
(a) The Company may terminate Employee's employment hereunder after the
occurrence and during the continuance of any "Disability" (as defined below) of
Employee, upon thirty (30) days' prior written notice to Employee. For purposes
of this Agreement, "Disability" means Employee's incapacity to perform
substantially all of his then current duties as required hereunder for one
hundred eighty (180) days or more within any period of three hundred sixty-five
(365) consecutive days because of mental or physical condition, illness or
injury, consistent with applicable state and federal law. In the event of any
dispute regarding the existence of Employee's Disability, the matter will be
resolved by the determination of a physician qualified to practice medicine in
the State of California, selected by Employee and reasonably approved by the
Company, or, failing such approval, by a majority of three physicians qualified
to practice medicine in the State of California, one to be selected by the
Company, one to be selected by Employee and the third to be selected by the two
designated physicians. For this purpose, Employee will submit to appropriate
medical examinations.
(b) The Company may terminate Employee's employment hereunder for "Cause."
For the purposes of this Agreement, "Cause" shall mean Employee shall have (i)
committed fraud, embezzlement or material dishonesty against the Company or any
of its Subsidiaries or an act of moral turpitude; (ii) engaged in gross
negligence or willful misconduct in the performance of Employee's duties
hereunder; (iii) been convicted of, or pleaded nolo contendere to, any felony;
(iv) breached any material provision hereof or failed to perform any material
duty assigned to Employee in accordance with the terms hereof; or (v) materially
misappropriated for his own purpose and benefit any property or opportunity of
the Company, or any Subsidiary or other affiliated entity of Company.
Notwithstanding anything to the contrary contained herein, none of the foregoing
events or circumstances (other than clause (iii) above) shall constitute "Cause"
for purposes of this Agreement unless the Company gives Employee written notice
delineating the claimed event or circumstance and setting forth the Company's
intention to terminate Employee's employment if such claimed event or
circumstance is not capable of remedy or is not duly remedied within a
reasonable period following such notice (not to exceed sixty (60) days), if
capable of remedy, and Employee fails to remedy such event or circumstance
within such reasonable period.
(c) The employment of Employee hereunder shall be automatically terminated
on the date of Employee's death.
(d) Employee may terminate his employment hereunder forthwith at any time
for "Good Reason" (as hereinafter defined) upon written notice to the Company.
For purposes of this Section 7(d), "Good Reason" shall mean the occurrence of
any of the following: (i) a material reduction or adverse change in, or a change
that is materially inconsistent with, Employee's responsibilities, duties,
authority, reporting, power, functions, title, working conditions or status;
(ii) a reassignment of Employee to a geographic location in excess of
thirty-five (35) miles from the Company's current principal offices; or (iii) a
material breach by the Company of any of its obligations to Employee hereunder.
Notwithstanding anything to the
3
<PAGE> 4
contrary contained herein, none of the foregoing events or circumstances shall
constitute "Good Reason" for purposes of this Agreement unless the Employee
gives Company written notice delineating the claimed event or circumstance and
setting forth the Employee's intention to terminate Employee's employment if
such claimed event or circumstance is not capable of remedy or is not duly
remedied within a reasonable period following such notice (not to exceed sixty
(60) days), if capable of remedy, and Company fails to remedy such event or
circumstance within such reasonable period.
(e) If Employee's employment is terminated pursuant to this Section 7,
Employee shall be entitled to, and the Company's obligation hereunder shall be
limited to, (i) the payment of the compensation (including, without limitation,
guaranteed bonus) accrued under Section 5 above to the effective date of such
termination and (for any termination other than pursuant to Section 7(b) above)
a pro rata portion of (A) any bonuses or incentive compensation payable with
respect to any period commencing prior to the termination date but not expired
as of the termination date, or (B) if no such bonuses or incentive compensation
is payable with respect to such period, so long as the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") during the fiscal year
of the Company prior to the fiscal year in which the termination occurs was not
more than 150% higher than the EBITDA of the Company during the fiscal year in
which the termination occurs, any bonus or incentive compensation paid to
Employee with respect to the prior Contract Year; (ii) any approved unreimbursed
expenses and other accrued employee benefits (as described above) through the
date of termination; and (iii) the additional compensation provided in Section
7(f) below, if any.
(f) If Employee's employment is terminated:
(i) by the Company pursuant to 7(a) above, Employee will receive the
benefit of any Company disability plans; or
(ii) (A) by the Company other than pursuant to Sections 7(a), 7(b)
or 7(c) above, or (B) by Employee pursuant to Section 7(d) above, the Company
shall continue to pay to Employee Employee's salary in equal monthly
installments, and Employee's guaranteed bonuses in equal quarterly installments,
in each case at the annualized levels being paid to Employee pursuant to Section
5 above at the time of such termination, for a period of twelve (12) consecutive
months after the effective date of such termination, and less required
withholdings. In addition, during such twelve (12)-month period, Employee shall
be entitled to continued participation in all of the Company's employee benefit
plans, including, without limitation, continued accrual for retirement benefits
and continued coverage under any Company medical, hospitalization, or life
insurance plan; provided, however, that the Company may, at its option, in lieu
of continuing Employee's participation in any or all such benefit plans, pay
Employee a lump sum equal to the aggregate cost to the Company of Employee's
participation in the benefit plan in which Employee shall no longer participate,
which lump sum shall be calculated based upon the cost to the Company of
Employee's participation in such benefit plan immediately prior to the
termination of Employee's employment. The parties hereto agree that the payments
set forth in this Section 7(f)(ii) constitute fair compensation and the sole
remedy for damages for any termination by the Company other than pursuant to
Section 7(a), 7(b) or 7(c) above, or by Employee pursuant to Section 7(d) above.
(g) Employee shall have no duty of mitigation and shall not be subject to
any right of offset with respect to any compensation received by Employee on or
after the termination of his employment.
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<PAGE> 5
(h) Nothing in this Agreement shall be deemed a release or waiver of right
to any medical or other employee benefits available to Employee on or after the
effective date of termination of the executive's employment by the Company under
any federal, state or local law that provides for the continuation of any
medical or other employee benefits after employment.
8. Rights to Works. In return for the consideration described herein, Employee
agrees as follows:
(a) All programs, inventions, recordings and work product of any nature
made pursuant to this Agreement or otherwise in the course of Employee's
services and Employee's contributions thereto (hereinafter referred to as
"Works") shall belong solely and exclusively to the Company. The Company shall
have the perpetual and exclusive right to use, exhibit, distribute, or license
throughout the universe, any Work or part thereof in which Employee's services
are utilized by all forms of audio, visual, textual, digital, electronic or
other distribution that are now known or may hereafter exist, and otherwise
exploit such Works in such media, forums and for such uses throughout the
universe as it deems appropriate; provided, however, that no likeness or quote
of Employee shall be used without Employee's written consent. All revenues
derived by the Company from the use, exhibition, distribution, licensing, or
other exploitation of such Works shall be the sole and exclusive property of the
Company.
(b) To the extent that the Works are considered: (i) contributions to
collective works and/or (ii) as parts or components of audiovisual works, the
parties hereby expressly agree that the Works shall be considered "works made
for hire" under the United States Copyright Act of 1976, as amended (17 U.S.C.
Section 101 et seq.). In accordance therewith, the sole right of copyright in
and to the Works shall belong exclusively to the Company in perpetuity. To the
extent that the Works are deemed works other than contributions to collective
works and/or parts or components of audiovisual works, Employee hereby assigns
to the Company all rights, title and interest in and to the copyrights of such
Works and all renewals and extensions of the copyrights that may be secured
under the laws now or hereafter in force and effect in the United States of
America or any other country or countries. At the Company's reasonable written
request and sole expense, Employee shall execute, verify, acknowledge, deliver
and file any and all formal assignments, recordations and any and all other
documents that the Company may prepare and reasonably call for to give effect to
the provisions of this Agreement. If Employee fails to execute any such document
or instrument, or perform any such act, within ten (10) business days, Employee
shall be deemed to have irrevocably constituted and appointed the Company, with
full power of substitution, to be Employee's true and lawful attorney, in
Employee's name, place, and stead, to execute, acknowledge, swear to, and file
all instruments, conveyances, certificates, agreements, and other documents, and
to take any action which may be necessary or appropriate to effect the
provisions of this Section 8. The powers of attorney granted herein shall be
deemed to be coupled with an interest and shall be irrevocable.
(c) It is understood that the rights granted to the Company in this
Section 8 shall continue in effect after the termination or expiration of this
Agreement to the extent necessary for the Company's full enjoyment of such
rights.
(d) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872. In accordance with Section
2870 of the California Labor Code, the obligation to assign as provided in this
Agreement does not apply to an invention or innovation that Employee developed
entirely on his own time without using the Company's equipment, supplies,
facilities, or trade secret information except for those inventions that either:
(i) relate to
5
<PAGE> 6
either (A) the business of the Company or any of its Subsidiaries at the time of
conception or reduction to practice of the invention, or (B) actual or
demonstrably anticipated research or development of the Company or any of its
Subsidiaries; or (ii) result from any work performed by Employee for the Company
or any of its Subsidiaries.
(e) Employee shall disclose all inventions and innovations to the Company,
even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
9. Noncompetition; Nonsolicitation. In recognition of the considerations
described herein, Employee agrees that for so long as Employee is employed by
the Company, and until the "Expiration Date" (as defined below), Employee will
not, directly or indirectly, without the prior written consent of the Company:
(a) enter into the employ of, or render any services to, any person, firm
or business entity engaged in any business that at that time is competitive with
the business of the Company or any Subsidiary (a "Competitive Business"),
including, without limitation, any business that:
(i) anywhere in the world: (A) operates a meta-music index or search
engine on the World Wide Web; or (B) sells or offers to sell through a World
Wide Web site music-related products or services, including, without limitation,
any devices or other means, whether utilizing technology existing as of the date
hereof or devised hereafter, on or by which sound may be recorded, transmitted
or reproduced, with or without a visual reproduction, primarily for home and/or
consumer use, including, without limitation, analog disc records, analog tape
cassettes, compact discs, mini-discs, digital audio tapes, video cassettes,
laser discs, and downloading via the internet ("Records"); or
(ii) within a fifty (50) mile radius of the principal office of the
Company or the relevant Subsidiary: (A) plans, develops, produces, and/or
promotes live musical or new media events; (B) represents musical artists for
personal appearance tours and live concerts, and/or clients involved in new
media endeavors; or (B) engages in the creation, distribution, marketing and/or
promotion of Records;
(b) engage in any Competitive Business for Employee's own account;
(c) become interested in any Competitive Business as an individual,
partner, shareholder (other than as described below), creditor, director,
officer, principal, agent, employee, trustee, consultant, advisor, franchisee or
in any other relationship or capacity;
(d) authorize his name or reputation to be used by any Competitive
Business;
(e) contact or solicit, or attempt to contact or solicit, for Employee's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity that was a client or customer of the Company or any
Subsidiary within the six (6)-month period preceding the effective date of the
termination of Employee's employment;
(f) contact or solicit, or attempt to contact or solicit, for Employee's
own account or any account other than that of the Company or any Subsidiary, any
person or business entity
6
<PAGE> 7
that has been contacted, orally or in writing, by the Company or any affiliated
entity of the Company as a potential customer or client within the six (6)-month
period preceding the effective date of the termination of Employee's employment;
or
(g) hire, subcontract, employ or engage, or contact or solicit, or attempt
to contact or solicit, for the purpose of hiring, contracting, employing or
engaging, for Employee's own account or any account other than that of the
Company or any Subsidiary, any person or entity (other than Employee's personal
assistant) who was an employee or exclusive subcontractor of the Company or any
affiliated entity of the Company at any time during the six (6)-month period
preceding the effective date of the termination of Employee's employment;
provided, however, that nothing contained in this Section 9 shall be deemed to
prohibit Employee from acquiring or holding, solely for investment, publicly
traded securities of any corporation some of the activities of which are
competitive with the business of the Company so long as such securities, in the
aggregate, constitute less than five percent (5%) of any class or series of
outstanding securities of such corporation. For purposes of this Section 9, the
"Expiration Date" shall mean the later of (i) the expiration of the then current
period of the Term and (ii) the date one (1) year after the effective date of
the termination of Employee's employment pursuant to Section 7 above; provided,
however, that in the case of either the Company's termination of Employee's
employment other than pursuant to Sections 7(a) or 7(b) above or Employee's
voluntary resignation pursuant to Section 7(d) above, the "Expiration Date"
shall mean the effective date of the termination of Employee's employment.
10. Trade Secrets. During the term of this Agreement and at all times
thereafter, Employee shall hold in secrecy all trade secrets and confidential
information relating to the Company's (and its affiliates') business and affairs
that may come to his knowledge or have come to his knowledge while employed by
the Company (excluding information that is or becomes publicly known or
available for use through no fault of Employee), including but not limited to:
(a) matters of a business nature, such as confidential information about costs,
profits, markets, sales, lists of customers, lists of clients and other
information of a similar nature, (b) confidential plans or strategies for
development of the business of the Company and (c) confidential matters of a
technical nature. Except as required in the performance of his duties to the
Company under this Agreement, Employee shall not use for his own benefit or
disclose to any person, directly or indirectly, such matters unless such use or
disclosure has been specifically authorized in writing by the Company in
advance.
11. Employee's Representations. Employee hereby represents and warrants that:
(a) he has the right to enter into this Agreement and to grant the rights
granted by him herein, (b) the provisions of this Agreement do not violate any
other contracts or agreements to which he is a party and that would adversely
affect his ability to perform his obligations hereunder, and (c) he will comply
with all policies of the Company of which he has notice, provided they are
consistent with applicable laws.
12. The Company's Representations. The Company hereby represents and warrants
that: (a) it has the right, power and authority to enter into this Agreement and
to incur the obligations incurred by it herein, (b) this Agreement has been duly
and validly authorized by the Company, and (c) the provisions of this Agreement
do not violate any other contracts or agreements to which it is a party that
would adversely affect its ability to perform its obligations hereunder.
13. Indemnification. The Company agrees that Employee shall be entitled to
indemnification and payment or reimbursement of expenses (including, without
limitation, attorneys' fees and expenses) to the fullest extent provided to
employees in the Company's Operating Agreement,
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<PAGE> 8
as in effect on the date hereof, and as it may be amended (but in no event on
terms less favorable to Employee than those in effect on the date hereof), for
all damages, losses and expenses incurred by Employee in connection with any
third-party claim, action, suit or proceeding that arises from Employee's
services and/or activities (other than Employee's gross negligence or willful
misconduct) as an officer and/or employee of the Company or any affiliate
thereof. This Section 13 shall survive any termination of the Term.
14. Voting Agreement. In consideration of the Company's execution and delivery
of this Agreement, Employee shall execute and deliver a Voting Agreement and
Power of Attorney substantially in the form attached hereto as Exhibit A.
15. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal substantive laws (and not the laws of
choice of laws) of the State of California.
16. Costs. If either party brings any legal action against the other to enforce
its rights under this Agreement, the prevailing party in such dispute shall be
entitled to recover from the other party all reasonable fees, costs and expenses
actually incurred in enforcing its rights under this Agreement including,
without limitation, the reasonable fees and expenses of attorneys, accountants
and expert witnesses, which shall include, without limitation, all fees, costs
and expenses of appeals and of enforcement.
17. Entire Agreement. This Agreement constitutes the whole agreement of the
parties hereto in reference to any employment of Employee by the Company and in
reference to the subject matter hereof, and all prior agreements, promises,
representations and understandings relative thereto are merged herein.
18. Assignability.
(a) In the event that the Company shall merge or consolidate with any
other corporation, partnership or business entity or all or substantially all
the Company's business or assets shall be transferred in any manner to any other
corporation, partnership or business entity, such successor shall thereupon
succeed to, and be subject to, all rights, interests, duties and obligations of,
and shall thereafter be deemed for all purposes hereof to be, the Company
hereunder and the Company shall obtain a written assumption agreement from such
successor prior to completion of any such merger, consolidation or sale of
assets.
(b) This Agreement is personal in nature and neither of the parties hereto
shall, without the written consent of the other party hereto, assign or transfer
this Agreement or any rights or obligations hereunder, except by operation of
law or pursuant to the terms of Section 18(a) above.
(c) Nothing expressed or implied herein is intended or shall be construed
to confer upon or give to any person, other than the parties hereto, any right,
remedy or claim under or by reason of this Agreement or of any term, covenant or
condition hereof.
19. Remedies. Any material breach, violation or evasion by Employee of the terms
of this Agreement, including specifically, but not limited to, Sections 8, 9 and
10 above, would result in immediate and irreparable injury and harm to the
Company, and would cause damage to the Company in amounts difficult to ascertain
and for which Company's remedies and defenses at law would be inadequate.
Accordingly, in the event of any such breach or threatened breach, the Company
shall be entitled to, and Employee hereby consents to the entry of, the remedies
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<PAGE> 9
or injunction and specific performance, or either of such remedies, as well as
all other remedies to which the Company may be entitled, at law, in equity or
otherwise.
20. Covenants Reasonable as to Time and Territory. Employee and the Company have
considered carefully the nature and extent of the restrictions set forth in this
Agreement and the rights and remedies conferred upon the Company under this
Agreement, and hereby acknowledge and agree that (i) the same are reasonable in
time and territory (ii) and that the consideration provided to the Employee
hereunder is sufficient to compensate the Employee for the restrictions
contained in this Agreement.
21. Amendments; Waivers. This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived
only by a written instrument executed by the parties hereto or, in the case of a
waiver, by the party waiving compliance. Any amendment to a material term of
this Agreement shall require the approval of the Committee. The failure of any
party at any time or times to require performance of any provision hereof shall
in no manner affect the right at a later time to enforce the same. No waiver by
any party of the breach of any term or provision contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
22. Notice. All notices, consents, requests and other communications hereunder
shall be in writing and, if given by personal delivery, shall be deemed to have
been validly served, given or delivered upon actual delivery and, if mailed or
delivered by overnight courier, shall be deemed to have been validly served,
given or delivered when deposited in the United States mail, as registered or
certified mail, with proper postage prepaid, or when deposited with the courier
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service, and addressed to the party or parties to be notified, at the following
addresses (or such other address(es) as a party may designate for itself by like
notice):
If to Employee: Donald Muller
20324 Howard Ct.
Woodland Hills, CA 91364
If to the Company: Artist Direct, LLC
17835 Ventura Blvd.
Suite 310
Encino, California 91316
With a copy to: Lenard & Gonzalez LLP
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
23. Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent that a
restrictive covenant contained herein may, at any time, be more restrictive than
permitted under the laws of any jurisdiction where this Agreement may be subject
to review and interpretation, the terms of such restrictive covenant shall be
those allowed by law and the covenant shall be deemed to have been revised
accordingly. Each and every term of this Agreement shall be enforced to the
fullest extent permitted by law.
24. Counterparts. This Agreement may be executed in two counterparts, each of
which shall be deemed an original and both of which together shall be deemed one
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"EMPLOYEE" "COMPANY"
ARTISTdirect, LLC
- ------------------------------
Donald Muller
By:
--------------------------------
Marc Geiger
Its: Member
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<PAGE> 1
EXHIBIT 23.2
The Capital Reorganization and Reverse Stock Split as described in Note 1 to the
consolidated financial statements have not been consummated at September 20,
1999. When these events have been consummated, we will be in a position to
render the following consent.
/s/ KPMG LLP
We consent to the inclusion of our reports with respect to the consolidated
balance sheets of ARTISTdirect, LLC and subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, changes in members'
and stockholders' equity (deficit), and cash flows for the years then ended
included herein dated September 3, 1999 (except as to note 1, which is dated as
of ...), and to the reference to our firm under the heading "Experts" in the
prospectus.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our report with respect to the balance sheets of
iMusic, Inc. as of December 31, 1997 and 1998, and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years then
ended included herein dated May 26, 1999, and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ KPMG LLP
Los Angeles, California
September 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ARTISTDIRECT, INC.'S CONSOLIDATED FINANCIALS STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1998, AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
INCLUDED IN ITS PROSPECTUS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 JUN-30-1998 JUN-30-1999
<EXCHANGE-RATE> 1 1 1 1
<CASH> 186 1,940 1,642 11,159
<SECURITIES> 0 0 0 0
<RECEIVABLES> 18 611 146 834
<ALLOWANCES> (5) (151) (16) (164)
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 200 2,567 1,869 12,613
<PP&E> 111 253 190 807
<DEPRECIATION> (24) (78) (44) (150)
<TOTAL-ASSETS> 314 3,187 2,092 29,292
<CURRENT-LIABILITIES> 726 1,488 3,661 3,761
<BONDS> 0 0 0 0
0 5,021 0 22,331
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> (412) (3,322) (1,568) (14,850)
<TOTAL-LIABILITY-AND-EQUITY> 314 3,187 2,092 29,292
<SALES> 269 1,548 360 2,335
<TOTAL-REVENUES> 1,888 4,582 1,300 3,682
<CGS> 366 2,133 454 2,470
<TOTAL-COSTS> 608 2,515 597 2,949
<OTHER-EXPENSES> 1,737 8,416 3,131 8,887
<LOSS-PROVISION> 5 187 11 51
<INTEREST-EXPENSE> 4 50 18 4
<INCOME-PRETAX> (460) (6,318) (2,443) (8,044)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (460) (6,318) (2,443) (8,044)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (460) (6,318) (2,433) (8,044)
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
