<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 2000
REGISTRATION NO. 333-87547
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ARTISTDIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7375 95-4760230
(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. [ ]
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 March 16, 2000
5,000,000 Shares
[ARTISTDIRECT LOGO]
COMMON STOCK
-------------------------
ARTISTDIRECT, INC. IS OFFERING 5,000,000 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 $10.00 AND
$12.00 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 9.
-------------------------
PRICE $ A SHARE
-------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ARTISTDIRECT
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<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 750,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
-------------------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
DEUTSCHE BANC ALEX. BROWN
, 2000
<PAGE> 3
INSIDE FRONT COVER
THE OUTSIDE GATEFOLD PAGE INCLUDES:
A four-by-four grid with a total of 16 rectangles, each depicting a picture of
an artist or band. The bottom row of rectangles have the ARTISTdirect logo
superimposed across them.
TWO PAGE INSIDE GATEFOLD INCLUDES:
The ARTISTdirect network logo across the top center.
In the upper left corner is a screen shot of the ARTISTdirect.com home page
with the following four lines of text immediately below the screen shot:
Overview of the ARTISTdirect Network
ARTISTdirect Network Navigator
Featured Programs
Search Capabilities
Immediately above the screen shot is the text: ARTISTDIRECT.COM
In the lower left corner is a screen shot of the iMusic.com home page with the
following five lines of text immediately below the screen shot:
Music Community Hub
Message Boards
Chat Sessions
Classifieds
Local Music Connection
Immediately above the screen shot is the text: IMUSIC.COM
In the upper right corner is a screen shot of the Downloads Direct home page
with the following four lines of text immediately below the screen shot:
Digital Downloads
High Profile Artists
Downloads by Genec
Music from Unsigned Artists
Immediately above the screen shot is the text: DOWNLOADS DIRECT
In the lower right corner is a screen shot of the ARTISTdirect Superstore home
page with the following five lines of text along the lower left side of the
screen shot:
200,000 CD Titles
Featured Artists
Weekly Specials
Artist Merchandise
Music by Genre
Immediately above the screen shot is the text: ARTISTDIRECT SUPERSTORE
In the left center are screen shots of the home pages of five ARTISTdirect
channels with the following four lines of text immediately below the screen
shots:
Official Artist Stores
Exclusive Merchandise
Exclusive Content
Contests and Ticket Giveaways
Immediately above the screen shot is the text: ARTIST CHANNELS.
In the right center is a screen shot of the UBL.com home page with the
following four lines of text immediately below the screen shot:
Comprehensive Music Resource
Search 95,000 Artists
Music News
Concert Information
Featured Artists
All the screen shots and text are superimposed on a backdrop that depicts the
names of artists.
<PAGE> 4
INSIDE BACK COVER
The following text is superimposed on a backdrop of a four-by-four grid
consisting of sixteen rectangles, each depicting the picture of an artist or
band:
Across the top center the following text appears: REPRESENTATIVE ARTIST CHANNELS
There are three columns of text. The left column consists of the following
artist names:
Aerosmith Black Crowes CSNY
Tori Amos blink-182 Cypress Hill
B-52s Bone Thugs 'N' Harmony Def Leppard
Backstreet Boys Cher Eminem
Beastie Boys Coal Chamber Eve 6
Beck Collective Soul Everclear
George Benson Chris Cornell Fastball
Bjork Counting Crows Bryan Ferry
Black Sabbath David Crosby Filter
Clint Black
The center column consists of the following artist names:
Foo Fighters Kenny Loggins Mike Ness
Vince Gill Aimee Mann Stevie Nicks
Godsmack Marilyn Manson No Doubt
Incubus Matchbox 20 The Offspring
Indigo Girls Megadeth Ozzy Osbourne
Chris Isaak Metallica Pantera
Kenny G Mighty Mighty Bosstones Patty Loveless
BB King Monster Magnet Pearl Jam
Korn Mandy Moore Tom Petty
Limp Bizkit
The right column consists of the following artist names:
Powerman 5000 Stabbing Westward System of a Down
Primus Static X Pam Tillis
Rage Against The Machine Steps Toto
Rancid Stone Temple Pilots Tina Turner
Red Hot Chili Peppers Sugar Ray The Who
Brian Setzer Sublime/Long Beach Dub Robbie Williams
Severdust All Stars Dwight Yoakam
Slaye Matthew Sweet Rob Zombie
Soul Coughing ZZ Top
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 4
Risk Factors........................ 9
Special Note Regarding
Forward-Looking Statements........ 25
Use of Proceeds..................... 26
Dividend Policy..................... 26
Capitalization...................... 27
Dilution............................ 29
Unaudited Pro Forma Consolidated
Financial Data.................... 30
Selected Consolidated Financial
Data.............................. 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 34
</TABLE>
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PAGE
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Business............................ 45
Management.......................... 64
Related Party Transactions.......... 76
Principal Stockholders.............. 84
Description of Capital Stock........ 88
Rescission Offer.................... 91
Shares Eligible For Future Sale..... 92
Underwriters........................ 94
Legal Matters....................... 96
Experts............................. 96
Where You Can Find Information...... 97
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.
UNTIL , 2000, 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.
3
<PAGE> 6
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. The conversion of all of our
convertible preferred stock outstanding as of the date of this prospectus is
based on an assumed offering price of $11.00 per share. The actual number of
shares issued upon conversion of the preferred stock may be adjusted based upon
the initial public offering price.
ARTISTDIRECT
We are an online music company that connects artists directly with their
fans worldwide. Through our online ARTISTdirect Network, we provide music
entertainment by offering multi-media content, community around shared music
interests and sales of music and related merchandise. During December 1999,
users visited more than 60 million pages in our ARTISTdirect Network.
Our ARTISTdirect Network is an integrated network of Web sites consisting
of:
- ARTISTchannels -- customized, artist-owned Web sites that provide one
destination for artist-specific music, merchandise and content. We build,
operate and maintain these sites on behalf of our artists. Artists
control the programming and products offered on their ARTISTchannels and
share in the revenue that they generate. As of December 31, 1999,
ARTISTdirect featured 79 unique, artist-owned ARTISTchannels, and had
signed agreements to launch channels with an additional 26 artists. A
selection of artists with ARTISTchannels includes:
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Aerosmith Chris Cornell Metallica
Backstreet Boys Cypress Hill Ozzy Osbourne
Beastie Boys Def Leppard Tom Petty
Beck Kenny G Red Hot Chili Peppers
Clint Black Korn Robbie Williams
Cher Limp Bizkit The Who
</TABLE>
- The Ultimate Band List or the UBL -- a comprehensive online music search
engine with information on more than 95,000 artists across numerous
musical genres and links to thousands of music Web sites. The UBL
features news, concert information, biographies, album reviews, contests,
promotions, music samples and downloads;
- iMusic -- a popular online music community with chats, message boards and
fan clubs. Through hosted chats and fan conferences on iMusic, fans can
interact directly with their favorite artists;
- The ARTISTdirect Superstore -- a retail site offering over 200,000 music
titles and merchandise from over 220 artists; and
- DOWNLOADSdirect -- a feature which enables users to download music from
the ARTISTdirect Network and to upload their music and other information.
We also operate a music talent agency, the ARTISTdirect Agency, and manage
a traditional record label, Kneeling Elephant Records. Consequently, we are able
to provide artists with a full range of traditional and online services. Marc
Geiger, our Chief Executive Officer, Don Muller, our President of the
ARTISTdirect Agency and Kneeling Elephant Records, Steve Rennie, our President
of the UBL and Nick Turner, our Vice President, ARTISTchannels, have 18, 14, 20
and 20 years of experience, respectively, in the music industry.
4
<PAGE> 7
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, in part because it enables fans
to communicate with their favorite artists and purchase music and related
merchandise directly from them. Jupiter Communications projects that online
sales of recorded music in the United States will grow from $327 million in 1999
to approximately $2.6 billion in 2003.
To take advantage of these opportunities, we have entered into strategic
relationships with six leading music and media companies, including Universal
Music Group, BMG Entertainment, Sony Music Entertainment, Time Warner Inc., an
affiliate of Cisneros Television Group, and Yahoo!. These companies invested an
aggregate of $97.5 million cash in ARTISTdirect in connection with these
strategic relationships and include four of the five major music companies, who
together accounted for 74.6% of U.S. music albums shipped in the year ended
December 31, 1999.
We generate revenue from sales of music and related merchandise, online
advertising and sponsorships, royalties on record sales and talent agency
commissions. Our revenue was $4.6 million for 1998 and $10.3 million for the
year ended December 31, 1999. Although traffic to our sites and our revenue have
increased, we incurred a net loss for the year ended December 31, 1999 of
approximately $57.8 million, and our accumulated losses of ARTISTdirect, Inc.
and its predecessors as of December 31, 1999 were approximately $64.6 million,
of which approximately $35.9 million represented stock-based compensation. While
we believe that we can increase our revenue and diversify our revenue
opportunities, we expect to continue to incur net losses and negative cash flows
for the foreseeable future. We also expect to continue to face strong
competition in our industry from the growing number of online music companies,
traditional music retailers, "portals" and record labels. Such competition could
adversely affect our future operating results.
We seek to be the leading online music company. To accomplish our
objective, we plan to:
- aggressively add ARTISTchannels;
- rapidly build consumer awareness of our brands;
- add features and content to our ARTISTdirect Network;
- package and exploit our diverse assets and services; and
- develop new 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. In this prospectus, "ARTISTdirect," "we," "us" and "our" refer to
ARTISTdirect, Inc., our subsidiaries and our predecessor ARTISTdirect, LLC. 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.
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, www.imusic.com and www.downloadsdirect.com.
All other trade names and trademarks appearing in this prospectus are the
property of their respective holders.
5
<PAGE> 8
THE OFFERING
Common stock offered................ 5,000,000 shares
Common stock to be outstanding after
the offering........................ 37,296,483 shares
Over-allotment option............... 750,000 shares
Use of proceeds..................... We intend to use approximately $30
million of the proceeds for advertising
and promotion of our brands,
approximately $10 million for content
production and Web site development,
approximately $741,000 to repay
existing indebtedness, and the
remainder for other general corporate
purposes, including for working capital
and potential obligations to fund a
rescission offer. See "Use of Proceeds"
on page 26 for more information on our
use of the proceeds from this offering.
Proposed Nasdaq National Market
symbol.............................. ARTD
- -------------------------
Unless otherwise indicated, all information in this prospectus:
- reflects the one-for-four reverse split of our common stock to be
effected before the closing of this offering;
- reflects outstanding shares as of December 31, 1999, after giving effect
to the issuance of 1,094,917 shares of Series C preferred stock in
January 2000;
- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock effective upon the closing of this
offering; all outstanding shares of Series C preferred stock, including
the 1,094,917 shares issued in January 2000, will convert into 11,079,550
shares of common stock upon the consummation of this offering, based on
an assumed initial offering price of $11.00. The actual number of shares
of common stock that will be issued upon the conversion of the Series C
preferred stock may be adjusted based upon the actual initial offering
price;
- assumes no exercise of the underwriters' over-allotment option;
- excludes shares of our common stock issuable pursuant to options and
warrants outstanding as of December 31, 1999;
- excludes up to 900,000 shares of common stock to be issued to acquire
Mjuice.com, Inc.;
- excludes approximately 100,000 shares of common stock to be issued as
accrued but unpaid dividends on preferred stock after December 31, 1999;
and
- excludes 62,500 shares of common stock issuable pursuant to a warrant
issued in March 2000.
6
<PAGE> 9
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 following events as if such events
occurred on January 1, 1998 or at original issuance date, if later:
- the exchange transaction and issuance of ARTISTdirect, LLC Series B
preferred units as more fully discussed on page 77;
- the one-for-four reverse split of our common stock to be effected before
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 at a ratio of one
preferred share for one common share; provided that shares of Series C
preferred stock are convertible at a ratio of one preferred share for
1.5827 common shares based on an assumed initial public offering price of
$11.00 per share.
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<CAPTION>
PERIOD FROM
AUGUST 8, 1996 YEAR ENDED DECEMBER 31,
(INCEPTION) TO ----------------------------
DECEMBER 31, 1996 1997 1998 1999
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue................................ $ -- $1,888 $4,582 $ 10,274
Gross profit............................... -- 1,280 2,067 34
Operating expense.......................... 28 1,737 8,416 58,169
Loss from operations....................... 28 457 6,349 58,135
Net loss................................... 28 460 6,318 57,804
Pro forma basic and diluted net loss per
share.................................... $ (2.96)
Weighted average shares outstanding used in
computing pro forma basic and diluted net
loss per share........................... 19,502,437
</TABLE>
The "pro forma as adjusted" column below reflects our capitalization as of
December 31, 1999 with adjustments to give effect to:
- the events listed above related to the pro forma basic and diluted net
loss per share;
- the issuance of 1,094,917 shares of Series C preferred stock in January
2000;
- the termination of the put option described in a "Related Party
Transactions -- Transaction with Scott Blum" on page 80, which will occur
upon the closing of this offering; and
- the issuance and sale of 5,000,000 shares of our common stock at an
assumed initial public offering price of $11.00 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 26.
7
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<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 69,119 $133,826
Working capital............................................. 67,730 132,437
Goodwill and intangibles, net............................... 13,415 13,415
Total assets................................................ 98,600 163,307
Total redeemable securities................................. 111,707 6,854
Total members' and stockholders' equity (deficit)........... (23,745) 145,815
</TABLE>
8
<PAGE> 11
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 and 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.
We have been operating all of these sites as an integrated network since July
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 and have incurred
accumulated losses of approximately $64.6 million as of December 31, 1999. For
the year ended December 31, 1999, we incurred a net loss of approximately $57.8
million, which represented approximately 560% of our revenue for that period. We
expect our operating losses and negative cash flow to continue for the
foreseeable
9
<PAGE> 12
future. We anticipate that our operating losses will increase 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. We estimate that, for the year
2000, we will increase our sales and marketing expenses by approximately $20
million, increase our content development expenses by approximately $5 million
and increase our technology and infrastructure development expenses by
approximately $5 million. 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.
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.
IF WE DO NOT GENERATE INCREASED REVENUE FROM ONLINE PRODUCT SALES, OUR
GROWTH WILL BE LIMITED AND OUR BUSINESS WILL BE ADVERSELY AFFECTED.
If we do not generate increased revenue from sales of online products, our
growth will be limited and our business will be adversely affected. To generate
significant online product 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. Since our
target market includes Internet users below the age of 18, and these users have
limited access to credit cards, our ability to capture online product revenue
from this group may be limited. If we are not successful in meeting these
challenges, our growth will be limited and our business will be adversely
affected.
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:
- respond to and anticipate fluctuations in the demand for, and pricing of,
online advertising;
- 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;
- accurately measure the size and demographic characteristics of our
audience;
- maintain key advertising relationships; and
- compete for advertisers with Internet and traditional media companies.
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<PAGE> 13
In addition to the above factors, general economic conditions, as well as
economic conditions specific to online advertising, electronic commerce and the
music industry, could affect our ability to increase our advertising revenue.
Our failure to achieve one or more of these objectives could impair our ability
to increase advertising revenue, which could adversely affect our business.
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 or incentives 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 or the ARTISTdirect Network. The artists own the domain names for
their ARTISTchannels and some of the intellectual property rights with respect
to content developed for the ARTISTchannels. As a result, we may lose the rights
to operate artists' sites if our agreements with these artists terminate and are
not renewed.
Most of our current artist contracts have a term of three years. Upon
expiration, artists may not renew these contracts on reasonable terms, if at
all. If 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, operate and promote the sites. Of the 100 ARTISTchannel contracts we
had as of December 31, 1999, none will expire in 2000 and 12 will expire in
2001. In addition, as of December 31, 1999, we did not have signed contracts for
five of the 79 ARTISTchannels that we operate.
As of December 31, 1999, we had granted options to purchase an aggregate of
2,476,561 shares of our common stock to 100 of our 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 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 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
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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.
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. We intend
to spend approximately $30 million during 2000 on our offline and online
advertising and promotional efforts to increase brand awareness, traffic and
revenue. 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.
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. We estimate that there
are currently over 150 Web sites that promote and distribute music and related
merchandise. 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. Our competitors include mp3.com, Launch Media, Amazon.com, CDnow,
CheckOut.com, major Internet portals and traditional music companies.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Some of our competitors
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.
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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 59.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR MUSIC MERCHANDISE,
FULFILLMENT AND DISTRIBUTION; IF WE CANNOT SECURE ALTERNATE SUPPLIERS, OUR
BUSINESS MAY 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. During the year
ended December 31, 1999, approximately 99.2% of the dollar volume of our orders
for music and related merchandise were fulfilled by Alliance. 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 purchase almost all of our compact discs from Alliance and a substantial
majority of our other music-related merchandise from two other vendors, Giant
Merchandising and Winterland Concessions Company. During the year ended December
31, 1999, we purchased approximately 96.0% of the dollar volume of our compact
discs from Alliance, and we obtained approximately 26.9% of the dollar volume of
our other music-related merchandise from Giant Merchandising and approximately
17.0% from Winterland Concessions. 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 suppliers, on acceptable terms in a timely
manner, or at all.
WE DEPEND ON THIRD PARTY INVENTORY AND FINANCIAL SYSTEMS AND CARRIER
SERVICES.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. If our distributors' systems
fail or are unable to scale or adapt to changing needs, or if we cannot
integrate our information systems with the systems of 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. In the quarter ended
December 31, 1999, both we and Alliance experienced an unusually high volume of
orders, which resulted in shipping delays to our customers. These delays did not
have a material adverse effect; however, our failure to deliver products to our
customers in a timely and accurate manner in the future could harm our
reputation, our relationship with customers, the ARTISTdirect and UBL brands and
our results of operations.
OUR BUSINESS IS SUBJECT TO SEASONALITY, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
We have experienced and expect to continue to experience seasonal
fluctuations in our online sales. These seasonal patterns will cause quarterly
fluctuations in our operating results. In particular, a
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disproportionate amount of our online sales have been realized during the fourth
calendar quarter and during the summer months, traditionally when artists go on
tour. Due to our limited operating history, it is difficult to predict the
seasonal pattern of our online sales and the impact of such seasonality on our
business and operating results. Our seasonal online sales patterns may become
more pronounced, strain our personnel, warehousing, and order shipment
activities and cause our operating results to be significantly less than
expected for any given period. This would likely cause our stock price to fall.
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, 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. 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. We have
periodically experienced service interruptions caused by temporary problems in
our own systems or software or in the systems or software of these third
parties. While we are implementing procedures to improve the reliability of our
systems, these interruptions may continue to occur from time to time.
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 we may be unable to seek reimbursement from them for losses that they cause.
Our users also depend on third party Internet service providers and 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 in the future which are unrelated to our
systems, but which could nonetheless adversely affect our business.
COMPUTER VIRUSES, ELECTRONIC BREAK-INS OR SIMILAR DISRUPTIVE EVENTS COULD
DISRUPT OUR SERVICES.
Computer viruses, electronic break-ins or similar disruptive events 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.
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,
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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 between
50 and 75 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 KEY PERSONNEL, INCLUDING MARC GEIGER, DONALD MULLER OR KEITH
YOKOMOTO, 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, particularly Marc Geiger, Donald Muller and
Keith Yokomoto. The loss of any of these individuals would likely have an
adverse effect on our business. Competition for personnel throughout our
industry is intense and we may be unable to retain these 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.
IF WE DO NOT REALIZE THE ANTICIPATED BENEFITS OF POTENTIAL FUTURE
ACQUISITIONS, OUR BUSINESS COULD BE SERIOUSLY HARMED AND OUR STOCK PRICE
COULD FALL.
We regularly evaluate, in the ordinary course of business, potential
acquisitions of, or investments in, complementary businesses, products and
technologies. If we are presented with appropriate opportunities, we intend to
actively pursue these acquisitions and/or investments. 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 other
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. Acquisitions or business combinations could
also 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.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
COMPETITIVE POSITION COULD BE HARMED OR WE COULD BE REQUIRED TO INCUR
EXPENSES TO ENFORCE OUR RIGHTS.
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
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.
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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.
OUR ACCESS TO COPYRIGHTED CONTENT DEPENDS UPON THE WILLINGNESS OF CONTENT
OWNERS TO MAKE THEIR CONTENT AVAILABLE.
The music content available on the ARTISTdirect Network is typically
comprised of copyrighted works owned or controlled by multiple third parties.
Most of the content on ARTISTchannels is either owned or licensed by the artist.
On other parts of the ARTISTdirect Network, depending on the nature of the
content and how we use the music content, we typically license such rights from
publishers, record labels, performing rights societies or 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 have not obtained a license for some of the content offered on the
ARTISTdirect Network, including links to other music-related sites and
thirty-second streamed song samples, 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 the content
from our Web sites and be forced to pay potentially significant financial
damages for past conduct.
INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD 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, we may face costly litigation, loss of access to, and
use of, content, 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. While we have resolved all such disputes in the
past, we may not be able to do so in the future. If there is a successful claim
of infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology or content on a timely
basis, it could harm our business.
In addition, we rely on third parties to provide services enabling our
online product sales transactions, including credit card processing, order
fulfillment and shipping. 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. These changes of trademarks,
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alteration of content, payment of financial damages or alteration of practices
may 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," "imusic.com" and
"downloadsdirect.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, WE COULD LOSE VISITORS TO OUR SITES
AND COULD BE SUBJECT TO CLAIMS FOR DAMAGE FROM OUR USERS, CONTENT
PROVIDERS, ADVERTISERS AND MERCHANTS.
Our relationships with consumers would be adversely affected and we may be
subject to claims for damage 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.
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CHANGES IN LAWS OR REGULATIONS MAY ADVERSELY AFFECT OUR ABILITY TO COLLECT
DEMOGRAPHIC AND PERSONAL INFORMATION FROM USERS AND COULD AFFECT OUR
ABILITY TO ATTRACT ADVERTISERS.
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 from 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 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 -- Governmental Regulation" on page 60 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 and have not experienced any Year 2000 issues to date,
we currently do not have, and do not plan to develop, a contingency plan to
address any problems caused by Year 2000 issues. 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 providers 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.
WE HAVE A CONTINGENT LIABILITY OF UP TO $27.0 MILLION AS A RESULT OF A
RESCISSION OFFER WE INTEND TO MAKE DUE TO OUR ISSUANCES OF SECURITIES IN
VIOLATION OF SECURITIES LAWS.
As of the date of this prospectus, we have issued shares or options to
purchase shares of our common stock to our employees and to artists and their
managers and advisors. Due to the nature of the persons who received these
shares and options in addition to our employees and the total number of shares
and options issued to them and our employees, the issuance of these shares and
options did not comply with
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the requirements of Rule 701 under the Securities Act, or any other available
exemptions from the registration requirements of Section 5 of the Securities
Act, and may not have qualified for any exemption from qualification under
California securities laws either.
Beginning approximately 180 days after the date of this prospectus, we
intend to make a rescission offer to all these persons pursuant to a
registration statement filed under the Securities Act and pursuant to California
securities law. In the rescission offer, we will offer to repurchase from these
persons all shares issued directly to these persons or pursuant to option
exercises by these persons before the expiration of the rescission offer
registration statement, at the purchase or exercise price paid for these shares,
plus interest at the rate of 10% per year from the date of issuance until the
rescission offer expires. To comply with California securities law, we will also
offer to repurchase all unexercised options issued to such persons at 20% of the
option exercise price multiplied by the number of shares subject to such
options, plus interest at the rate of 10% per year from the date of issuance
until the rescission offer expires. The rescission offer will expire
approximately 30 days after the effectiveness of the rescission offer
registration statement.
We could be required to pay up to approximately $17.5 million plus the
total amount of interest on that amount as described above based on the number
of shares which have already been issued or which may be issued pursuant to
vested unexercised options before the rescission offer period expires and the
number of outstanding options which will not be exercisable throughout the
rescission offer period. We currently expect to use a portion of the net
proceeds of this offering to fund any requested repayment. 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 their shares and options which were not issued in compliance
with the Securities Act or California securities laws. In this case, based on
the number of shares and options issued as of December 31, 1999, we could be
liable for a total amount of up to $27.0 million plus interest.
As of the date of this prospectus, we are not aware of any claims for
rescission against us. If we are required to repurchase all of the shares
subject to the rescission offer, our operating results and liquidity during the
period in which such repurchase occurs could be adversely affected.
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 via links to other Web sites or for
products sold through our Web site. While we have resolved all of these types of
claims made against us in the past, we may not be able to do so in the future.
We intend to implement measures to reduce exposure to these types of claims, but
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
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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 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.
IF CURRENT STANDARDS TO MEASURE THE EFFECTIVENESS OF ADVERTISING ON THE
INTERNET DO NOT DEVELOP, OUR ABILITY TO ATTRACT AND RETAIN ADVERTISERS
COULD BE ADVERSELY IMPACTED.
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.
SOFTWARE PROGRAMS THAT PREVENT OR LIMIT THE DELIVERY OF ADVERTISING MAY
SERIOUSLY DAMAGE OUR ABILITY TO ATTRACT AND RETAIN ADVERTISERS.
A number of "filter" software programs have been developed which limit or
prevent advertising from being delivered to an Internet user's computer. This
software could adversely affect the commercial viability of Internet
advertising. These programs attempt to blank out, or block, banner and other
advertisements. To date, such programs have not had a material adverse impact on
our ability to attract and retain advertisers or caused us to fail to meet the
terms of our advertising agreements. These programs may, however, have these
effects on us in the future. Widespread adoption of this type of software would
seriously damage our ability to attract and retain advertisers.
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.
20
<PAGE> 23
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
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 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.
21
<PAGE> 24
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 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
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR
STOCKHOLDERS WILL BENEFICIALLY OWN APPROXIMATELY 61.5% OF OUR OUTSTANDING
COMMON STOCK AND CONSEQUENTLY WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER ARTISTDIRECT.
After this offering, executive officers, directors and holders of 5% or
more of the outstanding ARTISTdirect common stock together will beneficially own
approximately 61.5% 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.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS
COULD PREVENT CHANGES IN OUR MANAGEMENT.
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 business combination involving
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
22
<PAGE> 25
outstanding voting stock, for three years following the date that the
stockholder acquired 15% or more of the corporation's stock unless:
- the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's stock;
- after the transaction where the stockholder acquired 15% or more of the
corporation's stock, 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 takeovers or changes 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;
- 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 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
23
<PAGE> 26
stock in this offering, you will experience immediate dilution of approximately
$7.45 in the book value per share of the common stock, based on an assumed
initial public offering price of $11.00 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 $3.68 per share. Please see "Dilution" on page 29 for more
information regarding the dilution you will experience.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE
CAPITAL NEEDS.
We currently anticipate that our available cash resources, without the
proceeds from this offering, will be sufficient to meet our anticipated needs
for working capital and capital expenditures for the next twelve months.
However, if our available cash, the proceeds from this offering and cash flows
from operations are insufficient to meet our anticipated needs for working
capital and capital expenditures, we will need to raise additional funds to
continue our operations, promote our brands, develop new or enhanced services,
respond to competitive pressures or make acquisitions. In particular, we intend
to spend approximately $30 million for advertising and promoting our brands and
network of web sites and approximately $10 million for content production and
Web site development. 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
37,296,483 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after December 31,
1999. Of these shares, the 5,000,000 shares sold in this offering are freely
tradable. This leaves 32,296,483 remaining shares, 20,963,555 of which will be
eligible for sale in the public market 180 days after the date of this
prospectus. Our directors, officers, existing stockholders and option holders
have entered into "lock-up" agreements with respect to 29,393,809 of our shares.
These lock-up agreements restrict the resale of the shares of our stock;
however, the underwriters may waive the restriction on resale on a case-by-case
basis. If they waive this restriction, more shares will be eligible for sale in
the public market at an earlier date.
24
<PAGE> 27
The following table sets forth the number of shares of common stock
available for sale in the public market based on shares outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES
ELIGIBLE FOR
DATE FUTURE SALE COMMENT
---- ------------ -------
<S> <C> <C>
Date of this prospectus........ 5,000,000 Shares sold in this offering
181 days after the date of this
prospectus................... 20,963,555 Underwriters' lock-up period
ends. These shares are eligible
for sale under Rule 144, 144(k)
or 701.
</TABLE>
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 December 31, 1999, we had outstanding
options to purchase 6,890,549 shares of our common stock and had reserved a
total of an additional 3,432,784 shares for future grants under our three option
plans. The exercise of stock options will reduce your percentage ownership in
ARTISTdirect.
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. You should not place undue reliance on
these forward-looking statements.
25
<PAGE> 28
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 5,000,000 shares of
common stock in this offering will be approximately $49.5 million, assuming an
initial public offering price of $11.00 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 $57.2 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:
- approximately $30 million for advertising and promoting our brands and
network of Web sites to increase consumer traffic;
- approximately $10 million for content production and Web site
development, in particular to develop and launch additional ARTIST
channels;
- approximately $741,000 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 "Related Party
Transactions -- Debt to Executive Officers and Director" on page 79 for
more information on these notes; and
- general corporate purposes, including working capital.
The portion available following application to the first three items above
may be used to fund the repurchase of our shares tendered in connection with our
rescission offer with respect to shares of, or options to purchase, our common
stock issued to our employees and our artists and their managers and advisors.
The amount required for the repurchase may be up to $17.5 million plus interest,
based on the number of options and shares issued as of December 31, 1999. See
"Rescission Offer" on page 91 for more information on the rescission offer. A
portion of the net proceeds may also be used for possible acquisitions of
complimentary businesses, technologies, product lines or content. 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.
26
<PAGE> 29
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on pro forma basis to reflect:
- the issuance of 1,094,917 shares of Series C preferred stock in
January 2000;
- 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;
- a one-for-four reverse stock split of our common stock and preferred
stock to be effected before the closing of this offering;
- the termination of the put option described in "Related Party
Transactions -- Transactions with Scott Blum" on page 80, which will
occur 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 at a
ratio of one preferred share for one common share; provided that the
shares of Series C preferred stock are convertible at a ratio of one
preferred share for 1.5827 common shares, based on an assumed initial
public offering price of $11.00 per share;
- on a pro forma as adjusted basis to reflect the pro forma adjustments and
the issuance and sale of 5,000,000 shares of common stock at an assumed
initial public offering price of $11.00 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 26.
None of the columns set forth below reflects the following:
- the 1,244,394 shares of common stock issuable upon exercise of warrants,
of which 529,303 were exercisable as of December 31, 1999 with a weighted
average exercise price of $7.18 per share;
- the 6,890,549 shares subject to outstanding options under our stock
option plans as of December 31, 1999, with a weighted average exercise
price of $3.67 per share;
- approximately 100,000 shares of common stock to be issued as accrued but
unpaid dividends on preferred stock subsequent to December 31, 1999;
- the issuance of up to 900,000 shares of common stock to be issued to
acquire Mjuice.com, Inc.;
- the issuance of up to 62,500 shares of common stock issuable upon the
exercise of a warrant issued in March 2000; and
- the effect of any shares or options repurchased in the rescission offer
that we intend to make after the closing of this offering, as described
in more detail on page 91 under "Rescission Offer".
27
<PAGE> 30
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 DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)...................... $ 69,119 $ 84,343 $133,826
======== ======== ========
Notes payable..................................... 741 741 741
Redeemable securities:
Series A redeemable preferred
securities -- issued and outstanding:
3,207,815 shares actual; none pro forma and
pro forma as adjusted........................ $ 4,963 -- --
Series B redeemable preferred
securities -- issued and outstanding:
3,750,000 shares actual; none pro forma and
pro forma as adjusted........................ 15,350 -- --
Series C redeemable preferred
securities -- issued 7,000,291 shares; none
outstanding actual, pro forma and pro forma
as adjusted(1)............................... 82,188
Redeemable common securities -- issued and
outstanding: 170,443 shares actual; 170,443
pro forma and pro forma as adjusted(2)....... 9,206 6,854 6,854
-------- -------- --------
Total redeemable securities.................. 111,707 6,854 6,854
-------- -------- --------
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; 32,296,483
shares issued on a pro forma basis(1); and
37,296,483 shares issued on a pro forma as
adjusted basis............................... 141 323 373
Additional paid in capital...................... 36,688 156,583 206,016
Unearned compensation............................. (36,976) (36,976) (36,976)
Accumulated deficit............................... (23,598) (23,598) (23,598)
-------- -------- --------
Total members' and stockholders' equity
(deficit).................................. (23,745) 96,332 145,815
-------- -------- --------
Total capitalization.................... $ 87,962 $103,186 $152,669
======== ======== ========
</TABLE>
- ------------------------
(1) Reflects the issuance of 1,094,917 shares of Series C preferred stock in
January 2000 for $15.25 million, and the conversion of all outstanding
shares of Series C preferred stock into 11,079,550 shares of common stock
upon the consummation of this offering, based on an initial public offering
price of $11.00 per share.
(2) The redeemable common securities are 170,443 common securities that were
subject to a put option as of December 31, 1999. The put option was granted
to the holder in connection with our acquisition of iMusic. The holder has
informed us that he does not intend to exercise this option. Accordingly, he
will retain ownership of these securities, and the put option will expire on
the closing of this offering. In addition redeemable common securities
includes options and securities subject to a rescission offer.
28
<PAGE> 31
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $82.9 million or $2.57 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 pro forma total number of
shares of common stock outstanding; the pro forma adjustments give effect to:
- the issuance of 1,094,917 shares of Series C preferred stock in January
2000;
- the one-for-four reverse stock split to be effected before 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 at a ratio
of one preferred share for one common share; provided that outstanding
shares of Series C preferred stock will convert into 11,079,551 shares of
common stock based on an assumed initial offering price of $11.00 per
share.
Assuming the sale of the 5,000,000 shares of common stock offered by us at
an assumed initial public offering price of $11.00 per share, and after
deducting the underwriting discounts, commissions and estimated offering
expenses, our pro forma net tangible book value as of December 31, 1999 would
have been approximately $132.4 million, or $3.55 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $0.98
per share to existing stockholders and an immediate dilution of $7.45 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............. $11.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $2.57
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 0.98
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.55
------
Dilution per share to new investors......................... $ 7.45
======
</TABLE>
The following table summarizes on a pro forma basis, after giving effect to
the January 2000 Series C preferred stock issuance, as of December 31, 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 $11.00 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..... 32,296,483 86.6% $118,833,000 68.4% $ 3.68
New investors............. 5,000,000 13.4 55,000,000 31.6 11.00
----------- ----- ------------ -----
Total........... 37,296,483 100.0% $173,833,000 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing table excludes 10,323,333 shares of common stock reserved for
issuance under our stock option plans, of which 6,890,549 were subject to
outstanding options as of December 31, 1999 at a weighted average exercise price
of $3.67 per share, shares issued after December 31, 1999 upon exercise of
outstanding options, and 1,244,394 shares of common stock issuable upon exercise
of warrants outstanding as of December 31, 1999 at a weighted average exercise
price of $6.71 per share.
29
<PAGE> 32
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 its subsidiaries for the period indicated. The historical
financial statements of ARTISTdirect represent the operations of ARTISTdirect,
LLC for the period from January 1, 1999 to October 5, 1999 (which was the period
before the conversion to a C corporation), and ARTISTdirect, Inc. from October
6, 1999 to December 31, 1999 (which was the period after the conversion to a C
corporation). The adjustments are described in accompanying notes.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1999 gives effect to:
- our acquisition of the 80% interest of iMusic we did not own; and
- our acquisition of the interests in The Ultimate Band List, LLC we did
not own.
as if each occurred at the beginning of the period.
The unaudited pro forma consolidated statement of operations is not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the period presented
and should not be construed as being representative of future operating results.
The historical financial statements of ARTISTdirect and its subsidiaries,
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.
30
<PAGE> 33
ARTISTDIRECT, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------
ARTISTDIRECT
AND SUBSIDIARIES
ACTUAL(A) ADJUSTMENTS PRO FORMA
---------------- ----------- -----------
<S> <C> <C> <C>
Net revenue
Online product sales......................... $ 5,282 $ -- $ 5,282
Advertising and other........................ 2,910 63(d) 2,973
Agency commissions........................... 1,304 -- 1,304
Record label................................. 778 -- 778
---------- ------- ----------
Total net revenue.................... 10,274 63(d) 10,337
Cost of revenue................................ 10,240 20(d) 10,260
---------- ------- ----------
Gross profit......................... 34 43 77
Operating expense:
Product development.......................... 1,815 -- 1,815
Sales and marketing.......................... 13,222 2(d) 13,224
General and administrative................... 10,319 52(d) 10,371
Amortization of stock-based compensation..... 30,304 -- 30,304
Depreciation and amortization................ 2,509 1,160(c) 3,669
---------- ------- ----------
Loss from operations................. (58,135) (1,171) (59,306)
Income from equity investment.................. 50 -- 50
Interest income, net................. 281 -- 281
---------- ------- ----------
Loss before provision for income
tax............................... (57,804) (1,171) (58,975)
Provision for income tax(b).................... -- -- --
---------- ------- ----------
Net income (loss).................... $ (57,804) $(1,171) $ (58,975)
========== ======= ==========
Basic and diluted net loss per share for period
from October 6, 1999 to December 31, 1999.... $ (1.66)
Weighted average shares outstanding used in
computing basic and diluted net loss per
share for period from October 6, 1999 to
December 31, 1999............................ 14,177,463
Pro forma basic and diluted net loss per
share........................................ $ (2.96) $ (3.02)
Weighted average shares outstanding used in
computing pro forma basic and diluted net
loss per share............................... 19,502,437 19,523,743(e)
==========
</TABLE>
31
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) Includes the operations of ARTISTdirect, Inc. (for the period from October
6, 1999 through December 31, 1999), ARTISTdirect, LLC, its predecessor
entity (for the period from January 1, 1999 through October 5, 1999) and the
following subsidiaries: ARTISTdirect Agency, LLC, Kneeling Elephant Records,
LLC, The Ultimate Band List, LLC, ARTISTdirect New Media, LLC, and iMusic,
Inc. For The Ultimate Band List, LLC, all of the entity's losses have been
allocated to the majority interest due to its funding of the operations. The
results of iMusic, Inc. are included from the date of acquisition of the
remaining 80% interest that we did not already own.
(b) On October 6, 1999, ARTISTdirect, LLC was merged into ARTISTdirect, Inc. The
transaction was a merger of entities under common control and, accordingly,
it has been accounted for on the historical cost basis. Before the merger,
we operated 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. The
Company is now taxed as a corporation. No impact of the merger is reflected
on the statement 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.
(c) In February 1999, The Ultimate Band List, LLC acquired the remaining 80% of
iMusic, Inc. that it did not already 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
approximately $180,000 in liabilities, resulting in excess purchase price
over net tangible assets acquired of $2.4 million. In May 1999,
ARTISTdirect, LLC acquired the interests of the minority unit holders of The
Ultimate Band List, LLC, which included the redeemable interest issued in
connection with the iMusic acquisition, 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 $13.1 million. The adjustments
reflect the additional amortization expense for total goodwill resulting
from the iMusic acquisition and purchase of the interests of The Ultimate
Band List, LLC that ARTISTdirect, LLC did not own, using a five year
estimated useful life for the applicable period. The acquisitions were
structured as tax free exchanges 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.
(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 redeemable
common shares issued in connection with the iMusic acquisition, assuming
such shares are not redeemed and common shares issued in the acquisition
of the UBL minority interest as if such shares were outstanding from
January 1, 1999;
- automatic conversion of our redeemable preferred stock into common stock
upon the consummation of this offering;
- the one-for-four reverse stock split to be effected before the closing of
this offering as though it had occurred on January 1, 1999; and
- the issuance of common stock as accrued dividends on redeemable preferred
stock.
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<PAGE> 35
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, 1998, 1999 and as of December 31, 1996, 1997, 1998, and 1999
are derived from our audited 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
AUGUST 8, 1996
(INCEPTION)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------
1996 1997 1998 1999
-------------- ------ ------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue:
Online product sales............................ $ -- $ 269 $ 1,548 $ 5,282
Advertising and other........................... -- 95 552 2,910
Agency commissions.............................. -- 974 1,917 1,304
Record label.................................... -- 550 565 778
---- ------ ------- ----------
Total net revenue............................ -- 1,888 4,582 10,274
Cost of revenue................................... -- 608 2,515 10,240
---- ------ ------- ----------
Gross profit................................. -- 1,280 2,067 34
Operating expense:
Product development............................. -- 78 589 1,815
Sales and marketing............................. 10 196 1,395 13,222
General and administrative...................... 13 1,442 2,545 10,319
Stock-based compensation(1)..................... -- -- 3,828 30,304
Depreciation and amortization................... 5 21 59 2,509
---- ------ ------- ----------
Loss from operations......................... (28) (457) (6,349) (58,135)
Income from equity investment..................... -- -- 2 50
Interest income (expense), net.................... -- (3) 29 281
---- ------ ------- ----------
Net loss..................................... $(28) $ (460) $(6,318) $ (57,804)
==== ====== ======= ==========
Pro forma basic and diluted net loss per share.... $ (2.96)
==========
Weighted average shares used in computing pro
forma basic and diluted net loss per share(2)... 19,502,437
==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1996 1997 1998 1999
------------ ------ ------- ----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 80 $ 167 $ 1,940 $ 69,119
Working capital................................... (20) (526) 1,079 67,730
Goodwill and intangibles, net..................... -- 16 45 13,415
Total assets...................................... 173 314 3,412 98,600
Total redeemable securities....................... -- -- 5,135 111,707
Total members' and stockholders' equity
(deficit)....................................... 72 (412) (3,436) (23,745)
</TABLE>
- -------------------------
(1) Stock-based compensation is comprised of sales and marketing expense of $0
and $8,551 in 1998 and 1999, respectively, and general and administrative
expense of $3,828 and $21,753 in 1998 and 1999, respectively.
(2) See Note 3 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.
33
<PAGE> 36
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 an 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. As of December 31, 1999, ARTISTdirect featured 79 unique, artist-owned
ARTISTchannels, and had signed agreements to launch channels with an additional
26 artists. The ARTISTdirect Network also features the UBL, a music search
engine on the Web, iMusic, a popular online community where fans exchange music
interests and commentary and DOWNLOADSdirect, a feature that allows users to
download music and upload music and other information to the ARTISTdirect
Network. 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 $180,000 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, particularly with respect to record label revenue, which we expect to
continue decreasing as a percentage of our total revenue in the future.
ARTISTdirect has incurred cumulative net losses of $64.6 million from
inception to December 31, 1999 of which approximately $35.9 million represented
stock-based compensation expense. We expect our net
34
<PAGE> 37
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 9 for a more complete description
of the many risks we face. Our business 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.
On October 6, 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 37. 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. Less than 1% of our revenue for the year ended
December 31, 1999 was barter revenue.
Revenue from the ARTISTdirect Network, including the ARTISTchannels, the
UBL, iMusic, DOWNLOADSdirect and the ARTISTdirect Superstore, consists primarily
of online product sales and advertising revenue as described below:
- Online product sales revenue includes the sale of music and related
merchandise, such as apparel, collectibles and accessories, through our
ARTISTchannels and the ARTISTdirect Superstore. We recognize the gross
amount of product sales and shipping revenue upon shipment of the item
and record appropriate reserves for product returns. We have experienced
seasonality with respect to our online product sales. In particular, our
online product sales in December have, on average, been higher than in
other months. We believe that this trend may continue for the foreseeable
future.
- 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 Web 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
35
<PAGE> 38
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,
payments to our artists for their share of net proceeds, Web site maintenance
expenses, content acquisition costs, payroll and related expenses for staff
involved in Web site maintenance, content programming and the ARTISTdirect
Agency, and amortization of non-cash compensation expense related to vendor
warrants and ARTISTchannel stock options granted to artists and their advisors
in connection with opening their ARTISTchannels. Artist royalties are based on
electronic commerce and advertising revenue generated from their ARTISTchannels.
Web site maintenance costs include personnel-related costs, software consulting
costs, Internet hosting charges, and networking costs.
In connection with the amortization of vendor warrants and ARTISTchannel
stock options granted through December 31, 1999, we recorded non-cash
compensation expense of approximately $1.8 million for the year ended December
31, 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.
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, business development, 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 $34.1
million of stock-based compensation expense for the period from inception
through December 31, 1999 in connection with equity granted to employees,
directors, professional firms and artists during this period. We expect to grant
additional options for promotional services in the future. We recorded
amortization of stock-based compensation expense of $30.3 million during the
year ended December 31, 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 acquisitions 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
36
<PAGE> 39
aggregate excess purchase price over the net tangible assets has been estimated
to be $15.5 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.
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.
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
NET REVENUE
Net revenue increased to $10.3 million in the year ended December 31, 1999
from $4.6 million in the same period of 1998. The increase was primarily due to
an increase in online product sales revenue to $5.3 million from $1.5 million,
reflecting additional ARTISTchannels plus contributions from the ARTISTdirect
Superstore. Advertising and other revenue also increased to $2.9 million from
$552,000, reflecting an increase in the page views generated by our Web sites
plus a significant increase in sales of sponsorships. Commission revenue from
the ARTISTdirect Agency decreased from $1.9 million to $1.3 million, due
primarily to a decrease in the touring activity of the agency's artists.
COST OF REVENUE
Direct cost of product revenue increased to $5.1 million in the year ended
December 31, 1999 from $1.5 million for the same period of 1998. This $3.6
million increase corresponded with the increase in online product sales revenue
and was primarily attributable to a related $2.4 million increase in royalties
payable to artists and $1.1 million increase in transaction costs. Other cost of
revenue increased to $5.1 million in 1999 from $1.0 million in 1998. This $4.1
million increase was primarily due to a $2.0 million increase in Web site
hosting and maintenance costs and $1.8 million of non-cash expense for the
amortization of warrants issued to vendors and options issued to artists and
their advisors related to our rights to operate ARTISTchannels. In total, in
1999 we recorded non-cash compensation charges of $15.5 million and such amount
will be amortized to cost of revenue over the life of the contract periods
associated with the warrants and options. Our overall gross profit margin
decreased to 0.3% of net revenue for the year ended December 31, 1999 from 45%
of net revenue for the year ended December 31, 1998, due to a higher proportion
of online product sales revenue, which has lower gross margin than our other
sources of revenue, and the increased costs detailed above.
OPERATING EXPENSE
Product Development. Product development expense increased to $1.8 million
for the year ended December 31, 1999 from $589,000 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 $13.2 million
for the year ended December 31, 1999 from $1.4 million for the same period in
1998. The increase was primarily attributable to a significant increase in
online and offline advertising, promotion and sponsorship. In
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<PAGE> 40
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
$10.3 million for the year ended December 31, 1999 from $2.5 million for the
year ended December 31, 1998. This increase was primarily attributable to a $3.0
million increase in personnel and related expenses and a $2.0 million increase
in outside professional services expenses. 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 $30.3
million of stock-based compensation expense for the year ended December 31, 1999
in connection with stock issuances to employees, directors, professional firms
and artists for promotional services which are being treated as variable stock
compensation. Stock-based compensation for the comparable period in 1998 was
$3.8 million, primarily in connection with stock issuances to employees,
directors and professional firms.
Depreciation and Amortization. Depreciation and amortization expense
increased to $2.5 million for the year ended December 31, 1999 from
approximately $59,000 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.
NET LOSS
Net loss increased to $57.8 million in the year ended December 31, 1999
compared to $6.3 million in the year ended December 31, 1998. The increase in
the net loss can be primarily attributed to a $26.5 million increase in the
amortization of stock-based compensation, $11.8 million increase in sales and
marketing expense, $7.8 million increase in general and administrative expense,
$2.5 million increase in depreciation and amortization expense and $2.0 million
decrease in gross profit due to increased expenditures for Web site hosting,
maintenance and content compared with the prior year.
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 online product
sales revenue and a $943,000 increase in ARTISTdirect Agency commission revenue.
The increase in online product sales 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 online product sales 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 online product sales revenue, which has a lower gross margin than other
sources of revenues.
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<PAGE> 41
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.
NET LOSS
Net loss increased to $6.3 million for the fiscal year ended December 31,
1998 from $460,000 for the fiscal year ended December 31, 1997. The increase in
the net loss can be primarily attributed to the $3.8 million amortization of
stock-based compensation expense in 1998 as well as the $.5 million increase in
product development, $1.2 million increase in sales and marketing, and $1.1
million increase in general and administrative expense compared with the prior
year.
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.
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<PAGE> 42
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 expense, and operating income (loss) by segment for the years
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
ARTISTDIRECT NETWORK
Net revenue:
Online product sales................................. $ 269 $ 1,548 $ 5,282
Advertising and other................................ 95 552 2,910
----- ------- --------
Total net revenue.................................. 364 2,100 8,192
Cost of revenue:
Direct cost of product sales......................... 262 1,505 5,091
Other cost of revenues............................... 172 735 4,488
----- ------- --------
Total cost of revenue.............................. 434 2,240 9,579
----- ------- --------
Gross profit (loss)..................................... (70) (140) (1,387)
Operating expense....................................... 670 5,116 56,513
----- ------- --------
Loss from operations.................................... (740) (5,256) (57,900)
----- ------- --------
TALENT AGENCY
Net revenue............................................. $ 974 $ 1,917 $ 1,304
Cost of revenue......................................... 174 259 432
----- ------- --------
Gross profit............................................ 800 1,658 872
Operating expense....................................... 603 2,287 850
----- ------- --------
Income (loss) from operations........................... 197 (629) 22
----- ------- --------
RECORD LABEL
Net revenue............................................. $ 550 $ 565 $ 778
Cost of revenue......................................... -- 16 229
----- ------- --------
Gross profit............................................ 550 549 549
Operating expense....................................... 464 1,013 806
----- ------- --------
Income (loss) from operations........................... 86 (464) (257)
----- ------- --------
TOTAL LOSS FROM OPERATIONS................................ $(457) $(6,349) $(58,135)
===== ======= ========
</TABLE>
Segment income (loss) from operations excludes interest income, interest
expense, and provision for income tax.
40
<PAGE> 43
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
for the six most recent quarters ended December 31, 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
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1999 1999 1999 1999
------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Online product sales........ $ 444 $ 744 $ 1,016 $ 1,154 $ 1,331 $ 1,781
Advertising and other....... 128 218 381 508 777 1,244
Agency commissions.......... 1,338 135 130 161 371 642
Record label................ 138 137 171 161 273 173
------- ------- ------- ------- -------- --------
Total net revenue.... 2,048 1,234 1,698 1,984 2,752 3,840
Cost of revenue............... 677 1,241 1,296 1,653 2,707 4,584
------- ------- ------- ------- -------- --------
Gross profit
(loss)............. 1,371 (7) 402 331 45 (744)
Operating expense:
Product development......... 99 253 191 440 397 787
Sales and marketing......... 419 603 777 1,760 2,901 7,784
General and
administrative............ 590 747 1,308 1,929 2,385 4,697
Amortization of stock-based
compensation.............. 1,090 1,450 802 1,115 19,625 8,762
Depreciation and
amortization.............. 17 17 88 625 841 955
------- ------- ------- ------- -------- --------
Loss from
operations......... (844) (3,077) (2,764) (5,538) (26,104) (23,729)
Income from equity
investment.................. -- 2 33 -- -- 17
Interest income (expense),
net......................... (1) 45 12 65 90 114
------- ------- ------- ------- -------- --------
Net loss............. $ (845) $(3,030) $(2,719) $(5,473) $(26,014) $(23,598)
======= ======= ======= ======= ======== ========
</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 $117.4 million
through private sales of preferred securities, including the sale of an
aggregate of $97.5 million of Series C preferred stock in December 1999 and
January 2000.
Net cash used in operating activities was $26.0 million for the year ended
December 31, 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 $312,000 for the
fiscal year ended December 31, 1997.
Net cash used in investing activities was $4.4 million for the year ended
December 31, 1999, and $514,000 and $101,000 for the fiscal years ended December
31, 1998 and 1997, respectively. Net cash
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used in investing activities for each of these periods consisted of purchases of
fixed assets, primarily computer equipment and systems, totaling $3.5 million
for the year ended December 31, 1999 and $141,000 for the year ended December
31, 1998.
Net cash provided by financing activities was $97.6 million for the year
ended December 31, 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 3,207,815 shares of Series
A preferred securities in exchange for an aggregate purchase price of
$4.9 million.
- In May 1999, we issued 3,750,000 shares of Series B preferred securities
in exchange for an aggregate purchase price of $15.0 million.
In December 1999, we issued an aggregate of 5,905,374 shares of Series C
preferred shares for a total purchase price of $82.25 million. In addition, in
January 2000 we issued 1,094,917 shares of Series C preferred stock for $15.25
million. All of the Series C preferred shares will be automatically converted
into 11,079,551 shares of common stock upon the closing of this offering based
upon an initial offering price of $11.00 .
As of December 31, 1999, we had $69.1 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. In November 1999, we reinstated two lines of credit totalling $5.0
million with Republic Bank California N.A. Interest on amounts outstanding under
these credit facilities accrues at the bank's base rate plus 1% per annum and is
payable monthly. The amounts outstanding under these credit facilities are
personally guaranteed by several of our officers and directors and are due on
demand. No amounts are currently outstanding under the credit facilities.
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 our available cash resources, without the
proceeds from this offering, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for the next 12 months. In
addition, we currently anticipate that the net proceeds from this offering,
together with our current cash, cash equivalents, short-term investments and
credit facilities, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 18 months.
Although we do not currently have any specific material capital commitments
beyond such 18-month period, if we are unsuccessful in generating sufficient
cash flow from operations, 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 additional financing is needed, we
might not be able to raise capital 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. We currently do not have any plans for
future equity offerings.
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<PAGE> 45
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
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results, 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 and performing any necessary remediation. This review included
testing to determine how our systems will function at and beyond the Year 2000
and updating our software where required for Year 2000 compliance. 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, the fact that most of our systems were recently developed, and the fact
that we have not experienced any Year 2000 issues to date, we believe that our
internal software is Year 2000 compliant. We have not, and 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. This
assessment included an audit of their software as well as performing necessary
remediation. 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 sought assurances from these vendors that their
software, computer technology and other services are year 2000 compliant. We
have received written assurances from our software vendors regarding the Year
2000 compliance of their software. We have also received written assurances from
most of our third party service providers, stating that they planned to become
Year 2000 compliant before December 31, 1999. 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.
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To date, we have not experienced any Year 2000 issues. We do not have, and
do not plan to develop, 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 quarters of all fiscal years beginning after June 15,
2000 (as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective date of FASB Statement No.
133"). 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. We are required to adopt
SFAS No. 133 for the quarter ended September 30, 2000. The adoption of SFAS No.
133 is not expected to have a material impact on our consolidated financial
statements.
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BUSINESS
OVERVIEW
We are an 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. As of December 31, 1999, ARTISTdirect featured 79 unique, artist-owned
ARTISTchannels, and had signed agreements to launch channels with an additional
26 artists. The ARTISTdirect Network also features the UBL, a music search
engine on the Web, iMusic, a popular online community where fans exchange music
interests and commentary and DOWNLOADSdirect, a feature which allows users to
download music and upload music and other information to the ARTISTdirect
Network. During December 1999, users viewed more than 60 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>
Aerosmith Chris Cornell Metallica
Backstreet Boys Cypress Hill Ozzy Osbourne
Beastie Boys Def Leppard Tom Petty
Beck Kenny G Red Hot Chili Peppers
Clint Black Korn Robbie Williams
Cher Limp Bizkit The Who
</TABLE>
- The Ultimate Band List -- a comprehensive online music search engine and
resource for music information. The UBL provides information on more than
95,000 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;
- 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; and
- DOWNLOADSdirect -- a feature which enables users to download music from
the ARTISTdirect Network. Users can also upload their music and other
information to the ARTISTdirect Network, making such content available to
other users.
We also operate a music talent agency, the ARTISTdirect Agency and manage a
traditional record label, Kneeling Elephant Records, which, when combined with
the ARTISTdirect Network, allow us to provide a full range of traditional and
online services to artists. Marc Geiger, our Chief Executive Officer, Don
Muller, our President of ARTISTdirect Agency and Kneeling Elephant Records,
Steve Rennie, our
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President of the UBL and Nick Turner, our Vice President, ARTISTchannels, have
18, 14, 20 and 20 years of experience, respectively, in the music industry. 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.
STRATEGIC RELATIONSHIPS
In November and December 1999, we entered into strategic relationships with
four of the five major music companies: Universal Music Group, Inc., BMG
Entertainment, Sony Music, and Time Warner Inc. We also entered into strategic
relationships with an affiliate of Cisneros Television Group, a leading pay
television content provider in Latin America, and Yahoo!, a leading global
Internet company. These companies invested an aggregate of $97.5 million cash in
ARTISTdirect in connection with these strategic relationships and represent four
of the five major music companies, who together accounted for 74.6% of U.S.
music albums shipped in the year ended December 31, 1999.
UNIVERSAL MUSIC GROUP
Our agreement with Universal Music Group has a term of three years and
provides us with the right to use, on a non-exclusive basis, content related to
Universal's artists as this material is generally made available to other
companies. This material may include music and music-related content such as new
releases, music videos, music audio samples, cybercasts, photographs, album
covers, concert film clips, biographical information, promotional merchandise
and similar materials. Universal will also, from time to time, provide to us the
right to license special content such as exclusive or semi-exclusive cybercasts
and chats with Universal's artists. The fee for this content will be negotiated
on a case-by-case basis. We are required to purchase a minimum of $1.0 million
of content each year, and an aggregate of $4.0 million of content over the term
of the agreement from Universal pursuant to the agreement. We will provide
Universal with marketing support, including advertising, marketing services,
data, data analyses and other promotional services on terms to be negotiated.
Universal is required to purchase a minimum of $1.0 million marketing support
each year, and an aggregate of $4.0 million of marketing support over the term
of the agreement from us. Universal also invested $30.0 million in connection
with this strategic relationship.
BMG ENTERTAINMENT
Our agreement with BMG Entertainment has a term of three years and provides
us with the right to use, on a non-exclusive basis, content related to BMG's
artists as this material is generally made available to other online music
companies. This material may include music and music-related content such as new
releases, electronic press kits, music audio samples, cybercasts, photographs,
album covers, concert film clips, biographical information, promotional
merchandise and similar materials. BMG will also make available to us special
content such as exclusive or semi-exclusive cybercasts, chats with BMG artists
and digital downloads. The fee for this content will be negotiated on a
case-by-case basis. BMG will have the right to designate a specified number of
its artists' Web sites to be integrated into the UBL search engine and to
designate a specified number of its artists to be featured on our Web site. We
will also provide BMG with marketing support, including advertising, marketing
services, data, data analyses and other promotional services on terms to be
negotiated. In addition, we will work with BMG to create a series of links
between our Web sites and BMG's Web sites. BMG also invested $15.0 million in
connection with this strategic relationship.
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<PAGE> 49
SONY MUSIC ENTERTAINMENT
Our agreement with Sony Music Entertainment has a term of two years and
provides us with a limited license to use audio and video excerpts and front
album cover artwork owned by Sony. Sony will consider reasonable requests from
us regarding promotions involving Sony artists that have an ARTISTchannel with
us. We are required to provide, on each of our Web sites that contains a
recording by, or video of, a Sony artist, an active link to the artist's Web
site or to the ARTISTchannel for that particular artist. We are also required to
provide Sony with usage and sales information related to Sony recordings. Sony
also invested $15.0 million connection with this strategic relationship.
TIME WARNER AND MAVERICK RECORDING COMPANY
We entered into two-year Webcasting, video license, audio sample and
marketing agreements with both Time Warner and Maverick Recording Company. The
Webcasting agreements provide us with a limited non-exclusive license to
transmit their sound recordings and display associated album cover art, in each
case, subject to specified conditions. We will pay a transmission fee for each
transmission. The video license agreements provide us with a limited
non-exclusive license to use Time Warner's and Maverick's videos on a revenue
sharing and per-use basis. The audio sample agreements provide us with
non-exclusive licenses to use audio samples of up to 30 seconds in length for
promotional purposes. The marketing agreements require Time Warner and Maverick
to make the UBL their preferred non-commerce music search engine on their Web
sites, and we are required to prominently feature their artist sites and
advertisements in connection with search results from the UBL pertaining to
their respective artists. Time Warner also invested $14.0 million and Maverick
invested $1.0 million in connection with this strategic relationship.
CISNEROS TELEVISION GROUP
We have agreed to establish a 50/50 joint venture with affiliates of
Cisneros Television Group to develop an Internet music portal featuring content
and e-commerce opportunities targeted to Spanish and Portuguese speaking
audiences in Latin America and the United States. We will provide technical
expertise and content and an affiliate of Cisneros Television Group will provide
content and advertising and promotional support. In particular, we are obligated
to contribute licenses to our proprietary software, provide technical
assistance, sign a specified number of artists to operate their Web sites for
the joint venture and to contribute or obtain content with respect to a
specified number of artists. An affiliate of Cisneros Television Group is
required to provide access to its media distribution channels, advertising, and
licenses to some of its programming.
The initial term of the venture is for fifty years and may be extended for
additional ten-year periods. Both of us may also be required to make capital
contributions from time to time on a pro-rata basis. An affiliate of Cisneros
Television Group will receive a fee for providing management and back-office
services for the first two years of the agreement. Data generated by the joint
venture will be licensed to both us and an affiliate of Cisneros Television
Group for a fee and content created or acquired by the joint venture will be
licensed to both us and an affiliate of Cisneros Television Group on a
royalty-free basis. After the thirtieth month of the agreement, an affiliate of
Cisneros Television Group will have the right to cause a roll-up of the joint
venture so that the affiliate's equity interests in the joint venture are
exchanged for our common stock on a fair market value basis. The shares of our
common stock that Cisneros Television Group's affiliate receives in the roll-up
will be subject to the registration rights agreement discussed on page 80. An
affiliate of Cisneros Television Group invested $20.0 million in ARTISTdirect in
connection with this strategic relationship.
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<PAGE> 50
YAHOO!
We have a two-year advertising and promotion agreement with Yahoo!,
pursuant to which we will purchase media placement on Yahoo! and be one of the
two premier music merchants featured on certain pages in Yahoo!'s music site.
Yahoo! is required to deliver a minimum number of impressions, or page views,
throughout its music and other selected sites, and will deliver a minimum number
of targeted e-mail messages to its users containing our promotional offers. In
exchange for these services, we will pay Yahoo! a slotting fee, a portion of
which will be paid in the form of in-kind co-marketing opportunities. In
addition, we entered into a two-year agreement to participate in Yahoo!'s Remote
Merchant Integration Program. This agreement allows us to market our music and
merchandise offerings through Yahoo!'s Shopping pages pursuant to a
revenue-sharing arrangement with Yahoo! We also issued Yahoo! a warrant to
purchase shares of our common stock. See "Description of Capital
Stock -- Warrants" on page 91 for more information on this warrant.
DISTRIBUTION AND CONTENT RELATIONSHIPS
GO NETWORK
In December 1999, we entered into an eighteen-month co-marketing agreement
with ABC News Internet Ventures, an affiliate of The Walt Disney Company. Under
the agreement, we provide distribution on the ARTISTdirect Network of selected
content developed by Wall of Sound, a music-oriented web site owned and operated
by ABC News Internet Ventures, and selected content developed by us is
distributed in the music area of the GO Network (http://wallofsound.go.com).
Each party's selected content may contain links back to its Web site. Over the
term of the agreement, should one party receive traffic from the other party's
site significantly in excess of the traffic it directs to the other party's
site, the agreement provides for the delivery of advertising inventory to
compensate for the shortfall.
CHUMCITY INTERNATIONAL
In November 1999, we entered into a strategic alliance agreement and a
three-year programming license agreement with CHUMcity International Ltd., a
member of the CHUM group. The strategic alliance agreement contemplates that the
parties will collectively produce a series of music events which they will
jointly own and exploit. Under the programming license agreement, we are allowed
access to CHUM's music library for exploitation over the Internet. This license
is not exclusive and is subject to limitations imposed by CHUM's existing
obligations to third parties. We will pay CHUM a fixed license fee over the term
of the programming license agreement.
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 were
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
48
<PAGE> 51
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. 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 $327 million in 1999,
representing 2.3% of online music sales, to approximately $2.6 billion in 2003,
representing 14.0% of online 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.
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 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.
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<PAGE> 52
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 a heavily trafficked music destination 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.
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 may be also 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
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through the DOWNLOADSdirect area of the ARTISTdirect Network. We have entered
into a definitive agreement to acquire Mjuice.com, a Web site offering secure
mp3 downloads, some of which are available free and some on a pay basis. 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 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 95,000 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. We currently allow free digital
downloads of promotional music and provide users with a variety of streaming
audio services through the DOWNLOADSdirect area of the ARTISTdirect Network,
including some content that is available only through ARTISTdirect. As digital
distribution becomes commercially 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.
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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 35 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 advertising expenditures of less than $8.0 million
through December, 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 intend to add features and content to the
ARTISTdirect Network to enhance our users' experience. We plan to help our users
discover new music by providing personalization tools, targeted recommendations,
digital downloads and streaming audio and video. For example, we have expanded
our digital download area and will seek to provide exclusive downloads from
well-known artists. The technologies we will use to add features and content to
the ARTISTdirect Network will be based on commercial packages provided by
third-party suppliers. We plan to integrate these packages by using the
provider's service department, outside consultants and our internal staff,
depending on the application.
Exploit Our Unique Assets. We intend to exploit 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;
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- 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 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, DOWNLOADSdirect 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, including news, tour information, music samples and special offers,
community, including artist-hosted chats, fan clubs and message boards, and
products, including music, merchandise and collectibles. These Web sites are
individually designed for, and owned by, the artists and are produced and
operated by ARTISTdirect. 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.
The ARTISTchannels are typically operated under a contractual arrangement
with the artist, under which ARTISTdirect undertakes to design, host and
regularly update the ARTISTchannel, to promote the ARTISTchannel via the
ARTISTdirect Network, and to provide a complete electronic commerce solution
that includes order and credit card transaction processing, inventory management
and warehousing, order fulfillment, and online and toll-free telephone customer
service. The artist agreements further provide that the artists share in the
various types of revenue generated by their sites, including from sales of music
and other products, as well as from advertising. The ARTISTchannels are
accessible directly using their specific Web site addresses, or through the
ARTISTdirect home page or the UBL. 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 benefits for loyalty and active purchasing.
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Our current roster of ARTISTchannels includes:
Aerosmith
www.aerosmithdirect.com
Tori Amos
www.toriamosdirect.com
B-52s
www.theb52sdirect.com
Backstreet Boys
www.bsbdirect.com
Beastie Boys
www.grandroyaldirect.com
Beck
www.beckdirect.com
George Benson
www.georgebensondirect.com
Bjork
www.bjorkdirect.com
Black Sabbath
www.blacksabbathdirect.com
Clint Black
www.clintblackdirect.com
Black Crowes
www.blackcrowesdirect.com
blink-182
www.loserkids.com
Bone Thugs 'N' Harmony
www.bonethugsdirect.com
Cher
www.cherdirect.com
Coal Chamber
www.coalchamberdirect.com
Collective Soul
www.collectivesouldirect.com
Chris Cornell
www.chriscornelldirect.com
Counting Crows
www.countingcrowsdirect.com
David Crosby
www.crosbycprdirect.com
CSNY
www.csnydirect.com
Cypress Hill
www.cypresshilldirect.com
Def Leppard
www.deflepparddirect.com
Eminem
www.eminemdirect.com
Eve 6
www.eve6direct.com
Everclear
www.evercleardirect.com
Fastball
www.fastballdirect.com
Bryan Ferry
www.bryanferrydirect.com
Filter
www.filterdirect.net
Foo Fighters
www.foofightersdirect.com
Vince Gill
www.vincegilldirect.com
Godsmack
www.godsmackdirect.net
Incubus
www.incubusdirect.com
Indigo Girls
www.indigogirlsdirect.com
Chris Isaak
www.chrisisaakdirect.com
Kenny G
www.kennygdirect.com
BB King
www.bbkingdirect.com
Korn
www.korndirect.com
Limp Bizkit
www.limpbizkitdirect.com
Kenny Loggins
www.kennylogginsdirect.com
Aimee Mann
www.aimeemanndirect.com
Marilyn Manson
www.marilynmansondirect.com
Matchbox 20
www.matchbox20direct.com
Megadeth
www.megadethdirect.com
Metallica
www.metallicadirect.com
Mighty Mighty Bosstones
www.bosstonesdirect.com
Monster Magnet
www.monstermagnetdirect.com
Mandy Moore
www.mandymooredirect.com
Mike Ness
www.mikenessdirect.com
Stevie Nicks
www.stevienicksdirect.com
No Doubt
www.nodoubtdirect.com
The Offspring
www.offspringdirect.com
Ozzy Osbourne
www.ozzydirect.com
Pantera
www.panteradirect.com
Patty Loveless
www.pattylovelessdirect.com
Pearl Jam
www.pearljamdirect.com
Tom Petty
www.tompettydirect.com
Powerman 5000
www.pm5kdirect.com
Primus
www.clubbastardo.com
Rage Against The Machine
www.ratmdirect.com
Rancid
www.ranciddirect.com
Red Hot Chili Peppers
www.chilipeppersdirect.com
Brian Setzer
www.briansetzerdirect.com
Sevendust
www.sevendustdirect.com
Slayer
www.slayerdirect.com
Soul Coughing
www.soulcoughingdirect.com
Stabbing Westward
www.stabbingwestwarddirect.com
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Static X
www.staticxdirect.com
Steps
www.stepsofficial.com
Stone Temple Pilots
www.stpdirect.com
Sugar Ray
www.sugarraydirect.com
Sublime/Long Beach
Dub All Stars
www.sublimedirect.com
Matthew Sweet
www.matthewsweetdirect.com
System of a Down
www.soaddirect.com
Pam Tillis
www.pamtillisdirect.com
Toto
www.toto99direct.com
Tina Turner
www.tinaturnerdirect.com
The Who
www.thewhodirect.com
Robbie Williams
www.robbiewilliamsdirect.com
Dwight Yoakam
www.dwightyoakam.net
Rob Zombie
www.robzombiedirect.com
ZZ Top
www.zztopdirect.com
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>
Jeff Beck eVe Diana Ross
Frank Black Perry Farrell Silverchair
Danielle Brisebois Galactic Sonic Youth
Sheryl Crow Tony Iommi James Taylor
DJ Shadow Janet Jackson Too $hort
DMX Lenny Kravitz Wallflowers
Dr. Dre Madonna Neil Young
Remy Zero
</TABLE>
Based on our recent experience, we generally launch new ARTIST channels
within 2 to 3 months after an agreement has been signed.
The UBL. The UBL is a music-specific Internet search engine. 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 bands available on the Web. The UBL currently
contains information regarding more than 95,000 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. 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.
DOWNLOADSdirect. In October 1999, we added an area within the ARTISTdirect
Network devoted to music downloads. We provide users with a selection of free
downloads chosen by the editorial staff of the UBL. Some of these downloads are
made available to us on an exclusive basis from artists. In addition, we enable
users to upload their music, biography and picture, and then we make this
content available to other users. We plan to expand this area to include a
larger number of downloads and to allow for downloads on a pay or subscription
basis. We have entered into a definitive agreement to acquire Mjuice, a Web site
offering secure mp3 downloads, some of which are available free and some on a
pay basis.
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.
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ARTISTDIRECT AGENCY
The ARTISTdirect Agency is a music talent agency that procures live
performance and concert touring appearance engagements, and seeks advertising
and sponsorship opportunities, for a roster of high-profile artists. In
connection with our agency activities, we have conceived, developed, managed and
promoted integrated series of live concert tours and festivals, including the
Sno-Core Tour, a punk rock winter snowboard lifestyle tour. We believe that our
agency services enhance the relationships we have with many of our artists for
whom we also host ARTISTchannels. These services also enable us to identify
potential sponsorship opportunities for the advertisers with whom we have
relationships. We typically receive 10% of the net revenue generated from
agency-provided services. For the year ended December 31, 1999, we derived 13%
of our revenue from commissions generated by the ARTISTdirect Agency. Currently,
the ARTISTdirect Agency roster includes over 70 acts, including:
<TABLE>
<S> <C> <C>
Alice in Chains Crystal Method Primus
Beastie Boys Everclear Rage Against the Machine
Beck Foo Fighters Red Hot Chili Peppers
Ben Folds Five Hovercraft Elliott Smith
Frank Black Ben Lee Sonic Youth
Blues Traveler The London Suede Sunny Day Real Estate
Catherine Wheel Marcy Playground The The
Chris Cornell Pearl Jam 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 was recently extended to March 21, 2000. 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.
Kneeling Elephant has signed seven bands to date: Fly/Longslide, Gloritone,
Snakefarm, The Innocence Mission, Lea Krueger, Zen Mafia and Wan Santo Condo. We
have begun to use the ARTISTdirect Network to market some Kneeling Elephant
artists directly to electronic consumers.
For the year ended December 31, 1999, we derived 8% of our revenues from
our Kneeling Elephant Records label.
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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. In particular, the
system will include materials management, sales and distribution, finance and
control features. We have transitioned all of our ARTISTchannel stores to the
Pandesic system and plan to fully transition our remaining systems to the
Pandesic 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. In August 1998, we entered into a five-year
agreement with Alliance Entertainment Corp. to be our primary supplier of music
and 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. Alliance
fulfills compact discs ordered by our customers and we pay Alliance the
wholesale cost plus a fulfillment fee. In addition, Alliance has 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 purchased by us from inventory held by
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 on a wholesale basis for
both our ARTISTchannels and the ARTISTdirect Superstore. Together, Giant and
Winterland represent more than 115 artists, including 35 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 6 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. As of December 31, 1999, we employed 25 full-time employees in
customer service operations.
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 1999, advertising represented 11% and 26% of revenue,
respectively. In 1999, Intel Corporation accounted for 25% of the Company's
advertising revenues but no other single advertiser represented more than 5% in
1999 or 1998. As of December 31, 1999, we employed a direct sales force of 12
people in Los Angeles and New York and intend to expand this staff.
Following is a sample of advertisers on the ARTISTdirect Network during
1999. This list provides a cross-section of different industries represented by
our advertisers:
<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 Intel Talk City
</TABLE>
The above advertisers purchased between $10,000 and $106,000 of advertising
in 1999, other than Intel, which purchased $637,500 of advertising.
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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 events that provide prominent
visibility for either ARTISTdirect or 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.
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. We believe that there are more than 150 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, CheckOut.com 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. Some 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.
Some of our competitors have agreed to work together to offer music over
the Internet, and we may face increased competitive pressures as a result. For
example, Universal Music Group and BMG Entertainment recently formed a joint
venture to operate an online music store.
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We believe that we compete primarily on the bases of:
- the popularity, quality and variety of our ARTISTchannels, including our
ability to attract well-known artists;
- 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 measures be taken to safeguard minors
under the age of 13. The FTC promulgated regulations implementing COPPA on
October 21, 1999 which will become effective on April 21, 2000. The principal
COPPA requirement is that individually identifiable information about
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minors under the age of 13 not be collected, used or displayed without first
obtaining informed parental consent that is verifiable in light of present
technology. The FTC final regulations create a "sliding scale" of permissible
methods for obtaining such consent. Consent for internal use of the individually
identifiable information of children under the age of 13 can be obtained through
e-mail plus an additional safeguard, such as confirming consent with a delayed
e-mail, telephone call, or letter. Obtaining verifiable consent from a child's
parent to share that child's information with a third party or enable the child
to publicly distribute the information by, for example, allowing unrestricted
access to a chat room or message board is significantly more burdensome.
The FTC has required that parental consent for such higher risk activities
be verified by more secure methods than e-mail, such as a credit card in
connection with a transaction, print-and-sign forms, toll-free numbers staffed
by trained operators, or digital signatures. Complying with the new requirements
will be costly and will likely dissuade some percentage of our customers. While
we plan to be fully compliant with the FTC requirements by the time they become
effective, our efforts may not be successful. In addition, if implementing a
system to adequately verify parental consent is too expensive, we may not be
able to provide our services to children under the age of 13, which may
adversely affect our business. Requiring parental consent from children under
the age of 13 may drive them to use different Internet sites for their music
needs, which may adversely affect our business. If our methods of obtaining
parental consent are inadequate, we may face litigation with the FTC or
individuals, which would adversely affect our business.
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 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
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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.
OUR WEB SITES FEATURE CONTENT THAT IS COPYRIGHTED BY MULTIPLE THIRD-PARTIES
A copyright gives the owner 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 artists, 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 part or all of an entire song or "webcasting," or the downloading
of an entire song in MP3 or other compressed audio formats. 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 artists for
rights to perform the associated underlying "musical composition." Where we
offer full-length downloads of songs in MP3 or other compressed audio formats,
we seek to obtain the rights to transmit, reproduce and perform the "sound
recording" in writing from the person or entity owning or controlling copyrights
in such "sound recording." With respect to rights in the "musical compositions"
embodied in such "sound recordings" offered for download, ARTISTdirect seeks to
clear rights in musical composition in one of the following three ways:
- a license agreement with the publisher, writer or other owner of such
copyright in the "musical composition";
- a waiver of any fees or royalties that would otherwise be required for
such use; or
- a representation and warranty from the owner of the copyrights in the
"sound recording" that no mechanical royalties are owed to any third
parties.
In the event that the foregoing steps are insufficient to clear rights, or
we otherwise fail to obtain rights, we could be exposed to claims of copyright
infringement, with attendant disruption to our operations and liability
including potential statutory or actual damages and loss of profits attributable
to infringement, plus payment of attorneys' fees and entry of an injunction.
There are other situations, such as a limited 30-second sample of a song
that is "streamed," where we use content without a license because we do not
believe that one is required. However, the laws in this
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area are uncertain, and 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. 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 may be
asserted against us as a result. The law regarding linking and framing remains
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.
DEFAMATION OR CONTRIBUTORY INFRINGEMENT
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 tools to post samples of their
works. Such postings could be misused to post unlicensed copyrighted content of
others. We have obtained limited safe-harbor protection under the
recently-enacted Digital Millennium Copyright Act against liability for
infringing material of which we do not have control and knowledge.
EMPLOYEES
As of December 31, 1999, we had 174 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. In addition, we currently lease approximately 8,200 square feet in
Woodland Hills, California under a sublease which expires in May 2000 and have
leased approximately 1,400 square feet for our New York sales office under a
lease that expires in November 2002. We also lease approximately 2,200 square
feet in Seattle, Washington under a lease that expires in January 2002. To
accommodate our growth, we recently leased approximately 64,000 square feet in
Los Angeles for our principal corporate offices under a lease that expires in
2010. We expect that this additional space will accommodate our needs for the
foreseeable future.
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 December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Marc P. Geiger........................... 37 Chairman of the Board and Chief Executive
Officer
Donald P. Muller......................... 39 President, ARTISTdirect Agency and
Kneeling Elephant Records and Director
Keith K. Yokomoto........................ 37 President, Chief Operating Officer and
Director
Stephen P. Rennie........................ 44 President, The Ultimate Band List
James B. Carroll......................... 44 Executive Vice President, Chief Financial
Officer, and Secretary
Scott M. Blum............................ 32 President, iMusic and Vice President,
Research & Development, ARTISTdirect
Richard B. Colbert....................... 43 Vice President, Sales and Business
Development
Pascal O. Desmarets...................... 38 Vice President, Information Technology
and Operations
Thomas F. Fuelling....................... 37 Vice President, Finance
Robert A. Morse.......................... 37 Vice President, Business Administration
and Treasurer
Jeffrey P. Rea........................... 41 Vice President, Marketing
Nicholas J. Turner....................... 40 Vice President, ARTISTchannels
Carlos E. Cisneros(1).................... 34 Director
Clifford H. Friedman..................... 40 Director
Dara Khosrowshahi(2)..................... 30 Director
Stephen M. Krupa......................... 35 Director
Allen D. Lenard.......................... 57 Director
Rick Rubin............................... 36 Director
</TABLE>
- ---------------
(1) Appointed in January 2000.
(2) Appointed in March 2000.
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.
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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.
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. Mr. Carroll has served as our Secretary since
July 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.
Carlos E. Cisneros has served as a director since January 2000. In October
1996, Mr. Cisneros founded and became Chief Executive Officer of the Cisneros
Television Group, a member of Ibero-American Media Partners, II, Ltd. In January
1998, Mr. Cisneros was named Vice-Chairman of Ibero-American Media Partners, II,
Ltd., an investment fund jointly owned by the Cisneros Group of Companies and
Hicks, Muse, Tate & Furst Incorporated. From June 1993 to October 1996, Mr.
Cisneros was Vice-President of New Business Development at Venevision
International. Mr. Cisneros serves on the board as a representative of
Meadowlane Enterprises, Ltd., an affiliate of Cisneros Television Group. Mr.
Cisneros also serves on the boards of El Sitio, Inc., OneSoft Corporation and
Playboy TV International, LLC. Mr. Cisneros received his B.A. in Political
Science from American University in Washington, D.C.
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.
Dara Khosrowshahi has served as a director since March 2000. Since October
1999, Mr. Khosrowshahi has been President of USANetworks Interactive, a division
of USAi. From February 1998 to October 1999, Mr. Khosrowshahi was the Vice
President of Strategic Planning for USAi and USANi LLC. From 1991 to 1998, he
was at Allen & Company Incorporated, an investment bank, where he was a Vice
President from 1995 to 1996 and a director from 1996 to 1998. Mr. Khosrowshahi
also serves as a director of Ticketmaster Online-CitySearch, Inc., HRN and
several private companies. Mr. Khosrowshahi received his B.S. in Bioelectrical
Engineering from Brown 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
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of Chase Capital Partners. Mr. Krupa is currently a director of several private
Internet companies. From February 1995 to July 1998, Mr. Krupa held various
positions at Wasserstein Perella & Co., most recently as a Vice President 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.
Richard B. Colbert has served as our Vice President of Sales and Business
Development since September 1999. From October 1998 to September 1999, Mr.
Colbert served as President of Northern NOMA Corp., providing consulting
services to internet and broadcasting companies. From 1983 to 1998, Mr. Colbert
was President of IntelliVentures, Inc., a producer and distributor of special
interest video programming. From 1989 to 1993, Mr. Colbert was Senior Executive
Vice President of ITC Domestic Television, a distributor of first-run television
programming.
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 Engineering and
Management from the Catholic University of Louvain, Belgium and his M.B.A. from
the University of Southern California.
Thomas F. Fuelling has served as our Vice President, Finance since October
1999. From April 1998 to September 1999, Mr. Fuelling was Vice President,
Finance and CFO of Sega GameWorks, LLC. From December 1995 to March 1998, Mr.
Fuelling was Executive Vice President, Finance and CFO of Village Roadshow
Pictures. From March 1994 to November 1995, Mr. Fuelling was Vice President and
Controller of The Samuel Goldwyn Company. From 1984 to 1994, Mr. Fuelling was a
certified public accountant with Price Waterhouse LLP in its Entertainment
practice unit. Mr. Fuelling received his B.S. in Business Administration from
the University of Southern California and his Master of Management from
Northwestern 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
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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.
Jeffrey P. Rea has served as our Vice President of Marketing since October
1999. From October 1998 to July 1999, Mr. Rea consulted as acting head of
marketing for Avanti Corporation. From March 1997 to October 1998, he was Vice
President of Sales and Marketing for Aramark Corporation's publishing
distribution operation. Between 1992 and 1996, Mr. Rea served in international
marketing and product development roles with Whirlpool Corporation. From 1989 to
1993, Mr. Rea served as Brand Director, Miller Lite and Director, New Business
Development for Miller Brewing Company. From 1983 to 1989, Mr. Rea served in a
variety of marketing and business analysis roles at Frito-Lay, Inc. Mr. Rea
received his B.A. in Business Administration from Washington State University
and his Master of Management from Northwestern University.
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.
BOARD COMPOSITION
Each of our directors was appointed to the Board of Directors pursuant to
the stockholders agreement described on page 80. Although the provisions of the
stockholders agreement regarding appointment of directors will terminate upon
the closing of the offering, our existing directors, officers and 5%
stockholders will hold approximately 74.6% of our outstanding voting stock
immediately after the offering. As a result, they will be able to re-elect these
directors. Carlos Cisneros is affiliated with Cisneros Television Group, Inc.,
which will beneficially own approximately 6.1% of our common stock after this
offering and Clifford Friedman is affiliated with Constellation Venture Capital,
L.P., which will beneficially own approximately 7.4% of our common stock after
this offering.
Upon the closing of this offering, our Board of Directors 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 of Directors. The Class I
directors will be Keith Yokomoto, Carlos Cisneros and Rick Rubin; the Class II
directors will be Donald Muller, Allen Lenard and Stephen Krupa; and the Class
III directors will be Marc Geiger and Clifford Friedman. 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.
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. Friedman, 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. Before 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
Employee Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
in the fiscal year ended December 31, 1999 for our Chief Executive Officer for
that year and for our four other most highly compensated executive officers
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ACCRUAL (EARNED) BASIS ------------
----------------------------------- 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................. 1999 $150,000 $100,000 4,715 -- --
Chairman and Chief Executive
Officer
Donald P. Muller............... 1999 150,000 100,000 4,508 -- --
President, ARTISTdirect
Agency
and
Kneeling Elephant Records
Keith K. Yokomoto.............. 1999 150,000 50,000 6,011 -- --
President, Chief Operating
Officer and Director
Stephen P. Rennie.............. 1999 137,500 37,500 -- -- --
President, UBL
James B. Carroll............... 1999 81,250 29,167 -- -- --
Vice President and Chief
Financial Officer
</TABLE>
- -------------------------
(1) Does not include deferred compensation of up to $200,000. The actual amount
of such deferred compensation is not determinable as of the date of this
prospectus. For more information on the
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deferred compensation arrangement, please see "Related Party
Transactions -- Deferred Compensation Agreement" on page 79.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to James Carroll, our chief financial officer, in 1999, including the
potential realizable value over the seven year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock. No other options were granted to any of our other named executive
officers in 1999.
<TABLE>
<CAPTION>
OPTIONS GRANTS IN 1999
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM($)
OPTIONS EMPLOYEES IN PER-SHARE EXPIRATION ------------------------
NAME GRANTED(#) 1999(%) ($) DATE 5% 10%
- ---- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James B. Carroll..... 459,184 13.3% $3.60 5/25/06 $5,454,234 $8,189,954
</TABLE>
The potential realizable value is calculated based on the seven year term
of the option at its time of grant. It is calculated based on the assumption
that the assumed initial public offering price of $11.00 per share appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term for
the appreciated stock price. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock and overall stock market
conditions. The amounts reflected in the table may not necessarily be achieved.
In addition, in March 2000, we granted Mr. Carroll an option to purchase 226,084
shares of our common stock at an exercise price equal to the initial offering
price of the common stock offered in this offering. Upon the closing of this
offering, we will also grant Keith Yokomoto and Steve Rennie options to purchase
our common stock. Please see "Related Party Transactions -- Options and Stock
Issued to James Carroll" on page 79 and "Related Party
Transactions -- Equity-Related Transactions Between Officers and Directors" on
page 81 for more information on the option grants to Messrs. Carroll, Yokomoto
and Rennie.
YEAR-END OPTION VALUES
The following table sets forth the number of shares of common stock
underlying the unexercised options held by James Carroll, our chief financial
officer, at the end of 1999. No other named executive officer held options at
the end of 1999. No options were exercised during 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James B. Carroll...................... 86,097 373,087 $637,118 $2,760,844
</TABLE>
There was no public trading market for our common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the assumed
initial public offering price of $11.00 per share, less the applicable exercise
price per share, multiplied by the number of shares underlying such options.
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<PAGE> 72
BENEFIT PLANS
STOCK OPTION PLANS.
Introduction. We maintain the following three separate stock option plans:
- The 1999 Employee Stock Option Plan under which we have reserved
6,500,000 shares of our common stock for issuance to our employees,
non-employee members of our board of directors and consultants. This
share reserve includes an increase of 1,250,000 shares which was approved
by our board in March 2000 and which will be submitted to our
stockholders for approval prior to the consummation of this offering.
This share reserve will also automatically increase on the first trading
day in January each calendar year, beginning 2001, by an amount equal to
two percent (2%) 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 875,000 shares. As
of December 31, 1999, options for 3,745,780 shares of our common stock
were outstanding under this plan, 58,750 options had been exercised, and
1,445,470 shares remained available for future option grant;
- The 1999 Artist Stock Option Plan under which we have reserved an
additional 4,000,000 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 two percent (2%) 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 875,000 shares. As of December 31, 1999, options for
2,146,144 shares of our common stock were outstanding under this plan,
117,916 options had been exercised, and 1,735,939 shares remained
available for future option grant; and
- The 1999 Artist and Artist Advisor Stock Option Plan under which we have
reserved 1,550,000 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 includes an increase of
300,000 shares which was approved by our board in March 2000 and which
will be submitted to our stockholders for approval prior to the
consummation of this offering. This share reserve will also automatically
increase on the first trading day in January each calendar year,
beginning 2001, by an amount equal to one percent (1%) 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 375,000 shares. As of December 31, 1999, options for
998,625 shares of our common stock were outstanding under this plan, no
options had been exercised, and 251,375 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. 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 through a same-day sale
program pursuant to which the purchased shares are immediately sold
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<PAGE> 73
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 October 13, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN.
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board on October 13, 1999 and approved by the stockholders in October 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. 500,000 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 2000, by an amount equal to
one percent (1%) 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 1,000,000 shares.
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
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<PAGE> 74
this offering is signed and will end on the last business day in April 2002. The
next offering period will start on the first business day in May 2002, 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 750 shares on any
purchase date, and not more than 250,000 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, 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:
Marc Geiger
In July 1998, we entered into an employment agreement with Marc Geiger, our
Chairman and Chief Executive Officer which provides for the following:
- Mr. Geiger is paid an annual salary of $150,000 and a guaranteed annual
bonus of $100,000.
- The initial term of his employment expires July 27, 2001, with automatic
extensions for successive one-year periods.
- The 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," such as the commission of a felony, material dishonesty
against ARTISTdirect, or gross negligence in the performance of
duties,
(3) due to Mr. Geiger's death, or
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<PAGE> 75
(4) if he terminates his employment for "good reason," such as an
adverse change of duties, a reassignment of location, or a material
breach of our obligations to him.
- If Mr. Geiger's employment is terminated for cause or disability, or he
resigns for other than good reasons, he is prohibited, for a period of
the later of one year after the early termination of his employment, or
the expiration of the term of his employment agreement, from competing
with ARTISTdirect or attempting to hire any ARTISTdirect employee.
Donald Muller
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, which provides for the following:
- Mr. Muller is paid an annual salary of $150,000 and a guaranteed annual
bonus of $100,000.
- The initial term of the agreement expires July 27, 2001, with automatic
extensions for successive one-year periods.
- The 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," such as the commission of a felony, material
dishonesty against ARTISTdirect, or gross negligence in the performance of
duties,
(3) due to Mr. Muller's death, or
(4) if he terminates his employment for "good reason," such as an
adverse change of duties, a reassignment of location, or a material breach
of our obligations to him.
- If Mr. Muller's employment is terminated for cause or disability or
resigns for other than good reasons, he is prohibited, for a period of
the later of one year after the early termination of his employment, or
the expiration of the term of his employment agreement, from competing
with ARTISTdirect or attempting to hire any ARTISTdirect employee.
Keith Yokomoto
In January 1998, we entered into an employment agreement with Keith
Yokomoto, our President and Chief Operating Officer, which provides for the
following:
- Mr. Yokomoto was 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 the agreement expires December 31, 2000, and
ARTISTdirect has an option to extend the term for two additional one-year
periods.
- The 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," such as the commission of a felony,
material dishonesty against ARTISTdirect, or gross negligence in the
performance of duties, or upon his death.
Mr. Yokomoto also signed a separate agreement concurrently with his
employment agreement which prohibits him from competing with ARTISTdirect or
attempting to hire any ARTISTdirect
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<PAGE> 76
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.
James Carroll
In May 1999, we entered into an employment agreement with James Carroll,
our Chief Financial Officer, which provides for the following:
- Mr. Carroll is paid an annual salary of $150,000 and a guaranteed annual
bonus of $50,000.
- The initial term of the agreement expires May 23, 2001, and ARTISTdirect
has an option to extend the term for one additional year.
- The employment agreement provides that if Mr. Carroll's employment is
terminated other than due to a disability, death or for "cause," such as
the commission of a felony, material dishonesty against ARTISTdirect, or
gross negligence in the performance of duties, he will be paid his base
salary for the lesser of:
(1) six months after the date of termination, or
(2) the remainder of the agreement.
- If Mr. Carroll is terminated for cause, he is prohibited from competing
with ARTISTdirect until the date the agreement would otherwise have
expired. Mr. Carroll is also prohibited from attempting to hire any
ARTISTdirect employee for one year following the later of:
(1) the date the agreement expires, or
(2) the actual date of termination.
In addition, please see "-- Options and Stock Issued to James Carroll" on
page 79 for information on stock and options issued to Mr. Carroll in connection
with his employment.
Steve Rennie
In April 1998, UBL, LLC entered into an employment agreement with Steve
Rennie, President of the Ultimate Band List, which provides for the following:
- 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 the agreement expires March 31, 2001.
- If Mr. Rennie's employment is terminated other than due to disability,
death, or for cause, such as the commission of a felony, material
dishonesty against ARTISTdirect, or gross negligence in the performance
of duties, 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
(2) the remaining period of the term.
In June 1998, Mr. Rennie also 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.
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<PAGE> 77
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 indemnification for
liabilities, including reimbursement for expenses incurred, arising under the
Securities Act. This indemnification may, however, be unenforceable as against
public policy.
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 very limited exceptions; and
- the rights conferred in our amended and restated bylaws are not
exclusive.
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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RELATED PARTY 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. Since its inception, ADNM has been 99% owned by
ARTISTdirect LLC and 1% owned by an entity owned by the members of ARTISTdirect,
LLC. From UBL, LLC's inception in June 1997 until May 1999, when ADNM exchanged
its interest in UBL, LLC for interests in ARTISTdirect LLC, ADNM owned
approximately 49% of the membership interests in UBL, LLC, and controlled and
funded the operations of the UBL Web site.
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<PAGE> 79
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 PURCHASE
PURCHASER PREFERRED 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>
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 SERIES B PURCHASE
PURCHASER PREFERRED UNITS PREFERRED 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> 80
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
$85,000 in exchange for accrued and unpaid preferred returns.
The preferred and common units of ARTISTdirect, LLC were exchanged for
preferred and common stock in connection with the merger of ARTISTdirect, LLC
into ARTISTdirect, Inc. on October 6, 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, approximately 50,000 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 84 for
information relating to the beneficial ownership of such shares.
ISSUANCES OF ARTISTDIRECT, INC. SERIES C PREFERRED STOCK
Between December 1999 and January 2000, ARTISTdirect, Inc. sold an
aggregate of 7,000,291 of its Series C preferred stock at a purchase price of
$13.928 per share to the following purchasers:
<TABLE>
<CAPTION>
SHARES OF
SERIES C AGGREGATE
PREFERRED PURCHASE
PURCHASER STOCK PRICE
--------- --------- -----------
<S> <C> <C>
Universal Music Group, Inc.................................. 2,153,935 $30,000,000
Cisneros Television Group(1)................................ 1,435,957 20,000,000
Sony Music, a Group of Sony Music Entertainment Inc......... 1,076,968 15,000,000
BMG Music d/b/a BMG Entertainment........................... 1,076,968 15,000,000
Time Warner Inc.(2)......................................... 1,005,170 14,000,000
Other purchasers............................................ 251,293 3,500,000
</TABLE>
- -------------------------
(1) Shares are actually held by Meadowlane Enterprises Ltd., an affiliate of
Cisneros Television Group.
(2) Shares are actually held by Art-Dir Holdings Inc., an affiliate of Time
Warner Inc.
Mr. Cisneros, one of our directors, is the Chairman and Chief Executive
Officer of the Cisneros Television Group. Universal Music Group, Inc. has the
right to appoint a director pursuant to the stockholders agreement described on
page 80. In addition, each of the Series C preferred stock investors entered
into strategic agreements with us in connection with their purchase of Series C
preferred stock. See "Business -- Strategic Relationships" on page 46 for more
information on these agreements. The actual number of shares of common stock to
be issued upon conversion of Series C preferred stock may be adjusted based upon
the initial public offering price. The actual number of shares into which each
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<PAGE> 81
share of Series C preferred stock will convert is equal to the ratio determined
by dividing $13.928 by 80% of the initial offering price. Assuming an initial
offering price of $11.00 per share, each share of Series C preferred stock will
convert into approximately 1.5827 shares of our common stock.
OPTIONS AND STOCK 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.
At the time Mr. Carroll's second option was granted, the option was
initially not exercisable and became exercisable as follows:
- One-half of the 114,796 shares underlying Mr. Carroll's second option
would become exercisable upon the completion of an offering.
- The remaining shares underlying this option would become exercisable if
the closing price of our common stock on any two or more trading days
exceeds 150% of the initial offering price during the one month period
following the closing of this offering. The remaining shares would also
become exercisable immediately upon a change of control which occurs
before May 24, 2002, provided that the valuation of ARTISTdirect at the
change of control equaled or exceeded $300 million. In February 2000, we
accelerated the exercisability of this option so that it immediately
became exercisable for all 114,796 of the shares subject to the option.
On September 23, 1999, James Carroll purchased 83,333 shares of common
stock from Don Muller and 27,778 shares of common stock from Keith Yokomoto for
$300,000 and $100,000, respectively.
On March 6, 2000, the board approved an option grant to Mr. Carroll which
will become effective at the time the initial public offering price for this
offering is determined. The option grant will be for 226,084 shares, will have
an exercise price equal to the initial public offering price and will become
exercisable with respect to one-third of the option shares on each anniversary
of the effectiveness of the option grant.
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 issued 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 bears
interest at a rate of 5.98% per annum and will become due and payable upon the
closing of this offering.
DEFERRED COMPENSATION AGREEMENT
In April 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 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
- April 1, 2005.
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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. Mr. Blum has notified us that he has decided not
to exercise his option. Accordingly, 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
We have entered into a registration rights agreement with Rick Rubin, one
of our directors, Marc Geiger, our Chairman of the Board and Chief Executive
Officer, Donald Muller, President of ARTISTdirect Agency and Kneeling Elephant
Records and one of our directors, and the holders of our Series A, Series B and
Series C 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 ten years after the closing date of this
offering.
STOCKHOLDERS AGREEMENT
We have entered into a stockholders agreement with a number of our
stockholders with respect to their rights, restrictions and obligations as
stockholders. These stockholders include several of our officers and directors
and their affiliates, including Marc Geiger, Donald Muller, Keith Yokomoto, L&G
Associates One, Steve Rennie, James Carroll, Robert Morse, Constellation Venture
Capital, L.P., Psilos Group Partners, L.P., Rick Rubin, Scott Blum, Chase
Venture Capital Associates, L.P., Universal Music Group, Inc., Meadowlane
Enterprises, Ltd., Sony Music, Art-Dir Holdings Inc., Maverick Recording
Company, BMG Music and Yahoo!. Although most of the provisions of this agreement
will terminate upon the consummation of this offering, the following provisions
will remain in effect:
- Private Transfer. If Messrs. Geiger or Muller, or any of their
transferees, proposes to transfer five percent or more of our outstanding
capital stock in a single private transaction or series of private transactions,
each of the parties to the stockholders agreement will be allowed to participate
in the transaction;
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- Mandatory redemption of Elson's Common Stock. William Elson has notified
us that he intends to exercise the option he received in connection with the
settlement agreement described in "-- Settlement Agreement" on page 83. When Mr.
Elson exercises this option, we will be required to automatically redeem an
amount of shares from each of Messrs. Geiger and Muller equal to 50% of the
number of shares of Common Stock issued to Elson pursuant to the option. The
price per share payable to Messrs. Geiger and Muller shall be equal to the price
per share paid by Mr. Elson; and
- Errors and omissions insurance. We are required to obtain and maintain an
errors and omissions insurance policy covering our officers and directors with a
stated policy limit of no less than $5,000,000. Rick Rubin, one of our
directors, Constellation Ventures (BVI), Inc., CCP/Psilos ARTISTdirect, LLC,
Chase Venture Capital Associates, L.P. Flatiron Fund 1998/99, LLC, Universal
Music Group, Inc., Meadowlane Enterprises, Ltd., Sony Music, Art-Dir Holdings
Inc., Maverick Recording Company, BMG Music and Yahoo! shall be additional named
insureds on the policy as long as such coverage is reasonably available.
PERSONAL GUARANTEES BY EXECUTIVE OFFICERS AND DIRECTORS
In February 1999, Marc Geiger, our Chairman of the Board and Chief
Executive Officer, and Donald Muller, President of ARTISTdirect Agency and
Kneeling Elephant Records and one of our directors, personally guaranteed
obligations by us under our $750,000 credit facility with Republic Bank
California, N.A., and obligations by UBL under the $1,250,000 credit facility
with Republic Bank. In November 1999, the $1,250,000 credit facility was
increased to $4,250,000 and James Carroll, our Chief Financial Officer, was
added as one of the personal guarantors on both this facility and the $750,000
facility. Rick Rubin, one of our directors, also personally guaranteed the
obligations by UBL under the $4,250,000 credit facility. As of the date of this
prospectus, no amounts were outstanding under the credit facilities.
In connection with the personal guarantees by Messrs. Geiger and Muller for
the $750,000 line of credit, ARTISTdirect, LLC, ARTISTdirect Holdings, L.L.C.,
ARTISTdirect Agency, LLC, ARTISTdirect New Media, LLC, Kneeling Elephant
Records, Keith Yokomoto, our President, Chief Operating Officer and one of our
directors, L&G Associates One, Stephen P. Rennie, President of The Ultimate Band
List, Robert A. Morse, our Vice President of Business Administration and
Treasurer, Constellation Venture Capital, L.P., Constellation Ventures (BVI),
Inc., Psilos Group Partners, L.P., DreamMedia Internet Ventures, LLC, Carl
Kawabe and CCP/Psilos ARTISTdirect, LLC, each agreed to reimburse Messrs. Geiger
and Muller on demand for any payment they make pursuant to the guarantees.
Additionally, Messrs. Geiger and Muller each agreed to pay the other's
proportionate share of their obligation if either one of them does not receive
the full amount of reimbursement described above.
In connection with the personal guarantees by Messrs. Geiger, Muller,
Carroll and Rubin for the $4,250,000 line of credit, ARTISTdirect, LLC,
ARTISTdirect Holdings, L.L.C., ARTISTdirect Agency, LLC, ARTISTdirect New Media,
LLC, Kneeling Elephant Records, American Recordings, Inc., Constellation Venture
Capital, L.P., Constellation Ventures (BVI), Inc., Psilos Group Partners, L.P.
DreamMedia Internet Ventures, LLC, Carl Kawabe and CCP/Psilos ARTISTdirect, LLC,
each agreed to reimburse Messrs. Geiger, Muller, Carroll and Rubin on demand for
any payment they make pursuant to the guarantees. Additionally, Messrs. Geiger,
Muller, Carroll and Rubin each agreed to pay each other's proportionate share of
their obligation if any one of them does not receive the full amount of
reimbursement described above. Rick Rubin, one of our directors, is President of
American Recordings, Inc.
EQUITY-RELATED TRANSACTIONS BETWEEN OFFICERS AND DIRECTORS
In March 2000, Marc Geiger, Donald Muller and Rick Rubin agreed to enter
into a series of transactions which will effectively transfer to Keith Yokomoto,
Steve Rennie and L&G Associates One the economic benefit of the increase in
value over $13.928 per share with respect to an aggregate of 1,234,386 shares of
our common stock, referred to below as the "Transferred Shares". The purpose of
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these transactions was to provide additional equity-based incentives to Messrs.
Yokomoto and Rennie and to provide both equity-based incentives and compensation
for past services to L&G Associates One.
To effect these transactions, Rick Rubin contributed 411,462 shares of his
common stock to ARTISTdirect Investors, LLC in exchange for membership interests
in that entity. ARTISTdirect Investors, LLC is the entity through which Messrs.
Geiger, Muller, Yokomoto, Rennie, and L&G Associates One currently hold their
shares. ARTISTdirect Investors, LLC then granted additional membership interests
to Messrs. Yokomoto and Rennie and L&G Associates One in a transaction that only
diluted the membership interests of Messrs. Geiger, Muller and Rubin. These
additional membership interests, which we refer to as the "Additional
Interests", do not entitle Messrs. Yokomoto or Rennie or L&G Associates One to
any share of the current capital value of ARTISTdirect Investors, LLC. Instead,
the Additional Interests entitle Messrs. Yokomoto and Rennie and L&G Associates
One to any increase in the value of 696,831, 238,913 and 298,642 shares,
respectively, of our common stock held by ARTISTdirect Investors, LLC over
$13.928 per share. Any increase in value will be determined based upon the
closing price of our common stock on the third day of trading, which we refer to
below as the "Closing Price".
Upon closing of this offering, ARTISTdirect Investors, LLC will distribute
the shares of common stock it holds to its members and then dissolve. The number
of shares distributed to each member will be determined based upon the Closing
Price. If the Closing Price does not exceed $13.928, Messrs. Yokomoto and Rennie
and L&G Associates One will not receive any additional shares of common stock
from ARTISTdirect Investors, LLC as a result of its issuance of the Additional
Interests.
In addition to any shares of common stock that they receive from
ARTISTdirect Investors, LLC, upon the closing of this offering, the Company will
issue each of Messrs. Yokomoto and Rennie and L&G Associates One an option to
purchase shares of the Company's common stock. These options will have an
exercise price equal to the Closing Price. The options of Messrs. Yokomoto and
Rennie and L&G Associate One will entitle them to purchase a number of shares
equal to the difference between 696,831, 238,913 and 298,642 and the number of
shares, if any, that ARTISTdirect Investors, LLC distributes to them in respect
of the additional interests. These options have seven year terms. The options to
be granted to Messrs. Yokomoto and Rennie will be granted under our 1999
Employee Stock Plan and will be exercisable at any time following the one year
anniversary of their grant, unless the applicable optionee voluntarily
terminates his employment prior to that date. In this event, that optionee's
option will terminate. The options granted to Messrs. Yokomoto and Rennie also
become immediately exercisable upon a change of control, or if the optionee
dies, becomes disabled or is terminated by us without cause. The option to be
granted to L&G Associates One will be granted under our 1999 Artist and Artist
Advisor Plan and will be immediately exercisable in full.
Each of Messrs. Rubin, Geiger and Muller have agreed that, upon exercise of
any of these options, they will sell to us, and we will redeem from them, the
same number of aggregate shares that we are required to issue in connection with
the exercise of the option. The price that we will pay Messrs. Rubin, Geiger and
Muller for their shares will be equal to the exercise price that we receive from
the optionee. Each of Messrs. Rubin, Geiger and Muller is obligated to sell us
one third of the number of shares issued by us upon the exercise. To effect this
agreement, Messrs. Rubin, Geiger and Muller have irrevocably authorized us to
hold in escrow share certificates representing the maximum number of shares of
common stock that may be acquired upon exercise of these options.
RETURN OF CAPITAL
In August 1997 and August 1998, we paid a total of $100,000 to Marc Geiger,
our Chairman of the Board and Chief Executive Officer, as a return of capital
that Mr. Geiger previously contributed to us.
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PAYMENTS TO LEGAL COUNSEL
In 1998 and 1999, we paid Lenard & Gonzalez LLP $350,000 and $1,010,000,
respectively, for legal services provided to us. Allen Lenard, one of our
directors, is Managing Partner of Lenard & Gonzalez LLP.
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.
Mr. Elson has notified us that he will exercise this option. 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
Except as indicated in footnote (1), the following table sets forth
information with respect to beneficial ownership of our common stock as of
December 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 own 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
NUMBER OF SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED(1) OWNED
------------------------ ----------------------
BEFORE AFTER BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OFFERING OFFERING(2) OFFERING OFFERING(2)
------------------------------------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Entities affiliated with Constellation Venture
Capital, L.P.(3)................................. 2,728,907 2,728,907 8.4% 7.3%
575 Lexington Avenue
New York, New York 10022
Entities affiliated with Chase Capital
Partners(4)...................................... 1,512,238 1,512,238 4.7 4.1
380 Madison Avenue, 12th Floor
New York, New York 10017
Universal Music Group, Inc.(5)..................... 3,409,091 3,409,091 10.6 9.1
10 Universal City Plaza
Universal City, California 91608
Entity affiliated with Cisneros Television Group,
Inc.(6).......................................... 2,272,727 2,272,727 7.0 6.1
404 Washington Avenue
Miami Beach, Florida 33139
BMG Music d/b/a BMG Entertainment(7)............... 1,704,547 1,704,547 5.3 4.6
1540 Broadway
New York, New York 10036
Sony Music, a Group of Sony Music
Entertainment(7)................................. 1,704,547 1,704,547 5.3 4.6
550 Madison Avenue
New York, New York 10022
Marc P. Geiger(8)(9)............................... 3,335,820 3,393,581 10.3 9.1
Donald P. Muller(8)(9)............................. 3,252,486 3,308,800 10.0 8.9
Keith K. Yokomoto(8)(10)........................... 1,955,324 1,923,837 6.1 5.2
Stephen P. Rennie(8)............................... 504,352 448,714 1.6 1.2
James B. Carroll(8)(11)............................ 312,004 312,456 1.0 0.8
Rick Rubin(8)...................................... 3,620,219 3,620,219 11.2 9.7
c/o Alan S. Halfon & Company
9595 Wilshire Boulevard, Suite 505
Beverly Hills, CA 90212
Clifford H. Friedman(3)............................ 2,728,907 2,728,907 8.4 7.3
Carlos E. Cisneros(6).............................. 2,272,727 2,272,727 7.0 6.1
Dara Khosrowshahi.................................. -- -- -- --
Stephen Krupa(12).................................. 1,288,577 1,288,577 4.0 3.5
Allen D. Lenard(8)(13)............................. 378,264 364,769 1.2 1.0
1900 Avenue of the Stars
Twenty-Fifth Floor
Los Angeles, California 90067
All directors and executive officers as a group (11
persons)(14)..................................... 19,648,680 19,662,587 60.8 52.7
</TABLE>
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- -------------------------
(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 December
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 before the offering is based on 32,296,483 shares of common stock
outstanding as of December 31, 1999, after giving effect to the issuance of
1,094,917 shares of Series C preferred stock issued in January 2000, and
the conversion of all outstanding shares of the preferred stock. Percentage
of beneficial ownership after the offering is based on 37,296,483 shares of
common stock issued and outstanding after completion of this offering.
These numbers assume the conversion of each share of Series C preferred
stock into 1.5827 shares of common stock, based on an initial public
offering price of $11.00. In addition, these numbers do not reflect the
issuance of an aggregate of approximately 100,000 shares of common stock as
accrued dividends on preferred stock, based on an initial offering price of
$11.00 per share.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes (a) 1,967,546 shares held by Constellation Venture Capital, L.P.;
and (b) 759,361 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) 515,803 shares held by DreamMedia Internet Ventures, LLC and
(b) 68,347 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 1,251,507 shares held by Chase Venture Capital Associates, L.P.
and 260,731 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 1,059,018 shares of Series C preferred stock issued in December
1999 and 1,094,917 shares of Series C preferred stock issued in January
2000, all of which will be automatically converted into an aggregate of
3,409,091 shares of common stock upon the consummation of this offering,
based on an initial public offering price of $11.00.
(6) Include 1,435,957 shares of Series C preferred stock held by Meadowlane
Enterprises Ltd., which will be converted into 2,272,727 shares of common
stock upon the consummation of this offering, based on an initial offering
price of $11.00 per share. An affiliate of Cisneros Television Group owns
all of the equity and voting interests in Meadowlane Enterprises Ltd. and
as such, Cisneros Television Group may be deemed to beneficially own such
shares. Mr. Cisneros is the Chairman
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and Chief Executive Officer of Cisneros Television Group and may be deemed
to exercise voting and investment power over such shares. Mr. Cisneros
disclaims beneficial ownership of such shares.
(7) Includes 1,076,968 shares of Series C preferred stock which will be
automatically converted into 1,704,547 shares of common stock upon the
consummation of this offering, based on an initial offering price of $11.00
per share.
(8) Includes shares of common stock which are 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 formed
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 will be
dissolved. ARTISTdirect Investors, LLC's operating agreement provides 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 is entitled to vote is different from the number of
shares each member will receive after the dissolution of ARTISTdirect
Investors, LLC. The actual number of shares of our common stock held by
ARTISTdirect Investors, LLC that each stockholder will receive upon
dissolution and is currently entitled to vote, is as follows:
<TABLE>
<CAPTION>
SHARES ENTITLED ADJUSTMENT OF SHARES TOTAL SHARES
STOCKHOLDER/MEMBER TO VOTE UPON DISTRIBUTION UPON DISTRIBUTION
------------------ ---------------- -------------------- -----------------
<S> <C> <C> <C>
Rick Rubin..................... 411,462 411,462
Marc P. Geiger................. 3,335,820 57,761 3,393,581
Donald P. Muller............... 3,252,486 56,314 3,308,800
Keith K. Yokomoto.............. 1,955,324 (31,487) 1,923,837
James B. Carroll............... 111,111 452 111,563
Stephen P. Rennie.............. 504,352 (55,638) 448,714
Robert A. Morse................ 126,088 (13,907) 112,181
L&G Associates One............. 378,264 (13,495) 364,769
</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 an adjusted number of shares that will be
determined based on the closing bid price of the stock on the trading day
immediately prior to the consummation of this offering. The number of
shares set forth under "Total Shares Upon Distribution" for each of Keith
Yokomoto, Stephen Rennie and L&G Associates One above does not reflect the
immediately exercisable options that will be issued to these stockholders
upon the dissolution of ARTISTdirect Investors, LLC. The number of shares
underlying these options will be 696,831 for Mr. Yokomoto, 238,913 for Mr.
Rennie, and 298,642 for L&G Associates One, in each case, based on an
assumed closing bid price equal to the assumed initial offering price of
$11.00. In addition, the number of shares set forth under "Total Shares
Upon Distribution" for each of Marc Geiger, Donald Muller and Rick Rubin
have not been adjusted to reflect the potential redemption of up to 411,462
shares from each of these stockholders upon the exercise of the options to
Keith Yokomoto, Stephen Rennie and L&G Associates One. Please see "Related
Party Transactions -- Equity-Related Transactions Between Officers and
Directors" on page 81 for more information on the transactions between the
members of ARTISTdirect Investors LLC.
(9) Does not reflect the effect of the transfer of the 100,000 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 "Related Party
Transactions -- Settlement Agreement" on page 83 for more information on
this transaction.
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(10) Includes (a) 361,111 shares held by Keith Yokomoto as trustee of the Geiger
Children's Trust and (b) 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.
Mr. Yokomoto disclaims beneficial ownership of these shares.
(11) Includes (a) the shares set forth in note (8), (b) 200,893 shares subject
to options which are exercisable within 60 days of December 31, 1999.
(12) Includes (a) 775,519 shares held by Psilos Group Partners, L.P.; (b)
440,325 shares held by CCP/ Psilos ARTISTdirect, LLC; and (c) 72,733 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.
(13) Represents all of the shares held by L&G Associates One. Mr. Lenard is
General Partner of Lenard Holdings, L.P., which is the Managing L&G
Associates One, and as such, may be 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.
(14) Includes the information set forth in notes 3, 6, and 8-13 above.
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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 December 31, 1999, there will be 37,296,983 outstanding shares
of common stock, outstanding options to purchase 6,890,549 shares of common
stock and outstanding warrants to purchase 1,244,394 shares of common stock.
This number assumes the conversion of each share of Series C preferred stock
into 1.5827 shares of common stock, based on an initial public offering price of
$11.00. If the initial public offering price is greater than or equal to $17.41,
then each share of Series C preferred stock will convert into one share of
common stock.
COMMON STOCK
As of December 31, 1999, there were 32,296,483 shares of common stock
outstanding and held of record by 44 stockholders, assuming conversion of all
shares of preferred stock into common stock and including the issuance of
1,094,917 shares of Series C preferred stock in January 2000. Based on the
number of shares outstanding as of that date and giving effect to the issuance
of the 5,000,000 shares of common stock offered by us hereby, there will be
37,296,483 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,
Series B and Series C 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 in a "business combination"
involving 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
There are provisions in our amended and restated certificate of
incorporation and our amended and restated bylaws, which will become effective
upon the closing of this offering, that 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 the types of transactions which may involve an actual or
threatened change in control of ARTISTdirect;
- discourage 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 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 some 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 52.3% 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, Series B and Series C
preferred stock 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 "Related Party Transactions -- Registration Rights Agreement" on page
80 for more information on these rights.
WARRANTS
As of December 31, 1999, Giant Merchandising and Winterland Concessions
held outstanding warrants to purchase 562,500 and 342,640 shares of our common
stock, respectively, at a price of $4.00 per share, and Yahoo! held a warrant to
purchase 169,627 shares of our common stock at a price of $13.928 per share, and
169,627 shares of our common stock at a price of $11.00 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 shares or options to
purchase shares of our common stock to our employees and to artists and their
managers and advisors. Due to the nature of the persons who received these
shares and options in addition to our employees and the total number of shares
and options issued to them and our employees, the issuance of these shares and
options did not comply with the requirements of Rule 701 under the Securities
Act, or any other available exemptions from the registration requirements of
Section 5 of the Securities Act, and may not have qualified for any exemption
from qualification under California securities laws either. Beginning
approximately 180 days after the date of this prospectus, we intend to make a
rescission offer to all these persons pursuant to a registration statement filed
under the Securities Act and pursuant to California securities law.
In the rescission offer, we will offer to repurchase from these persons all
shares issued directly to these persons or pursuant to option exercises by these
persons before the expiration of the rescission offer registration statement, at
the purchase or exercise price paid for these shares, plus interest at the rate
of 10% per year from the date of issuance until the rescission offer expires. To
comply with California securities law, we will also offer to repurchase all
unexercised options issued to such persons at 20% of the option exercise price
multiplied by the number of shares subject to such options, plus interest at the
rate of 10% per year from the date of issuance until the rescission offer
expires. The rescission offer will expire approximately 30 days after the
effectiveness of the rescission offer registration statement.
We could be required to pay up to approximately $17.5 million plus the
total amount of interest on that amount as described above based on the number
of shares which have been already issued or which may be issued pursuant to
vested unexercised options before the rescission offer period expires and the
number of outstanding options which will not be exercisable throughout the
rescission offer period. We currently expect to use a portion of the net
proceeds of this offering to fund any requested repayment. In addition, we will
keep the rescission offer 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
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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 their shares and options
which were not issued in compliance with the Securities Act or California
Securities laws. In this case, based on the number of shares and options issued
as of December 31, 1999, we could be liable for a total amount of up to $27.0
million 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 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, we will have outstanding 37,296,483
shares of common stock and 38,046,483 shares if the underwriters exercise their
over-allotment option in full, assuming no exercise of outstanding warrants and
options. Of these shares, 5,000,000 shares, plus an additional 750,000 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. Based
on shares outstanding as of December 31, 1999, the remaining shares will become
eligible for public sale as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF
SHARES
ELIGIBLE FOR
DATE FUTURE SALE COMMENT
---- ------------ -------
<S> <C> <C>
Date of this prospectus........ 5,000,000 Shares sold in this offering
181 days after the date of this
prospectus................... 20,963,555 Underwriters' lock-up period
ends. These shares are eligible
for sale under Rule 144, 144(k)
or 701.
</TABLE>
LOCK-UP AGREEMENTS
A total of approximately 29,393,809 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;
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- 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 372,955 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 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 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 some of the 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 1999 Employee Stock Option Plan and
nonstatutory stock option agreements which are outside of these plans. Based on
the number of outstanding shares and shares subject to outstanding options as of
December 31, 1999, the registration statement would cover approximately
7,317,216 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 23,098,856 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 "Related Party
Transactions -- Registration Rights Agreement" on page 80 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 legal matters by their counsel and to 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 other 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 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 $1.67 million. In
addition, shares of our common stock that Morgan Stanley & Co. Incorporated will
receive for providing financial advisory services to us in connection with our
acquisition of Mjuice.com, Inc. have been deemed underwriting compensation
received in connection with this offering by the National Association of
Securities Dealers, Inc.
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 750,000
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 may become obligated 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.
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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.
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 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 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 a number of 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 575,000 shares offered in this
prospectus for directors, officers, employees, and business associates of
ARTISTdirect as well as their family members. 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. The principal
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 other financial and operating information of ARTISTdirect in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and other 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.
Morgan Stanley & Co. Incorporated and Bear, Stearns & Co. Inc. also acted
as placement agents in connection with our private offering of Series C
preferred stock in December 1999 and January 2000, for which they will receive
customary fees for performing such services. In addition, Morgan Stanley & Co.
Incorporated has provided other financial advisory services to us in connection
with our acquisition of Mjuice.com, Inc. for which Morgan Stanley & Co.
Incorporated will receive $500,000 in shares of our common stock at the initial
offering price, or 45,457 shares, based on an initial public offering price of
$11.00 per share. These securities have been deemed underwriting compensation by
the National Association of Securities Dealers, Inc. and shall not be sold,
transferred, assigned, pledged or hypothecated for one year from the effective
date of this offering.
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
December 31, 1999, Brobeck, Phleger & Harrison LLP and a number of individuals
affiliated with Brobeck, Phleger & Harrison LLP beneficially own a total of
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, Inc. (and its predecessor company
ARTISTdirect, LLC) and subsidiaries as of December 31, 1998 and 1999, and for
each of the years in the three year period ended December 31, 1999, and the
financial statements of iMusic, Inc., as of December 31, 1997 and 1998 and the
years ended December 31, 1997 and 1998, have been included herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
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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.
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, Inc. 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-28
Balance Sheets............................................ F-29
Statements of Operations.................................. F-30
Statements of Stockholders' Equity (Deficit).............. F-31
Statements of Cash Flows.................................. F-32
Notes to Financial Statements............................. F-33
</TABLE>
F-1
<PAGE> 101
The Reverse Stock Split as described in Note 2 to the consolidated
financial statements has not been consummated at March 16, 2000. When this event
has been consummated, we will be in a position to render the following report.
/s/ KPMG LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ARTISTdirect, Inc.
We have audited the accompanying consolidated balance sheets of
ARTISTdirect, Inc. (and its predecessor company ARTISTdirect, LLC) and
subsidiaries (the Company) as of December 31, 1998 and 1999 and the related
consolidated statements of operations, changes in members' and stockholders'
equity (deficit) and cash flows for each of the years in the three year period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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, Inc. and
subsidiaries as of December 31, 1998 and 1999 and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1999, in conformity with generally accepted accounting principles.
Los Angeles, CA
February 23, 2000, except as to note 2
which is as of , 2000
F-2
<PAGE> 102
ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
REDEEMABLE
SECURITIES AND
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ DECEMBER 31,
1998 1999 1999
------- -------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,940 $ 69,119
Cash held for clients..................................... -- 770
Accounts receivable, net.................................. 460 1,001
Prepaid expenses and other current assets................. 392 6,795
------- --------
Total current assets.................................... 2,792 77,685
Property and equipment, net................................. 175 3,343
Investments................................................. 373 70
Goodwill and intangibles, net............................... 45 13,415
Other assets, net........................................... 27 4,087
------- --------
$ 3,412 $ 98,600
======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Cash held for clients..................................... $ -- $ 770
Accounts payable.......................................... 507 3,709
Accrued expenses.......................................... 761 4,698
Due to employees.......................................... 288 --
Notes payable............................................. -- 741
Deferred revenue.......................................... 157 37
------- --------
Total current liabilities............................... 1,713 9,955
Long term liabilities..................................... -- 683
------- -------- ---------
Total liabilities....................................... 1,713 10,638
Redeemable securities:
Series A redeemable preferred stock, $.01 par value.
Authorized, issued and outstanding 3,207,815 shares in
1998 and 1999. Liquidation preference and redemption
value of $5,021 and $4,963 in 1998 and 1999,
respectively............................................ 5,021 4,963 --
Series B redeemable preferred stock, $.01 par value.
Authorized 3,750,000 shares, issued and outstanding
3,750,000 shares in 1999. Liquidation preference and
redemption value of $15,350 in 1999..................... -- 15,350 --
Series C redeemable preferred stock, $.01 par value.
Authorized 8,550,000, issued and outstanding 5,905,374
shares in 1999. Liquidation preference and redemption
value of $82,250 in 1999................................ -- 82,188 --
Redeemable common securities, $.01 par value. Authorized
10,800,000 shares. Liquidation preference and redemption
value of $114 and $9,206 in 1998 and 1999,
respectively............................................ 114 9,206 9,854
------- -------- ---------
Total redeemable securities............................. 5,135 111,707 9,854
------- -------- ---------
Member's and stockholders' equity:
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 14,088,674 shares in
1999.................................................... -- 141 271
Additional paid-in-capital................................ -- 36,688 138,411
Members' interest......................................... 3,872 -- --
Unearned compensation..................................... (502) (36,976) (36,976)
Accumulated (deficit)..................................... (6,806) (23,598) (23,598)
------- -------- ---------
Total members' and stockholders' equity
(deficit)............................................ (3,436) (23,745) $ 78,108
------- -------- =========
$ 3,412 $ 98,600
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 103
ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- ----------
<S> <C> <C> <C>
Net revenue:
Online product sales................................... $ 269 $ 1,548 $ 5,282
Advertising and other.................................. 95 552 2,910
Agency commissions..................................... 974 1,917 1,304
Record label........................................... 550 565 778
------ ------- ----------
Total net revenue................................... 1,888 4,582 10,274
Cost of revenue:
Direct cost of product sales........................... 262 1,505 5,091
Other cost of revenues................................. 346 1,010 3,380
Stock-based compensation............................... -- -- 1,769
------ ------- ----------
Total cost of revenue............................... 608 2,515 10,240
Gross profit........................................ 1,280 2,067 34
Operating expense:
Product development.................................... 78 589 1,815
Sales and marketing.................................... 196 1,395 13,222
General and administrative............................. 1,442 2,545 10,319
Stock-based compensation(1)............................ -- 3,828 30,304
Depreciation and amortization.......................... 21 59 2,509
------ ------- ----------
Loss from operations................................ (457) (6,349) (58,135)
Income from equity investment.......................... -- 2 50
Interest income (expense), net......................... (3) 29 281
------ ------- ----------
Net loss............................................ $ (460) $(6,318) $ (57,804)
====== ======= ==========
Basic and diluted net loss per share for period from
October 6, 1999 to December 31, 1999................... $ (1.66)
Weighted average shares outstanding used in calculating
net loss per share basic and diluted net loss per share
for period from October 6, 1999 to December 31, 1999... 14,177,463
Pro forma basic and diluted net loss per share:.......... $ (2.96)
====== ==========
Pro forma weighted average shares basic and diluted.... 19,502,437
</TABLE>
- ---------------
(1) Stock-based compensation is comprised of sales and marketing expense of $0
and $8,551, in 1998 and 1999, respectively and general and administrative
expense of $3,828 and $21,753 in 1998 and 1999, respectively.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 104
ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID IN MEMBERS' UNEARNED ACCUMULATED TOTAL
SHARES AMOUNT CAPITAL INTEREST COMPENSATION DEFICIT EQUITY
---------- ------- ---------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Securities subject to rescission..... -- -- (114) -- -- (114)
Net loss............................. -- -- -- -- (6,318) (6,318)
---------- ---- ------- -------- -------- -------- --------
Balance at December 31, 1998........... -- -- 3,872 (502) (6,806) (3,436)
Issuance of securities............... -- -- 13,859 -- -- 13,859
Issuance of options/warrants......... -- -- 51,202 (51,202) -- --
Profit interests..................... -- -- 16,470 (16,470) -- --
Amortization of unearned
compensation....................... -- -- -- 31,198 -- 31,198
Payment of preferred dividend by
LLC................................ -- -- (85) -- -- (85)
Conversion of preferred return to
common securities as an LLC........ -- -- 355 -- -- 355
Accrual of dividends to preferred
members............................ -- -- (1,414) -- -- (1,414)
Accretion of redeemable stock........ -- -- (184) -- -- (184)
Conversion to C corporation.......... 13,699,006 137 42,926 (84,075) -- 41,012 --
Payment of preferred dividend by C --
corporation........................ -- (191) -- -- -- (191)
Exercise of stock option............. 176,666 2 669 -- -- -- 671
Conversion of preferred return to 213,002
common stock as a C corporation.... 2 765 -- -- -- 767
Securities subject to rescission..... -- (6,740) -- -- -- (6,740)
Notes issued to shareholders......... -- (741) -- -- -- (741)
Net loss............................. -- -- -- -- (57,804) (57,804)
---------- ---- ------- -------- -------- -------- --------
Balance at December 31, 1999........... 14,088,674 $141 $36,688 $ -- $(36,976) $(23,598) $(23,745)
========== ==== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 105
ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(460) $(6,318) $(57,804)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 21 59 2,509
Income from equity investment........................ -- (2) (50)
Allowance for doubtful accounts and sales returns.... 5 89 29
Write-off of investment.............................. -- -- 250
Amortization of unearned compensation................ -- 3,828 32,073
Changes in assets and liabilities:
Accounts receivable................................ (18) (536) (571)
Prepaid expenses and other current assets.......... (2) (391) (6,628)
Other assets....................................... 59 (49) (2,054)
Accounts payable and accrued expenses.............. 507 1,049 6,384
Deferred revenue................................... 200 (43) (120)
----- ------- --------
Net cash provided by (used in) operating
activities.................................... 312 (2,314) (25,982)
----- ------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (101) (141) (3,513)
Purchase of programming rights.......................... -- -- (675)
Cash paid for acquisitions.............................. -- -- (237)
Investments............................................. -- (373) (30)
Distribution of earnings from equity investment......... -- -- 33
----- ------- --------
Net cash used in investing activities........... (101) (514) (4,422)
----- ------- --------
Cash flows from financing activities:
Repayment of borrowings................................. (100) -- --
Payment of preferred dividend........................... -- -- (276)
Distribution of members' interest....................... (24) (249) --
Proceeds from exercise of stock options................. -- -- 671
Proceeds from issuance of preferred securities.......... -- 4,850 97,188
----- ------- --------
Net cash (used in) provided by financing
activities.................................... (124) 4,601 97,583
----- ------- --------
Net increase in cash and cash equivalents....... 87 1,773 67,179
Cash and cash equivalents at beginning of period.......... 80 167 1,940
----- ------- --------
Cash and cash equivalents at end of period................ $ 167 $ 1,940 $ 69,119
===== ======= ========
Supplemental disclosure of cash flow information -- cash
paid during the period for interest..................... $ 4 $ 50 $ 11
===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 106
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ORGANIZATION
ARTISTdirect, Inc. (the "Company") was formed on October 6, 1999 upon its
merger with ARTISTdirect, LLC (the "Capital Reorganization"). The Capital
Reorganization was only a change in the form of ownership of the Company.
ARTISTdirect, LLC was organized as a California limited liability company and
commenced operations on August 8, 1996. The controlling members of ARTISTdirect,
LLC were also majority owners of the following other California limited
liability companies ("affiliated companies"): ARTISTdirect Agency LLC, Ultimate
Band List, LLC, ("UBL"), Kneeling Elephant Records, LLC and ARTISTdirect
NewMedia, LLC. In February 1999, UBL acquired the remaining 80% of iMusic, Inc.,
a Washington corporation, that it did not already own. On May 18, 1999,
ARTISTdirect, LLC entered into an agreement with the affiliated companies
whereby units in ARTISTdirect, LLC were exchanged for the membership interests
of the affiliated companies. The transaction was accounted for as a purchase of
entities under common control. The acquisition of the minority interests in UBL
was accounted for under purchase accounting.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
the Company and its subsidiaries in which it has controlling interests in the
form of voting and operating control. All significant intercompany accounts and
transactions have been eliminated for all periods presented. UBL generated
losses on its operations for all periods prior to the Company's purchase of the
minority interest in UBL. Due to the full funding of those losses by the Company
and its members, none of the losses generated by UBL during the periods
presented have been allocated to the minority holders.
LIQUIDITY
The Company has relied on various equity financings to fund its operations
in the past. The Company believes that its available cash resources, without the
proceeds from this offering, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures for the next 12 months.
2. CAPITAL REORGANIZATION AND REVERSE STOCK SPLIT
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 , 2000, 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.
3. 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.
F-7
<PAGE> 107
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Online product sales, which consists primarily of the gross amount of sales
revenue paid by the customer for recorded music and merchandise sold via the
Internet, includes shipping fees and is recognized when the products are
shipped. The Company obtains merchandise from merchandisers and manufacturers,
music from a third party distributor, contracts for warehousing and fulfillment,
processes customer orders and provides customer service. The Company takes title
to all products sold and bears the risk of loss for collections and non-delivery
subject to any recourse against the shipper. Online product sales are subject to
amounts due to the respective artists based on their contracts, and such expense
is recorded as part of direct cost of product sales.
The Company generates revenue from the sale of on-line advertisements under
short-term contracts. To date, the duration of the Company's advertising
commitments has generally averaged from one to three months. Online 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 number of impressions is not expected to be met. There
were no such instances as of December 31, 1997, 1998 and 1999.
Revenue generated from sponsorships is recognized evenly over the terms of
the sponsorship agreements.
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.
Overhead advances on the record label are recognized as revenue evenly over
the period covered by the advances. Royalties earned on albums sold by artists
signed to the record label are recognized as revenue at the time the releases
are shipped to the retailer. Reserves are established for possible returns.
COST OF REVENUE
Direct cost of product sales consists of amounts payable to artists, which
includes the cost of merchandise sold and a share of net proceeds, and online
commerce transaction costs, including credit card fees, fulfillment charges and
shipping costs. Other cost of revenue consists primarily of Web site hosting and
maintenance costs, online content programming costs, online advertising serving
costs, record royalties payable to artists and payroll and related expenses for
staff involved in Web site maintenance, content programming and the agency.
Stock-based compensation expense relates to non-cash charges in connection with
warrants issued to vendors and options issued to artists and their advisors for
the right to operate their stores. Amounts payable to artists and transaction
costs are recognized upon shipment. Web site-related costs are recognized
immediately when incurred. Payroll and related expenses are recognized
F-8
<PAGE> 108
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
over the period benefited. Non-cash stock-based compensation charges are
recognized over the period of the related agreements.
INVENTORIES
Inventories, included in prepaid expenses and other current assets, consist
of music-related merchandise and amounts advanced for inventory on behalf of
artists and are stated at the net realizable value. Cost is determined using the
first-in, first-out method.
INCOME TAXES
Prior to the Capital Reorganization, the Company was treated as a limited
liability company for federal and state income tax reporting purposes whereby
income (or losses) of the Company was reported in the individual income tax
returns of the Company's members. After the Capital Reorganization, the Company
began accounting 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.
PRODUCT DEVELOPMENT COSTS
Product development costs consist 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 COSTS
Advertising costs are expensed as incurred and totaled $24,000, $461,000
and $7.7 million during the years ended December 31, 1997, 1998 and 1999,
respectively.
INTANGIBLE ASSETS
Goodwill and other intangible assets resulting from the acquisitions of
minority interests in the UBL and iMusic, Inc. are amortized on a straight-line
basis over five years, the estimated period of benefit.
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.
F-9
<PAGE> 109
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 October 6, 1999 (see Note 2), 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
The pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding giving
pro forma effect to the Reverse Stock Split of the Company, the dividend from
the rescission offer, 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, 1999, 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 as there was no pro forma effect on income tax expense.
Pro forma diluted loss per share excludes 7.6 million of securities (after
giving effect to the Reverse Stock Split) as of December 31, 1999, since the
impact would be anti-dilutive.
F-10
<PAGE> 110
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
DECEMBER 31,
1999
------------
<S> <C>
Actual shares at beginning of the period.................... 16,568,192
Pro forma weighted average shares issued during the
period.................................................... 2,934,245
-----------
Pro forma basic and diluted weighted average shares at the
end of the period......................................... 19,502,437
===========
</TABLE>
PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
Effective upon the closing of this offering, the outstanding shares of
Series A, Series B and Series C Redeemable Preferred Stock will automatically
convert into approximately 3,207,815, 3,750,000 and 5,905,374 shares,
respectively, of common stock (after giving effect to the Reverse Stock Split).
The pro forma effects of these transactions have been reflected in the
accompanying Pro Forma Stockholders' Equity at December 31, 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 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
F-11
<PAGE> 111
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 quarters of all fiscal years beginning after June 15,
2000 (as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective date of FASB Statement No.
133"). 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. The adoption of SFAS No. 133
is not expected to have a material impact on the Company's consolidated
financial statements.
4. 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
DECEMBER 31,
---------------
1998 1999
---- -------
(IN THOUSANDS)
<S> <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
Acquisition costs -- cash paid............................ 127
Net assets acquired....................................... -- (938)
---- -------
Goodwill............................................. $ -- $13,111
==== =======
Accrual of dividends on redeemable preferred securities..... $171 $ 1,414
Securities subject to potential rescission offer............ $114 $ 6,740
Accretion on redeemable stock............................... $ -- $ 184
Issuance of options/warrants................................ $ -- $51,202
Appreciation of profit interests............................ $ -- $16,470
Conversion of preferred return to common securities......... $ -- $ 1,122
Issuance of shares to officer............................... $ -- $ 875
Notes issued to shareholders................................ $ -- $ 741
</TABLE>
F-12
<PAGE> 112
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment and software............................. $220 $3,559
Furniture and fixtures...................................... 33 207
---- ------
253 3,766
Less accumulated depreciation............................... (78) (423)
---- ------
Property and equipment, net................................. $175 $3,343
==== ======
</TABLE>
6. 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>
YEAR ENDED
DECEMBER 31,
---------------
1998 1999
----- ------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $ -- $ 81
Provision for doubtful accounts............................. 115 385
Amounts charged off......................................... (34) (377)
---- -----
Balance, end of period...................................... $ 81 $ 89
==== =====
</TABLE>
A summary of the activity of the reserve for sales returns for the periods
indicated is reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1998 1999
----- ------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period................................ $ 5 $ 13
Provision for sales returns................................. 16 180
Amounts charged off......................................... (8) (159)
--- -----
Balance, end of period...................................... $13 $ 34
=== =====
</TABLE>
F-13
<PAGE> 113
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Accrued payroll and related........................... $105 $1,470
Accrued advertising costs............................. 88 873
Accrued cost of sales................................. 359 865
Accrued professional fees............................. 143 333
Programming rights.................................... -- 682
Other accrued expenses................................ 66 475
---- ------
Total accrued expenses........................... $761 $4,698
==== ======
</TABLE>
8. INVESTMENTS
Investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
American Digital Network.............................. $250 --
iMusic, Inc........................................... 100 --
SnoCore, LLC.......................................... 23 70
---- ------
Total investments................................... $373 $ 70
==== ======
</TABLE>
In 1998 the Company acquired a 1.7% ownership in American Digital Networks
("ADN") and accounted for this investment under the cost method. During 1999,
the Company fully reserved its investment in ADN to reflect its estimated net
realizable value.
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. In
February 1999, the Company acquired all of the outstanding capital stock of
iMusic, Inc. that it did not already own.
As of December 31, 1998 and December 31, 1999, the Company has a 30% and
45%, respectively, ownership in SnoCore, LLC, and accounts for the investment
under the equity method. The Company recorded income of $2,000 and $50,000 for
this investment for the years ended December 31, 1998 and 1999, respectively.
The Company received a $33,000 distribution of income from the investee during
the year ended December 31, 1999.
In December 1999, the Company entered into a joint venture with Cisneros
Television Group. The venture will be owned and funded equally by both parties,
and will be accounted for under the equity method. Neither party made capital
contributions during the year ended December 31, 1999.
F-14
<PAGE> 114
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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, to $2.0 million in
February 1999 and to $5.0 million in November 1999. The line of credit is
guaranteed by certain officers and stockholders of the Company and bears
interest, which is payable monthly, at a base rate as defined in the lending
agreement plus 1%. There was no balance outstanding on the line of credit as of
December 31, 1998 and the line of credit was terminated at the Company's option
in September 1999 and reinstated in October 1999. As of December 31, 1999, there
was no balance outstanding on the line of credit.
10. 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 UBL 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. The Company recorded
goodwill of approximately $2.4 million as a result of this acquisition, which is
being amortized over a five year period.
In May 1999 the Company acquired the 40.29% minority interest in the UBL in
exchange for common interests in ARTISTdirect, LLC. The value of the
consideration given was approximately $13.9 million, which was based on the
value of the equity given, using the pricing of third party equity contributed
at or around the time of the purchase transaction; the transaction has been
accounted for as a purchase. Due to the full funding of the losses of UBL by the
Company and its members prior to the purchase of the minority interest, none of
the losses generated by UBL during the periods presented have been allocated to
the minority holders. The Company recorded goodwill of approximately $13.1
million as a result of this acquisition, which is being amortized over a five
year period.
The pro forma results of operations assuming the above transactions had
occurred at the beginning of the period as follows:
<TABLE>
YEAR ENDED
DECEMBER 31,
1999
-------
(IN THOUSANDS)
<S> <C>
Revenues.................................................. $10,337
-------
Net loss.................................................. $58,975
-------
</TABLE>
F-15
<PAGE> 115
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
Income taxes for the period from October 6, 1999 (the date of conversion to
a C corporation) to December 31, 1999 differs from the amount computed using the
federal income tax rate of 34% as a result of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Computed expected tax benefit.............................. $(8,259)
State and local income taxes, net of federal income tax
benefit.................................................. (977)
FAS 109 implementation..................................... (9,227)
Goodwill amortization...................................... 271
Other...................................................... 27
Increase in valuation allowance............................ 18,165
-------
Total tax benefit................................ $ --
=======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1999 are
presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 4,520
Amortization of stock based compensation.................. 14,296
Other..................................................... 576
--------
Total deferred tax assets................................... 19,392
Less -- valuation allowance................................. (18,165)
--------
Net deferred assets......................................... 1,227
--------
Deferred tax liability -- state income taxes................ (1,227)
--------
Net deferred tax assets........................... $ --
========
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards
totaling approximately $11.5 million for Federal income tax purposes expiring in
2019 and California state net operating loss carryforwards of $5.7 million
expiring in 2004. Due to the uncertainty surrounding the realization of the
benefits of its tax attributes, including net operating loss carryforwards in
future tax returns, the Company has recorded a valuation allowance against its
deferred tax assets as of December 31, 1999 of $18.2 million.
In assessing the potential realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the Company attaining future taxable income during the
periods in which those temporary differences become deductible. In addition, the
utilization of net operating loss carryforwards may be limited due to
restrictions imposed under applicable Federal and state laws due to a change in
ownership.
12. 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
F-16
<PAGE> 116
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
severance payment of $175,000, to be paid out in eight quarterly installments.
The amount due under this severance arrangement was $175,000 and $88,000 as of
December 31, 1997 and 1998, respectively. The amount was paid in full as of
December 31, 1999. 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. The employee has
communicated to the Company that he intends to exercise the purchase option.
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 have been
netted together in the financial statements.
For the years ended December 31, 1998 and 1999, the Company incurred legal
expenses of approximately $450,000 and $1,101,000, respectively, 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 agreement. The maximum term of the agreement is six
years. Under the agreement, RCA provided 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 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 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, 1998 and 1999 are $1,000, $4,000,
and $1,000, 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 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 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 Reverse
F-17
<PAGE> 117
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 November 1999, the Company entered into three year programming license
agreement with CHUMcity International. The Company is amortizing the license
cost over the contractual license period.
In December 1999, the Company entered into an eighteen month marketing
agreement with ABC News Internet Ventures. The agreement provides for the
exchange and distribution of content by both parties. As the values of the
content and services being provided by both parties is not readily determinable,
the content and services provided and received by the Company will be recorded
at their cost basis to the Company, which is zero.
In connection with the issuance of Series C Preferred shares, the Company
entered into strategic relationships with four record labels. Under the terms of
these agreements, the Company has the right to purchase certain content related
to each of the respective companies' artists on terms generally made available
to other online music companies. The cost associated with the acquisition of
such content will be expensed as it is acquired and broadcast online.
In December 1999, the Company entered into a two-year advertising and
promotion agreement with Yahoo! pursuant to which the Company will purchase
media placement on Yahoo! in return for certain promotional considerations. The
Company will record the expense related to the amounts paid to Yahoo! for
advertising and promotion services over the term of the agreement as services or
promotions are received. Also in connection with the agreement, the Company
issued Yahoo! warrants to purchase 339,254 shares of common stock (after giving
effect to the Reverse Stock Split). The exercise price for 169,627 of the
warrants is $13.93, and the exercise price for the remaining warrants shall be
the IPO price. The expense related to the warrants will also be amortized over
the term of the agreement.
13. 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 Exchange Transaction, 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. The
Series A Preferred shares have liquidation preference over all other classes of
shares except for the Series B Preferred shares. The liquidation preference and
redemption value of the Series A Preferred shares was approximately $5.0 million
as of December 31, 1998 and 1999.
F-18
<PAGE> 118
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 17, 1999, the Company issued 170,443 redeemable common shares
(Redeemable Stock) (after giving effect to 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. Upon redemption, the Company is also required to pay a total of
$200,000 in bonuses to employees of iMusic, Inc. as designated by the holder.
The holder has communicated to the Company that he will not exercise the
redemption right and will retain the common shares. 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, which is also the liquidation
preference and redemption value, of the Redeemable Stock was approximately $2.4
million as of December 31, 1999.
On May 18, 1999, the Company issued 3,750,000 Series B redeemable preferred
shares (Series B Preferred) (after giving effect to the Reverse Stock Split) for
proceeds of $15 million. The Series B Preferred shares have the same redemption
terms as the Series A Preferred shares, and have a current conversion price of
$4.00 per share. The Series B Preferred shares have liquidation preference over
all other classes of shares. The liquidation preference and redemption value of
the Series B Preferred shares was $15.4 million as of December 31, 1999.
In December 1999, the Company issued 5,905,374 Series C redeemable
preferred shares (Series C Preferred) (after giving effect to the Reverse Stock
Split) for proceeds of $82.2 million and in January 2000, the Company issued an
additional 1,094,917 Series C Preferred shares for proceeds of $15.2 million.
The total sum of $97.5 million was raised through the sale of shares to six
music and media companies which included Universal Music Group, BMG
Entertainment, Sony Music Entertainment, Time Warner Inc, an affiliate of
Cisneros Television Group and Yahoo! The Series C Preferred shares have the same
redemption terms as the Series A and Series B Preferred shares and have a
conversion price of $13.928 per share. The liquidation preference and redemption
value as of December 31, 1999 was $82.3 million.
Included in Redeemable Common Securities are amounts related to options and
securities subject to a potential rescission offer. The rescission offer will
include an offer to repurchase shares issued directly to certain individuals or
purchased pursuant to option exercises at the exercise price, plus interest at
an annual rate of 10% from the date of issuance. To comply with California
Securities law, the Company will also offer to repurchase all unexercised
options issued to such persons at 20% of the option exercise price multiplied by
the number of shares subject to such options, plus interest at an annual rate of
10% per year from the date of issuance. The amounts due under the potential
rescission offer aggregated $114,000 and $6.9 million as of December 31, 1998
and 1999, respectively, including interest. Under the terms of the rescission
offer, the Company could be required to repurchase all underlying shares and
options that may be exercisable within 180 days of the date of the prospectus
for the initial public offering. The potential rescission offer based on the
repurchase of all shares underlying options outstanding as of December 31, 1999
that may be exercisable within 180 days of the date of the prospectus for the
initial public offering is approximately $17.5 million plus interest. The
potential rescission offer based on the repurchase of all shares underlying
options outstanding as of December 31, 1999 is approximately $27.0 million plus
interest.
F-19
<PAGE> 119
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. MEMBERS' EQUITY
MEMBER DISTRIBUTIONS
The Company made distributions to members of $24,000, $249,000 and $741,000
in 1997, 1998 and 1999, 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. The common
units issued to outside legal counsel were valued at estimated fair value as
determined by the Company. Accordingly the value of these rights are adjusted
upon changes in the fair value of the Company. The Company has estimated the
fair value of the Company for the periods presented based primarily on third
party equity financing. The Company has recorded compensation expense of $3.8
million and $16.3 million for the years ended December 31, 1998 and 1999,
respectively, related to the employee and legal counsel common units. There is
no provision for the Company to settle common units in cash or by issuance of
additional equity securities.
WARRANTS
In May and June 1999, the Company issued 359,676 warrants to purchase
common stock (after giving effect to the Reverse Stock Split) to two vendors
from whom it purchases merchandise ("merchandisers"). The value of the warrants
is $864,000, of which $168,000 has been recognized as expense for the year ended
December 31, 1999. The value of the warrants has been recorded as unearned
compensation in the statement of changes in members' and stockholders' equity,
and will be amortized as cost of revenues over the term of the related
merchandising agreements. Additionally, the merchandisers may earn up to 545,464
of additional warrants based on certain performance levels as specified in the
merchandising agreements.
In December 1999, the Company issued 339,254 warrants to purchase common
stock in connection with an advertising and promotion agreement. The value of
the warrants is $2.0 million, of which $19,000 has been recorded as expense for
the year ended December 31, 1999. The value of the warrants will be amortized
over the term of the related agreement.
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 Reverse Stock Split), as well
as a cash payment of $85,000.
F-20
<PAGE> 120
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 6, 1999, the Company paid to the Series A and B redeemable
preferred stockholders the accrued dividends to that date of $767,000 in the
form of 213,002 shares of common stock (after giving effect to the Reverse Stock
Split), as well as a cash payment of $191,000.
PURCHASE OF SHARES BY OFFICER
In September 1999, the Company's Chief Financial Officer purchased 111,111
shares of common securities from certain officer stockholders at a purchase
price of $3.60 per share. The difference between the purchase price and the fair
value of the securities as of the date of the transaction has been reflected as
stock-based compensation. The amount of stock-based compensation aggregated
$875,000. The Company determined the fair value of the securities based on the
continued growth of the Company's operations and recent equity transactions with
third parties.
15. OPTIONS
In July 1998, the Company implemented the 1998 Unit Option Plan (which was
subsequently amended and replaced by the 1999 Employee Stock Option Plan), which
reserved 5,250,000 shares (after giving effect to the Reverse Stock Split) of
our common stock for issuance to 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 two percent (2%) 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 875,000 shares. No option may have
a term in excess of 10 years. The options issued during 1998 and 1999 vest
within three years. As of December 31, 1999, 1,445,470 shares remained available
for future option grant.
The Company accounts for its employee 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 1999 Stock Option Plan during the years
ended December 31, 1998 and 1999 is as follows (after giving effect to the
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....................................... 3,449,062 3.60
Exercised..................................... (58,750) 3.40
Canceled...................................... (1,250) 3.60
--------- -----
Outstanding options at December 31, 1999........ 3,745,780 $3.41
========= =====
</TABLE>
F-21
<PAGE> 121
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1999 the Company issued 7,500 options to
consultants, resulting in a weighted average fair value per option of $10.21,
and a total value of $77,000. The Company recorded this amount as stock based
compensation for the year ended December 31, 1999.
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 years ended December 31, 1998 and 1999 would have changed
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Net loss:
As reported................................ $6,318 $57,804
Pro forma.................................. 6,334 $58,254
====== =======
</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 6.0% and an expected life of five years. The weighted average fair
values of the options on the date of grant were $.32 per share and $5.56 per
share for the options granted in 1998 and 1999, respectively.
The following table summarizes information regarding options outstanding
and options exerciseable at December 31, 1999 (after giving effect to the
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>
$ 1.24 256,746 8.60 years $1.24 158,497 $1.24
2.30 94,972 8.60 2.32 58,534 2.32
3.60 3,394,062 9.62 3.60 204,683 3.60
- ----------- --------- ---------- ----- --------- -----
$1.24-$3.60 3,745,780 9.52 years $3.41 421,713 $2.54
=========== ========= ========== ===== ========= =====
</TABLE>
In June 1999 and as amended in October 1999, the Company adopted the 1999
Artist and Artist Advisor Stock Option Plan (the Advisor Plan). The Plan has
reserved 1,250,000 shares (after giving effect to the Reverse Stock Split) of
common stock for issuance to artists for whom the Company maintains
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 one
percent (1%) 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 375,000 shares. As of December 31, 1999,
251,375 shares remained available for future option grants. The options expire
seven years from the date of grant. Vesting generally varies between one to
three years, as specifically stated in each advisor's option agreement.
F-22
<PAGE> 122
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summary stock option activity for the Advisor Plan options during the year
ended December 31, 1999 is as follows (after giving effect to the Reverse Stock
Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
Outstanding Options at
December 31, 1998............................... -- --
Granted...................................... 1,036,125 $3.92
Exercised.................................... (37,500) 3.60
Canceled..................................... -- --
--------- -----
Outstanding Options at
December 31, 1999............................... 998,625 $3.93
========= =====
</TABLE>
The weighted average fair value of options granted under the Advisor Plan
was $9.34 per option, resulting in a total value for options granted of $9.7
million, which has been recorded as unearned compensation in the statement of
charges in members' and stockholders' equity, and will be amortized over the
term of the advisor's option agreement. Compensation expense recognized during
the year ended December 31, 1999 was $6.0 million, and is recorded in cost of
revenue or operating expense based on the services provided by the advisor. The
weighted average remaining contractual life of the advisor options granted
during the year ended December 31, 1999 is 6.7 years, and there are 774,313
options exercisable as of December 31, 1999.
In June 1999 and as amended in October 1999, the Company adopted the 1999
Artist Stock Plan (the Artist Option Plan), which has reserved 4,000,000 shares
(after giving effect to the Reverse Stock Split) of common stock for issuance to
artists for whom the Company maintains ARTISTchannels. This share reserve will
automatically increase on the first trading day in January each calendar year,
beginning 2001, by an amount equal to two percent (2%) 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
875,000 shares. As of December 31, 1999, 1,735,939 shares remained available for
future option grants. The options expire seven years from the date of grant.
Vesting generally varies between one to three years, as specifically stated in
each artist's option agreement.
Summary stock option activity for the Artist Option Plan during the year
ended December 31, 1999 is as follows (after giving effect to the Reverse Stock
Split):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding Options at
December 31, 1998................................ -- --
Granted....................................... 2,476,561 $3.97
Exercised..................................... (330,417) 3.74
Canceled...................................... -- --
--------- -----
Outstanding Options at
December 31, 1999................................ 2,146,144 $4.00
========= =====
</TABLE>
F-23
<PAGE> 123
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of the options granted under the Artist
Option Plan was $8.33 per option, resulting in a total value for options granted
of $20.6 million, which has been recorded as unearned compensation in the
statement of changes in members' and stockholders' equity, and will be amortized
over the service period of the related artist agreements. Compensation expense
recognized during the year ended December 31, 1999 was $6.4 million, and is
recorded in cost of revenue or operating expense based on the services provided
by the artist.
The weighted average remaining contractual life of the artist options
granted during the year ended December 31, 1999 is 6.7 years, and 1,114,250 of
these options were exerciseable as of December 31, 1999.
The estimated fair values of the options granted under the Advisor Plan and
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 6.0%, a volatility factor of 81%, no expected dividends and an
expected life of seven years.
In October 1999, the Company adopted the 1999 Employee Stock Purchase Plan,
which has reserved 500,000 shares of common stock for issuance under this plan.
Terms of the plan permit eligible employees to purchase common stock through
payroll deduction of up to 15% of each employee's compensation. The accumulated
deductions will be applied to the purchase on shares on each semi-annual
purchase date at a purchase price per share equal to 85% of the fair market
value per share on the participant's entry date into the offering period or the
semi-annual purchase date, whichever is lower. Pursuant to the provisions of APB
No. 25, shares issued to employees under this plan are considered
noncompensatory.
16. 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,
1999, are as follows as of the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000.............................................. $ 1,163
2001.............................................. 1,659
2002.............................................. 1,837
2003.............................................. 1,756
2004.............................................. 1,746
Thereafter........................................ 10,251
-------
Total........................................... $18,412
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1997,
1998 and 1999 for the Company was $58,000, $109,000, and $341,000, respectively.
F-24
<PAGE> 124
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYMENT CONTRACTS
Future payments under employment contracts entered into through December
31, 1999 are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000.............................................. $2,396
2001.............................................. 1,334
2002.............................................. 25
------
Total........................................... $3,755
======
</TABLE>
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.
17. 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,
operating income and depreciation and amortization by segment for the years
ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenue:
ARTISTdirect Network............................ $ 364 $ 2,100 $ 8,192
Talent Agency................................... 974 1,917 1,304
Record Label.................................... 550 565 778
------ ------- --------
1,888 4,582 10,274
Income (Loss) from Operations:
ARTISTdirect Network............................ (740) (5,256) (57,900)
Talent Agency................................... 197 (629) 22
Record Label.................................... 86 (464) (257)
------ ------- --------
(457) (6,349) (58,135)
------ ------- --------
Interest income (expense), net.................... (3) 29 281
Income from equity investment..................... -- 2 50
------ ------- --------
Net Loss.......................................... $ (460) $(6,318) $(57,804)
====== ======= ========
</TABLE>
F-25
<PAGE> 125
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization:
ARTISTdirect Network............................ $ 4 $ 38 $ 2,504
Talent Agency................................... 11 18 5
Record Label.................................... 6 3 --
------ ------- --------
$ 21 $ 59 $ 2,509
====== ======= ========
</TABLE>
The following tables summarize the capital expenditures for the years ended
December 31, 1997, 1998, and 1999 and assets as of December 31, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
----- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital expenditures:
ARTISTdirect Network............................... $ 23 $ 123 $ 3,498
Talent Agency...................................... 57 15 9
Record Label....................................... 21 3 6
----- ------ -------
$ 101 $ 141 $ 3,513
===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Assets:
Corporate................................................ $ 403 $78,406
ARTISTdirect Network..................................... 2,932 17,571
Talent Agency............................................ 68 2,547
Record Label............................................. 9 76
------ -------
$3,412 $98,600
====== =======
</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, computer equipment and other assets.
18. SUBSEQUENT EVENTS
In January 2000, the Company signed a definitive merger agreement with
Mjuice.com, Inc., a company involved in the development and distribution of the
secure digital distribution of MP3-formatted music. The Company plans to issue
up to $15.0 million of its shares in exchange for all of the outstanding equity
of Mjuice.com, Inc. The acquisition is to be accounted for as a purchase, with
substantially all of the purchase price being attributed to goodwill that will
be amortized over a five-year period. The acquisition is expected to close
shortly following the Company's initial public offering.
In March 2000, Marc Geiger, Donald Muller and Rick Rubin agreed to enter
into a series of transactions which will effectively transfer to Keith Yokomoto,
Steve Rennie and L&G Associates One the economic benefit ("Appreciation Rights")
of the difference between the closing price on the third day of trading after
the initial public offering and $13.93 per share, for the number of shares as
specified in the terms of the related agreement. Such increase in value shall be
transferred in the form of
F-26
<PAGE> 126
ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of common stock of the Company. Additionally, the Company will issue to
these parties options to purchase common stock at an exercise price equal to the
closing price on the third day of trading after the initial public offering. The
Company will record as expense the appreciation in the price per share of the
common stock over $13.93 for Messrs. Yokomoto and Rennie. As the options granted
to Messrs. Yokomoto and Rennie will have an exercise price equal to the fair
value on the date of grant, the Company will not record compensation for the
options granted to these individuals. The Company will record as expense the
fair value of the appreciation rights and stock options granted to L&G
Associates One as determined on the respective grant dates.
F-27
<PAGE> 127
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-28
<PAGE> 128
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-29
<PAGE> 129
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-30
<PAGE> 130
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-31
<PAGE> 131
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-32
<PAGE> 132
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-33
<PAGE> 133
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-34
<PAGE> 134
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-35
<PAGE> 135
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-36
<PAGE> 136
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-37
<PAGE> 137
[ARTISTDIRECT LOGO]
<PAGE> 138
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................................ 5,000
Printing and engraving expenses........................... 350,000
Legal fees and expenses................................... 550,000
Accounting fees and expenses.............................. 625,000
Transfer agent and registrar fees......................... 4,000
Miscellaneous............................................. 100,000
-------------
Total........................................... $1,667,102.50
=============
</TABLE>
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 director or officer is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
II-1
<PAGE> 139
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 the Company and
ARTISTdirect LLC, predecessor to the Company, since 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 prior to 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.
(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, including affiliates
of Constellation Venture Capital, L.P., Chase Capital Partners, Psilos
Group Partners, DreamMedia Internet Ventures and Carl Kawabe.
II-2
<PAGE> 140
(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, including affiliates of Constellation
Venture Capital, L.P. Psilos Group Partners, L.P., Chase Venture
Capital Associates, L.P., Flatiron Fund 1998/99, LLC, Spinnaker
Technology Fund, LP, and Toronto Dominion Investments, Inc. 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.
(i) In June 1999, ARTISTdirect, LLC issued Winterland Concessions a
warrant to purchase 342,640 shares of our common stock at a price of
$4.00 per share. ARTISTdirect, LLC also issued Giant Merchandising
warrants to purchase a total of 562,500 shares of our common stock at
a price of $4.00 per share.
(j) In December 1999 and January 2000, we issued a total of 7,000,291
shares of Series C preferred stock for an aggregate purchase price of
$97.5 million to several outside investors, including affiliates of
Universal Music Group, Inc., Cisneros Television Group, Sony Music,
BMG Music, Time Warner Inc., Maverick Recording Company and Yahoo!.
(k) In December 1999, we issued Yahoo! a warrant to purchase an aggregate
of 339,254 shares of common stock at an exercise price of $13.928 per
share with respect to half of the shares and an exercise price of
$11.00 per share with respect to the remaining half of the shares.
(l) In March 2000, we issued 5670 Wilshire, L.P. a warrant to purchase
62,500 shares of our common stock at a price of $13.92 per share.
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. 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.
From August 1, 1998 to December 31, 1999, we granted options to purchase an
aggregate of 7,317,216 shares of common stock to our directors, executive
officers, employees, artists and consultants at a weighted average exercise
price of $3.67. As of December 31, 1999, options to purchase 261,746 shares at
an exercise price of $1.24 per share, 89,972 shares at an exercise price of
$2.32 per share, 3,560,937 shares at an exercise price of $3.60 per share and
2,977,895 shares at an exercise price of $4.00 per share were outstanding. At
the time these options were issued under the Company's various stock option
plans, the Company believed that each of the issuances were exempt from the
registration requirements of the Securities Act either by virtue of (i) the
exemption provided by Rule 701 for securities offered under compensatory benefit
plans and contracts or (ii) a "no-sale" theory under Section 5 of the Securities
Act of 1933, since none of the optionees provided any consideration for the
grants (the sale of the underlying option shares occurs only when the option is
exercised and the purchase price for the shares is paid to the Company).
Rule 701 was amended in April 1999 to revise, among other things, the
category of persons who will qualify as consultants for purposes of securities
issued pursuant to such rule. As a result, the Company believes that a number of
artists and other non-employees who were granted options under the Company's
plans may no longer qualify as consultants under amended Rule 701 and that the
Rule 701 exemption may no longer be available for the options granted to those
individuals. In addition, the
II-3
<PAGE> 141
Company believes that the aggregate dollar amount of the offering represented by
the options granted under the Company's stock option plans may have exceeded the
applicable limits set forth in Rule 701. Because the Company does not wish to
rely solely on a "no-sale" theory for these option grants, the Company intends
to make a rescission offer with respect to the unexercised options and shares of
its common stock issued pursuant to the exercise of options. The details of this
rescissions offer are summarized on page 87 of the prospectus contained in this
registration statement.
As set forth on page 87 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.
In February 2000, we agreed to acquire Mjuice.com, Inc. for $15.0 million
of our stock. We intend to rely on Section 3(a)(10) of the Securities Act for an
exemption from the registration requirements of the Security Act when these
securities are issued.
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.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** 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.
10.2** Digex Services and Products Agreement, dated August 8, 1999,
between Digex, Inc. 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, as amended.
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** Third Amended and Restated Registration Rights Agreement,
dated as of November 12, 1999, among the Registrant and the
other parties who are signatories thereto, as amended.
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 January 1, 1996, between the Registrant and
Keith Yokomoto.
</TABLE>
II-4
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
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 April 1, 1998,
by and 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 Employee Stock Option Plan.
10.23** 1999 Artist and Artist Advisor Stock Option Plan.
10.24** 1999 Artist Stock Option Plan.
10.25+ 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.
10.29** Form of Directors Indemnification Agreement
10.30** Form of Officers Indemnification Agreement
10.31** Audio Sample License Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company.
10.32+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Maverick Recording Company.
10.33+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Maverick Recording
Company.
10.34**+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company.
10.35**+ Audio Sample License Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc.
10.36**+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Warner Music Group Inc.
10.37**+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Warner Music Group
Inc.
10.38**+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc.
10.39** Strategic Marketing Agreement dated as of December 6, 1999
between the Company and Universal Music Group, Inc.
10.40+** ARTISTdirect -- Cisneros Television Group Memorandum of
Understanding dated as of November 15, 1999 between the
Company and Lakeport Overseas Ltd.
10.41+** Strategic Licensing Agreement dated as of December 6, 1999
between the Company and Sony Music.
</TABLE>
II-5
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.42** Strategic Marketing Agreement dated as of December 20, 1999
between the Company and BMG Music.
10.43+ Advertising and Promotion Agreement dated as of December 24,
1999 between the Company and Yahoo! Inc.
10.44**+ Yahoo! Remote Merchant Integration (RMI) Program Agreement
dated as of December 24, 1999 between the Company and Yahoo!
Inc.
10.45** Form of Series C Preferred Stock Purchase Agreement.
10.46 Warrant dated December 24, 1999, issued to Yahoo!
10.47** 5670 Wilshire Boulevard Office Lease, as amended
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.
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed by the Registrant with the Commission.
+ 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. The undersigned Registrant hereby undertakes to provide to the
underwriter, at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
2. 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.
3. 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-6
<PAGE> 144
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 5 to the 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 16th day of March 2000.
ARTISTDIRECT, INC.
By: /s/ MARC P. GEIGER
------------------------------------
Marc P. Geiger
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act, this Amendment No. 5 to
the 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 and March 16, 2000
- ----------------------------------------------------- Chairman of the Board
Marc P. Geiger (Principal Executive Officer)
DONALD P. MULLER * President, ARTISTdirect March 16, 2000
- ----------------------------------------------------- Agency and Kneeling Elephant
Donald P. Muller Records and Director
KEITH YOKOMOTO * Chief Operating Officer, March 16, 2000
- ----------------------------------------------------- President and Director
Keith Yokomoto
/s/ JAMES B. CARROLL Executive Vice President and March 16, 2000
- ----------------------------------------------------- Chief Financial Officer
James B. Carroll (Principal Financial and
Accounting Officer)
ALLEN D. LENARD * Director March 16, 2000
- -----------------------------------------------------
Allen D. Lenard
CLIFFORD H. FRIEDMAN * Director March 16, 2000
- -----------------------------------------------------
Clifford H. Friedman
</TABLE>
II-7
<PAGE> 145
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
STEPHEN KRUPA * Director March 16, 2000
- -----------------------------------------------------
Stephen Krupa
RICK RUBIN * Director March 16, 2000
- -----------------------------------------------------
Rick Rubin
CARLOS E. CISNEROS * Director March 16, 2000
- -----------------------------------------------------
Carlos E. Cisneros
DARA KHOSROWSHAHI * Director March 16, 2000
- -----------------------------------------------------
Dara Khosrowshahi
* Power of attorney
By: /s/ JAMES B. CARROLL
- -----------------------------------------------------
James B. Carroll
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 146
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
1.1** Form of Underwriting Agreement..............................
3.1** Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.2** 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............................
10.2** Digex Services and Products Agreement, dated August 8, 1999,
between Digex, Inc. 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, as amended....
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** Third Amended and Restated Registration Rights Agreement,
dated as of November 12, 1999, among the Registrant and the
other parties who are signatories thereto, as amended.......
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...........................
</TABLE>
<PAGE> 147
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
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 Employee Stock Option Plan.............................
10.23** 1999 Artist and Artist Advisor Stock Option Plan............
10.24** 1999 Artist Stock Option Plan...............................
10.25+ 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.........................................................
10.29** Form of Directors Indemnification Agreement.................
10.30** Form of Officers Indemnification Agreement..................
10.31** Audio Sample License Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company..........
10.32+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Maverick Recording Company.....
10.33+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Maverick Recording
Company.....................................................
10.34+** Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Maverick Recording Company..........
10.35+** Audio Sample License Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc..............
10.36**+ Internet Video License Agreement dated as of December 20,
1999 between the Company and Warner Music Group Inc.........
10.37**+ Webcasting Transmission License Agreement dated as of
December 20, 1999 between the Company and Warner Music Group
Inc.........................................................
10.38**+ Strategic Marketing Agreement dated as of December 20, 1999
between the Company and Warner Music Group Inc..............
10.39** Strategic Marketing Agreement dated as of December 6, 1999
between the Company and Universal Music Group, Inc..........
10.40+** ARTISTdirect -- Cisneros Television Group Memorandum of
Understanding dated as of November 15, 1999 between the
Company and Lakeport Overseas Ltd...........................
10.41+** Strategic Licensing Agreement dated as of December 6, 1999
between the Company and Sony Music..........................
10.42** Strategic Marketing Agreement dated as of December 20, 1999
between the Company and BMG Music...........................
10.43+ Advertising and Promotion Agreement dated as of December 24,
1999 between the Company and Yahoo! Inc.....................
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ------------
<S> <C> <C>
10.44**+ Yahoo! Remote Merchant Integration (RMI) Program Agreement
dated as of December 24, 1999 between the Company and Yahoo!
Inc.........................................................
10.45** Form of Series C Preferred Stock Purchase Agreement.........
10.46 Warrant dated December 24, 1999, issued to Yahoo!...........
10.47** 5670 Wilshire Boulevard Office Lease, as amended............
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..........................................
27.1** Financial Data Schedule.....................................
</TABLE>
- -------------------------
** Previously filed by the Registrant with the Commission.
+ 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.
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REDACTED
EXHIBIT 10.1
The following shall constitute the agreement, between THE RCA RECORDS
LABEL, a unit of BMG ENTERTAINMENT ("RCA") and ARTIST DIRECT LLC ("AD"), dated
as of November 15, 1996, with respect to creation of a record label ("Label") to
be managed by AD and funded by RCA as set forth below. The parties hereto agree
to negotiate reasonably, in good faith a more formal agreement consistent with
the terms of this Agreement (the "Formal Agreement"), provided that until the
Formal Agreement is fully executed, this Agreement shall be deemed binding and
fully effective and shall constitute the entire agreement between the parties.
RCA's good faith reasonableness in negotiating the Formal Agreement shall be
judged by reference to RCA's customary business practices relating to comparable
deals.
I. PURPOSE:
A. The Label will identify, secure, and develop recording artists
("Artists").
B. Initially, AD's participation in the proceeds from the
exploitation of master recordings by the Artists will be on a
royalty basis as set forth in paragraph V below (the "Label
Deal"). However, if the provisions of paragraph III.C are
applicable, AD's participation in the proceeds from the
exploitation of master recordings by the Artists shall be
converted into a profit participation (the "Profit Deal").
C. In either event, the Artists' records will be released under the
AD label throughout the world. In the United States, the
Artists' records will be distributed through BMG Distribution,
it being understood and agreed that RCA will not release the
Artists' records in the United States through "independent"
distribution channels without AD's consent. The release of
records through "independent" distribution channels outside of
the United States shall be governed by subparagraph VI.B.2
below.
D. An affiliate of AD ("NT Affiliate") will have the right to
purchase Artist's records from BMG pursuant to its standard
"price card" to customers in the United States. RCA represents
and warrants that the "price card" attached hereto as Exhibit
"A" is in effect as of the date hereof. The NT Affiliate shall
have the benefit of all appropriate discounts on a
product-by-product basis offered by BMG to any of its customers
[for example, discounts based on the purchase of catalog albums
(i.e., records which have been released for more than one (1)
year and are not currently on the sales charts, and discounts to
induce the sale of records by new artists. At such times during
the term of this Agreement that BMG changes its "price cards" to
its regular customers in the United States, the prices set forth
in said Exhibit "A" shall be automatically increased or
decreased accordingly. Subject to paragraph I.E.3 hereof, the NT
Affiliate shall have the right to sell such records through
non-traditional developing distribution channels throughout the
world (e.g., sales over the Internet and other similar networks
and sales at tour locations) (collectively, "Non-Traditional
Channels").
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E. RCA acknowledges that the NT Affiliate will also be in the
business of entering into agreements with recording artists
specifically for the purpose of distributing product through
Non-Traditional Channels ("NT Product"). In this regard, RCA
recognizes that it is the intention of the NT Affiliate that
these agreements will pay the artist small or no advances and a
substantial share of profits and possibly give the artist
reversion rights in the NT Product.
1. If the NT Affiliate acquires the right to distribute the
NT Product through traditional channels of distribution,
it shall first offer such rights to RCA in writing. If,
within fifteen (15) business days after RCA's receipt of
such offer, RCA does not make a written offer to the NT
Affiliate for such rights, then the NT Affiliate shall
have the right to license to any third party such
rights. Alternatively, if RCA makes an offer to the NT
Affiliate as aforesaid, but the parties are unable to
consummate a deal, then the NT Affiliate shall have the
right to license to any third party such rights,
provided the economic terms offered by such third party
for comparable rights are no less favorable to AD than
the economic terms last offered by AD to RCA. If the
economic terms of the third party's offer for comparable
rights are less favorable to AD than the economic terms
contained in AD's last offer to RCA with respect to such
rights, then the NT Affiliate shall notify RCA of such
terms, and RCA shall have the right to match the third
party's offer within ten (10) business days after such
notice.
2. If the NT Affiliate at any time during the Term (as
defined below) desires to enter into an agreement
("Financing Agreement") with a "strategic partner" or
other person or entity to acquire financing for the NT
Affiliate, the NT Affiliate shall first negotiate with
RCA. If the parties are unable to consummate a Financing
Agreement within thirty (30) days, then the NT Affiliate
will have the right to enter into a Financing Agreement
with a third party. RCA will have the right to match the
terms of that agreement if they are equal to or less
favorable to the NT Affiliate than the terms of AD's
last offer. Notwithstanding the foregoing, if the
distribution of audio-only records through
Non-Traditional Channels at the time is a meaningful
alternative to distribution through traditional
distribution channels, RCA shall have the right to match
any third-party offer.
3. Prior to entering into any agreement with any other
manufacturer or distributor, the NT Affiliate shall
negotiate in good faith with BMG, an agreement for BMG
to manufacture and/or fulfill orders for finished goods
of the NT Product for Non-Traditional Distribution in
audio-only configurations ("Fulfillment Agreement").
(The parties understand and agree that such finished
goods may include product by recording artists in
addition to the Artists signed to the Label.) If the
parties are unable to consummate a Fulfillment Agreement
within thirty (30) days, then the NT Affiliate will have
the right to enter into a Fulfillment Agreement with a
third party. BMG will have the right to match the terms
of that agreement if they are equal to or less favorable
to the NT Affiliate than the terms of AD's last offer.
If AD enters into a Fulfillment Agreement with a third
party, RCA's rights under this paragraph I.E.3. shall be
reinstated upon the expiration of such agreement.
II. TERRITORY: The world.
III. TERM AND PROFIT SHARING CONVERSION:
A. Subject to paragraph III.C below, the term of the Agreement will
be three (3) years commencing upon January 1, 1997. However, if
as set forth in paragraph III.C below, the Label Deal is
converted to the Profit Deal (the "Conversion"), then the term
of Profit Deal shall be equal to six (6) years minus the term of
the Label Deal. All references herein to the "Term" shall mean
the term of the Label Deal and, if applicable, the term of the
Profit Deal.
B. Subject to paragraph III.C below, RCA will have the option to
terminate the Term as of the end of the third year of the Term
("Early Termination Right"). In which event:
1. If the Label has had [***] in net billings during the
term of the Label Deal, or (ii) [***] in net billings in
the 3rd year of the Label Deal, the assets of the Label
will not be divided between RCA and AD.
2. If the Label has had (i) [***] in net billings during
the Label Term, and (ii) [***] in net billings during
the 3rd year of the term of the Label Deal, the assets
of the Label will be divided between RCA and AD, with AD
having the first pick of the Artists.
3. If the terms of paragraph III.B.1 and III.B.2 are not
applicable, the assets of the Label will be divided
between RCA and AD, with RCA having the first pick of
the Artists.
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4. The party who has the first pick can elect to transfer
such first pick to other party. The party who has the
second pick pursuant to either paragraphs III.B.2 or
III.B.3 above will pick the next 2 Artists; thereafter,
the parties will alternate by picking 1 Artist until all
of the Artists have been divided.
5. Rights and Royalty Overrides After the Exercise of the
Early Termination Right:
(a) RCA shall retain the ownership to all product
("Pre-Conversion Product") released by RCA prior
to the date (the "Termination Date") of RCA's
exercise of the Early Termination Right.
(b) With respect to all Artists kept by RCA under
any of the above scenarios ("RCA Retained
Artists"), RCA shall have the unilateral right
to exercise all creative decisions thereafter,
subject to good faith consultation with Marc or
Don provided either of them are available. Prior
to the execution of the Formal Agreement, the
parties agree to negotiate in good faith a
procedure which would allow either party to
pick-up an Artist after the Label Term (without
a royalty override or other participation) if
the other party should decide thereafter not to
exercise an option under an Artist Agreement.
(c) RCA shall continue to advance the Artist
advances and recording funds with respect to
records to be recorded by the Artist after the
Termination Date.
(d) RCA will continue to account to AD on a royalty
basis (the "AD Royalty Participation") for all
records subject to an Artist Agreement in
perpetuity. With respect to product recorded by
a RCA Retained Artist prior to the Termination
Date and all product recorded by a RCA Retained
Artist as of the date a RCA Retained Artist
delivers under the applicable Artist Agreement
the second album recorded after the Termination
Date, the AD Royalty Participation shall be the
amount (the "Label Royalty Spread") by which the
royalty payable to AD pursuant to paragraph V
hereof exceeds the "all-in "royalties payable to
the applicable RCA Retained Artist (including
producer royalties) ("Artist Royalties"). With
respect to product recorded after the delivery
of such second album, the AD Royalty
Participation shall be the Label Royalty Spread
less 50% of any increases in the Artist
Royalties agreed to by RCA after the Termination
Date. Notwithstanding the foregoing, in no event
shall the Ad
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Royalty Participation be less than [***] of the
SRLP with respect to 100% (less free goods and
discounts) of top-line net sales of albums
through normal retail channels in the United
States ("USNRC Album Sales"). The AD Royalty
Participation shall be calculated, reduced and
paid in accordance with the terms of the Formal
Agreement with respect to USNRC Album Sales and
with respect to all other exploitations of the
applicable master recordings. The payment of the
AD Royalty Participation shall continue to be
subject to the recoupment provisions contained
in paragraph IV.G hereof.
(e) Notwithstanding RCA's exercise of the Early
Termination Right, AD will continue to own the
name of the Label; it being understood and
agreed, however, that all prior and future
product under an Artist Agreement shall be
released under the Label's name.
(f) With respect to each Artist that is picked by
AD, RCA shall be entitled to an override royalty
("RCA Override"). With respect to 100% (less
free goods and discounts) of USNRC Album Sales
sold by AD on a "p&d" and/or profit sharing
basis, the RCA Override shall be the lesser of
(i) [***] of the SRLP, or (ii) the amount by
which [***]* exceeds the royalty rate payable to
the Artist, the applicable record producers and
all other third party royalty participants. In
such event, the RCA Override with respect to
USNRC Album Sales and with respect to all other
exploitations of the applicable master
recordings shall be calculated, reduced and paid
in accordance with the applicable Artist
Agreement. With respect to sales of records
through a third party distribution agreement
where AD is paid a royalty and does not pay or
is charged with the manufacturing costs of the
records, the RCA Override shall be equal to
[***] of the difference between the royalty
rates payable to AD under such agreement and the
"all-in" royalties payable to the Artists,
producers and other third party royalty
participants. The RCA Override shall only be
payable to RCA with respect to master recordings
recorded by each Artist prior to the release of
the second newly-recorded album after the
exercise of the Early Termination Right
(including those master recordings contained on
such second album), but shall not be payable
with respect to product distributed by RCA or
any affiliate controlled by RCA. The RCA
Override shall be payable in respect of each
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applicable LP prospectively after recoupment of
the recording costs and artist advances paid in
connection with the LP concerned. Such
recoupment will be calculated at a royalty rate
of [***] of the SRLP with respect to USNRC Album
Sales, whether AD is paid on a royalty basis or
a profit sharing (or "p&d") basis.
C. The Label Deal will automatically convert to a Profit Deal at
the end of the first 3 years, unless RCA exercises the Early
Termination Right. However, if prior to the end of the first 3
years, the aggregate net billings of the Label exceed either (i)
[***] in Qualified Sales, or (ii) [***] in Aggregate Sales, the
Label Deal will automatically convert to the Profit Deal at the
end of the first semi-annual accounting period during which such
sales are achieved ("Conversion Date"). For purposes of the
above calculation, as used herein:
1. the term "Qualified Sales" shall mean all net sales
other than (A) net billings over [***] from the
master recordings contained on any album by an Artist
signed to a exclusive term recording agreement, and (B)
aggregate net billings from the master recordings
contained on any one-off albums (e.g., soundtrack
albums, albums developed by the NT Affiliate, etc.) in
excess of [***];
2. the term "Aggregate Sales" shall mean all net billings
other than aggregate net billings from the master
recordings contained on all one-off albums in excess of
[***]; and
3. the term "net billings" for purposes of determining
Qualified Sales and Aggregate Sales shall mean:
(a) in the United States, (A) the gross wholesale
receipts to BMG from its customers on all
records shipped less actual returns and a
reasonable reserve for future returns, but
without any other deduction (e.g., any
distribution fees or charges or manufacturing
costs), (B) RCA's receipts the licensing of
master recordings by the Artists, and (C) monies
paid to BMG Distribution by the NT Affiliate;
and
(b) on sales outside of the United States, 100% of
the all-in inter-company "matrix" (as defined
in BMG's Inter-Company License Agreement, such
definition being attached hereto as Exhibit
"B") (the "Matrix") paid or credited to RCA by
its foreign affiliates and all monies paid or
credited by its non-affiliated licensees.
In determining the amount of foreign
income under this subparagraph II.C.3.b. RCA
shall include its good-faith estimate of
so-called "pipeline" royalties in the EEC,
Australia, and Japan.
IV. LABEL FUNDING AND RECOUPMENT UNDER THE LABEL DEAL:
A. Signing Payment: [***], payable on January 2, 1997.
B. Overhead Advances: [***] per year, [***] of which will be
payable [***].
C. Sales Bonus Overhead Payments: Promptly after the following
events, RCA will pay AD:
1. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable;
2. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable;
3. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable, and
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4. a sales bonus of [***] for the first album which sells
more than [***] USNRC units, of which [***] shall be
non-recoupable.
For the avoidance of doubt, each bonus payment will be a
one-time only payment, which shall be paid in respect of the
first album to achieve the applicable threshold during the Label
Term.
D. A&R:
1. AD shall sign at least 3 Artists during each year of the
Label Term. If at the end of any year of the Label Term,
AD has signed less than 3 Artists in such year, RCA
shall have the right, by written notice to AD, to
suspend its obligations to AD (other than the payment of
Artist and producer advances and royalties) and the term
of the Term until such artists are signed. If any such
suspension continues for 12 months, RCA shall have the
right, within 30 days thereafter, to terminate the Term,
and the assets of the Label will not be divided between
RCA and AD.
2. If at the end of the second year of the Term, less than
[***] albums have been delivered by the Artists, RCA
shall have the right, by written notice to AD, to
suspend its obligations to AD (other than the payment of
Artist and producer advances and royalties) and the Term
until such albums are delivered. Further, if at the end
of the third year of the Term and each year thereafter,
less than [***] albums have been delivered by the
Artists in such year, RCA shall have the right, by
written notice to AD, to suspend its obligations to AD
(other than the payment of Artist and producer advances
and royalties) and the Term. If any such suspension
continues for 6 months, RCA shall have the right within
30 days thereafter to terminate the Term, and the assets
of the Label will not be divided between RCA and AD.
3. Initial Product Commitment: Subject to paragraph IV.D.3
hereof, RCA will make available to AD [***] ("Maximum
A&R Funding") in each year of the Label Deal to be spent
on Artist advances and recording costs (including
producer advances) for the initial product commitment
for each Artist. As used herein, the "initial product
commitment" means all product intended to be recorded
under an Artist Agreement prior to the exercise of an
option under the applicable Artist Agreement. The Artist
advances and recording funds for the initial product
commitment will be subject to the mutual approval of AD
and RCA, provided that if RCA does not
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consent to the Artist advances and/or recording funds
for an initial product commitment, neither RCA nor any
company controlled by RCA shall sign the Artist directly
(unless RCA has knowledge of such Artist independently
from AD), and AD may elect to either take the Artist
(each a "Rejected Artist") to another record company
(subject to subparagraph 3(d) below) or, notwithstanding
RCA's non-consent, AD may enter into the Artist
Agreement with the applicable Artists ("AD Selected
Artists") so long as:
(a) the Artist advances and recording fund for a 1
album firm deal do not exceed [***] for the
first album, and the Artist advances and
recording funds for a 2 album firm deal do not
exceed an aggregate of [***] for the first 2
albums:
(b) the aggregate of all Artist advances and
recording funds for the initial product
commitment for all of the AD Selected Artists in
any 1 year of the Term ("Annual A&R Commitment")
do not exceed [***];
(c) with respect to AD Selected Artists after the
first one in each of the second and third years
of the Label Term, the signing of an AD Selected
Artist in the second or third year of the Label
Term would not cause AD to exceed the "Aggregate
Maximum." The Aggregate Maximum would occur in
the second or subsequent year of the Label Term
whenever the "Outstanding Amount" equals or is
more than [***] in the applicable year of the
Term. As used herein, the term "Outstanding
Amount" shall mean the amount, if any, by which
(i) the aggregate of unrecouped and expensed (in
accordance with GAAP) Artist advances and
recording costs for all AD Selected Artists
previously signed to the Label (but excluding
any other charges recoupable from AD or the
Selected Artists) exceeds (ii) all royalties
therefore credited to accounts of all of the AD
Selected Artists previously signed to the Label
and all royalties credited to AD's account with
respect to AD Selected Artists previously
signed to the Label. For purposes of this
calculation; (i) AD may require RCA, up to a
maximum of two (2) times in any calendar year of
the Term, to include in its calculation of
royalties a good-faith estimate of so-called
"pipeline" royalties in the EEC, Australia, and
Japan; and (ii) all royalties credited to AD's
account with respect to the AD Selected Artists
shall first be applied to recoup such artists'
advances and recording costs, prior to the
recoupment of other recoupable charges; and
(d) Notwithstanding anything to the contrary set
forth herein, AD shall not have the right to
sign more than [***] Rejected Artists to another
record company during any Contract Year of the
Term; provided, however, that AD shall not sign
any Artist to another record company on terms
less favorable than the terms last offered to
RCA by AD unless AD first offers to enter into
an agreement on the same terms.
4. Unused A&R Funds: If AD spends less than the Maximum A&R
Funding for initial product commitment in any one year,
then AD can use the lesser of [***] of the difference or
[***] to increase the Maximum A&R Funding for the
next year of the Label Deal.
5. Optional Product: RCA will advance all Artist advances
and recording funds payable with respect to all product
after the initial product commitment, provided that the
Label will not exercise an option under an Artist
Agreement without RCA's consent, not to be
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unreasonably withheld. Prior to the execution of the
Formal Agreement, the parties agree to negotiate in good
faith a procedure which would allow AD to pick-up an
Artist (without a royalty override or other
participation to RCA) if RCA should decide not to
exercise an option under an Artist Agreement.
6. Creative Control: AD will meaningfully and fully consult
with RCA on all creative matters. With respect to each
album, AD will regularly furnish copies of recordings
made during the recording process so that RCA may take
advantage of its consultation right, and so that RCA can
begin to make plans regarding the marketing of the album
concerned.
E. RCA's Marketing and Promotion: RCA will commit to spend at least
[***] to market each album released in the United States. Those
amounts will be spent in accordance with RCA's marketing plan.
RCA will fully consult with AD regarding each marketing plan.
F. AD's Marketing and Promotion:
1. In addition to RCA's committed marketing expenditures,
RCA will spend at least [***] as directed by AD for each
album released in the United States. AD will allocate
these amounts for traditional record marketing purposes
(e.g., independent promotion and marketing, tour
support, etc.) in the United States. AD will have the
right to use the lesser of [***] of any unused portion
of this $100,000 marketing fund or [***] per album
for the marketing and promotion of other albums in full
consultation with RCA.
2. In addition, during the Label Term, RCA will make
available to AD a minimum of [***] in the aggregate for
use in non-traditional marketing in full consultation
with RCA.
G. Recoupment:
1. Artist Advances. Artist advances [***] will be
recoupable by RCA from [***] of the royalties set forth
in paragraph V below with respect to the applicable
Artist. There will be no cross-collateralization between
Artists' accounts.
2. Signing Advance, Overhead Advances, and Sales Bonus
Overhead Payments. [***] of the Signing Advance and the
Overhead Advances and the recoupable portion of the
Sales Bonus Overhead Payments (as set forth in paragraph
IV.C hereof) shall be
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recoupable from the aggregate of [***] of the royalties
set forth in paragraph V below from all Artists from the
first record sold.
V. ALL-IN ROYALTY RATES UNDER THE LABEL DEAL:
A. RCA will pay AD a royalty of [***] (the "Base Rate") of the SRLP
with respect to [***] of USNRC Album Sales. The Base Rate will
escalate prospectively to [***] with respect to any album by an
Artist which sells more than [***] USNRC units. If any album by
an Artist sells more than [***] USNRC units, the Base Rate for
all subsequently released albums by that Artist will be [***].
RCA will pay AD a royalty of [***] of the SRLP with respect to
[***] of top-line singles sold through normal retail channels in
the United States.
B. The royalty for compact discs will be [***] of the otherwise
applicable royalty rate. However, if an album in all
configurations has USNRC Album Sales in excess of [***], then
the royalty rate for units of that album sold through USNRC in
excess of [***] will be [***] of the otherwise applicable rate,
and the rate for all compact discs of an album by the applicable
Artist released thereafter shall be [***] of the otherwise
applicable rate.
C. If an Artist's record is released on another type of audiophile
record, then, until such time as particular type of audiophile
record equals [***] of the aggregate of industry-wide sales of
all other configurations, the royalty rate for that record and
all other records by that Artist released in that particular
audiophile configuration during such period will be [***] of the
otherwise applicable royalty rate. Thereafter, the parties will
negotiate a royalty rate for the applicable audiophile record.
D. The foregoing royalty rates assume a standard free goods
allowance of [***] for albums sold in the United States in the
cassette configuration, [***] for albums sold in the United
States in the compact disc configuration and [***] for singles,
and standard packaging deductions of [***] for vinyl, [***] for
analog tape, and [***] for compact discs.
E. On sales through normal trade channels outside the United
States, RCA will pay AD a royalty calculated as a percentage of
the otherwise applicable rate as follows: Canada - [***]; the UK
(including Eire) and Japan - [***]; the rest of the EEC
Countries, Switzerland, Australia and New Zealand - [***]; and
R.O.W. - [***].
F. The other royalty terms will be subject to negotiation prior to
execution of the Formal Agreement.
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VI. VARIOUS PROVISIONS APPLICABLE TO BOTH THE LABEL DEAL AND THE PROFIT
DEAL:
A. Artist Agreements: The terms of the Artist Agreements will be
mutually approved as to total product, royalty rates, etc.
However, RCA will pre-approve certain terms so that AD will not
have to obtain RCA's approval as to the pre-approved terms. With
regard to mechanicals, AD will use its best efforts to secure a
[***] controlled composition rate in its Artist Agreements with
a [***] times cap on albums ([***] times cap on CDs) and subject
to an allowance for [***] covers per album at the full minimum
statutory rate.
B. Release Commitment:
1. RCA will be obligated to release each album delivered by
an Artist in satisfaction of its recording commitment in
the United States.
2. Each time an Artist delivers an album, AD shall provide
a pre-release copy of the album to BMG. BMG shall notify
AD within 60 days thereafter whether it will release
such album. If BMG notifies AD that it will release the
album, BMG will release the album in Canada, the EEC,
Japan, and Australia ( the "Release Territories") within
120 days after the initial release of such album in the
United States. Notwithstanding the foregoing, if the
album concerned is submitted to BMG less than 60 days
prior to its initial release date in the United States,
such 120-day period will be extended by the number of
days by which 60 days exceeds the number of days the
album is submitted prior to the initial release date in
the United States. If BMG does not release the album in
any Release Territory within such time period, AD shall
have the right to enter into a licensing agreement in
such Territory, provided that, without the approval of
RCA, (i) the foreign licensee shall not have the right
to release more than the applicable album (such licensee
shall also have the right to release singles derived
from such album), and (ii) the foreign licensee shall
not be affiliated with [***] (or any company affiliated
with [***] or [***]. If BMG notifies AD that it will not
release the album, AD shall have the right to cause a
licensing agreement to be entered into with respect to
territories outside of the United States on the terms
and conditions set forth above, provided that the
parties will negotiate at the time whether such license
will be granted by BMG or directly by AD. Under the
Label Deal, each foreign licensee not controlled by RCA
shall pay [***] of
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all monies to RCA. After paying the applicable Artist
royalty, RCA will take [***] of the proceeds for its own
account and will apply the remaining [***] of the
proceeds to AD's account. Notwithstanding the foregoing,
at AD's election, up to [***] of such proceeds may be
used for international tour support. During the Profit
Deal, the revenues from AD's foreign licensees shall be
deemed income in computing net profits.
C. Finished Goods Purchases: AD and the NT affiliate will be
entitled to purchase finished goods from BMG (at prices to be
mutually agreed upon prior to the execution of the Label Deal)
for the NT Affiliate's exploitation and distribution over the
internet or other networks, at tour locations and other
non-traditional distribution channels.
D. Record Clubs: No record will be sold through a record club in
the United States earlier than 9 months after its initial
release.
VII. DON'S AND MARC'S ENGAGEMENT:
A. Exclusivity: During the Term, neither Don, nor Marc, nor AD nor
any other company owned by either or both of them will have the
right to enter into any agreement with any other company which
involves the sale of records through traditional record
distribution channels. (If RCA becomes a "strategic partner" in
the NT Affiliate, then the exclusivity shall include all
exploitations of master recordings.) Don and Marc will be free
to pursue any other business, including, without limitation, a
talent agency, music publishing, internet website, and the
production, acquisition and/or exploitation of goods and
services, including audio and audiovisual product, over the
internet or other networks and at tour locations, and
merchandising; provided such activities do not interfere with
their material obligations hereunder.
B. Talent Agents: Neither Don nor Marc shall be required under the
Label Deal or the Profit Deal to breach their fiduciary or other
legal obligations to any of their talent agency clients.
VIII. PROFIT DEAL:
A. Management: Promptly after the Conversion Date, AD and RCA shall
negotiate in good faith an operating agreement, which shall
govern the operation of the New Entity. This agreement will
provide, among other matters, that the business of the New
Entity shall be generally run by a Board of Managers comprised
of Don, Marc, and 2 people designated by RCA, one of whom shall
always be a senior executive of RCA. However, the day-to-day
management decisions of the New Entity shall be made by Don and
Marc. In other words, AD shall have sole and absolute discretion
to run the day-to-day operation of the business of the New
Entity through Marc and Don, subject to the New Entity's
business plan which shall be reasonably agreed upon annually by
the Board of Managers.
B. Ownership and Net Profits: AD and RCA will each own 50% of the
New Entity. AD will be entitled to 50% of the net profits under
the Profit Deal, which will be paid within 90 days after each
year of the Profit Deal. Except for possible minimum annual
distributions to cover each party's tax
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11
<PAGE> 12
obligations with respect to income subject to the Profit Deal,
no net profits will be distributed until RCA has been reimbursed
for all Chargeable Expenses. Net Profits would mean all revenues
to the Label calculated in accordance with GAAP, as consistently
applied to the financial statements of BMG less Chargeable
Expenses. Revenues from sales of records outside the United
States would mean the Matrix paid or credited to RCA by its
foreign affiliates and all monies paid or credited by its
non-affiliated licensees. As used herein, "Chargeable Expenses"
means the Working Capital Advance described below, all third
party, out-of-pocket manufacturing, marketing, promotional and
exploitation costs incurred by RCA in connection with records
initially released after the Conversion Date and certain
pre-Conversion Date costs as set forth in paragraph VIII.E.2
below.
C. Conversion Payment: If the Label Deal converts to a Profit Deal
as a result of AD achieving the automatic conversion target set
forth in paragraph III.C above (the "Automatic Conversion"), RCA
will pay, upon the Conversion Date, a [***] profit advance to
AD. If the Label Deal converts to a Profit Deal as a result of
RCA exercising its option to extend the Term beyond the initial
3 years (the "Optional Conversion"), RCA will pay, upon the
Conversion Date, a [***] profit advance to AD.
D. Working Capital Advance: Operating funds would be made available
by RCA pursuant to mutually approved annual plans on a
non-interest bearing basis. If AD and RCA are unable to agree
upon an annual business plan for any year, the working capital
advance provided for such non-plan year will be an amount equal
to the following amounts based on the assumption that the New
Entity will sign 5 new Artist during such year: (i) A&R funding
equal to [***] for the initial product commitment; (ii) a
minimum of [***] per album release in marketing and promotion
funds, and (iii) overhead payments equal to [***] in the event
of an Automatic Conversion or [***] in the event of an Optional
Conversion. RCA agrees that all or any portion of the overhead
payments may, at AD's election, be paid to Don and Marc as
salary, perquisites and benefits other distributions.
E. Transition Issues:
1. With respect to all sales and other exploitations of
Pre-Conversion Product prior to the Conversation Date,
RCA will account to AD on a royalty basis.
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<PAGE> 13
2. All sales and other exploitations after the Conversions
Date will be subject to the Profit Deal; subject to the
following:
(a) RCA shall license to the New Entity all rights
to exploit and otherwise use the Pre-Conversion
Product throughout the world during the term of
the Profit Deal (i.e., such license shall end at
the end of the Term). In consideration for such
license, the New Entity shall pay RCA a royalty.
Such royalty shall be at the rate of [***] of
the SRLP with respect to [***] (less free goods
and discounts) of USNRC Album Sales. Such
royalty shall be calculated, reduced and paid in
accordance with the terms of the Formal
Agreement with respect to USNRC Album Sales and
with respect to all other exploitations of the
applicable master recordings.
(b) The New Entity shall pay RCA all artist
royalties payable for all sales and
exploitations of the Pre-Conversion Product by
the New Entity until such time as all advances
and other recoupable charges incurred by RCA
prior to the Conversion Date have been recouped.
Thereafter and during the rest of the Term, the
Label shall account to the applicable Artists
with respect to such artist royalties. The New
Entity will also pay RCA for: (i) all
Pre-Conversion inventory; and (ii) all
Pre-Conversion marketing expenses incurred in
connection with product to be initially released
after the Conversion Date.
3. Except as set forth in paragraph VIII.E.2 above, no
other expenditures by RCA under the Label Deal will be
deemed Chargeable Expenses in computing net profits or
will be used to reduce the Working Capital Advance.
F. Domestic Distribution: Net profits shall be calculated [***].
RCA agrees that, prior to the execution of this Agreement, it
has supplied AD with a true and correct written statement of
calculation of such [***].
G. Domestic Manufacturing: Net profits shall be calculated using
the applicable manufacturing and packaging prices paid by RCA
for its own product as set forth in Exhibit "C" hereof.
H. Foreign Revenues: The revenue from foreign sales by an affiliate
of RCA will be calculated using the Matrix paid to RCA by its
foreign affiliates for
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<PAGE> 14
RCA's other product and all monies paid by licensees of RCA and
of the New Entity.
I. Additional Services: RCA shall provide the New Entity with
promotion, marketing, creative services, including video, art,
artist relations, publicity, promotional merchandise, sales,
distribution, general financial, royalty accounting and
administrative services with respect to the New Entity's
product. In consideration of the foregoing services, RCA shall
be entitled to the following fees: (i) [***] of RCA's wholesale
receipts in the United States paid or credited to the New Entity
in the applicable year until such fees equal [***], (ii) [***]
of such receipts between of in the applicable year until such
fees equal [***], and (iii) [***] of such receipts until such
fees equal [***] in the applicable year. Notwithstanding the
foregoing, the fees payable in any one(1) year shall not be in
excess of [***]. Further, if RCA does not perform all of the
foregoing services, the parties shall negotiate in good faith a
reduction in the maximum fees payable in each year, provided
that RCA shall continue to be paid the fees as set forth herein
during the period of such negotiations.
J. Buy-Out:
1. If RCA does not exercise its Early Termination Right, AD
shall have the right, at any time after the date 6
months prior to the end of the 6th year of the Term, to
offer ("Buy-Out Offer") to sell AD's interest in the New
Entity to RCA as of the last day of the Term for a
purchase price equal to the Buy-Out Offer price. If AD
has not made a Buy-Out Offer as of the end of the Term,
RCA shall have the right thereafter to require AD to
make a Buy-Out Offer by notifying AD to such effect. If
AD does not make a Buy-Out Offer within 60 days after
such notice, then RCA shall have the right to suspend
its obligation to make any further payments to AD until
AD makes a Buy-Out Offer.
2. RCA shall either accept the Buy-Out Offer or offer to
sell its interest in the New Entity to AD for the
Buy-Out Offer price, within 30 days after RCA's receipt
of the Buy-Out Offer.
3. If, on the one hand, RCA accepts the Buy-Out Offer, then
RCA shall promptly purchase AD's interest in the New
Entity for the Buy-Out Offer price. If, on the other
hand, RCA offers to sell its interest in the New Entity
to AD, then AD shall notify RCA, within 30 days
thereafter, whether AD is electing to purchase RCA's
interest in the New Entity at the Buy-Out Offer or is
rejecting RCA's offer to sell.
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<PAGE> 15
4. In the event AD rejects RCA's offer to sell RCA's
interest in the New Entity, AD shall be deemed to have
offered to sell to RCA AD's interest in the New Entity
for [***] of the original Buy-Out Offer price. RCA shall
either accept the [***] Buy-Out Offer or offer to sell
its interest in the New Entity to AD for the [***]
Buy-Out Offer or offer to sell its interest in the New
Entity to AD for the [***] Buy-Out Offer price, within
30 days after such notice. If, on the one hand, RCA
accepts the [***] Buy-Out Offer, then RCA shall promptly
purchase AD's interest in the New Entity for the [***]
Buy-Out Offer price. If, on the other hand, RCA offers
to sell its interest in the New Entity to AD, then AD
shall notify RCA, within 30 days thereafter, whether AD
is electing to purchase RCA's interest in the New Entity
at the [***] Buy-Out Offer or is rejecting RCA's offer
to sell.
5. The foregoing procedure will continue with reductions
equal to [***] of the initial Buy-Out Offer price at
each level until one of the parties agrees to purchase
the other party's interest in the New Entity.
6. For the avoidance of doubt, the Pre-Conversion Product
shall not be deemed assets of the New Entity and,
accordingly, shall not be subject to the foregoing
provisions of this paragraph VIII.J.
7. It is understood and agreed that if AD purchases RCA's
interest in the New Entity, [***] of the New Entity's
net losses shall be added to AD's purchase price.
K. Consultants: If RCA purchases AD's interest in the New Entity,
Marc and Don, at RCA's election at the time of RCA's purchase
(provided that RCA will not be able to engage one without the
other), will act as consultants to the Label for one (1) year.
During this period, Marc and Don will not be involved in the
record industry (insofar as traditional record distribution is
concerned) with anyone other than RCA. The salary paid to Marc
and Don during this consultancy will be the same amount as the
salary paid to them during the last year of the Profit Deal. The
other terms related to this consultancy shall be negotiated by
the parties in good faith prior to the execution of the Formal
Agreement.
IX. ANCILLARY RIGHTS: In the event that AD or the Label (or any other entity
owned or controlled, directly or indirectly, by the Marc and Don)
obtains music publishing or merchandising rights with respect to any
artist, RCA or its affiliates will be given the first opportunity to
exploit such rights on reasonable business terms. "Reasonableness" in
the preceding sentence will be judged by references
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<PAGE> 16
to ordinary course, arms-length negotiations conducted in good faith. If
the parties are unable to reach agreement with respect to ancillary
rights in any case, AD and its affiliates will not do a deal with any
third party on terms less favorable than the terms offered to RCA or its
affiliate without first offering such terms to RCA or its affiliate.
X. KEY MAN: During the Term, both Don and Marc will be deemed to be "key
men." Accordingly, if either of them cease to perform or becomes unable
to perform their respective obligations during the Term, RCA will have
the option to terminate the Term.
XI. LEGAL FEES: RCA will not be responsible for any legal or consultancy
fees incurred in connection with the negotiation of this transaction.
XII. WARRANTIES: Each of the parties hereto represents and warrants that: (i)
it has the full right and authority to enter into and fully perform this
agreement; (ii) entering into this agreement will not violate or
infringe upon the rights of any third party: and (iii) it is under no
disability, restriction, or prohibition with respect to its rights to
enter into, and fulfill, all of its obligations under this agreement.
XIII. MISCELLANEOUS: All reference to "this Agreement," "hereof," "herein,"
"hereunder," and words of similar connotation include all exhibits
attached hereto, unless specified otherwise. This Agreement cannot be
canceled, modified, amended or waived, in part or in full, in any manner
except by an instrument in writing signed by the party to be charged. No
waiver by any party to this Agreement, whether expressed or implied, of
any provision of this Agreement or default hereunder shall affect such
party's right to thereafter enforce such provision or to exercise the
right or remedy set forth in this Agreement in the event of any other
default, whether or not similar. Whenever examples are used in this
Agreement with the words "including," "for example," "e.g.," "such as,"
"etc." or any derivation thereof, such examples are intended to be
illustrative and not in limitation thereof.
RCA RECORDS, INC. ARTIST DIRECT, LLC
By: /s/ Jeff Walker By: /s/ Marc Geiger
------------------------------- -------------------------------
Jeff Walker Marc Geiger
Senior Vice President
Business & Legal Affairs
By: /s/ Marc Geiger
-------------------------------
Marc Geiger
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<PAGE> 1
REDACTED EXHIBIT 10.3
BMI WEB SITE
MUSIC PERFORMANCE AGREEMENT
http://www.bmi.com
AGREEMENT, made on October 9, 1998, by and between BROADCAST MUSIC, INC.
("BMI"), a New York corporation with its principal offices at 320 West 57th
Street, New York, New York 10019 and ARTISTDIRECT ("LICENSEE") a California
(State)
(check one) [ ] corporation
[ ] partnership
[ ] limited liability company
[ ] individual d/b/a ___________________________ (complete if
applicable) with its principal offices at 17835 Ventura Blvd., Suite 310,
Encino, CA 91316.
IT IS HEREBY AGREED AS FOLLOWS:
1. Definitions.
As used in this Agreement, the following terms shall have the following
respective meanings:
(a) The "Term" of this Agreement shall mean the period from
October 9, 1998 through June 30, 2000 and continuing on a year-to-year basis
thereafter; provided, however, that either party may terminate the Agreement
upon 60 days' prior written notice at the end of June of any year beginning with
June 30, 2000.
(b) "Web Site" shall mean an Internet computer service currently
registered with Internic and known as ULTIMATE BAND LIST that LICENSEE produces
and/or packages and then transmits or causes to be transmitted either directly
or indirectly to persons who receive the service from the URL http://UBL.COM
over the Internet by means of a personal computer or by means of another device
capable of receiving Internet transmissions. LICENSEE agrees that this Agreement
covers only transmissions originating from this Web Site and URL within the
Territory. LICENSEE may list additional Web Sites owned, operated and/or
controlled by LICENSEE on Exhibit A hereto. LICENSEE must comply separately with
all reporting requirements under this Agreement for each Web Site listed on
Exhibit A. References herein to Web Site shall include those additional sites
listed on Exhibit A.
(c) "Territory" shall mean the United States, its territories,
commonwealths and possessions.
(d) "Online Service" shall mean a commercial computer online
information and/or entertainment programming packaging service (including, but
not limited to, America Online, Microsoft Network, CompuServe and Prodigy) which
may offer consumers, for a fee, access to proprietary centralized databases as
well as remote sources of audio and video programming and which may provide
Internet access.
(e) "Web page" shall mean a set of associated files transferred
sequentially to and rendered more or less simultaneously by a browser.
<PAGE> 2
(f) "Page impression" shall mean a transfer request for a single
web page.
(g) "Music page" shall mean a web page which presents an icon
that may be clicked on to access music or at which music is played upon loading
the web page.
(h) "Music impression" shall mean a page impression of a music
page multiplied by the number of music file titles on that page either visible
by means of an icon on that page or otherwise (e.g., a music page with five (5)
music file titles would yield 5 music impressions whenever that page is
requested).
(i) "Gross Revenues" shall mean all revenues, including all
billings on behalf of, and all payments made to, LICENSEE, or as authorized by
LICENSEE, its employees, representatives, agents or any other person acting on
LICENSEE's behalf, and all billing on behalf of, and payments made to, any
person, company, firm or corporation under the same or substantially the same
ownership, management and control as LICENSEE for: (1) access to and/or use of
the Web Site or portions thereof, including online time, subscriptions, payments
from Internet Service Providers and other transactional charges, including
commissions from third parties on transactions; (2) advertising (including
sponsor "hot links") on the Web Site, including billings to and payments
received from sponsors less advertising agency commissions not to exceed 15%
actually incurred to a recognized advertising agency not owned or controlled by
LICENSEE; (3) the provisions of time or space on the Web Site to any other
person; (4) donation; (5) the fair market value of merchandise, services or any
thing or service of value which LICENSEE may receive in lieu of cash
consideration for the use of the Web Site (i.e. trade and barter); and (6)
LICENSEE's proprietary software used to access the Web Site, or download any
aspect thereof. Gross Revenues shall include such payments as set forth in (1)
through (6) above to which LICENSEE is entitled but which are paid to a parent,
subsidiary, or division of LICENSEE or any third party, in lieu of payment to
LICENSEE, for LICENSEE's Web Site.
(j) "Music Area Revenues" shall mean Gross Revenues multiplied
by a fraction the numerator of which is the total number of music impressions
for the Web Site and the denominator or which is the total number of page
impressions for the Web Site.
2. Grant of Rights.
(a) BMI hereby grants to LICENSEE, for the Term of this
Agreement, a non-exclusive license to perform publicly within the Territory, in
and as part of LICENSEE's Web Site transmitted or caused to be transmitted
either directly or indirectly by LICENSEE over the Internet all musical works,
the rights to grant public performance licenses of which BMI controls. This
license shall include only public performances by transmissions originating from
a server within the Territory and received by listeners via personal computers
or by means of another device capable of receiving the Internet through
streaming technologies as well as those transmissions that are downloaded by
persons on personal computers or otherwise. This license shall not include
dramatic rights or the right to perform dramatico-musical works in whole or in
substantial part. In no event shall this license include transmissions to any
commercial premises where LICENSEE's Web Site is used as a commercial music
service (as that term is currently understood in the industry) or is performed
publicly; such performances of BMI music shall be subject to appropriate
separate BMI license(s).
(b) Nothing herein shall be construed as the grant by BMI of any
license in connection with any transmission which is not party of LICENSEE's Web
Site transmitted or caused to be transmitted by LICENSEE and nothing herein
shall be construed as authorizing LICENSEE to grant to others (including, but
not limited to, online services, cable television system operators and open
video systems (acting as other than Internet service providers)) any license or
right to reproduce or perform publicly by any means, method or process
whatsoever, any of the musical compositions licensed hereunder.
(c) The transmission by LICENSEE of a public performance
licensed hereunder may originate at any place within the Territory whether or
not such place is licensed by BMI.
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<PAGE> 3
(d) This Agreement grants only public performing rights to
LICENSEE, and does not grant any reproduction, distribution, performance right
in sound recordings or any other intellectual property right(s) in any musical
compositions to any person or entity that may receive and/or download or
otherwise store the transmission of musical works.
(e) This Agreement only grants to LICENSEE the right to publicly
perform musical works in which and to the extent BMI has been granted the public
performing rights.
(f) LICENSEE represents and warrants that it shall not offer
LICENSEE's Web Site for resale by a third party as a pay or premium audio
service, and that LICENSEE's Web Site shall not be packaged or included on a
tier of services for additional revenues either independently or with other Web
Sites by third parties. The license granted hereunder shall not extend to any
such use of the Web Site.
3. License Fee.
In consideration of the license granted herein, LICENSEE shall pay to
BMI for each quarter year of the Term a license fee equal to either of the
following amounts the choice between which shall be LICENSEE's:
(a) Gross Revenues Calculation. LICENSEE shall pay to BMI [***]
of LICENSEE's Gross Revenues generated by LICENSEE's Web Site during each
quarter year of the Term according to the Payment Schedule set forth below
("Payment Schedule"); or
(b) Music Area Revenues Calculation. LICENSEE shall pay to BMI
the [***].
[***]:
<TABLE>
<CAPTION>
Quarter Period Ending Payment Due Date
------- ------------- -----------------
<S> <C> <C>
[***] [***] [***]
[***] [***] [***]
[***] [***] [***]
[***] [***] [***]
</TABLE>
4. Minimum Fee
Upon signing this Agreement, LICENSEE shall pay to BMI an [***].
Thereafter, LICENSEE shall pay the [***] the beginning of each calendar year by
no later than January 31. The minimum fee payment will be credited against any
additional fees LICENSEE shall owe to BMI above the minimum fee in the same year
to which the minimum fee shall apply. Web Sites paying only the minimum fee must
still furnish financial reports under Paragraph 5 per the schedule set forth
above.
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<PAGE> 4
5. Financial Reports and Audit.
(a) LICENSEE shall submit to BMI separate reports as to all
Gross Revenues generated by LICENSEE's Web Site as follows:
(i) For each quarter year to which this Agreement
applies, a quarterly report, certified by an authorized representative of
LICENSEE, for the Web Site, in the form substantially the same as the Web Site
Music Performance License Quarterly Report Form annexed to this Agreement as
Exhibit B, due at the same time as the applicable quarterly license fee on or
before the thirtieth (30th) day after the end of the quarter year in accordance
with the Payment Schedule set forth above in Paragraph 3. LICENSEE agrees to use
software which BMI may provide to LICENSEE to prepare and deliver such reports
electronically.
(ii) In the absence of timely filed quarterly reports as
set forth above, BMI shall have the right to estimate the fees due for a given
quarter year on the basis of the highest quarterly fee during the previous
twelve (12) months and bill LICENSEE therefor. However, neither BMI's estimation
of the fee for a reporting period nor anything else shall relieve LICENSEE of
the obligation to report and make appropriate actual fee payment for the
reporting period. If said quarterly estimate in the absence of a timely
completed report reflects that LICENSEE's total estimated license fee for said
quarter year was less than the estimated fee paid, BMI shall credit the
overpayment to LICENSEE's account. If LICENSEE has submitted all contractually
required prior reports and payments to BMI and this Agreement is no longer in
effect, BMI shall refund the overpayment to LICENSEE.
(b) BMI shall have the right to require that LICENSEE provide
BMI with data or information as may be necessary to ascertain the license fee
due hereunder.
(c) BMI shall have the right, once with respect to each year of
the Term (or portion thereof), by its duly authorized representatives, at any
time during customary business hours and upon thirty (30) days' advance written
notice, to examine the books and records of account of LICENSEE necessary to
verify any and all statements, accounting and reports rendered and/or required
by this Agreement and in order to ascertain the license fee due BMI for any
unreported period. BMI shall treat as confidential all data and information
coming to its attention as the result of any such examination of books and
records.
(d) In the event that BMI conducts an audit under Paragraph 5(c)
and such audit reveals that LICENSEE has underpaid license fees to BMI, LICENSEE
shall immediately pay the amount LICENSEE owes BMI and, in addition, if such
underpayment amounts to [***] or more of LICENSEES annual fees for the audited
period LICENSEE shall pay BMI a late payment charge in the amount of one and
one-half percent (1 1/2%) per month of all monies owed commencing on the actual
date such monies were due.
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<PAGE> 5
6. Late Payment Charge.
BMI may impose a late payment charge of one and one-half percent
(1 1/2%) per month from the date payment was due on any payment that is received
by BMI more than [***] after the due date.
7. Music Use Reports.
Upon BMI's request, LICENSEE shall provide BMI with separate detailed
information in electronic form from LICENSEE's log, and statistics about the
transmission of all musical works on LICENSEE's Web Site. Such information shall
identify the musical works by title, composer/writer, author, artist, record
label, length, type of use (i.e., theme, background or feature performance) and
manner of performance (i.e. instrumental or vocal) (or any other methodology
agreed to by BMI and LICENSEE) and specify the number of times each musical work
is transmitted and whether such transmission is streamed or downloaded. LICENSEE
shall request reports from its licensors or outside producers with respect to
all content provided by others and transmitted by LICENSEE as part of LICENSEE's
Web Site. LICENSEE shall deliver to BMI all reports with respect to such data
covering programs transmitted by LICENSEE during each calendar quarter year on
or before the thirtieth day following the end of such quarter pursuant to the
schedule set forth in Paragraph 3 herein. LICENSEE agrees to use software which
BMI may provide to LICENSEE to prepare and deliver such reports electronically.
8. Indemnification.
BMI shall indemnify, save and hold harmless and defend LICENSEE and its
officers and employees from and against any and all claims, demands and suits
that may be made or brought against them or any of them with respect to the
public performance within the Territory of any Works, licensed under this
Agreement; provided, however, that such indemnity shall be limited to those
claims, demands or suits that are made or brought within the Territory, and
provided further that such indemnity shall be limited to works which are BMI
affiliated works at the time of LICENSEE's performance of such works. This
indemnity shall not apply to transmissions of any musical work performed by
LICENSEE after written request from BMI to LICENSEE that LICENSEE refrain from
performance thereof. BMI shall, upon reasonable written request, advise LICENSEE
whether particular musical works are available for performance as part of BMI's
repertoire. LICENSEE shall provide the title and the writer/composer of each
musical composition requested to be identified. LICENSEE agrees to give BMI
immediate notice of any such claim, demand, or suit, to deliver to BMI any
papers pertaining thereto, and to cooperate with BMI with respect thereto, and
BMI shall have full charge of the defense of such claim, demand, or suit;
provided, however, that LICENSEE may retain counsel on its behalf and at its own
expense and participate in the defense of such claim, demand or suit.
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<PAGE> 6
9. Warranty: Reservation of Rights.
(a) LICENSEE shall use its best efforts to ensure that its
transmissions of musical works by means of LICENSEE's Web Site are digitally
encoded to prevent the recipient of the transmission from digitally copying or
transmitting the works to others.
(b) This Agreement is experimental in nature and both parties
reserve the right to reevaluate the appropriateness of the fees and terms herein
for periods following the expiration of the Term.
10. Breach or Default.
Upon any breach or default of the terms and conditions of this Agreement
by LICENSEE, BMI shall have the right to cancel this Agreement, but any such
cancellation shall only become effective if such breach or default continues
thirty (30) days after LICENSEE's receipt of written notice thereof. The right
to cancel shall be in addition to any and all other remedies which BMI may have.
No waiver by BMI of full performance of this Agreement by LICENSEE in any one or
more instances shall be a waiver of the right to require full and complete
performance of this Agreement thereafter or of the right to cancel this
Agreement in accordance with the terms of this Paragraph.
11. Arbitration.
All disputes of any kind, nature or description arising in connection
with the terms and conditions of this Agreement (except for matters within the
jurisdiction of the BMI rate court) shall be submitted to arbitration in the
City, County, and State of New York under the then prevailing rules of the
American Arbitration Association by an arbitrator or arbitrators to be selected
as follows: Each of the parties shall, by written notice to the other, have the
right to appoint one arbitrator. If, within ten (10) days following the giving
of such notice by one party the other shall not, by written notice, appoint
another arbitrator, the first arbitrator shall be the sole arbitrator. If two
arbitrators are so appointed, they shall appoint a third arbitrator. If ten (10)
days elapse after the appointment of the second arbitrator and the two
arbitrators are unable to agree upon the third arbitrator, then either party
may, in writing, request the American Arbitration Association to appoint the
third arbitrator. The award made in the arbitration shall be binding and
conclusive on the parties and judgment may be, but need not be, entered in any
court having jurisdiction. Such award shall include the fixing of costs,
expenses, and attorneys' fees of arbitration, which shall be borne by the
unsuccessful party.
12. Withdrawal of Works.
BMI reserves the right at its discretion to withdraw from the license
granted hereunder any musical work as to which legal action has been instituted
or a claim made that BMI does not have the right to license the performing
rights in such work or that such work infringes another composition.
6
<PAGE> 7
13. Notice.
All notices and other communications between the parties hereto shall be
in writing and deemed received (i) when delivered in person; (ii) upon confirmed
transmission by telex or facsimile device; or (iii) five (5) days after
deposited in the United States mails, postage prepaid, certified or registered
mail, addressed to the other party at the address set forth below (or at such
other address as such other party may supply by written notice):
BMI 320 West 57th Street
New York, New York 10019
Attn: John Shaker
Senior Vice President Licensing
with a separate copy to:
Marvin L. Berenson Esq.
Senior Vice President and General Counsel
LICENSEE: 17835 Ventura Blvd., #310
-----------------------------------------------
Encino, CA 91316
-----------------------------------------------
Attn
-----------------------------------------------
with a separate copy to:
Tricia Halloran
-----------------------------------------------
Content Editor
-----------------------------------------------
14. Assignment.
This Agreement shall inure to the benefit of and shall be binding upon
the parties hereto and their respective successors and assigns, but no
assignment shall relieve the parties hereto of their respective obligations
hereunder.
15. Entire Agreement.
This Agreement constitutes the entire understanding between the parties
with respect to the subject matter hereof. This Agreement cannot be waived,
added to or modified orally and no waiver, addition or modification shall be
valid unless in writing and signed by the parties. This Agreement, its validity,
construction, and effect, shall be governed by the laws of the State of New
York. The fact that any provisions herein are found by a court of competent
jurisdiction to
7
<PAGE> 8
be void or unenforceable shall not affect the validity or enforceability of any
other provisions.
BROADCAST MUSIC, INC. Ultimate Band List
------------------------------------
(Licensee)
By: /s/ Richard Conlon
---------------------------------
(Signature) By: /s/ Steve Rennie
------------------------------------
(Signature)
Richard Conlon
- ------------------------------------
(Print Name of Signer) Steve Rennie
------------------------------------
(Print Name of Signer)
Vice President
Marketing & Business Development President
Media Licensing ------------------------------------
- ------------------------------------ (Title of Signer)
(Title of Signer)
PLEASE COMPLETE SHADED AREA ONLY
Please return signed agreement together with minimum fee to:
BMI
320 West 57th Street
New York, NY 10019
ATTN: Web Site Licensing
8
<PAGE> 9
EXHIBIT B
- --------------------------------------------------------------------------------
BMI WEB SITE MUSIC PERFORMANCE AGREEMENT
Music Area Revenues Calculation
QUARTERLY REPORT FORM
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1- April 1- July 1- October 1-
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C> <C>
Report for Calendar Quarter: [ ] [ ] [ ] [X] 1998
</TABLE>
Company Name: ARTISTDIRECT
-----------------------------
Address: 17835 Ventura Blvd.
-----------------------------
Encino, CA 91316
-----------------------------
Phone #: 818-748-8700
-----------------------------
Name of Web Site: ULTIMATE BAND LIST
-----------------------------
URL: http://ubl.com
-----------------------------
Your Gross Revenues
<TABLE>
<S> <C>
1. Subscriber Revenue (including commissions on third party transactions) [***]
2. Advertising Revenue (less agency commissions) [***]
3. Provision of Space or Time [***]
4. Donations [***]
5. Trade or Barter [***]
6. Proprietary Software [***]
</TABLE>
TOTAL GROSS REVENUES (add lines 1 through 6) [***]
<TABLE>
<S> <C> <C> <C>
[***] x ( [***] ) + ( [***] ) = [***]
- -------------------- ---------------------------- --------------------------- -------------------
Total Gross Revenues Total # of Music Impressions Total # of Page Impressions Music Area Revenues
</TABLE>
LICENSEE'S TOTAL PAYMENT DUE SHALL BE THE [***].
(a) [***] X [***] = [***]
------------------- --------------
Music Area Revenues Music Area Fee
- ----------
[***] Confidential treatment has been requested for the
bracketed portion. The confidential redacted portion has been omitted
and filed separately with the Securities and Exchange Commission.
9
<PAGE> 10
(b) [***] x [***] = [***]
-------------- --------------
Gross Revenues
TOTAL PAYMENT DUE = [***]
I hereby certify on this 9th day of October, 1998 that the above is true and
correct.
BY: /s/ Steve Rennie Please return report and payment to:
-------------------------------
(Signature)
Steve Rennie
------------------------------- Web Licensing
(Print Name of Signer) BMI
320 West 57th Street, 4th Floor
New York, NY 10019
President
-------------------------------
(Title of Signer)
Please e-mail any questions to [email protected]
- ----------
[***] Confidential treatment has been requested for the
bracketed portion. The confidential redacted portion has been omitted
and filed separately with the Securities and Exchange Commission.
10
<PAGE> 1
EXHIBIT 10.6
AEC ONE STOP GROUP, INC.
DATABASE, ON-LINE INTERNET RETAIL STORE
AND CONSUMER DIRECT FULFILLMENT SERVICES AGREEMENT
Dated as of August 15, 1998
1. SERVICES: AEC One Stop Group, Inc. (hereafter referred to as "AEC") is in the
business of wholesaling and fulfilling orders for pre-recorded audio and video
products, maintaining certain associated databases, and designing and developing
certain technologies that help its retail customers increase sales of products
found in such databases. Company wishes to engage AEC to provide, by itself and
through its affiliated entities, the following services and licenses to The
Ultimate Band List, LLC (hereafter referred to as "Company"):
- To develop, design and create a generic internet music retail storefront
for Company (the "Store") tentatively called "The UBL Store," to be
linked with Company's Internet Web Site called "The Ultimate Band List"
located under the domain name www.ubl.com ("UBL.COM");
- To operate and maintain the Store on behalf of Company, until such time
as Company and AEC mutually agree to transition the continued operation
and maintenance of the Store from AEC to Company;
- To handle all customer orders placed through the Store, including by
processing all credit card transactions and providing necessary customer
support services in accordance with [Exhibit 1 - Customer Service]
hereto, until such time as Company and AEC mutually agree to transition
the continued customer order handling from AEC to Company;
- To perform as Company's preferred product distributor and fulfillment
service provider with respect to pre-recorded audio-only product in all
formats ("Records) sold through the Store; and
- To receive, warehouse and manage Company's inventory of all such other
products ("Consignment Product") as may be offered for sale on the Store
from time to time (e.g., apparel, concert tickets, posters, tour
memorabilia, collectible items and other merchandise), and fulfill all
orders thereof on Company's behalf.
- To license to Company, for use on the Store as well as on UBL.COM, the
electronic database versions of the general interest music and movie
guides published under the trade names "All-Music Guide" and "All-Movie
Guide" (individually and collectively, the "AMG Database"), which
databases are compiled by AEC;
2. EXCLUSIVITY: During the term of this Agreement, Company agrees (subject
to the terms and conditions of this Agreement): (i) to use AEC as the
exclusive distributor and fulfillment service provider for the Store in
the United States and Canada with respect to those Records found in
AEC's product availability file, as well as Records that AEC can secure
on behalf of Company as a special order, but specifically excluding
Commercially Unavailable Product; and (ii) not to use on the Store a
third party database service similar and competitive to the "All-Music
Guide" database.
1
<PAGE> 2
3. TERM: Subject to the respective termination rights of the parties set forth
in Annex A hereto, this Agreement shall have a term of five (5) years commencing
on June 1, 1998, and shall automatically renew for additional one (1) year terms
unless either party notifies the other of termination at least 90 days prior to
the expiration of the then current term.
4. GENERAL TERMS AND CONDITIONS: All of the above terms are subject to the
General Terms and Conditions attached hereto as Annex A and incorporated herein
by reference. Additionally, shipping and return policies and procedures,
electronic interfacing protocols, representations and warranties, choice of law
provisions, etc., are all as contained in said Annex A, and such terms and
conditions are an integral part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
THE ULTIMATE BAND LIST, LLC AEC ONE STOP GROUP, INC.
By: ARTISTdirect New Media, LLC By: [Illegible]
Its: Manager --------------------------------
Its:
-------------------------------
By: ARTISTdirect, LLC
Its: Member
By: /s/ Marc Geiger
----------------------
Marc Geiger
Its: Member
By: /s/ Donald Muller
----------------------
Donald Muller
Its: Member
2
<PAGE> 3
ANNEX A - GENERAL TERMS AND CONDITIONS
TO AEC ONE STOP GROUP, INC.
DATABASE, ON-LINE INTERNET RETAIL STORE
AND CONSUMER DIRECT FULFILLMENT SERVICES AGREEMENT
In consideration of the mutual agreements and covenants contained herein, the
parties hereto agree as follows:
1. STORE DEVELOPMENT AND OPERATION.
1.1 Store Development:
1.1.1 AEC will, at its sole expense, design, create and develop the Store on
behalf of, and in cooperation with, Company, pursuant to the specifications set
forth in Exhibit 2 attached hereto.
1.1.2 AEC shall provide software repairs to the Store for the development effort
completed by AEC and as defined in said Exhibit 2. It is understood by both
parties that on-going enhancements of the Store shall be regularly required to
keep the Store compelling and competitive in the marketplace. Therefore, Company
and AEC agree that a transition period is required after AEC completes its
initial service role in the development of the Store and to shift the on-going
development effort required on the Store to the Company for its control and
continued improvement.
1.1.3 AEC shall use its best commercially reasonable efforts to make available
to Company the required information to facilitate the Transition (as defined
below) in a manner that minimizes interruptions to each party. AEC shall deliver
to Company the latest version of the source code for the Store as and when it is
updated, but in any event no less frequently than twice per month. Upon
Company's request, but in no event later than upon the commencement of the
Transition, AEC shall deliver to Company complete documentation for the source
code.
1.1.4 Company shall cooperate with AEC to develop the technical linkages between
the Store, UBL.COM and the AMG Database. AEC will not intentionally design or
develop the Store in a manner that would prevent Company from adapting the Store
to accommodate the inventory availability databases used by other fulfillment
providers if AEC is no longer fulfilling Product for the Store.
1.2 Store Hosting:
1.2.1 Prior to the Transition, AEC shall host and maintain the Store. In this
regard, Company shall provide AEC with one or more servers (which shall remain
the property of Company and be returned to Company as part of the Transition) to
be used for workload balancing and redundancy for the Store. AEC shall use its
current, recently upgraded T1 line to support the Store.
Annex A - Page 1
<PAGE> 4
1.2.2 Company agrees to reimburse AEC for the following costs reasonably
incurred by AEC and directly associated with hosting and maintaining the Store:
(i) [***].
1.3 Store Transition:
1.3.1 The parties agree that a transition of the hosting and maintenance of the
Store from AEC to Company (the "Transition") shall be made on or about February
28, 1999 (or such alternative time as the parties hereto may mutually agree).
1.3.2 AEC shall provide technical support for the Store, including timely
maintenance and repair on any of the development completed on the Store features
developed by AEC, for three (3) months following the Transition. In the event
Company continues to require AEC technical support for the Store after such
three (3) month period, Company and AEC shall negotiate a reasonable monthly fee
payable by Company to AEC for such support services.
1.3.3 Company agrees to reimburse AEC for all reasonable ISP costs incurred by
AEC in connection with the Transition.
2. ORDER FULFILLMENT. Subject to the terms of this Section 2, AEC shall supply
to customers all Records and Consignment Product (collectively, "Product")
ordered by the customers of the Store (the "Customers"). In connection
therewith, AEC shall perform the fulfillment, technical and professional
services described below.
2.1 Fulfillment Services:
2.1.1 AEC shall process orders received from Store and arrange to have the
ordered Product shipped to the Customer. All orders will be quality controlled
through advanced sorting and UPC verification methods. However, AEC will have no
obligation to ship "Commercially Unavailable Product," which shall mean any
Record or other item of Product which, at the time the order for such item is
ordered by a Customer or during the process of such order being fulfilled, is
not in the inventory of AEC and, with respect to Records only: (a) is no longer
manufactured; (b) is not reasonably available to AEC from the company that
releases such product; or (c) has been deleted from the catalog of the company
that releases such items.
2.1.2 The Store shall provide advanced on-line connectivity in order to query or
commit Product orders for Customers in real time fulfillment.
2.1.3 AEC shall host a "Remote Order Entry" application that will permit Company
to manually enter Customer orders, cancel or delete orders, query order status
and process authorization for product returns, directly from the AEC fulfillment
computer system. This application will permit Company to access Customer orders.
2.1.4 AEC shall be an invisible fulfillment arm. AEC will produce custom Company
invoices with Company's logo and store policies, shipping labels and packaging
consistent with AEC technologies and capabilities that will accompany an order
to identify the product/order as from
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 2
<PAGE> 5
Company. AEC will affix stickers and any other identification labels as Company
may request from time to time in respect of all orders of Product, for no
additional charge to Company so long as there is no more than one label per unit
of Product and it is compatible with AEC's material and handling technology. In
addition, AEC will, at no charge, insert promotional materials (e.g., stickers
bearing Company's logo, coupons, etc.) on behalf of Company with each shipment,
subject to the understanding that all costs reasonably incurred by AEC and
associated with the inserts in excess of the first insert per package, shall be
borne by Company. AEC shall bear the costs of invoices and shipping labels,
provided Company accepts AEC's invoice and shipping label formats (samples of
which are attached hereto as Exhibit 3). Special handling considerations not
otherwise addressed herein shall be reviewed during formal operations meetings
and it is understood that AEC and Company shall negotiate in good faith as to
the cost, if any, which will be charged for such special handling.
2.1.5 AEC will make available account representatives who will be responsible
for using reasonable efforts to meet all Company's customer service, product
sales, and technological needs for Company to manage the Store on an on-going
basis.
2.2 Shipping and Return Procedures:
2.2.1 Other than with respect to Commercially Unavailable Product, AEC
represents that (i) all Product for which a Verified Order has been received by
AEC prior to 3:00 PM Eastern Time shall be shipped on a same-day basis, and (ii)
no less than 95% of all units of Product shall be shipped from an AEC facility
within 24 hours of AEC's receipt of a Verified Order therefor. No Product shall
be shipped or otherwise released by AEC to any third party other than pursuant
to a Verified Order. As used herein, the term "Verified Order" means an order
that provides all of the relevant Customer information, including valid account,
address, credit card information and Product related information and for which
transaction authorization has been received by Company's (or AEC's, if
applicable) credit card contractor or payment from the Customer has otherwise
been received by Company.
2.2.2 Current methods of shipment include: United States Postal Service: and
United Parcel Service. AEC shall offer to Company the full range of shipping
options to Customers of Company at no additional cost above fees charged by the
shipping carriers. [***].
2.2.3 Company shall designate the return policies of the Store (which current
policies are set forth on Exhibit 4 attached hereto and shall not be subject to
significant changes in respect of Records without AEC's consent). AEC shall not
issue a refund or other credit to any Consumer for returned Product without
first verifying that Company has issued an appropriate return authorization for
the Product concerned. Company shall assume and pay for all shipping and other
costs incurred in respect of returned, exchanged, refused and undeliverable
Product, including all shipping and other costs incurred with respect to the
processing of an order if the Customer provides incorrect information to AEC, or
if Company causes incorrect order information (i.e., other than as provided by
the Customer) to be provided to AEC. Notwithstanding the foregoing, AEC shall be
responsible for all Product either incorrectly shipped to a Customer or damaged
while in transit to the Customer, but only if such Product was shipped via an
insured and traceable carrier. In such cases, AEC shall assume and pay for all
shipping and other costs incurred in the return or exchange of Product and will
ensure that Company incurs no product cost for the involved transaction. With
respect to all unopened
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Annex A - Page 3
<PAGE> 6
Records returned by a Customer in accordance with the return policies of the
Store other than defective, damaged or incorrectly shipped Records, Company
shall receive full credit therefor less a return handling fee of [***] per
Record; provided AEC returns such Record to its inventory for resale or is able
to return it to the distributor for a credit.
2.2.4 Company shall also be able to receive electronic updates on orders
shipped, including shipping methods, tracking numbers, fill, invoice totals, and
all pertinent data reasonably requested by Company.
2.3 Prices; Costs; Fees:
2.3.1 Company shall designate the price of all Product offered for sale on the
Store, as well as all other amounts to be charged to the Customers (e.g.,
shipping and handling charges).
2.3.2 Company shall purchase from AEC each Record fulfilled by AEC hereunder at
competitive prices (currently for a purchase price equal to that set forth on
Exhibit 5 attached hereto). The parties acknowledge that such prices may be
subject to such increases or decreases (e.g., if the manufacturers of Records
adjust their prices to AEC) as mutually agreed by the parties from time to time.
Such prices are inclusive of the Consumer Direct Fulfillment services normally
charged for such activities as pick, pack and handling of individual customer
orders.
2.3.3 Notwithstanding the foregoing, in order effectively to promote and attract
Customers to the Store, the parties acknowledge the value of Company offering
for sale on the Store selected Records at special marked-down prices for limited
periods of time (a "Limited Special"). Company shall advise AEC of the
applicable SKU's and time periods for which Company wishes to conduct a Limited
Special at least thirty (30) days prior to the scheduled commencement thereof,
and AEC agrees to use its best commercially reasonable efforts to offer such
SKU's to Company at a discounted price, provided that AEC shall not be obligated
to so discount more than [***] SKU's as part of any particular Limited Special
or during any particular month.
2.3.4 Company shall pay AEC a fulfillment fee for each item of Consignment
Product fulfilled by AEC hereunder equal to that set forth on Exhibit 6 attached
hereto.
2.3.5 Subject to paragraph 2.2.2 above, Company shall reimburse AEC for its
actual shipping expenses to ship ordered Product to the Customers. The shipping
rates of AEC's shippers and carriers that shall be charged to Company are set
forth on Exhibit 7 attached hereto. Subject to paragraph 2.2.2 above, shipping
rates are subject to changes generally noticed to trade and Company by AEC.
2.3.6 Company shall be responsible for the cost of actual packaging materials
(e.g., shipping boxes) required for secure shipment of Consignment Product (as
opposed to shipment of Records, for which the costs of packaging materials are
included in the prices charged to Company hereunder) to Customers. Such costs
are set forth on Exhibit 8 attached hereto.
2.3.7 Company shall pay AEC a [***] service charge per Customer inquiry handled
by AEC pursuant to Section 3 below, including per manual order processed by AEC
(i.e., orders received by AEC other than via the interactive Store electronic
order processing, such as via fax, phone or email). The parties agree to
negotiate a reasonable increase or decrease of such service charge if the volume
of Customer inquiries and/or AEC's associated costs prove significantly
different than expected by the parties as of the execution hereof.
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Annex A - Page 4
<PAGE> 7
2.3.8 Except as otherwise expressly provided herein, AEC shall impose no
additional incremental charges to Company for handling Records and Consignment
Product to be shipped to Company's customers hereunder.
2.4 Foreign Fulfillment: It is the intention of the parties that AEC shall
initially fulfill orders of Product hereunder throughout the world. However,
if, during the term of this Agreement, Company desires to fulfill orders of
Records hereunder for distribution in one (1) or more foreign territories
through a fulfillment operation located outside the United States and Canada,
it shall notify AEC of the major terms and conditions upon which Company wishes
to obtain fulfillment in the territory(ies) concerned (the "Offer"). So long as
AEC has, at the time of the Offer, directly or through an affiliate, a
fulfillment operation in place capable of satisfactorily servicing the
applicable territory(ies), the following shall apply: (i) AEC shall have the
right, exercisable within ten (10) business days of the date of the Offer, to
notify Company that it wishes to negotiate with Company in respect of the
fulfillment of Records for the Store in such territory(ies); (ii) if AEC
exercises such right within said ten (10) business day period, Company shall
not enter into an agreement with any third party in respect of the fulfillment
of Records for the Store in such territory(ies) for a period of thirty (30)
days after the date of the Offer; and (iii) after such thirty (30) day period,
Company and AEC have not reached an agreement, Company shall have the right to
enter into an agreement with any third party for the fulfillment of Records in
such territory(ies), but only if the terms of such agreement are not less
favorable to Company than those set forth in AEC's last offer to Company and
provided that such agreement is consummated within one hundred eighty (180)
days after the date of the Offer (failing which, the rights of AEC under this
paragraph 2.4 will be revived).
3. CUSTOMER SERVICE.
3.1 Subject to paragraph 2.3.7 above, AEC shall initially provide, on behalf of
Company, customer support for those orders placed by Customers through the
Store. It is contemplated that AEC shall provide such services during the
initial nine (9) months of the term of this Agreement. The period during which
AEC provides such services is sometimes referred to herein as the "AEC Service
Period." These services shall include retaining and supervising customer support
personnel who will respond to Customer inquiries about products ordered via the
telephone, fax, and on-line. AEC shall also provide office space and equipment
for that personnel. It is further contemplated that, after said nine (9) month
period, Company shall assume this Customer support function, subject to Company
notifying AEC of its intention to do so at least 60 days in advance. The parties
understand that when AEC provides Customer support, it will be provided so the
Customer perceives that such support is being provided by Company. AEC (or
Company, as applicable) shall respond promptly and professionally to Customers'
questions regarding the procedure for ordering Products and any other questions
regarding their orders. In communicating with Customers in connection with
Customers' inquiries, AEC and Company shall use e-mail or other online
connectivity to Customers whenever reasonably possible.
3.2 AEC will provide Company's customers with a toll-free (800 phone number)
call center and AEC will establish and maintain an e-mail customer service
address. AEC will maintain Company's consumer call center at its Florida
headquarters. Consumer Call Center operates Monday through Friday (excluding
holidays), 9:00 AM to 6:00 PM, Eastern Time. Incoming phone calls received after
normal coverage hours are handled via e-mail and AEC will respond to all its
customer email messages the following working day. The services to be provided
by AEC under this Section 3 are further outlined on Exhibit 1 attached hereto.
3.3 The Store will contain a prominently featured hyperlink, with the AMG logo,
to www.allmusic.com. In the event Company receives corrections, additions,
errors, and other comments about the AMG Database from the Store's users,
Company shall forward those comments to the AEC staff. Additionally, both
Company and AEC will review, use and evaluate statistical information collected
via the Store that indicates Customer preferences, purchasing patterns and
similar buying behaviors.
3.4 During the AEC Service Period, all credit card transactions shall be handled
by AEC, at no additional charge, under Company's credit card merchant clearing
agreement. If AEC should nevertheless receive
Annex A - Page 5
<PAGE> 8
any monies from a Customer in respect of Product sold on the Store, it will
promptly pay over 100% of such monies to Company.
4. DATABASES.
4.1 AMG Database:
4.1.1 AEC hereby irrevocably grants to Company the non-exclusive license
(without the right of sub-license, whether to Company's affiliates or
otherwise), throughout the universe, to use, copy, display and otherwise exploit
the AMG Database, and any portions thereof, and the AMG Marks (as defined in
Section 5 below), solely in and as part of the Store and/or UBL.COM.
4.1.2 Subject to paragraph 4.3.7 below, the period of the license granted to
Company pursuant to this paragraph 4.1 shall commence on June 1, 1998 and end on
the date five (5) years after the expiration or termination of the term of this
Agreement (the "AMG License Period").
4.1.3 The rights licensed to Company hereby in respect of the AMG Database shall
include all future revisions, enhancements and updates thereto. In this regard,
AEC shall deliver to Company an updated copy of the most recent version of the
AMG Database no later than upon the fifth day of each month of the AMG License
Period (unless otherwise agreed upon by both parties) in a format to be mutually
agreed upon. Delivery shall be by FTP pickup, at a designated site for Company's
site, unless otherwise agreed by the parties. Any expenses for any other method
of delivery shall be borne by Company.
4.1.4 With respect to musical recordings sold on the Store during the term of
this Agreement via a digital transferring process when the AMG Database is used
to help promote and feature such sales, AEC shall receive [***] of the revenues
derived from such sales and actually received by Company [***].
4.1.5 If Company continues to use the AMG Database on the Store and/or UBL.COM
during the portion of the AMG License Period occurring after the expiration or
termination of the term of this Agreement, then, in consideration of the license
granted to Company under this paragraph 4.1, Company agrees to pay AEC a royalty
equal to [***] of the Net Monthly Sales generated after the expiration or
termination of the term of this Agreement, but only for as long as Company
continues to use the AMG Database. As used herein, the term "Net Monthly Sales"
shall mean amount of revenues generated by the Store (and UBL.COM, to the
extent the AMG Database is used to help promote and feature the applicable
sales), less any applicable shipping costs, handling charges, returns and
allowances, sales tax and various credit card charges.
4.1.6 For purposes of Section 365(n) of the United States Bankruptcy Code, the
licenses granted to Company under this paragraph 4.1 shall be considered
licenses of rights to "intellectual property" as defined thereunder.
Notwithstanding any provision contained herein to the contrary, if the party
that grants such license is under any proceeding under the United States
Bankruptcy Code and the trustee in bankruptcy of such party, or such party, as a
debtor in possession, rightfully elects to reject this Agreement, Company may,
pursuant to 11 U.S.C.
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confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Annex A - Page 6
<PAGE> 9
Section 365(n)(1) and (2), retain any and all rights licensed to Company under
this paragraph 4.1, to the maximum extent permitted by law, subject to Company
making any payments to AEC required under paragraph 4.1.5 above.
4.1.7 If, at any time during the AMG License Period, AEC (or any affiliate of
AEC) is approached by a third party or otherwise commences communications with a
third party with respect to a proposed sale or other transfer of ownership or
control in respect of the AMG Database, AEC (or such affiliate) shall promptly
notify Company to such effect so as to accord Company a reasonable opportunity
to negotiate with AEC (or such affiliate) in order to obtain the rights proposed
to be so sold or transferred.
4.2 AEC Availability File: AEC currently compiles and maintains, and shall
continue at all times during the term of this Agreement to compile and maintain,
a separate inventory database which provides AEC's retail customers with
information regarding the availability and pricing of AEC's available SKU's (the
"AEC Availability File"). Subject to paragraph 4.3.7 below, AEC hereby
irrevocably grants to Company, during the term of this Agreement, the
non-exclusive license (without the right of sub-license, whether to Company's
affiliates or otherwise), throughout the universe, to use, copy, display and
otherwise exploit the AEC Availability File, and any portions thereof, solely in
and as part of the Store and in the manner contemplated hereby.
4.3 Other Terms Concerning Databases:
4.3.1 The AMG Database and the AEC Availability File are sometimes referred to
herein individually as a "Database" or collectively as the "Databases."
4.3.2 Except as set forth in paragraph 4.1.5 above, the rights licensed to
Company hereby in respect of the Databases shall not involve the payment of
royalties or any other consideration whatsoever to AEC, its affiliates, or any
other person or entity.
4.3.3 AEC shall incorporate the Databases into the Store to be used as the
Customers' shopping catalog, and shall provide regular updating and general
editorial and database maintenance service at all times so as to make the
information contained in the Databases current and complete to the same extent
as the versions of the Databases which are current at the time this Agreement is
executed, which versions have been reviewed by Company. AEC represents and
warrants that the AMG Database shall be updated no less frequently than monthly,
and that the AEC Availability File shall be updated no less frequently than
weekly, or at such other intervals as mutually agreed by AEC and Company, but in
no event less frequently than AEC or any of its affiliates provide updates to
any of their other licensees. Both parties recognize the importance of offering
the Customers complete details on the up and coming new album releases.
4.3.4 At Company's request, AEC shall adapt the Databases so as to allow them to
be linked to third party audio sample databases (subject to AEC's reasonable
approval), provided such third party databases contain accurate UPC bar codes
for all applicable audio formats and configurations (e.g., videocassette, laser
discs, etc.) and Company causes such third party databases to be delivered to
AEC. If Company requires additional linking beyond the UPC bar code, this can be
arranged for a fee to be agreed upon by Company and AEC.
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4.3.5 AEC shall provide reasonable maintenance and support for the Databases to
Company personnel at all times during the license period set forth herein
applicable to the Database concerned.
4.3.6 The parties acknowledge that additional product data will have to be
incorporated into the Databases for use in the Store in order to support the
sale of Consignment Product; the parties hereto shall mutually determine the
best means (operationally and from an expense position) to accomplish such task.
4.3.7 [***].
5. AMG TRADEMARKS.
5.1 Company agrees to include the "All Music Guide" trademark, service mark
and/or associated design or logo (individually and collectively, the "AMG
Marks") with all presentations of AMG Database information on the Store and
UBL.COM (e.g., page view, discography listing, biography, album review, album
track listing), so as to inform the viewer that the data viewed has been
provided by the All Music Guide. The placement of the AMG Marks shall be
designated by AEC, subject to Company's approval, not to be unreasonably
withheld or delayed. Placement of the AMG Marks in accordance with the
illustrations attached hereto as Exhibit 9 attached hereto shall be deemed
pre-approved by AEC and Company. Without limiting the generality of the
foregoing, displays of the following AMG Database information will be marked
with the corresponding AMG logo and branding as set forth below: Artist
Biographies, Essays, and Album Reviews will be marked "AMG Biography," "AMG
Essay," and "AMG Review," respectively. After each biography and album review,
the name of the author, and the term "AMG" will be listed. Ratings will be
marked "AMG Ratings," and relational elements such as the following will be
marked as: "AMG Roots & Influences," "AMG Similar/Related Artists," "AMG Music
Maps," "AMG Track Listings" and "AMG Similar Albums."
5.2 During the AMG License Period, Company agrees to cause the AMG Marks to
appear prominently in all promotional materials prepared by Company in respect
of the Store, provided that any inadvertent failure to comply with this
paragraph 5.2 shall not be deemed a breach of this Agreement.
6. CONSIGNMENT PRODUCT.
6.1 With respect to all items of Consignment Product, as between AEC and
Company, Company shall be solely responsible for: (i) shipping the items to AEC
[***], (iii) assisting AEC in insuring that each item has a viable UPC code,
(iv) ensuring that each item is legal for sale and that Company has the legal
rights to request AEC to fill orders thereof.
6.2 The parties hereto anticipate that inventory of Consignment Product held by
AEC in its warehouses will be in such quantities and held for such periods of
time so as to allow an average
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of no less than [***] turnovers per year of such inventory. In the event, after
the initial three (3) months the Store has been in operation, the parties
determine that the average turnover rate for all such inventory is less than so
anticipated, then AEC shall be entitled to charge Company a warehouse rental fee
equal to [***] per month thereafter during which the turnover rate is lower than
an average of [***] per year for each required warehouse bin/storage location.
6.3 AEC shall receive, unpack, count and add UPC codes (to the extent required)
to all shipments of Consignment Product and promptly incorporate such units into
the AEC Availability File and/or otherwise provide Company with up-to-date
inventory levels in a manner reasonably satisfactory to Company. AEC shall
promptly notify Company if there is a discrepancy between the actual number of
units received in any shipment and the corresponding number reflected on the
packing slip. Company shall advise AEC at least seven (7) days in advance of
forthcoming deliveries.
6.4 As between AEC and Company, all Consignment Product inventory shall remain
the property of Company at all times. AEC agrees that it shall safeguard such
inventory in the same manner that it safeguards items in its own inventory in
its warehouse, and that it shall be responsible for all inventory shrinkage.
6.5 All inventory of Consignment Product shall be held in separate locations in
AEC's warehouse so as to physically segregate all Consignment Product inventory
from AEC's inventory of other products, which locations shall be clearly marked
by posted signs or placards identifying all inventory in the applicable storage
area as belonging to a third party. Company shall have the right to approve all
such signs and placards as to language, size and placement. AEC agrees from time
to time to execute and deliver all further instruments and documents, and take
all further actions, that may be necessary or desirable, or that Company may
reasonably request, in order to protect Company's and the Company Clients'
rights in the Consignment Product inventory. Without limiting the generality of
the foregoing AEC hereby irrevocably grants to each of Company and the Company
Clients a power-of-attorney to sign and file one or more financing or
continuation statements, and amendments thereto, under the Uniform Commercial
Code relative to all or any part of the Consignment Product inventory without
the signature of AEC where permitted by law.
7. PAYMENTS, REPORTS AND AUDIT RIGHTS.
7.1 Payment Terms: Company shall make all payments due AEC hereunder within
[***] days of its receipt of appropriate invoices therefor from AEC.
Notwithstanding the foregoing, invoices for payments due pursuant to paragraphs
1.2.2, 1.3.3 and 2.3.7 hereof shall be payable within fifteen (15) days of
Company's receipt thereof.
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7.2 Sales Reports:
7.2.1 During the AEC Service Period, AEC shall electronically transmit to
Company, on a daily basis, data reflecting all sales and returns of Product for
the preceding day. Further, within thirty (30) days after each calendar month of
the AEC Service Period, AEC shall send Company a comprehensive report detailing
all sales and returns of Product during the calendar month concerned.
7.2.2 Within thirty (30) days after each calendar month of the term of this
Agreement subsequent to the AEC Service Period, Company shall send AEC a summary
sales report detailing the Net Monthly Sales during the calendar month
concerned.
7.2.3 To the extent Company uses the AMG Database after the term of this
Agreement, Company shall compute, pursuant to paragraph 4.1.5 above, AEC's share
of the Net Monthly Sales received by Company during each calendar month and send
AEC, within thirty (30) days after the calendar month concerned, a summary sales
report detailing such Net Monthly Sales, along with payment of any amounts due.
7.2.4 In the event Company sells musical recordings on the Store via a digital
transferring process and the AMG Database is used to help promote and feature
such sales, then Company shall send AEC, [***] after each calendar month of the
AMG License Period, a summary sales report detailing all revenues generated
thereby, as well as all associated sales tax and credit card charges, together
with payment to AEC computed in accordance with paragraph 4.1.4 above in respect
of any such revenues earned during the term of this Agreement, it being
understood that any such revenues earned after the term of this Agreement shall
be included as "Net Monthly Sales" under paragraph 4.1.5 above. Company shall
not be obligated to render statements under this paragraph 7.2.4 for months
during which there are no such sales.
7.3 Inventory Reports: Without limiting the generality of paragraph 6.3 above,
within thirty (30) days after each calendar month of the term of this Agreement,
AEC shall send Company detailed inventory reports for all Consignment Product
reflecting shipments received, units sold and returned, and then-current
inventory levels as of the end of the calendar month concerned. Company shall
have reasonable access to AEC's warehouse in order to perform physical inventory
counts from time to time.
7.4 Books and Records: Each party shall have the right, at its sole cost and
expense and upon reasonable notice to the other party, to inspect and audit the
books and records of such other party insofar as said books and records pertain
to the calculation of monies payable hereunder. Such examination shall take
place during normal business hours at the place of business where such books and
records are kept, and not more than once per calendar year. Any such inspection
must be undertaken within two (2) years after the end of the calendar year being
inspected.
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8. OWNERSHIP.
8.1 Store: Subject to AEC's rights in the Developed Technology (as defined
below) pursuant to paragraph 8.1 below, AEC recognizes and agrees that Company
is the sole owner of all right, title and interest in all rights associated with
the Store, and that all goodwill associated with the Store shall inure
exclusively to the benefit of Company.
8.2 Developed Technology: All rights (including all intellectual property
rights, whether recognized currently or in the future) in and to the works
developed by AEC for the Store in connection with this Agreement ("Developed
Technology"), including the source and object code, end-user interface,
navigational structure, appearance, commerce technology, HTML formatting code,
scripts, software, text, graphics, audio, video, artwork and designs, [***].
8.3 Independent Technology: Notwithstanding anything to the contrary contained
in this Agreement, Company will acquire no ownership interest in any technology
developed by AEC prior to or independently of this Agreement ("AEC Technology")
and AEC will acquire no ownership interest in any technology developed by
Company prior to or independently of this Agreement (the "Company Technology").
AEC hereby grants to Company a royalty-free, nonexclusive, irrevocable,
perpetual license, throughout the universe, to exploit the AEC Technology (but
specifically excluding the Databases) solely to the extent reasonably required
to facilitate Company's continued use, modification, maintenance and promotion
of the Store and the Developed Technology. For purposes of Section 365(n) of the
United States Bankruptcy Code, said license shall be considered a license of
rights to "intellectual property" as defined thereunder. Notwithstanding any
provision contained herein to the contrary, if AEC is under any proceeding under
the United States Bankruptcy Code and the trustee in bankruptcy of AEC, or AEC,
as a debtor in possession, rightfully elects to reject this Agreement, then
Company may, pursuant to 11 U.S.C. Section 365(n)(1) and (2), retain any and all
of its rights under such license, to the maximum extent permitted by law.
8.4 Databases:
8.4.1 Company acknowledges and agrees that the Databases and all revisions,
modifications and enhancements thereof provided by AEC to Company under this
Agreement are the exclusive and proprietary information of AEC. Title and full
ownership rights thereto, including copyright, trade secret, trademark, trade
name and other intellectual and proprietary rights, are reserved to, and shall
remain with and be the valuable property of, AEC. Company acknowledges the
valuable, proprietary nature of the Databases, including all revisions,
modifications and enhancements thereof, and agrees that irreparable injury will
result from any use, disclosure, reproduction or distribution of the Databases
that is not authorized by this Agreement and agrees not to contest in any way
whatsoever the proprietary status of the Databases or AEC's subsisting
copyrights therein. Company will not remove any proprietary or confidential
legends or markings which AEC has placed upon or within the Databases. Transfer
of certain Store
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technology, as provided herein, shall not, under any circumstances, transfer any
right , title or interest in or to the Databases from AEC to Company.
8.4.2 Company acknowledges that AEC may, at any time or times during the license
period set forth herein applicable to the Database concerned, substitute a new
version of the Database for the version of such Database originally provided
hereunder; in which case the license granted to Company by this Agreement shall
cease with respect to the replaced version of such Database, and Company shall
purge all copies of the replaced version from Company's computer system and from
any other computer storage device or medium as to which Company has or should
have control consistent with this license.
8.5 AMG Marks: Company acknowledges that AEC is the sole owner of all right,
title and interest in the AMG Marks. Nothing contained in this Agreement shall
be construed as an assignment or grant to Company of any right, title or
interest in or to the AMG Marks. All rights relating thereto are expressly being
reserved by AEC, except for the limited licenses granted to Company herein, and
all goodwill associated with the AMG Marks inures to the benefit of AEC.
8.6 UBL Properties: AEC acknowledges and agrees that all information obtained by
AEC from UBL.COM (including any information contained in the various databases
published by Company through UBL.COM, such as artist information and links to
third party Web Sites) or supplied to AEC, in connection with linking UBL.COM
with the Store and the AMG Database or otherwise, as well as all related
copyright, trade secret, trademark, trade name and other intellectual and
proprietary rights (collectively, "UBL Properties") are reserved to, and shall
remain with and be the valuable property of, Company. AEC acknowledges the
valuable, proprietary nature of the UBL Properties, including all revisions,
modifications and enhancements thereof, and agrees that irreparable injury will
result from any use, disclosure, reproduction or distribution of the UBL
Properties that is not authorized by this Agreement and agrees not to contest in
any way whatsoever the proprietary status of the UBL Properties or Company's
subsisting copyrights therein. [***].
9. CONFIDENTIALITY.
9.1 During and following the term hereof, each party to this Agreement expressly
undertakes to retain in confidence, and to require and cause its subsidiaries
and affiliates and its and their respective employees, contractors and agents to
retain in confidence, all information and know how transmitted to such party
(the "Receiving Party") (i) which the disclosing party hereunder (the
"Disclosing Party") has identified in writing as being proprietary and/or
confidential or (ii) which the Receiving Party reasonably should know, based
upon the nature of the information being disclosed, ought to be treated as
confidential (collectively "Confidential Information"). The Receiving Party will
make no use of such Confidential Information except as expressly authorized
under this Agreement. Either party may, however, disclose Confidential
Information if required by law or legal process, provided such party shall
undertake to give the other
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reasonable notice prior to such disclosure and shall comply with any applicable
protective order or equivalent. Under no circumstances shall a Disclosing Party
be entitled to terminate this Agreement for an alleged unauthorized use or
disclosure by the Receiving Party of Confidential Information which was not
marked as "confidential" or "proprietary" unless such disclosure was made in bad
faith (in which case the Disclosing Party may terminate this Agreement to the
extent permitted under Section 12 below).
9.2 Without limiting the generality of paragraph 9.1 above, the parties agree
that the following information disclosed by one party to the other shall be
deemed Confidential Information: the capabilities, technical descriptions and
source code relating to either party's released or unreleased software or
hardware products or services; the marketing or promotion plans of any product
or service of either party; either party's business policies or practices; and
information received from others that either party is obligated to treat as
confidential.
9.3 Without limiting the foregoing:
9.3.1 Company agrees that the Databases and all information contained therein
and/or provided by AEC hereunder, including database layouts, schema, algorithms
and linking and other program features, are and shall be treated as Confidential
Information. Company agrees not to copy, disclose or otherwise make available
the Databases, in any form, to any person for any purpose other than as
necessary to permit Company's use of the Databases as authorized herein. Company
shall include in copies or reproductions of the AMG Database the "AMG" logo and
any other patent, copyright, trademark or proprietary notices contained in the
original or as reasonably required by AEC. Company shall take all reasonable
steps to safeguard the Databases against unauthorized disclosure. Company also
agrees not to use the Databases except as authorized under this Agreement and,
in particular, without limiting the foregoing, not to use such information to
develop a product that would be competitive with the Databases.
9.3.2 AEC agrees that the UBL Properties and all information contained therein
and/or provided by Company hereunder, including database layouts, schema,
algorithms and linking and other program features, are and shall be treated as
Confidential Information. AEC agrees not to copy, disclose or otherwise make
available any UBL Properties, in any form, to any person for any purpose. AEC
shall take all reasonable steps to safeguard the UBL Properties against
unauthorized disclosure. AEC also agrees not to use the UBL Properties except
for purposes of performing its services hereunder in connection with the Store
and, in particular, without limiting the foregoing, not to use such information
to develop a product that would be competitive with UBL.COM.
9.4 Both parties acknowledge that unauthorized disclosure or use of Confidential
Information could cause irreparable harm and significant injury which may be
difficult to ascertain. Accordingly, both parties agree that the aggrieved party
will have the right to seek and obtain injunctive relief from breaches of this
Section 9, in addition to any other rights and remedies it may have. Both
parties agree that each has and shall retain ownership rights to its own
Confidential Information, and that upon expiration or termination of this
Agreement each party shall return and shall not retain the Confidential
Information of the other party.
9.5 Notwithstanding anything in this Section 9 to the contrary, Confidential
Information shall not be construed to mean any information which the Receiving
Party can show: (i) is, or subsequently becomes, publicly available other than
as a result of the Receiving Party's breach of
Annex A - Page 13
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any obligation owed to the Disclosing Party or a third party; (ii) became known
to the Receiving Party prior to the Disclosing Party's disclosure of such
information to the Receiving Party, (iii) became known to the Receiving Party
from a source other than the Disclosing Party other than as a result of such
source's breach of an obligation of confidentiality owed to the Disclosing
Party, (iv) is independently developed by the Receiving Party, or (v) has been
authorized for disclosure by the Disclosing Party.
9.6 The provisions of this Section 9 shall survive termination or expiration of
the term of this Agreement.
10. WARRANTIES AND REPRESENTATIONS.
10.1 By AEC.
10.1.1 AEC warrants and represents for the benefit of Company as follows: (i)
the services to be performed by AEC hereunder will be rendered in accordance
with all requirements identified in this Agreement, (ii) AEC has all rights,
licenses and authorizations required to enter into and perform this Agreement,
and the performance of AEC's obligations pursuant to this Agreement will not
violate any United States federal, state or municipal laws, rules, regulations
or ordinances or the provisions of any agreement to which AEC is a party or by
which AEC is bound; (iii) no Developed Technology or the exploitation or use
thereof shall violate or infringe upon any common law or statutory rights of any
party, including contractual rights, copyrights, and rights of privacy or
publicity or shall defame any person or entity; and (iv) any invoices, reports
and documentation to be delivered to Company hereunder will be complete and
accurate to the best of AEC's knowledge.
10.1.2 AEC represents and warrants that AEC (and its affiliates) is the rightful
owner and/or licenser of the Databases, including the copyrights, trademarks,
trade names or other property rights contained therein and being licensed herein
by AEC. The foregoing notwithstanding, AEC does not warrant that it owns any
right to the album artwork or artist images or likenesses that have been
electronically scanned and linked to the Databases. The scanning process and
delivery of the images has been done as a service to Company.
10.2 By Company. Company warrants and represents for the benefit of AEC as
follows: (i) Company's responsibilities and promises herein will be rendered in
accordance with all requirements identified in this Agreement; (ii) Company has
all rights, licenses and authorizations required to enter into and perform this
Agreement, and the performance by Company of its obligations pursuant to this
Agreement will not violate any United States federal, state or municipal laws,
rules, regulations or ordinances or the provisions of any agreement to which
Company is a party or by which Company is bound; and (iii) to the best of
Company's knowledge, all orders for Products conveyed to AEC shall be accurately
conveyed to AEC including, as to each order, all information in the form
provided by any Customer. AEC acknowledges that Company is making no
representations and warranties concerning anticipated success of the Store
and/or the amount of consideration payable to AEC hereunder. AEC agrees that it
shall not make any claim and no liability shall be imposed upon Company based
upon any claim that more sales could have been made or better business could
have been done in connection with the Store.
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10.3 Survival. The representations and warranties contained in this Section 10
are continuous in nature and shall be deemed first given upon the execution of
the Agreement and shall survive termination or expiration of this Agreement.
11. INDEMNIFICATION.
11.1 BY AEC. AEC shall indemnify, hold harmless and defend Company and all of
Company's members, employees, officers, directors and agents from and against
any and all claims, damages, losses, liabilities, suits, actions, demands,
proceedings (whether legal or administrative) and expenses (including reasonable
attorneys' fees incurred, with or without suit, in arbitration or mediation, on
appeal or in a bankruptcy or similar proceeding) (collectively, "Claims")
threatened, asserted or filed by a third party against any of the aforesaid
persons or entities to the extent that such third party Claims arise out of or
relate to (i) the breach of any material warranty, representation or agreement
made by AEC in this Agreement; or (ii) any grossly negligent or tortuous act,
willful misconduct or willful omission by AEC; provided, however, that AEC shall
not be liable for any errors, omissions or inaccuracies in the Databases, or the
updates thereof unless caused by AEC's gross negligence or willful neglect.
Furthermore, AEC shall not be liable for any delays or interruptions in the
delivery, transmission or distribution of the Databases or the updates by reason
of unavoidable equipment failure, communication circuit failure, power failure,
Acts of God, government intervention, fire, flood, or other Acts beyond AEC's
reasonable control. Claims arising from modifications by Company of the
Databases or as a result of a failure by Company to implement any enhancements,
improvements, or updates to the Databases as supplied by AEC, shall be deemed
excluded from the indemnity under this paragraph 11.1.
11.2 By Company. Company shall indemnify, hold harmless and defend AEC and all
employees, officers, directors and agents of AEC from and against any and all
Claims threatened, asserted or filed by a third party against any of the
aforesaid persons or entities to the extent that such third party Claims arise
out of or relate to: (i) the breach of any material warranty, representation or
agreement made by Company in this Agreement; or (ii) any grossly negligent or
tortuous act, willful misconduct or willful omission by Company (iii) the use of
the digitized album and portrait pictures used in the Store.
11.3 Manner of Exercise. Any person or entity that is entitled to be indemnified
pursuant to this Section 11 (the "Indemnified Party") must give prompt notice to
the indemnifying party (the "Indemnifying Party") of the occurrence of the Claim
for which indemnity is requested and, at the option of the Indemnifying Party,
the Indemnifying Party may assume the handling, settlement and defense of such
Claim, in which event the Indemnified Party will cooperate in all reasonable
respects with the Indemnifying Party at the Indemnifying Party's expense. The
failure by the Indemnified Party to give such prompt notice shall not relieve
the Indemnifying Party from any liability under this Section 11 unless, and only
to the extent that, such failure results in prejudice to or forfeiture of,
substantive rights or defenses of the Indemnifying Party. The Indemnifying Party
shall reimburse the Indemnified Party on demand for any payment made by the
Indemnified Party in respect of any Claim to which the foregoing indemnity
relates which either (i) has resulted in an adverse judgment against the
Indemnified Party or (ii) has been settled with the written consent of the
Indemnifying Party, which it may withhold for any reason.
12. DEFAULT AND TERMINATION RIGHTS.
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12.1 Default. In the event of a default (a "Default"), the non defaulting party
shall have the right, without limiting any other right or remedy provided in
this Agreement or that it may have under law or equity (subject, however, to
Section 13 below), to terminate this Agreement by giving notice to the other
party under this Agreement and of its election to terminate this Agreement,
after the non defaulting party becomes aware of such Default. Each of the
following is a Default
12.1.1 The failure of either party to materially perform any of such party's
obligations contained in this Agreement, which failure has not been cured within
[***], in the case of a breach in any payment obligation hereunder, or [***], in
the case of a breach in any other kind of obligation hereunder, after the non
breaching party provides notice to the breaching party describing the breach(es)
in reasonable detail.
12.1.2 The failure by AEC to fulfill on a timely basis, in accordance with the
requirements set forth in paragraph 2.2.1 above, at least [***] of all orders
for units of Product received during any particular [***] period (except with
respect to Commercially Unavailable Product, cutouts and imports); provided,
however, that the preceding [***] figure shall instead be [***] with respect to
any thirty (30) day period, the majority of which occurs during a Surge Month.
As used herein, the term "Surge Month" shall mean any calendar month in which
the average daily order volume (measured by the number of discrete orders
placed, not the total number of Product items ordered) exceeds the average daily
order volumes for the previous two (2) calendar months by at least [***].
12.1.3 The occurrence of any of the following: (a) any party admits in writing
its inability to pay its debts generally or makes a general assignment for the
benefit of creditors; (b) any affirmative act of insolvency by any party filing
by any party of any petition or action under any bankruptcy, reorganization,
insolvency, arrangement, liquidation, dissolution or moratorium law, or any
other similar law or laws for the benefit of, or relating to, debtors; (c) the
filing, by any third party, against any party of any petition or action of the
type described in clause (b) above, which has not been either controverted by
such party within fifteen (15) days after its receipt of the service of process
dating to such filing, or stayed or dismissed within thirty (30) days after the
time of such receipt; (d) the subjection of a material part of any party's
property to any levy, seizure, assignment or sale for or by any creditor, third
party or governmental agency, provided that such levy, seizure, assignment or
sale has not been stayed, discharged or reversed within thirty (30) days after
the date of issuance of the order or decree which authorized the same; or (e)
the issuance of an injunction enjoining either party from performing any of its
material obligations hereunder, which injunction has not been stayed, discharged
or reversed within thirty (30) days after the date of issuance of the order or
decree which authorized the same.
13. LIMITATION OF LIABILITY. NEITHER OF THE PARTIES HERETO SHALL HAVE ANY
LIABILITY TO THE OTHER PARTY HERETO OR TO ANY THIRD PARTY FOR ANY INDIRECT,
SPECIAL, CONSEQUENTIAL, EXEMPLARY OR INCIDENTAL DAMAGES ARISING UNDER THE TERMS
OF THIS AGREEMENT, EVEN IF ADVISED IN ADVANCE OF THE POSSIBILITY OF SUCH
DAMAGES. The foregoing shall not be interpreted to limit any party's right to be
fully indemnified to the extent provided under Section
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11 above for damages claimed by a third party. Company acknowledges that nothing
in this Agreement shall be deemed to establish a contractual or other legally
recognizable relationship between AEC and a Customer, it being agreed that the
services provided hereunder are for Company's benefit and as agent for Company.
14. FORCE MAJEURE. Except for obligations under Section 9 above and obligations
of payment, the executory obligations of the parties hereunder shall be excused
to the extent, but only to the extent, delayed or prevented by Acts of God,
including earthquake, storm, flood, fire, explosion, power failure, civil
insurrection, or any other cause beyond the reasonable control of the affected
party hereto and which such party could not by reasonable diligence have avoided
(collectively, "Force Majeure"), provided that notice of such Force Majeure is
given by the affected party to the other within twenty (20) days of such party's
becoming affected by the Force Majeure. Furthermore, in the event such notice is
timely given, no failure or delay by either party in the performance of any of
its obligations (other than under Section 9 above) as a result of a Force
Majeure shall give rise to any liability to the other party for any loss,
injury, delay, or other casualty suffered or incurred by such other party due to
such Force Majeure. The party directly affected by a Force Majeure shall use all
reasonable efforts to minimize the effects of the same. At the election of the
party not directly affected by a Force Majeure, a period of time equal to the
duration of any suspension of performance by the other party as a result of a
Force Majeure shall be added to the end of the then current term of this
Agreement, and such term shall be accordingly extended.
15. GENERAL.
15.1 Entire Agreement/Amendment: All references to "this Agreement," "hereof,"
"herein" and words of similar connotation include the agreement to which this
Annex A is attached, as well as all exhibits attached hereto, unless specified
otherwise. Each party acknowledges that it has read this Agreement, understands
it, and agrees to be bound by its terms. This Agreement represents the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements, negotiations, understandings, representations,
statements and writings among the parties relating thereto with regard to the
subject matter hereof. No modification, alteration, waiver or change in any of
the terms of this Agreement shall be valid or binding upon the parties hereto
unless made in writing and duly executed by both of the parties hereto.
15.2 Governing Law: This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Florida and the United States of
America, without regard to the principles of conflicts of law. The parties
hereby consent to and submit to the sole jurisdiction of a competent court
located in the State of Florida. Such court shall be the sole and exclusive
venue for resolution of any disputes or disagreements between the parties
relating to this Agreement or the transactions contemplated hereby or otherwise
arising hereunder or with respect to any breach of the terms and provisions
hereof.
15.3 Severability: Should any part of this Agreement be held unenforceable or in
conflict with the applicable laws or regulations of any jurisdiction, the
invalid or unenforceable part or provision shall be replaced with a provision
which accomplishes, to the extent possible, the original business purpose of
such part or provision in a valid and enforceable manner, and the remainder of
this Agreement shall remain binding upon the parties.
Annex A - Page 17
<PAGE> 20
15.4 Successors and Assigns: This Agreement and all obligations and rights
herein shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
15.5 Relationship between the Parties: This Agreement is not intended to create
any relationship other than AEC as an independent contractor performing services
covered by this Agreement, and Company as the party contacting with AEC for
those services. No party is a partner or a legal representative of the other for
any purpose whatsoever. No party is authorized to make any contract, agreement
or warranty on behalf of any other party. Under no circumstance shall one
party's employees be construed to be employees of any other party.
15.6 Notices: All notices given to the parties hereunder and all statements and
payments hereunder shall be addressed to the parties at the address set forth
below or at such other address as shall be designated by the parties in writing
from time to time:
If to Company: with a copy to:
The Ultimate Band List, LLC Lenard & Gonzalez LLP
17835 Ventura Blvd., Suite 310 1900 Avenue of the Stars, 25th Floor
Encino, CA 91316 Los Angeles, CA 90067
Attn.: Marc Geiger Attn.: Allen D. Lenard, Esq.
If to AEC: with a copy to:
AEC One Stop Group, Inc. Alliance Entertainment Corp.
4250 Coral Ridge Drive 4250 Coral Ridge Drive
Coral Springs, Florida 33065 Coral Springs, Florida 33065
Attn.: Eric Weisman Attn.: General Counsel
All notices shall be in writing and shall be personally delivered, or served by
certified mail, return receipt requested, or by overnight mail service such as
Federal Express, all charges prepaid. Except as otherwise provided herein, such
notices shall be deemed given three days after mailing or delivery to an
overnight mail service, all charges prepaid, except that notices of change of
address shall be effective only after actual receipt thereof. The failure of the
recipient to accept or receive notice given by certified mail, return receipt
requested, postage prepaid, does not affect the validity of the notice.
15.7 Survival: The terms and provisions of this Agreement by their sense and
context are intended to survive the performance of such term or provision or of
this Agreement shall so survive the completion of performance and termination of
this Agreement, including the provisions of Sections 9, 10 and 11 hereof.
15.8 Waiver of Default or Breach: Waiver by either party of a default or breach
or a succession of defaults or breaches, or any failure by either party to
enforce any rights hereunder, shall not be deemed to constitute a waiver of any
subsequent default or breach with respect to the same or any other provision
hereof, and shall not deprive such party of any right to terminate this
Agreement arising by reason of any subsequent default or breach.
15.9 Captions; Examples: The captions used in this Agreement are for convenience
of reference only and are not to affect the construction hereof or be taken into
consideration in the
Annex A - Page 18
<PAGE> 21
interpretation hereof. Whenever examples are used in this Agreement with the
words "including," "for example," "e.g.," "such as," "etc." or any derivation
thereof, such examples are intended to be illustrative and not in limitation
thereof.
15.10 Drafting Party: Notwithstanding that this Agreement may have been drafted
by one or another of the parties hereto, neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against either
party, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties hereto and shall be construed
and interpreted according to the fair meaning of the words used so as to
accomplish the purposes and intentions of the parties hereto.
15.11 Counterparts: This Agreement may be executed in one or more counterparts
each of which shall be deemed an original but all of which taken together shall
be deemed one and the same instrument.
End of General Terms & Conditions
Annex A - Page 19
<PAGE> 22
EXHIBIT 1
CUSTOMER SERVICE
AEC shall provide on behalf of Company customer support for those
orders placed by Customers through the Store. This Exhibit shall define the
service level and performance requirements mandated to govern such activities.
DEFINITION OF SERVICE LEVEL
1. Contact Numbers. AEC Customer Support Service Department will provide
Company with an (800) phone number, Voice-Mail Messaging system, a (800) fax
phone number, and an e-mail address. The contact numbers will be presented
to the Customers from within the Store and on the printed hardcopy invoice.
The contact numbers will be provided to Company prior to Store launch.
Company shall designate and provide to AEC a contact person (including their
phone number, fax number and email address) to resolve out of policy store
issues that may arise from Store Customers.
2. Customer Support Hours. AEC Customer Support Service Department will operate
Monday through Friday (excluding holidays), between the hours of 9:00 AM and
6:00 PM Eastern Time.
3. Customer Support Activities. AEC Customer Support Services Department will
assist customers with all customer inquiries concerning orders and product
information as defined below:
a) Order Status Information. Customer Service will provide research
and/or updates on orders, as required by the consumer (i.e., is the
order shipping today, did my order ship, when should I expect the
order, etc.)
b) Back Orders & Special Orders. Customer Service will provide support,
answer, update information from the consumer on items placed on back
order or on special order. (e.g., Has the product been received? Do
you know when product will become available? How long does this
usually take?) Additionally, Customer Service will update the
consumer on discontinued items, release product as these become
available, and cancel back orders.
c) Shipping Status. Customer Service will answer questions on items
already shipped or currently in AEC's warehouse ready to ship. This
may also involve tracking the shipment through UPS and providing an
estimate on date of arrival to consumer.
d) Tracking and Locating Product. Customer Service will initiate tracers
with UPS on shipments that have not arrived as promised, and file
claims for service failures.
e) Order Changes, Cancellations, and/or Deletions. Customer Service will
make changes for orders that have not been processed or already
billed. Once orders are processed, changes cannot be made. (e.g.,
adding or deleting product, cancel orders, change shipping address,
etc.)
f) Refused/Undeliverable Shipment. Customer Service will contact
customer when product has been refused on delivery. This will involve
determining if the item(s) should be reshipped, address may need
correction or simply issuing credit to the consumer. If product is
returned "undeliverable" Customer Service will contact the customer
to validate address and arrange for re-shipment of product.
g) Claims Research. Customer Service will research all claims for
product that has already been billed and shipped. (e.g., billing
information, overcharges, credits, product ordered, total amount
billed to credit card, tracking number, ship via method, invoice
itemization, returns etc.)
h) Defective-Product received defective. Customer Service will validate
the defect, issue a return authorization number, retrieve the
defective product and generate a replacement order.
Alliance Entertainment Corp.
Exhibit 1 - Page 1
<PAGE> 23
i) Damaged-Product arrived damaged. Customer Service will validate the
damage, file a claim for the loss with UPS issue a return
authorization number, retrieve the damaged product and generate a
replacement order.
j) Lost-Product lost in transit. Customer Service will validate the
damage, file a claim for the loss with shipping agent, issue a return
authorization, retrieve the damaged product and generate a
replacement order.
k) Incorrect Product. Customer Service will validate the claim for
incorrect item received and will issue a return authorization number,
retrieve product and generate a replacement order.
l) Billing Inquiries. Customer Service will answer and support general
billing questions from consumer, as well as provide detailed
itemization of billing charges.
m) Copy of Invoices. Upon request, Customer Service will generate an
additional copy of the invoice and mail a copy to the consumer.
n) Credit Card Reconciliation. Customer Service will research charges
and credits on behalf of the consumer. (i.e. product returned and
credit has not yet been applied to the credit card, researching
overcharges and credits )
o) Product Inquiries. Customer Service will provide information on
product availability, song titles and artist information to the
consumer. (i.e., Is this available ?, Who is this artist)
4. Non-Store Sales Orders. AEC Customer Service shall provide sales support for
those orders not placed directly through the Store. The following are two
order entry methods available to the Customer.
Phone Sales (order Entry). Customer Service will support orders
submitted via the telephone. All telephone orders will be answered in
the order these are received in Customer Service. If the call is not
answered by a Customer Service Representative, the consumer may leave a
voice mail message and have their call returned.
Fax Sales (order entry). Customer Service will enter orders received via
fax on behalf of the consumer. All fax orders will be answered in the
order these are received in Customer Service.
5. Product Returns. AEC Customer Service will process Customer returns and
conduct the authorization and processing required based on Company's
predetermined returns policy.
Returns. Customers may return product for received damaged, incorrect
item(s) or defective. Customer Service will validate the customer's
claim and issue a return authorization number. Customer Service will
perform this function in accordance with the Store's procedures and
policy.
CUSTOMER SERVICE PERFORMANCE REQUIREMENTS
6. Performance Requirements. The following are AEC's Customer Service
performance representations.
Daily Phone Call Volume. In order to meet the level of Customer Service
as defined herein, a daily incoming Customer Service call volume of (30)
thirty Customer Service related calls (excluding order placement calls)
shall be processed while meeting the below performance standards. Should
demand exceed Daily Call Volume by 15% or more in any month, AEC will
notify Company of the increased Call
Alliance Entertainment Corp.
Exhibit 1 - Page 2
<PAGE> 24
Volume (as provided in Customer Service Regular Customer Service
Reports), and the parties shall negotiate a reasonable monthly fee
payable by Company to AEC by virtue of such increase.
Voice Mail Support. The goal of customer service is to be able to answer
each inbound call immediately by anyone of our several Customer Service
Representatives. However, in the event that the customer's call cannot
be answered in the order it is received, the customer may leave a voice
mail message. Voice mail inquiries received Monday through Friday before
12:00 noon Eastern Time will be acknowledged on the same day. Voice mail
inquiries received after 12:00 noon Eastern Time will be answered the
next day. Voice mail inquiries received over the weekend or on
non-working holidays will be answered on the next regularly scheduled
working day.
Faxed Sales Orders. Orders faxed for manual order entry received by
12:00 noon (Monday-Friday) Eastern Time will be processed and prepared
for shipment the same day. Fax orders received after 12:00 noon Eastern
Time will be processed the following working day and shipped that same
day. Fax orders received over the weekend or on non-working holidays
will be answered on the next regularly scheduled working day.
Phone Sales Orders. All telephone sales orders received for manual order
entry and processing before 12:00 noon (Monday-Friday) Eastern Time will
be processed and prepared for shipment the same day. Voice mail messages
received after 12:00 noon (Monday-Friday) Eastern Time will be
acknowledged, processed and prepared for shipment the next regularly
scheduled working day.
E-mail Inquiries. Email inquiries received before 12:00 noon Eastern
Time (Monday through Friday) will be acknowledged on the same day. Email
received after 12:00 noon Eastern Time (Monday through Friday) will be
answered the next day. Email received over the weekend or on non-working
holidays will be responded to on the next regularly scheduled working
day.
Customer Service Claims Report. A Customer Service Claims Report,
provided by AEC to Company will be generated and distributed to Company
on a BI-weekly basis. The report will display Company with information
pertaining to all open, pending and resolved inquiries received by the
AEC Customer Service Department. This report is primarily used by
Customer Service to monitor service issues. Customer Service will
provide via an Excel file an electronic e-mail copy of this report to
Company. This report will provide detail of customer inquiries by date,
inquiry reason and resolution. This report is currently used to measure
the performance and responsiveness of Customer Service.
Alliance Entertainment Corp.
Exhibit 1 - Page 3
<PAGE> 25
EXHIBIT 2
STORE DEFINITION SUMMARY
AEC as service to the Company, shall design, develop and host the Store as
defined below. This Exhibit shall define the general features and functionality
of the Store. Additionally, the attached ("Storyboard") shall display a visual
depiction of the general flow of the user navigation, and the data elements that
will be displayed on the various particular page views.
STORE LOCATION
1. URL Address. The Store will be reached via the Ultimate Band List Internet
Web Page (UBL.COM). This site is located at http://www.ubl.com. The actual
Store itself will be hosted on AEC'S web servers located in Coral Springs,
Florida.
DATABASE SEARCHES
1. Searches. The Store will allow for the following database search and
retrieval capabilities.
a) The artist search and alpha-key board type search by artist will be
performed by UBL.
b) The album and song title search will be performed by AEC.
c) AEC searches may accept one or more full or partial keywords.
d) A direct match for an artist search will result in the corresponding
artist card being displayed.
e) A direct match for an album or song title search will result in the
corresponding album page being displayed.
f) If a direct match is not found for the artist search, the artist
search results list will be displayed
g) If a direct match is not found for the album or song title search,
the album search results list will be displayed
ALBUM FEATURES - SPOTLIGHTS
1. Features. The Store will provided browsers with several different (i.e.,
genre specific) featured albums depending on area in the Store the browser
is in. Albums selected for featuring will normally contain complete
descriptive details (e.g., artist name, album title, tracks, cover art,
sound bytes (if available), fulfillment status, etc,.). The feature album
list(s) will be updated automatically by AEC and AMG on a weekly basis. AEC
and AMG staff will determine the albums that will be featured on a weekly
basis. The feature album list will be uploaded into the Store database via
an automated application process.
a) Up to three (3) albums will be featured upon entering each main
section of the Store. These album features could be of any musical
genre.
Alliance Entertainment Corp.
Exhibit 2 - Page 1
<PAGE> 26
b) Up to three (3) genre specific features will be displayed in
corresponding genre areas of the Store (e.g., search performed on New
Release by Genre will produce (3) featured albums from the specific
genre searched upon) to the type of genre being displayed.
c) All features will normally contain complete details and/or
descriptive album content (i.e., covers, track listings, sound
bytes.)
NEW RELEASE LISTS
1. New Releases. The program will allow for the easy display of all new
releases contain in the AEC Availability File. Release information is
updated in the Store on weekly basis.
a) Upon selecting the New Release option, user will be displayed (3)
non-genre specific featured albums and will then need to select from
a the list of genres available and/or a date range (e.g., last two
weeks, etc.).
b) New releases will be displayed alphabetically by artist.
c) A release is considered new for the prior 30 days of release or the
following 7 days of the date selected.
d) The album images (if available at the time of release) will be
displayed along with artist name, album title, price and any
suggestive sales data such as sound bytes, etc.
TOP SELLERS
1. Top Sellers. This list will provide the browser with an update-to-date
(weekly) listing of those albums that captured the lions-share of individual
total units sold both to traditional retail and/internet sales on product
sold and filled by AEC. The top sellers are AEC'S top sellers.
a) Up to the top 25 sellers will be displayed by genre.
b) Top sellers are determined weekly based on AEC sales.
c) Top sellers will be AMG content rich.
d) Featured Albums will be presented within each list.
UPCOMING RELEASES
1. Upcoming Releases. These releases are albums that are targeted for release
to general public but are not available for immediate shipment. Accuracy of
releases dates will always be suspect for review. The Store will allow for
and process the pre-booking of upcoming releases. These orders if not in AEC
inventory upon order and/or availability will be treated as a back-order or
a special order.
a) A release is defined as upcoming if it is to be released in the next
7 or more days.
b) Upcoming releases will be displayed by genre and/or release date.
Alliance Entertainment Corp.
Exhibit 2 - Page 2
<PAGE> 27
c) New releases will be featured in this section.
SHOP BY GENRE
1. Shop by Genre. This area of the Store will help the music consumer better
explore areas of music they may not be familiar with. The view is provided
with detailed information about a particular genre of their choice and is
presented with a convenient and quick list of artists and/or albums of
recognized acclaim within this specific genre.
a) A genre is chosen upon entering this section.
b) A style or decade may then be entered.
c) If style is chosen, a description of the style is displayed along
with a listing of the most notable artists of this style.
d) If decade is chosen, the best artists and the best albums for the
decade will be displayed.
e) New releases will be featured in this section.
RECOMMENDATIONS
1. Album and Artist Recommendations. This section of the Store will provide a
quick and specific list of either a list of artists or albums that the music
consumer may want to explore based on their entry of a "liked" artist or
"album". It is not based on "case-based reasoning" or the likes of other
music consumers.
a) User enters their favorite Artist or Album title.
b) The Store returns a list of similar recommendations.
c) While viewing recommendations list, the suggested sell and the most
recent release will be featured automatically.
SHOPPING CART
1. Shopping Cart Features.
a) Cybercash will be used to process credit cards.
b) Gift wrapping options and selection of the gift wrap style (e.g.,
Xmas, birth-day, etc.) will be available to the viewer via images. If
one or more items are ordered, each item in that order will be gift
wrapped individually.
c) Inventory will be checked real time and reserved after placing the
entire order.
Alliance Entertainment Corp.
Exhibit 2 - Page 3
<PAGE> 28
d) A confirmation number will be assigned after the order is completed.
HELP
1. The Help Section. The help section of the Store will contain the following
topics. Many items will need continual updating to keep the information
presented up-to-date and accurate. Both AEC and Company will work closely
together on defining and maintaining this section of the Store.
a) Customer service
b) Database Search
c) Store Policies
d) Returns Processing
e) Back Orders
f) Special Orders
g) Shipping Rates
h) Frequently Asked Questions
Alliance Entertainment Corp.
Exhibit 2 - Page 4
<PAGE> 29
EXHIBIT 3
SAMPLE INVOICES
Alliance Entertainment Corp.
Exhibit 3
<PAGE> 30
EXHIBIT 4
RETURNS POLICY
Your satisfaction guaranteed!
If you have received damaged, defective, or incorrectly shipped merchandise
please notify Customer Service within 30 days and follow the instructions below.
We will gladly replace the merchandise without additional charge, or provide you
with a full refund.
If you are unsatisfied with your UBL purchase and the merchandise is unopened we
will be happy to exchange it for you. Original shipping and handling charges
cannot be refunded, and you will be responsible for all costs associated with
return shipment. No COD returns will be accepted.
A return must be approved by Customer Service. Once validated a Return
Authorization Number (RA#) is issued. At that time, Customer Service will
generate a new order and replace the item(s). All returns must display the
Return Authorization number on the outside of each box, along with the
customer's return address. Returns received at our facility without an
authorization will be refused on delivery.
Important Information
- Special order and open product are non-returnable.
- Prior to returning product, contents must be well packaged to
assure safe arrival. Product must be unopened, and in re-salable
condition. We recommend using the original packaging for
shipment.
- Shipments must be received pre-paid at our returns facility. Any
COD shipments will not be accepted.
RETURNS PROCEDURE
Please follow these simple steps to ensure your fast returns and appropriate new
shipment or credit.
1. CONTACT CUSTOMER SERVICE
You must contact Customer Service to obtain a RETURN AUTHORIZATION NUMBER (RA#).
Returns cannot be accepted without this number. You may contact Customer Service
in any of the following three ways:
- E-mail: [email protected]
- Phone: 1-800-538-3465, Monday to Friday, 9am to 6pm, Eastern
Standard Time
Alliance Entertainment Corp.
Exhibit 4
<PAGE> 31
- Fax: (954) 255-4837
2. INFORMATION NEEDED
Please have the following information ready before you call or as part of your
e-mail or fax.
1. Order confirmation number
2. Your name
3. Your e-mail address
4. Your phone number
5. Product #
6. Product Name
7. Reason for return
3. PACK AND SEND
1. Fill out the return label (provided on the back of your invoice),
including your RA#. RETURNS CANNOT BE ACCEPTED WITHOUT AN RA#.
2. Enclose merchandise and this completed form in a sturdy package (the
original package is preferred).
3. Enclose the original packing slip/invoice in the package.
4. Affix the return label to the outside of the package and send to the
following address:
Ultimate Band List Store
Attn: Returns Department
4250 Coral Ridge Drive
Coral Springs, FL 33065
Alliance Entertainment Corp.
Exhibit 4
<PAGE> 32
EXHIBIT 5
INTERNET FULFILLMENT PRICE LIST
a. I. Major Label and Independent Price List
(i) Compact Disc
(ii) Suggested List UBL Price
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
I = INDEPENDENT LABEL PRICE M = MAJOR LABEL PRICE
Cassette
(III) Suggested List UBL Price
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
II. MONTHLY DISCOUNTS
Within thirty (30) days before the beginning of each calendar month,
Company and AEC shall use good faith efforts to agree upon [***].
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 5
<PAGE> 33
EXHIBIT 6
CONSIGNMENT PRODUCT FULFILLMENT FEES
-----------------------------------------------------------
Product Item Retail Price Fulfillment Fee
-----------------------------------------------------------
[***] [***]
[***] [***]
[***] [***]
[***] [***]
-----------------------------------------------------------
- --------------------------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 6
<PAGE> 34
EXHIBIT 7
SHIPPING RATES
[***]
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 7
<PAGE> 35
EXHIBIT 8
PACKAGING MATERIAL COSTS
-----------------------------------------------------------
Box Size Packaging Cost
-----------------------------------------------------------
[***] [***]
[***] [***]
[***] [***]
-----------------------------------------------------------
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Alliance Entertainment Corp.
Exhibit 8
<PAGE> 36
EXHIBIT 9
AMG MARK PLACEMENT
Alliance Entertainment Corp.
<PAGE> 1
EXHIBIT 10.21
ARTISTdirect, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of ARTISTdirect Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret
and construe any provision of the Plan and to adopt such rules and regulations
for administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall be limited to
Two Million (2,000,000) shares.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of January
each calendar year during the term of the Plan, beginning with calendar year
2001, by an amount equal to one percent (1%) of the total number of shares of
Common Stock outstanding on the last trading day in December of the immediately
preceding calendar year, but in no event shall any such annual increase exceed
Four Million (4,000,000) shares.
C. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and class of securities
issuable under the Plan, (ii) the maximum number and class of securities
purchasable per Participant on any one Purchase Date, (iii) the maximum number
and class of securities purchasable in total by all Participants on any one
Purchase Date, (iv) the maximum number and/or class of securities by which the
share reserve is to increase automatically each
<PAGE> 2
calendar year pursuant to the provisions of Section III.B of this Article One
and (v) the number and class of securities and the price per share in effect
under each outstanding purchase right in order to prevent the dilution or
enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive offering periods until such time as (i)
the maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in April
2002. The next offering period shall commence on the first business day in
May 2002, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May to the last business day in October each year and from the
first business day in November each year to the last business day in April in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in April 2000.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date
of any offering period under the Plan may enter that offering period on such
start date or on any subsequent Semi-Annual Entry Date within that offering
period, provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after
the start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period,
the Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
2.
<PAGE> 3
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock during an offering period may be
any multiple of one percent (1%) of the Cash Earnings paid to the Participant
during each Purchase Interval within that offering period, up to a maximum of
fifteen percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective
as soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one
(1) such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of
any new Purchase Interval within the offering period, increase the rate
of his or her payroll deduction by filing the appropriate form with the
Plan Administrator. The new rate (which may not exceed the fifteen
percent (15%) maximum) shall become effective on the start date of the
first Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
administratively feasible following the Participant's Entry Date into the
offering period and shall (unless sooner terminated by the Participant) continue
through the pay day ending with or immediately prior to the last day of that
offering period. The amounts so collected shall be credited to the Participant's
book account under the Plan, but no interest shall be paid on the balance from
time to time outstanding in such account. The amounts collected from the
Participant shall not be required to be held in any segregated account or trust
fund and may be commingled with the general assets of the Corporation and used
for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan
on any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date, whether within the
same or a different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHTS. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive
3.
<PAGE> 4
installments over the remainder of such offering period, upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under
the Plan to any Eligible Employee if such individual would, immediately after
the grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date. However, for any Participant whose Entry Date
occurs after the start date of the offering period, the clause (i) amount shall
not be less than the Fair Market Value per share of Common Stock on such start
date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed Three Thousand (3,000) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization. In addition, the
maximum number of shares of Common Stock purchasable in total by all
Participants on any one Purchase Date shall not exceed One Million (1,000,000)
shares, subject to periodic adjustments in the event of certain changes in the
Corporation's capitalization. However, the Plan Administrator shall have the
discretionary authority, exercisable prior to the start of any offering period
under the Plan, to increase or decrease the limitations to be in effect for the
number of shares purchasable per Participant and in total by all Participants on
each Purchase Date within that offering period.
4.
<PAGE> 5
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied
to the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions
shall be collected from the Participant with respect to the terminated
purchase right. Any payroll deductions collected during the Purchase
Interval in which such termination occurs shall, at the Participant's
election, be immediately refunded or held for the purchase of shares on
the next Purchase Date. If no such election is made at the time such
purchase right is terminated, then the payroll deductions collected with
respect to the terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was granted. In
order to resume participation in any subsequent offering period, such
individual must re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry
Date into that offering period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in
status) while his or her purchase right remains outstanding, then that
purchase right shall immediately terminate, and all of the Participant's
payroll deductions for the Purchase Interval in which the purchase right
so terminates shall be immediately refunded. However, should the
Participant cease to remain in active service by reason of an approved
unpaid leave of absence, then the Participant shall have the right,
exercisable up until the last business day of the Purchase Interval in
which such leave commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase Interval or (b)
have such funds held for the purchase of shares on his or her behalf on
the next scheduled Purchase Date. In no event, however, shall any
further payroll deductions be collected on the Participant's behalf
during such leave. Upon the Participant's return to active service (x)
within ninety (90) days following the commencement of such leave or (y)
prior to the expiration of any longer period for which such
Participant's right to reemployment with the Corporation is guaranteed
by statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in
5.
<PAGE> 6
effect at the time the leave began, unless the Participant withdraws
from the Plan prior to his or her return. An individual who returns to
active employment following a leave of absence which exceeds in duration
the applicable (x) or (y) time period will be treated as a new Employee
for purposes of subsequent participation in the Plan and must
accordingly re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry
Date into the offering period.
G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, for
any Participant whose Entry Date occurs after the start date of the offering
period, the clause (i) amount shall not be less than the Fair Market Value per
share of Common Stock on such start date. In addition, the applicable limitation
on the number of shares of Common Stock purchasable per Participant shall
continue to apply to any such purchase, but not the limitation applicable to the
maximum number of shares of Common Stock purchasable in total by all
Participants.
The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Change in Control,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of
shares of Common Stock to be purchased pursuant to outstanding purchase rights
on any particular date exceed the number of shares then available for issuance
under the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only
by the Participant and shall not be assignable or transferable by the
Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
6.
<PAGE> 7
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000.00) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the
purchase rights granted under the Plan, the following provisions shall be in
effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on
each successive Purchase Date during the offering period on which such
right remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
Common Stock under one or more other purchase rights at a rate equal to
Twenty-Five Thousand Dollars ($25,000.00) worth of Common Stock
(determined on the basis of the Fair Market Value per share on the date
or dates of grant) for each calendar year such rights were at any time
outstanding.
C. If by reason of such accrual limitations, any purchase right
of a Participant does not accrue for a particular Purchase Interval, then the
payroll deductions which the Participant made during that Purchase Interval with
respect to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of
this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on October 13, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock
7.
<PAGE> 8
exchange (or the Nasdaq National Market, if applicable) on which the Common
Stock is listed for trading and all other applicable requirements established by
law or regulation. In the event such stockholder approval is not obtained, or
such compliance is not effected, within twelve (12) months after the date on
which the Plan is adopted by the Board, the Plan shall terminate and have no
further force or effect, and all sums collected from Participants during the
initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall
terminate upon the earliest of (i) the last business day in October 2009, (ii)
the date on which all shares available for issuance under the Plan shall have
been sold pursuant to purchase rights exercised under the Plan or (iii) the date
on which all purchase rights are exercised in connection with a Change in
Control. No further purchase rights shall be granted or exercised, and no
further payroll deductions shall be collected, under the Plan following such
termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at
any time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the Corporation to recognize
compensation expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following
amendments or revisions to the Plan without the approval of the Corporation's
stockholders: (i) increase the number of shares of Common Stock issuable under
the Plan, except for permissible adjustments in the event of certain changes in
the Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the
Plan shall be paid by the Corporation; however, each Plan Participant shall bear
all costs and expenses incurred by such individual in the sale or other
disposition of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any
right to continue in the employ of the Corporation or any Corporate Affiliate
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Corporate Affiliate employing such
person) or of the Participant, which rights are hereby expressly reserved by
each, to terminate such person's employment at any time for any reason, with or
without cause.
8.
<PAGE> 9
C. The provisions of the Plan shall be governed by the laws of
the State of California without resort to that State's conflict-of-laws rules.
9.
<PAGE> 10
SCHEDULE A
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
ARTISTdirect, Inc.
<PAGE> 11
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH EARNINGS shall mean (i) the regular base salary paid to
a Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan and (ii)
any overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Cash Earnings shall
be calculated before deduction of (A) any income or employment tax withholdings
or (B) any contributions made by the Participant to any Code Section 401(k)
salary deferral plan or Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. Cash
Earnings shall not include any contributions made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established (other than Code Section 401(k) or Code
Section 125 contributions deducted from such Cash Earnings).
C. CHANGE IN CONTROL shall mean a change in ownership of the
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by or is
under common control with the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders.
C. CODE shall mean the Internal Revenue Code of 1986, as
amended.
D. COMMON STOCK shall mean the Corporation's common stock.
A-1
<PAGE> 12
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CORPORATION shall mean ARTISTdirect, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of ARTISTdirect, Inc. which shall by appropriate action
adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of the initial offering period which
begins at the Effective Time, the Fair Market Value shall be deemed to
be equal to the price per share at which the Common Stock is sold in the
initial public offering pursuant to the Underwriting Agreement.
A-2.
<PAGE> 13
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
M. PARTICIPANT shall mean any Eligible Employee of a
Participating Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
0. PLAN shall mean the Corporation's 1999 Employee Stock
Purchase Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or
more Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each
Purchase Interval. The initial Purchase Date shall be April 28, 2000.
R. PURCHASE INTERVAL shall mean each successive six (6)-month
period within the offering period at the end of which there shall be purchased
shares of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
May and November each year on which an Eligible Employee may first enter an
offering period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE> 1
EXHIBIT 10.25
PANDESIC AGREEMENT
ORDER FORM
<TABLE>
<CAPTION>
CONTRACT DATE: April 15, 1999 CONTRACT NUMBER:
----------------------- ---------------------------
MERCHANT INFORMATION
- -------------------------------------------------------------------------------------------
<S> <C>
COMPANY NAME: ARTISTdirect, LLC CONTACT NAME: PASCAL DESMARETS
----------------------- -----------------------------
BILLING ADDRESS: 17835 VENTURA BLVD. PHONE: 818-758-8700
-------------------- ------------------------------------
SUITE 310 FAX: 818-758-8722
- ------------------------------------- --------------------------------------
ENCINO, CA 91316 E-MAIL: [email protected]
- ------------------------------------- -----------------------------------
BILLING CONTACT: BOB MORSE TECHNICAL CONTACT: MORGAN PORTER
--------------------- -------------------------
PHONE: 818-758-8700 PHONE: 818-758-8700
------------------------------ ------------------------------------
FAX: 818-758-8722 FAX: 818-758-8722
-------------------------------- ------------------------------------
E-MAIL: [email protected] E-MAIL: [email protected]
----------------------------- ------------------------------------
</TABLE>
Merchant hereby orders the Pandesic E-Business Solution Service from PANDESIC
LLC ("PANDESIC"). This Order Form and Exhibit A to this Order Form Additional
Services is subject to the Terms and Conditions and the Pandesic reference
documents referred to herein (collectively, the "Agreement"). This Agreement is
valid when accepted by an authorized representative of PANDESIC.
The Pandesic E-Business Solution Service consists of (i) the installation,
implementation, hosting and administration of Merchant's e-commerce web site
(the "Hosting Services") on computers and system software (the "Pandesic
Equipment") operated by PANDESIC or its hosting partner (the "Hosting Partner"),
and (ii) licenses of associated Pandesic and third party ("Supplier")
application software (the "Software") for such purposes.
Other services provided hereunder include (i) training on the operation of the
Pandesic E-Business Solution Service, and (ii) maintenance and support services
(the "Maintenance Services"), all as described from time to time in PANDESIC
reference documents. The Pandesic E-Business Solution Service and the other
services are referred to collectively as the "Services."
MERCHANT HAS READ AND AGREES TO BE BOUND BY THE TERMS AND CONDITIONS OF THIS
AGREEMENT. MERCHANT AND PANDESIC AGREE THAT THE TERMS AND CONDITIONS OF THIS
AGREEMENT REPLACE AND SUPERSEDE ALL PROPOSALS, WRITTEN OR ORAL, AS WELL AS OTHER
COMMUNICATIONS BETWEEN MERCHANT AND PANDESIC RELATING TO THIS AGREEMENT.
<TABLE>
<CAPTION>
ACCEPTANCE
- -------------------------------------------------------------------------------------------
<S> <C>
ACCEPTED BY MERCHANT: ACCEPTED BY PANDESIC LLC:
SIGNATURE: /s/ Marc P. Geiger SIGNATURE: /s/ Peter Wolcott
--------------------------- --------------------------------
PRINT NAME: Marc P. Geiger PRINT NAME: Peter Wolcott
-------------------------- -------------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: President
------------------------------ -----------------------------------
DATE: April 15, 1999 DATE: 5/2/99
------------------------------ -----------------------------------
</TABLE>
Page 1
<PAGE> 2
PANDESIC AGREEMENT
RATE SHEET
INITIAL SET-UP CHARGE
- - Merchant shall pay an initial set-up charge of [***], payable within
[***] days of acceptance of this Agreement.
MONTHLY TRANSACTION FEES
- - The Monthly Base Fee shall be [***].
- - Monthly Transaction Fees will be calculated using the Monthly Base
Fee plus a percentage of monthly revenue (defined as [***] generated
by the sale or other distribution of products
- - Monthly Transaction Fees commence upon the Technical Installation
(the date that the Pandesic software is loaded on the servers and the
servers are ready to accept Merchant's configuration and functional
installation of its products), at the site of Pandesic's Hosting
Partner ("Digex").
FEE SCHEDULE
Monthly Transaction Fee shall be determined in accordance with the following
table:
<TABLE>
<CAPTION>
<S> <C> <C>
MERCHANT MONTHLY SALES MONTHLY TRANSACTION FEE
From To Base Fee Incremental Transaction %
- --------------------- ------------------------ -------------------------
[***] [***] [***] [***]
[***] [***] [***] [***]
</TABLE>
For example, a merchant that transacts [***] of monthly gross sales and [***] of
freight revenue would be responsible for a Monthly Transaction Fee of [***].
Monthly Base Fee for [***] in Monthly Sales [***]
[***] [***]
Total owed to Pandesic [***]
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
Page 1
<PAGE> 3
Pandesic Agreement
Rate Sheet
ACCEPTANCE
ACCEPTED BY MERCHANT: ACCEPTED BY PANDESIC LLC:
SIGNATURE: /s/ Marc P. Geiger SIGNATURE: /s/ Peter Wolcott
------------------------------ ---------------------------
PRINT NAME: Marc P. Geiger PRINT NAME: Peter Wolcott
----------------------------- --------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: President
--------------------------------- ------------------------------
DATE: April 15, 1999 DATE: 5/2/99
--------------------------------- ------------------------------
Page 2
<PAGE> 4
PANDESIC AGREEMENT
TERMS AND CONDITIONS
The following terms and conditions (these "Terms") govern the provisions by
Pandesic LLC ("Pandesic") of the Services described on the Pandesic E-Business
Solution Service Order Form ("Order Form") to the company ("Merchant")
identified on the Order Form.
1. OBLIGATIONS OF PANDESIC
1.1 Pandesic will provide, deploy, support and maintain the
Pandesic E-Business Solution Service.
1.2 Pandesic hereby grants to Merchant a non-exclusive and
non-assignable license to use the Software in the United
States for the purpose of conducting business over the
Internet throughout the world.
2. OBLIGATIONS OF MERCHANT
2.1 Merchant shall comply with all of the terms of this Agreement,
including but not limited to, the Acceptable Use Policy (the
"Use Policy"), as the Use Policy may be modified from time to
time during the term of this Agreement
2.2 Merchant may use the Services for the purpose of conducting
electronic commerce activities, as well as processing third
party data, solely in connection with products and services
offered via Merchant's website. Subject to the foregoing
Merchant shall not offer, for a fee or free of charge,
services consisting of the processing of data through the use
of the Services for, or for the benefit of, any person other
than Merchant.
3. PAYMENT
3.1 Merchant shall pay the fees set out in the Rate Sheet,
attached hereto.
3.2 All payments shall be made in U.S. Dollars. In all cases,
payments are due upon receipt by Merchant of the applicable
monthly invoices.
3.3 Payments and any additional charges, including, but not
limited to, any early cancellation charges, accrued interest
and late fees shall be invoiced in arrears and shall appear on
the monthly invoices for Services or separate invoices, as
determined by Pandesic in its sole discretion.
3.4 In addition to any other remedies that may be available to
Pandesic under this Agreement (including, but not limited to,
those in connection with the termination of this Agreement
pursuant to Section 13 below) or applicable law, invoices that
are not paid in full thirty (30) days after receipt by
Merchant (a "Payment Default") will be subject to interest
charges of the lesser of one and one-half percent (1.5%) per
month or portion thereof and the highest amount permitted by
law, which interest shall accrue daily.
3.5 Subject to Section 13.3 of this Agreement, Merchant shall be
liable for all amounts owed to Pandesic pursuant to this
Agreement, irrespective of the termination of this Agreement
Merchant also shall pay to Pandesic all expenses incurred by
Pandesic in exercising any of its rights under this Agreement
or applicable law with respect to the collection of a Payment
Default, including, but not limited to, reasonable attorneys'
fees and the fees of any collection agency retained by
Pandesic.
3.6 Merchant shall be liable for, and shall reimburse Pandesic and
indemnify and hold Pandesic harmless from all local, state,
federal and non-United States taxes or similar assessments or
charges (including any interest and penalties imposed
thereon), other than taxes based on the net income of
Pandesic, arising out of or relating to this Agreement or the
provision of the Services hereunder.
Page 1
<PAGE> 5
PANDESIC AGREEMENT
TERMS AND CONDITIONS
4. MAINTENANCE
4.1 Pandesic designates time periods ("Scheduled Maintenance
Windows") during which it may limit or suspend the
availability of the Pandesic Equipment and/or Software
involved in providing its Services (an "Outage") to perform
necessary maintenance or updates. Scheduled Maintenance
Windows currently are each Tuesday and Friday between the
hours of 4:00 a.m. and 8:00 a.m. and the third Saturday of
each month between the hours of 4:00 a.m. and 12 noon Pacific
Standard Time.
4.2 If planned maintenance has the possibility of making the
Pandesic Equipment used by Merchant inaccessible to the
Internet during a Scheduled Maintenance Window, Pandesic will
provide not less than twenty-four (24) hours prior electronic
mail or other notice to Merchant of the Scheduled Maintenance
Window during which the Outage is planned.
4.3 In addition, Pandesic reserves the right to perform any
required maintenance work or updates outside of the Scheduled
Maintenance Window with a minimum of seven (7) days prior
notice to Merchant. Pandesic also may perform at any time any
maintenance or updates it believes is necessary to preserve
the integrity of Pandesic's network and services offered
regardless of whether it has provided any notice to Merchant
thereof. Pandesic shall perform any upgrades to the Software
at times mutually acceptable to both parties.
4.4 Merchant agrees that Pandesic, its Hosting Partner and its
third party service providers shall have access to its
internet commerce system and web site for the purposes
contemplated in this Agreement.
5. CONFIDENTIALITY
5.1 In the course of business dealing, both parties will be
releasing valuable trade secrets and other confidential
information to the other including, in Pandesic's case,
information about the Services and Software provided by
Pandesic, Hosting Partner and Suppliers, and in Merchant's
case, its customer business data. Each party recognizes that
such information constitutes valuable trade secrets of the
other.
5.2 Accordingly, each party agrees that (i) the provisions of this
Agreement (ii) any information whatsoever with respect to the
Services and the Software, (iii) the course of dealing between
Pandesic and Merchant hereunder, (iv) Merchant's data, and (v)
all other non-public information (whether technical or
otherwise) made available or disclosed to such party (the
"recipient") by the other (the "disclosing party")
(collectively, the "Confidential Information") shall be
treated by recipient on a confidential basis and shall not be
reproduced, reduced to writing, or disclosed to any employee
or contractor except as necessary to provide or use the
Services, or to any other person or entity without the prior
written consent of disclosing party.
5.3 Upon termination of this Agreement, any documentation
reflecting any Confidential Information of the other party
shall be returned promptly to such party. Disclosure of
information pursuant to applicable statutes or regulations
(collectively, 'Laws') shall be excepted from the provisions
of this Section 5; provided, however, that prior to any
disclosure by the recipient pursuant to any Laws, recipient
will assert the confidential nature of the Confidential
Information and will cooperate fully with the disclosing
party, at the disclosing party's expense, in protecting
against any such disclosure including, but not limited to,
obtaining a protective order or similar order narrowing the
scope of such disclosure of the Confidential Information. In
the event such protection is not obtained, the recipient shall
disclose the Confidential Information only to the extent
necessary to comply with the Laws.
6. PROPRIETARY RIGHTS INDEMNIFICATION
6.1 Merchant agrees to indemnify and hold harmless Pandesic, all
individuals or entities controlling, controlled by or under
common control with Pandesic (each, a "Pandesic Affiliate"),
Hosting Partner, and the officers, directors and employees of
Pandesic, Pandesic Affiliates and Hosting Partner (an
"Indemnified Party") against any losses, claims, damages,
liabilities, penalties, actions,
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PANDESIC AGREEMENT
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proceedings or judgments (collectively "Losses") to which an
Indemnified Party may become subject related to or arising out
of any infringement or misappropriation or alleged
infringement or misappropriation of any United States
copyright, trade secret or other proprietary right related to
any hardware or software (other than the Pandesic Equipment
and the Software) utilized by Merchant in connection with any
of the Services or to any Merchant data distributed via the
Pandesic E-Business Solution Service and will reimburse such
Indemnified Party for all legal and other direct expenses,
including reasonable attorneys' fees incurred by such
Indemnified Party in connection with investigating, defending
or settling any Loss, whether or not in connection with
pending or threatened litigation in which such Indemnified
Party is a party.
6.2 Pandesic agrees to indemnify and hold harmless Merchant
against any Losses to which Merchant may become subject,
related to or arising out of any infringement or
misappropriation or alleged infringement or misappropriation
of any United States patent, copyright, trade secret or other
proprietary right related to the Pandesic Equipment or the
Software and will reimburse Merchant for all legal and other
direct expenses, including reasonable attorneys' fees incurred
by Merchant in connection with investigating, defending or
settling any Loss, whether or not in connection with pending
or threatened litigation in which Merchant is a party. This
indemnification does not relate to the Merchant data or
matters that arise from Merchant data or conduct. The
provisions of this Agreement relating to indemnification shall
survive termination of this Agreement.
6.3 In the event of any claim of infringement or misappropriation
under paragraph 6.2 above, Pandesic shall use its best
efforts, at its option and expense to either (i) procure for
Merchant the right to continue using the Pandesic Equipment or
the Software, (ii) replace such Pandesic Equipment or Software
with non-infringing equipment or software, or (iii) modify the
same so as to make it non-infringing, and thereafter, (iv)
terminate the Agreement as to the infringing Pandesic
Equipment or Software and refund to Merchant any of the unused
portion of the fees paid for Services prior to such
termination.
7. INDEMNIFICATION
7.1 In addition to other indemnification provided herein,
including without limitation Indemnification provided in
Section 8.3 of this Agreement from the date of any such breach
of warranty, notwithstanding any cure period, and except as to
matters covered by paragraph 6.2 above, Merchant agrees to
indemnify and hold harmless Pandesic, Pandesic Affiliates,
Hosting Partner, and the officers, directors and employees of
Pandesic, Pandesic Affiliates, and Hosting Partner (each an
"Indemnified Party") against any Losses to which an
Indemnified Party may become subject and which Losses arise
out of, or relate to Merchants breach of this Agreement in
connection with Its use of the Services under or related to
this Agreement, and will reimburse an Indemnified Party for
all legal and other expenses, including reasonable attorneys'
fees Incurred by such Indemnified Party in connection with
investigating, defending or settling any Loss whether or not
in connection with pending or threatened litigation in which
such Indemnified Party is a party.
8. OTHER MERCHANT ASSURANCES
8.1 During any time period when Merchant is provided access to any
facilities, hardware or other property owned or leased by, or
otherwise under the control of Pandesic or Hosting Partner
(collectively "Pandesic Property") pursuant to this Agreement
Merchant shall (i)maintain insurance, with Pandesic and
Hosting Partner as a named payee, covering any damage or
destruction to Pandesic Property (collectively "'Damage"); (i)
reimburse Pandesic for all expenses incurred by Pandesic in
replacing or repairing, as the case may be, any Damage caused
by Merchant, other than normal wear and tear on Pandesic
Property.
8.2 Merchant shall not attempt to copy, modify, alter,
disassemble, decompile, translate or convert Into human
readable form, or reverse engineer, all or any part of the
Software and shall not use the Software to develop any
derivative works or any functionally compatible or competitive
software, except to the extent permitted under applicable law.
However, Merchant may create interfaces to the Software or
modify the provided interfaces to permit interfacing with
Merchant's legacy database systems solely for Merchant's use
in connection with the Services provided pursuant to this
Agreement. Merchant shall not. separate the Software into its
component parts, nor
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incorporate any component files into any product, nor shall it
remove any proprietary, trademark or copyright markings or
confidentiality legends within the Software.
8.3 Merchant shall not use the Services in any manner which
violates any law or regulation, is for a fraudulent purpose,
contravenes public policy, or may cause Pandesic or its
Suppliers to be subject to prosecution or legal action.
Merchant shall only use the Services to process sales
transactions which, to the best of its knowledge, are genuine
and do not arise out of fraudulent or illegal activities in
the sale of goods, information or services. Merchant agrees,
represents and warrants that Merchant's web site shall not
contain any content or materials that infringe on the rights
of any other party or violate any applicable law or regulation
or any proprietary, contract, moral, privacy or other third
party right, or which would expose Pandesic, its Hosting
Partner or its Suppliers to any civil or criminal liability or
otherwise would affect Pandesic's or its Hosting Partner's
business; provided however, that in the event of any such
Infringement, Merchant shall have a period of fifteen (15)
business days from any such infringement to take any steps
required to cure any such breach of the warranty provided
herein with respect to such content or materials. Merchant
shall indemnify and save Pandesic, Pandesic Affiliates,
Hosting Partner, and the officers, directors and employees of
Pandesic harmless (each an "Indemnified Party") against any
claim, liabilities and costs by which an Indemnified Party may
become subject to and which arise out of, or relate to any
content contained on Merchants web site or which result from
the use of the Services in contravention of this section.
Merchant shall (a) acquire all authorizations necessary in
respect of any hyperlinks by its commerce web site, and upon
reasonable request by Pandesic, (b) provide Pandesic and its
Hosting Partner with accurate information concerning
descriptive claims, warranties, guarantees, nature of its
business and the addresses where its business is conducted.
8.4 Merchant appoints Pandesic as its agent to accept customer
relationships with certain of its Suppliers [***] as more
fully described In the reference documents.
9. USE OF MERCHANT'S NAME
9.1 Pandesic shall be permitted to use Merchant's name in a manner
mutually agreed to by the parties and in compliance with any
trademark usage guidelines provided by Merchant to Pandesic,
in connection with proposals to prospective merchants and
otherwise in print and in electronic form for marketing or
other purposes, including, but not limited to, use in
connection with (i) compliance with applicable laws or
regulations; and (ii) the protection of any rights relating to
Pandesic or its business.
10. USE OF PANDESIC'S NAME
10.1 Merchant may use the name "PANDESIC" in connection with the
Services or otherwise only with the prior written consent of
Pandesic. Pandesic shall be permitted to place an image of its
logo on Merchant's web site in order to identify Pandesic as
the e-business solution provider to Merchant. The parties
shall jointly agree the size and location of such logo.
10.2 Except as set forth herein, neither party shall have the right
to use or display the trademarks of the other party (including
with respect to consent of Pandesic, Pandesic's Hosting
Partner and Suppliers) in connection with the Services or
otherwise without prior written consent of the other party.
11. USE OF PANDESIC'S NAME
11.1 Subject to Section 4, Pandesic will use its reasonable
commercial best efforts to assure that the Services will be
available twenty-four (24) hours a day, seven (7) days a week.
If the Services are unavailable for more than a total of 4
hours in any week, other than as a result of the maintenance
activities described in Section 4, Merchant's sole and
exclusive remedy shall be that, in the event the Fees are
below the Monthly Base Fee in the month of availability, the
fees shall be waived on a pro rata basis for the period of
unavailability.
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[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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11.2 For purposes of this Agreement, a week shall be considered to
run from Sunday to Saturday and the Services shall be deemed
to be unavailable if (i) the system network is incapable of
transmitting data (subject to Section 15 below); or (ii)
Pandesic's standard hardware; software, or operating system is
functioning in a manner that prevents http, ftp, or mail
access to the Internet server or the software is unable to
process standard functions of the Pandesic E-Business Solution
Service ("Unavailability").
11.3 Notwithstanding the foregoing, Pandesic shall not be in breach
of this warranty for any period of unavailability which
results from Merchant' s action or inaction, including, but
not limited to, Merchants use of Merchant owned, non-standard,
or unsupported hardware and/or software installed by the
Merchant (or by Pandesic at the Merchant's request).
11.4 Pandesic warrants that the Maintenance Services will be
performed in accordance with generally accepted industry
standards for comparable services. Merchant's sole and
exclusive remedy for any breach of the foregoing warranty
shall be to provide Pandesic with notice of such nonconformity
within thirty (30) days of the defective performance and
Pandesic shall re-perform such Maintenance Services.
11.5 YEAR 2000 COMPLIANCE
11.5.1 The Pandesic-owned portion of the Software shall be
Year 2000 Compliant as of September 30, 1999.
11.5.2 In this regard, "Year 2000 Compliant" shall mean that
the software shall continue to function before, during
and after January 1, 2000 without error related to, or
the product of, date data which represents or
references different centuries, and, more specifically,
(a) correctly manages and manipulates data involving
dates, including single-century formulae and
multi-century formulae, (b) correctly identifies the
year 2000 as a leap year, (c) does not include any
information other than a specific date, and (d) uses
four digits to indicate the year in storage, use and
communication of all date data date-related functions.
11.5.3 The Software also includes third party Software. In
some cases, the Year 2000 capabilities of such third
party Software are unwarranted by the Suppliers of such
Software. Pandesic shall test the third party Software
for Year 2000 Compliance and shall use its reasonable
commercial best efforts to cause such Software to be
made Year 2000 Compliant by their Suppliers.
11.5.4 Provided that Pandesic takes reasonable steps to test
the third party Software as provided in Section 11.5.3
of this Agreement, Pandesic is not responsible for
errors resulting from third-party systems or devices,
which directly access the database and overwrite the
database date fields or from the improper integration
of non-Year 2000 Compliant systems by Merchant.
11.6 EXCEPT AS SET FORTH HEREIN, PANDESIC, HOSTING PARTNER AND
SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
11.7 PANDESIC DOES NOT WARRANT THE ACCURACY OF THE TAX DATA AND
OTHER TAX CALCULATIONS MADE BY THE SOFTWARE. MERCHANT BEARS
FULL RESPONSIBILITY FOR THE DETERMINATION OF THE ACCURACY AND
APPLICABILITY OF THE OUTPUT FROM THE SOFTWARE AND ACKNOWLEDGES
AND UNDERSTANDS THAT TAX CALCULATIONS OFTEN INVOLVE
INTERPRETATIONS AND THAT THE DATA OF MANY JURISDICTIONS CAN
CHANGE RAPIDLY. MERCHANT UNDERSTANDS THAT PANDESIC IS
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PANDESIC AGREEMENT
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NOT PROVIDING SPECIFIC TAX, LEGAL, ACCOUNTING OR OTHER EXPERT ADVICE AND
MERCHANT SHOULD OBTAIN THE ADVICE OF QUALIFIED PROFESSIONALS IN THE AREA.
12. LIMITATION OF LIABILITY
12.1 NEITHER MERCHANT NOR PANDESIC, HOSTING PARTNER AND SUPPLIERS
SHALL BE LIABLE FOR (i) ANY INDIRECT, INCIDENTAL, SPECIAL,
CONSEQUENTIAL OR EXEMPLARY DAMAGES, OR FOR ANY LOSS OF
PROFITS, LOSS OF REVENUE OR BUSINESS INTERRUPTION OR LOSS OF
BUSINESS INFORMATION RESULTING FROM THE SERVICES, THE PANDESIC
EQUIPMENT OR THE SOFTWARE EVEN IF PANDESIC OR MERCHANT HAS
BEEN ADVISED OF THE POSSIBILITY THEREOF OR (II) ANY LOSS OF
DATA RESULTING FROM DELAYS, NON-DELIVERIES, MIS-DELIVERIES OR
SERVICE INTERRUPTIONS CAUSED BY PANDESIC OR MERCHANT. In no
event shall Merchant or Pandesic's aggregate cumulative
liability for any damages whatsoever to Merchant or Pandesic,
their employees, officers, directors, agents or contractors
arising out of or related to this Agreement exceed the amount
paid by Merchant or Pandesic, during the term, with respect to
the Services.
12.2 Neither Pandesic nor any of its officers, directors,
employees, contractors or agents shall be liable for any
damage or destruction of equipment or other materials
belonging to, leased by, or otherwise under the control of
Merchant, whether or not any such equipment or Materials are
at any time located in facilities owned or operated by
Pandesic, except where such damage or destruction is a direct
result of the gross negligence, recklessness or willful
misconduct of Pandesic or any of its officers, directors,
employees, contractors and agents.
12.3 The limitations of liability provided in this section shall
inure to the benefit of Merchant and Pandesic, Pandesic
Affiliates, Hosting Partner, Suppliers and to all of the
respective officers, directors, employees and agents of
Merchant and Pandesic and such other entities ("Limited
Liability Parties").
12.4 The limitations of liability in this Agreement shall apply
whether (i) the action in which recovery is sought is based in
contract, tort (including, but not limited to, negligence or
strict liability), statute or otherwise; or (ii) a Limited
Liability Party is alleged to be liable jointly with one or
more parties or otherwise.
13. TERM AND TERMINATION
13.1 The initial term of this Agreement shall commence on the
Contract Date and shall continue for twenty-four (24) months
from the date that the Pandesic software is loaded on the
servers and the servers are ready to accept Merchant's
configuration and functional installation of its products,
("Technical Installation"), following which it shall
automatically renew for successive twenty-four (24)-month
terms at the charges in effect at the commencement of each
such terms, unless written notice of non-renewal by either
party is delivered to the other party at least ninety (90)
days prior to the end of the then-current term.
13.2 TERMINATION BY PANDESIC
13.2.1 In addition to any other rights it may have under this
Agreement or applicable law, Pandesic may, at its
option, immediately terminate this Agreement, upon (i)
a Payment Default, which is not cured within fifteen
(15) business days of notice of such default (ii)
Merchants failure to comply with any other material
obligation of Merchant under this Agreement including,
but not limited to, its failure to comply with any of
the terms of the Use Policy, which is not cured within
fifteen (15) business days of notice of such default
(iii) Merchant ceasing to do business in the normal
course, becoming or being declared insolvent or
bankrupt, being the subject of any proceeding relating
to liquidation or insolvency which is not dismissed
ninety (90) calendar days or making an assignment for
the benefit of its creditors, (iv) any attempt that is
prohibited under this Agreement by Merchant to derive
any source code from the Software, (v) breach of
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Merchant's obligations under Section 5 hereto, or (vi)
Pandesic, Hosting Partner or any Supplier becomes the
subject of an investigation by a law enforcement agency
not withdrawn within ninety (90) days or threatened
with prosecution as a result of Merchant's use of the
Services.
13.2.2 Pandesic may, at its option, terminate this Agreement
and retain the initial set-up charge paid by Merchant
in the event that Merchant does not complete its
pre-work obligations to permit deployment of the
Pandesic E-Business Solution Service by Pandesic within
six (6) months of the Contract Date.
13.3 TERMINATION BY MERCHANT
13.3.1 Merchant may terminate this Agreement in the event of a
material breach by Pandesic of its obligations under
this Agreement which breach is not cured within fifteen
(15) business days after written notice thereof is
received by Pandesic (a "Permissible Termination")
other than breaches that have defined remedies
associated therewith. In the event of a Permissible
Termination, Merchant shall pay a pro-rated Monthly
Transaction Fee based on the number of days Pandesic
provided Services prior to the date of termination of
this Agreement by Merchant under this Section 13.3, if
the level of Fees for such month would fall within the
Monthly Base Fee.
13.3.2 If Merchant terminates this Agreement other than in a
Permissible Termination, Merchant agrees that it would
be impractical and/or extremely difficult to fix or
establish the actual damage sustained by Pandesic as a
result of such termination and agrees that Merchant
shall pay to Pandesic as liquidated damages an amount
equal to [***].
13.3.3 Merchant may also terminate this Agreement in the event
that Pandesic (i) becomes insolvent, or files or has
filed against it any proceeding in bankruptcy or for
reorganization under any federal bankruptcy law or
similar state law, or has any receiver appointed for
all or a substantial part of Pandesic's assets or
business, or makes any assignment for the benefit of
its creditors, or enters into any other proceeding for
debt relief and such proceeding is not dismissed within
ninety (90) days after it has begun; or (ii) ceases to
do business or institutes any proceedings for the
liquidation or winding up of its business or for the
termination of its corporate charter. Within thirty
(30) days of termination by Merchant pursuant to (i) or
(ii) above, Pandesic shall provide the Source Code and
the compiled executables to Merchant. For purposes of
this Section 13.3.3 only, Source Code shall be defined
as one copy of the source code and related documents
which pertain to the Pandesic-owned portion of the
Software only, without updates. In the event that the
Source Code is released to Merchant pursuant to (i) or
(ii) above, Pandesic hereby grants Merchant the
royalty-free right to use such Source Code solely for
the purpose of maintaining its object code version of
the Pandesic-owned portion of the Software as of the
date this Agreement terminates in accordance with this
Section 13 of this Agreement and for no other reason
whatsoever.
13.4 Upon termination of this Agreement, Pandesic and Merchant
shall have no obligations to each other except as provided in
this Agreement. Upon termination of this Agreement, Merchant
shall (i) pay all amounts due and owing to Pandesic, (ii)
remove from Pandesic's and Hosting Partner's premises all
property owned by Merchant in respect of the Services
provided, and (iii) return to Pandesic all equipment,
documentation, software, access keys and any other property
provided to Merchant by Pandesic under this Agreement. Any
property of Merchant not removed from Pandesic's and Hosting
Partner's premises. Within ten (10) days after such
termination shall become the property of Pandesic, which may,
among other things, dispose of such property without the
payment of any compensation to Merchant. Pandesic shall return
to Merchant all of its data residing on the Pandesic Equipment
provided, however, that in the event that Merchant gives
Pandesic written notice that Merchant can not immediately
provide for the receipt of Merchants data residing on the
Pandesic Equipment, this Agreement will continue in effect
until such data is
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[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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returned, Pandesic agrees to continue to host such data for up
to sixty (60) days from the date of such notice, and Merchant
agrees to continue to pay Pandesic and provided for in this
Agreement The rights and obligations of the parties hereto
which by their nature would continue beyond the termination or
cancellation of this Agreement (Including, without limitation,
those relating to confidentiality, payment of charges,
limitations of liability and indemnification) shall survive
any such termination or cancellation.
14. DISPUTE RESOLUTION
14.1 If a dispute or difference of any kind whatsoever (a
"Dispute") shall arise between Pandesic and Merchant in
connection with, relating to or arising out of this Agreement,
including the interpretation, performance, non-performance, or
termination hereof, the parties shall attempt to settle such
Dispute in the first instance by mutual discussions. If such
Dispute has not been resolved within thirty (30) days by
mutual discussions, the parties shall endeavor to settle the
Dispute by mediation under the Mediation Rules of the American
Arbitration Association prior to any recourse to arbitration
pursuant to Section 14.2 below.
14.2 If such Dispute cannot be settled within thirty (30) days
after submission to mediation pursuant to Section 14.1 above
(the "Mediation Period"), such Dispute shall be settled by an
arbitral tribunal (the "Tribunal") under the Arbitration Rules
of the American Arbitration Association (the "Arbitration
Rules"). Each party shall appoint an arbitrator within thirty
(30) days after the expiration of the Mediation Period, which
arbitrators shall then jointly appoint a third arbitrator
within thirty (30) days after the appointment of the first two
arbitrators, to act as president of the Tribunal. Arbitrators
not so appointed shall be appointed pursuant to the
Arbitration Rules. The costs of the arbitration shall be borne
by the parties as determined by the Tribunal. The award
rendered in any arbitration commenced hereunder shall be final
and conclusive and judgment thereon may be entered in any
court having jurisdiction for its enforcement. Neither party
shall (i) appeal to any court from the decision of the
Tribunal; or (ii) have any right to commence or maintain any
suit or legal proceeding concerning a Dispute until such
Dispute has been determined in accordance with the arbitration
procedure provided for herein, and then only for enforcement
of the award rendered in such arbitration.
14.3 Notwithstanding the foregoing, nothing in Sections 14.1 or
14.2 shall be deemed as preventing either party from seeking
injunctive relief from the courts pursuant to Section 14.4
below. All mediation and arbitration proceedings -pursuant to
this Agreement shall take place in Santa Clara County,
California.
14.4 Notwithstanding the foregoing, each party acknowledges that
violation of Section 5.2 will cause irreparable harm to the
other not adequately compensable by monetary damages. In
addition to other relief, each party agrees that injunctive
relief shall be available to the other in the event of such
violations without necessity of posting bond to prevent any
actual or threatened violation of such section.
15. GENERAL
15.1 Neither Merchant nor Pandesic shall be deemed to be in default
of any provision of this Agreement or be liable for any delay,
failure of performance of obligations or interruption of the
provision of Services under this Agreement resulting, directly
or indirectly, from any (i) weather conditions, natural
disasters or other acts of God, (ii) action of any
governmental or military authority, (iii) failure caused by
telecommunication or other Internet provider (but not
including Hosting Partner), or (iv) any other force or
occurrence beyond its control, including any termination of
the agreement between Pandesic and the Hosting Partner.
15.2 Hosting Partner and Suppliers are third-party beneficiaries to
this Agreement to the extent that this Agreement contains
provisions which relate to Merchants use of Hosting Partner's
services or the Supplier Software. Such provisions are made
for the benefit of such third parties and are enforceable by
them in addition to Pandesic.
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15.3 Unless otherwise specified herein, any notices or other
communications required or permitted hereunder shall be
sufficiently given if in writing and delivered personally or
sent by facsimile transmission, email, internationally
recognized overnight courier, registered or certified mail
(postage prepaid with return receipt requested), to the
address or facsimile number of Merchant as set forth in the
Order Form or Pandesic as set forth below. In addition to the
obligations set forth herein, in the event that Pandesic sends
to Merchant any notice or other communication of Merchants
material breach of this Agreement, Pandesic shall provide any
such notice to Michelle Katz, Esq., Lenard and Gonzales, 1900
Avenue of the Stars, 25th Floor, Los Angeles, CA 90067. Such
notices or other communications shall be deemed received (i)
on the date delivered, if delivered personally, (ii) on the
date that return confirmation is received, if sent by
facsimile; (iii) on the business day after being sent by an
internationally recognized overnight air courier, or (iv) five
(5) days after being sent, if sent by first class registered
mail, return receipt requested.
Pandesic LLC
990 Almanor Avenue
Sunnyvale, California 94086
Attention: Director of Law & Corporate Affairs
Facsimile Number (408) 616-1920
15.4 Any claims arising out of or related to this Agreement must be
brought no later than one year after it has accrued.
15.5 Nothing in this Agreement or in the course of dealing between
Pandesic and Merchant pursuant hereto shall be deemed to
create between Pandesic and Merchant (including their
respective directors, officers, employees and agents) a
partnership, joint venture, association, employment
relationship or any other relationship other than that of
independent contractors with respect to each other.
15.6 This Agreement shall be governed by and construed in
accordance with the laws of the State of California without
regard to choice of law provisions that would cause the
application of the law of another jurisdiction.
15.7 Failure by either Pandesic or Merchant to enforce any of the
provisions of this Agreement or any rights with respect hereto
shall not be considered to be waiver of such provisions or
rights, or to in any way affect the validity of this
Agreement.
15.8 If one or more of the provisions contained in this Agreement
are found to be invalid, illegal or unenforceable in any
respect the validity, legality and enforceability of the
remaining provisions shall not be affected.
15.9 This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15.10 Pandesic may change its Hosting Partner at any time in its
sole discretion.
15.11 Upon reasonable notice and in a manner which does not unduly
interfere with Merchants operations, Pandesic shall have the
right to audit and inspect Merchant's use of the Pandesic
E-Business Solution Service and the sales records associated
therewith in order to verify compliance with the terms of this
Agreement In the event there is a discrepancy of [***], or
more in the accounts, Merchant shall be responsible for and
shall pay the reasonable costs of such audit to Pandesic.
15.12 Pandesic, as part of its E-Business Solutions Services
provides certain equipment to Merchant for use in connection
with the said Services. Merchant holds such equipment subject
and subordinate to the rights of Pandesic. Merchant will keep
such equipment free from any liens or encumbrances whatsoever
and will indemnify and hold Pandesic harmless from it failure
to do so. Merchant will
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confidential redacted portion has been omitted and filed separately with the
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PANDESIC AGREEMENT
TERMS AND CONDITIONS
use commercially reasonable efforts to maintain such equipment
in good operating order, protect such from deterioration other
than normal wear and tear and will not use such for any
purposes other than contemplated herein.
15.13 This Agreement constitutes the entire agreement of the parties
and supersedes all oral negotiations and prior writings with
respect thereto. Except as set forth in Section 13 above, this
Agreement may not be amended, modified or terminated unless it
is in writing signed by both parties hereto.
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PANDESIC AGREEMENT
TERMS AND CONDITIONS
ACCEPTANCE
ACCEPTED BY MERCHANT: ACCEPTED BY PANDESIC LLC:
SIGNATURE: /s/ Marc P. Geiger SIGNATURE: /s/ Peter Wolcott
------------------------------ ------------------------------
PRINT NAME: Marc P. Geiger PRINT NAME: Peter Wolcott
------------------------------ ------------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: President
------------------------------ ------------------------------
DATE: April 15, 1999 DATE: 5/2/99
------------------------------ ------------------------------
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EXHIBIT A
ADDITIONAL SERVICES
Artist Direct/Ultimate Band List (UBL.com)
Per discussions between Pascal Desmarets and Harold Hughes and Rob
Vickery held on April 14, 1999 at Artist Direct headquarters on behalf
of Merchant and Pandesic, respectively, Merchant and Pandesic agree to
the following:
1. Pandesic agrees to make a standalone FI/CO instance and such services as
the parties mutually agree available to Merchant for the duration of the
agreement. Merchant agrees to make an expert (or any equivalent
consultant services) in the FI/CO modules of SAP R/3 available to
Pandesic for the term of the FI/CO installation project.
2. Pandesic will operate Artist Direct and UBL stores on the same
installation of Pandesic 3.0.
3. Pandesic will use its best efforts to deploy initial Artist Direct
stores within 6 weeks of the date of technical install. Pandesic will
make best efforts to condense this effort to 4 weeks but makes no
commitments that any such deployment will be made in less than 6 weeks
from the date of technical install.
4. Pandesic will commit to Cybersource fraud detection and payment
integration for Romeo. Transaction fees associated with all Cybersource
services will be the complete responsibility of Merchant.
5. Pandesic will deliver procurement functionality as part of the Romeo
release. Until the Romeo release, Merchant will utilize the procurement
processes utilized by DVD Express.
6. Fulfillment with Alliance Entertainment is completely the responsibility
of Merchant. Should Pandesic be required to provide any personnel for
implementation and/or testing, these personnel will be billable at
[***]. Pandesic will ensure that the fulfillment API functions as
documented.
7. Wholesale Orders - Pandesic will provide a "work around" to handle
multiple shipments/line item. Pandesic will use its best efforts to
provide the functionality within R/3 for Romeo to handle multiple
shipments/line item.
8. Pandesic will allow Merchant to use the I/Pro Agent on Pandesic servers
provided that any such use does not negatively impact Pandesic services.
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The confidential redacted portion has been omitted and filed separately with the
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<PAGE> 1
EXHIBIT 10.26
ADNM MERCHANDISER AGREEMENT
THIS AGREEMENT, dated as of April 1, 1999, between Giant Merchandising
("Merchandiser"), 5655 Union Pacific Avenue, Commerce, CA 90022, and
ARTISTdirect New Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA
91316, is being entered into in light of the following:
A. Merchandiser is in the business of acquiring the right to use the
names, photographs and other likenesses, biographical material and other
personal identification (collectively, "Personal Identification") of musical
artists in connection with the manufacture and sale of merchandise and the
licensing of such rights to third parties.
B. ADNM is in the business of developing and operating Internet retail
storefronts for musical artists ("Artist Stores") that, among other things, sell
merchandise containing the Personal Identification of the applicable artist.
C. Merchandiser and ADNM are entering into this Agreement in order to
set forth the terms and conditions upon which Merchandiser has agreed to
accommodate ADNM in respect of developing and opening new Artist Stores
featuring Merchandiser Artists (as defined below) and in the operation thereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits contained herein, the parties hereto agree as follows:
1. Term: The term of this Agreement (the "Term") shall be four (4) years
commencing on the date of this Agreement.
2. Signing Procedures:
(a) As used herein, "Merchandiser Artist" shall mean, individually
and collectively, each and every musical recording artist in respect of which
Merchandiser from time to time has the exclusive right to manufacture
merchandise utilizing such artist's Personal Identification and to sell such
merchandise for distribution through retail channels, including to retailers who
solely or primarily sell merchandise via the Internet (collectively, the
"Rights"). Merchandiser represents and warrants that attached hereto as Exhibit
A is a true and complete list of Merchandiser Artists as of the execution of
this Agreement, as well as the territory of the Rights in respect of each such
Merchandiser Artist.
(b) During the Term, Merchandiser agrees that, promptly upon
Merchandiser entering into an agreement to obtain Rights in respect of a
Merchandiser Artist, Merchandiser shall notify ADNM of the applicable artist
name(s) as well as the territory of the Rights. Upon Merchandiser's entering
into such agreement, the applicable Merchandiser Artist shall be deemed added to
said Exhibit A.
(c) Merchandiser agrees to promptly notify ADNM if any of the
information on said Exhibit A should change during the Term, or if the Rights in
respect of a particular Merchandiser Artist shall have terminated and/or the
"sell-off" provisions
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of Merchandiser's agreement with the applicable Merchandiser Artist have
become operative (after which such artist shall be deemed deleted from said
Exhibit A.)
(d) Said Exhibit A indicates with an asterisk (*) those Merchandiser
Artists in respect of which ADNM desires to enter into a Store Agreement as of
the execution of this Agreement. ADNM shall have the right from time to time
during the Term to notify Merchandiser that it desires to enter into a Store
Agreement with any other Merchandiser Artists. Each such Merchandiser Artist
shall be referred to herein as an "Accepted Artist." ADNM and Merchandiser shall
use their collective commercially reasonable efforts to cause the applicable
Merchandiser Artist to enter into an agreement with ADNM (each such agreement,
along with any extensions or renewals thereof, is sometimes referred to herein
as a "Store Agreement") substantially in the form attached hereto as Exhibit B.
ADNM agrees to provide Merchandiser with copies of each such Store Agreement
promptly after the complete execution thereof during the Term.
(e) Merchandiser acknowledges that, prior to the execution hereof,
ADNM entered into a Store Agreement with respect to the Merchandiser Artist
professionally known as [***] and that all Merchandiser Product sold under said
Store Agreement after the date hereof ("[***] Merchandise") shall be subject to
the terms of this Agreement, except as set forth below in this paragraph 2(e).
ADNM agrees to use best efforts to cause [***] to agree that the License Fee (as
defined in paragraph 6 below) shall be payable to Merchandiser hereunder (rather
than to [***]) in respect of all [***] Merchandise. In the event [***]
nevertheless refuses to so agree, ADNM shall pay Merchandiser the following
product consignment charges in respect of all [***] Merchandise, computed as if
the License Fee had been actually paid to Merchandiser hereunder, as follows:
(i) an amount equal to that portion of the otherwise applicable License Fee that
Merchandiser would have been entitled to retain for its sole account under its
agreement with [***] (e.g., as opposed to any portion thereof that Merchandiser
would be obligated to credit to [***] royalty account), plus (ii) the amount
of the Consignment Charge, if any, that would have been applicable under
paragraph 6(c) below.
3. Product Supply:
(a) As used herein:
(i) "Merchandiser Product" means all merchandise containing the
Personal Identification of a Merchandiser Artist and sold pursuant to a Store
Agreement (whether through the applicable Artist Store or the UBL Store), that
is provided by or on behalf of Merchandiser or a Sublicensee pursuant to the
Merchandiser Terms;
(ii) "Artist Product" means all merchandise and other products or
services sold pursuant to a Store Agreement (whether through the applicable
Artist Store or the UBL Store) other than Merchandiser Product (e.g., records,
concert tickets, advertisement space, and merchandise supplied by a Sublicensee
other than pursuant to the Merchandiser Terms); and
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(iii) "Merchandiser Terms" means that payment for the applicable
merchandise shall not become due until the date [***] after the applicable
merchandise has arrived at ADNM's fulfillment center(s) (the "Center"), it being
understood that ADNM shall have the right to return any such merchandise to
Merchandiser for a full credit within said [***] period (provided the applicable
returned merchandise arrives at Merchandiser's warehouse no later than [***]
after the expiration of said [***] period). For purposes of this paragraph
3(a)(iii), merchandise shall be deemed to have "arrived at the Center" at such
time as the vehicle delivering such merchandise arrives at the Center,
regardless of the date on which such merchandise is unloaded.
(b) During the term of each Store Agreement (but only as long as
Merchandiser has the Rights in respect of the applicable Merchandiser Artist),
Merchandiser agrees to sell merchandise manufactured by or under the control of
Merchandiser to ADNM for resale under the applicable Store Agreement upon the
following terms:
(i) All such sales shall be subject to the Merchandiser Terms.
(ii) All such sales shall be at Merchandiser's standard wholesale
prices (i.e., the prices that Merchandiser generally charges its other wholesale
customers, subject to Merchandiser's customary volume discounts). Merchandiser
represents and warrants that attached hereto as Exhibit C are Merchandiser's
standard wholesale prices as of the execution of this Agreement. Merchandiser
shall notify ADNM of any changes to its standard wholesale prices, which changes
shall only apply to Merchandiser Product ordered by ADNM after its receipt of
such notice from Merchandiser. Notwithstanding the foregoing, the parties agree
and acknowledge that Merchandiser may not have standard wholesale prices for
certain Collectibles (as defined in paragraph 6(b)(v) below), in which case the
wholesale price shall be reasonably determined by Merchandiser.
(iii) ADNM and Merchandiser shall in their good faith business
judgment mutually determine on an item-by-item basis the applicable minimum and
maximum inventory levels to be carried by ADNM, and Merchandiser agrees to use
commercially reasonable efforts to ship merchandise on a timely basis consistent
therewith.
(iv) ADNM shall pay all costs (including all associated freight
and insurance costs) of shipping the products to the Center and returning any
unsold merchandise from the Center to Merchandiser's warehouse.
(c) Merchandiser shall use reasonable efforts to cause each person or
entity who manufactures and distributes merchandise under license from
Merchandiser (a "Sublicensee") to sell merchandise to ADNM hereunder upon the
foregoing terms (e.g., in accordance with the Merchandiser Terms and at no more
than the
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confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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Sublicensee's standard wholesale prices). If a Sublicensee is unwilling
to do so, Merchandiser may elect (in its discretion) to purchase the applicable
merchandise from such Sublicensee and sell same to ADNM pursuant to the
Merchandiser Terms.
(d) For the avoidance of doubt, Merchandiser agrees and acknowledges
that Artist Product will be sold on the Artist Stores and the UBL Store
and that no License Fee shall be payable to Merchandiser in respect of any
Artist Product.
(e) After the expiration of the [***] period described in paragraph
3(a)(iii) above, ADNM shall have the right to return (not for credit) to
Merchandiser any unsold merchandise hereunder. Merchandiser agrees to use its
commercially reasonably efforts to promptly sell such returned product at
liquidation prices (subject to Merchandiser's commercially reasonable efforts to
maximize the liquidation proceeds) and to remit to ADNM, within [***] after each
such sale, [***] of the net proceeds thereof. As used in this paragraph 3(e),
the term "net proceeds" shall mean the gross amount payable or credited to
Merchandiser from such sales, less Merchandiser's verifiable direct third party
out-of-pocket costs in connection with such sales.
4. UBL Store: Merchandiser agrees and acknowledges that ADNM may elect
to make available for sale on an Internet on-line store (the "UBL Store")
operated by a company affiliated with ADNM certain items of Merchandiser Product
offered for sale through an Artist Store. ADNM agrees that its books and records
shall clearly distinguish Merchandiser Product sold through an Artist Store from
Merchandiser Product sold through the UBL Store, and ADNM shall, for the
avoidance of doubt, at no time credit a sale that took place through an Artist
Store as a sale through the UBL Store.
5. Grant of Rights: With respect to each Store Agreement (and subject to
the terms and conditions set forth therein), Merchandiser shall be deemed to
have granted to ADNM, in consideration for the License Fee, the following
rights, but only insofar as Merchandiser has such Rights and for the territory
Merchandiser has such Rights, during the term of such Store Agreement (but only
as long as Merchandiser has the Rights in respect of the applicable Merchandiser
Artist): (a) the exclusive right and license to develop and operate the only
"official" Internet store for the applicable Merchandiser Artist, and (b) the
non-exclusive (subject to paragraph 11 below) right and license to utilize such
Merchandiser Artist's Personal Identification in connection with the applicable
Artist Store. Notwithstanding the foregoing, ADNM acknowledges that such uses of
the Merchandiser Artist's Personal Identification may be subject to the approval
of the applicable Merchandiser Artist under Merchandiser's agreement with such
Merchandiser Artist; in this regard, Merchandiser hereby authorizes ADNM to seek
to obtain such approvals directly from the applicable Merchandiser Artist.
6. License Fee:
(a) In consideration for the rights licensed pursuant to paragraph 5
above and Merchandiser's agreement to supply Merchandiser Product to ADNM
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confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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pursuant to the Merchandiser Terms, ADNM agrees to pay Merchandiser a License
Fee with respect to all Merchandiser Product sold at any time (including after
the Term).
(b) As used herein:
(i) "License Fee" shall mean, subject to paragraph 6(c) below,
the [***].
(A) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Merchandiser Product (other than Collectibles) sold through an Artist
Store and with respect to Collectibles sold through the UBL Store (or through
any other source other than an Artist Store);
(B) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Merchandiser Product (other than Collectibles) sold through the UBL
Store (or through any other source other than an Artist Store); and
(C) [***] of the Adjusted Gross Merchandiser Product Revenue with
respect to Collectibles sold through an Artist Store.
(ii) "Adjusted Gross Merchandiser Product Revenue" shall mean [***].
(iii) "Gross Merchandiser Product Revenue" shall mean the [***].
(iv) "Deductible Amounts" shall mean all of the following costs paid
by ADNM and specifically attributable to Merchandiser Product: all amounts paid
under paragraph 3(b)(iv) above; all actual packaging and shipping costs paid to
third parties (not to exceed the associated shipping and handling revenues
referred to in paragraph 6(b)(iii) above); all third party fulfillment fees and
related charges; sales, use and value-added taxes actually paid; credit card
fees; and any credits for returns, rebates, cancellations and exchanges. ADNM
shall not deduct any fulfillment fees or related charges to the extent they
exceed such amounts as Merchandiser has approved; Merchandiser hereby
pre-approves the applicable amounts set forth on Exhibit D attached hereto. To
the extent ADNM is unable to identify a particular item of cost as being
attributable to either Merchandiser Product or Artist Product, only a portion
thereof shall be deemed a "Deductible Amount" hereunder, such portion to be
determined reasonably by ADNM, taking into account the total amount of Gross
Merchandiser Product Revenues as compared to the total amount of other
applicable revenues during the applicable accounting period. Notwithstanding
anything to the contrary contained herein, as between ADNM and Merchandiser,
[***] shall be solely responsible for all customer bad debts in respect of
Merchandiser Product shipped by ADNM (or its designee), including all associated
Deductible Amounts.
(v) "Collectibles" means any single item of Merchandiser Product
bearing a wholesale price in excess of [***].
(c) Within ten (10) business days after the date ADNM notifies
Merchandiser of each new Accepted Artist pursuant to paragraph 2(d) above (or
within ten (10) business days after the complete execution of this Agreement, in
respect of any
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confidential redacted portion has been omitted and filed separately with the
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Accepted Artist indicated on Exhibit A as of the execution hereof), Merchandiser
shall have the right to notify ADNM of the percentage of the applicable License
Fees hereunder that Merchandiser is obligated to pay to, or credit to the
account of, the applicable Accepted Artist or its furnishing company (the
"Artist Percentage"), if such Artist Percentage exceeds [***]. In such event,
notwithstanding anything to the contrary contained herein, ADNM shall pay to
Merchandiser a product consignment charge (the "Consignment Charge") equal to
[***] of the Adjusted Gross Merchandiser Product Revenue with respect to such
Accepted Artist for each [***] by which such Artist Percentage exceeds [***].
For purposes of illustration, in the event that Merchandiser has properly
notified ADNM that the Artist Percentage with respect to a particular Accepted
Artist equals [***], then with respect to such Accepted Artist, ADNM shall pay
to Merchandiser a Consignment Charge equal to [***] of the Adjusted Gross
Merchandiser Product Revenue with respect to such Accepted Artist. For the
avoidance of doubt, no Consignment Charge shall be applicable with respect to
any Merchandiser Artist for which Merchandiser does not timely notify ADNM of
the Artist Percentage as provided in this paragraph 6(c).
(d) Attached hereto as Exhibit E are certain example computations of
the License Fee.
7. Artist Store Advertising Revenues. In respect of any amounts received
by ADNM during the Term in consideration of the placement of hyperlinks, banners
and other advertisements contained on an Artist Store ("Artist Store Advertising
Revenues"), ADNM agrees to pay Merchandiser [***] of the amount by which such
Artist Store Advertising Revenues exceed all agent commissions related thereto.
The parties acknowledge that all such hyperlinks, banners and other
advertisements may be subject to the approval of the applicable Accepted Artist.
8. Artist Store Customer Databases. During the Term, subject to the
consent of the applicable Merchandiser Artist, ADNM shall provide Merchandiser
with customer database information from the Artist Stores, [***] , to be used by
Merchandiser solely for purposes of promoting the Artist Stores and
Merchandiser's business in connection with the applicable Merchandiser Artist to
which the database relates. Merchandiser specifically acknowledges and agrees
that it shall have no right to sell, distribute, sublicense or otherwise dispose
of the customer database information provided to Merchandiser hereunder or any
portion thereof.
9. ARTISTdirect Warrant. In further consideration of Merchandiser's
entering into and fully performing its obligations under this Agreement, and in
exchange for the payment by Merchandiser to ARTISTdirect, LLC ("AD") of one
dollar ($1.00), upon the consummation of the transaction that currently is
contemplated to occur whereby AD will become the beneficial owner of one hundred
percent (100%) of the outstanding membership interests of The Ultimate Band
List, LLC (the "Rollup"), ADNM shall cause AD to grant to Merchandiser a warrant
to acquire Common Units of ARTISTdirect, LLC
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confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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representing [***] of AD's outstanding membership interests for an aggregate
exercise price [***] which warrant shall be subject to the terms generally set
forth in Exhibit F attached hereto; provided, however, that if the Rollup shall
not occur prior to July 31, 1999, then ADNM shall then cause AD to grant to
Merchandiser a warrant substantially in the form of Exhibit F attached hereto.
10. Accountings:
(a) ADNM shall compute the License Fee, any Consignment Charges and
Merchandiser's applicable share of any Artist Store Advertising Revenues,
payable to Merchandiser and render an accounting statement to Merchandiser
within thirty (30) days after March 31, June 30, September 30 and December 31
for the three-month period preceding March 31, June 30, September 30 or December
31, as the case may be. Each such statement shall include an itemized breakdown
of the sources of the applicable revenue, Deductible Amounts and all other
reductions in computing the License Fee and share of Artist Store Advertising
Revenues, and shall be accompanied by the payment of the amounts, if any, earned
by Merchandiser during the accounting period to which the statement relates.
(b) Merchandiser or a certified public accountant on Merchandiser's
behalf may, at ADNM's offices and at Merchandiser's expense, examine ADNM's
books and records relevant to the calculation of the License Fee solely for the
purposes of verifying the accuracy of statements rendered by ADNM to
Merchandiser. Such books and records may be examined as aforesaid only (i)
during ADNM's normal business hours, (ii) upon reasonable notice to ADNM, and
(iii) within two years after the date a statement is due hereunder. Further,
Merchandiser shall not have the right to examine such books and records more
frequently than once in any twelve month period or more than once with respect
to any particular statement. Each statement shall be deemed final and binding
upon Merchandiser as an account stated and shall not be subject to any claim or
objection by Merchandiser (A) unless Merchandiser notifies ADNM of
Merchandiser's specific written objection to the applicable statement, stating
the basis thereof in reasonable detail within two (2) years after the date such
statement is due hereunder, and (B) unless, within said two (2)-year period,
Merchandiser make proper service of process upon ADNM in a suit instituted in a
court of proper jurisdiction.
11. Exclusivity: Insofar as ADNM is concerned, Merchandiser shall have
the right to sell and authorize others to sell merchandise containing a
Merchandiser Artist's Personal Identification over the Internet. However, during
the Term, Merchandiser shall not, without ADNM's consent, develop or maintain a
web site, or license or otherwise authorize any other web site provider to
develop or maintain a web site, that is identified solely with a single
Merchandiser Artist (e.g., a web site that is the "official" merchandise web
site for a Merchandiser Artist). The foregoing is not intended to prohibit
Merchandiser from operating a web site relating to multiple artists, with
certain pages or sections thereof devoted solely or primarily to a particular
Merchandiser Artist, and to
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confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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sell merchandise on such web site; provided the appearance of such web site is
not designed so as to give the consumer the impression that the merchandise is
being purchased directly from the Merchandiser Artist, rather than from
Merchandiser (or its licensee). [For the avoidance of doubt, the operation of
any such web site by Merchandiser shall not in any way affect ADNM's rights
hereunder or otherwise to develop and operate the "official" web site of the
applicable Artist (e.g., an Artist Store).]
12. Tour Merchandising and Sublicensing Rights: During the Term and for
a period of one (1) year thereafter, ADNM agrees that it and its affiliates
shall refrain from seeking from any artist (a) tour merchandising rights, or (b)
the right to sublicense merchandising rights to third parties, or (c) the right
to manufacture merchandise containing such artist's Personal Identification.
13. [***]: As used herein, the term "Outside Artist" shall mean an
artist who is not a Merchandiser Artist, who is then subject to a store
agreement with ADNM, and who is not then subject to an agreement pursuant to
which the Rights with respect to such artist are held by a third party (e.g.,
another merchandising company). During the Term, [***].
14. Representations and Warranties; Indemnity:
(a) Each party hereto represents and warrants that: (i) it has the
full right, power and authority to enter into and to perform this Agreement;
(ii) it is not under any restriction or obligation that may or will impair such
party's full performance of this Agreement; and (iii) it shall not at any time
do or authorize any person or entity to do anything inconsistent with, or
anything that might diminish, impair or interfere with any of the other party's
rights hereunder.
(b) Merchandiser agrees to indemnify and hold ADNM and its members,
employees, attorneys, agents, successors, affiliates, assigns and licensees
harmless against any claim, liability, cost and expenses (including attorneys'
and accountants' fees reasonably incurred) in connection with any breach or
alleged breach of this Agreement by Merchandiser. In this regard, ADNM shall not
settle any claim without first notifying Merchandiser of the terms of any
proposed settlement and obtaining Merchandiser's consent thereto.
(c) ADNM agrees to indemnify and hold Merchandiser and its members,
employees, attorneys, agents, successors, affiliates, assigns and licensees
harmless against any claim, liability, cost and expenses (including attorneys'
and accountants' fees reasonably incurred) in connection with any breach or
alleged breach of this Agreement by ADNM and/or in connection with the breach by
ADNM of any Store Agreement. In this regard, Merchandiser shall not settle any
claim without first notifying ADNM of the terms of any proposed settlement and
obtaining ADNM's consent thereto.
(d) Merchandiser acknowledges that ADNM is making no representations
and warranties concerning anticipated success of the Stores, the amount of
compensation payable to Merchandiser hereunder, and/or the current or future
value of ADNM or the warrants described in paragraph 8 above. Likewise, ADNM
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confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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acknowledges that Merchandiser is making no representations and warranties
concerning anticipated success of the Stores or the amount of compensation
payable to ADNM with respect thereto.
15. Notices; Approvals:
(a) All notices and payments to either party hereto shall be sent to
such party's address first mentioned herein, or such other address as a party
hereto may hereafter designate by notice to the other. All notices sent under
this Agreement must be in writing to be effective, and must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until ADNM notifies Merchandiser otherwise, a copy of all
notices hereunder to ADNM shall be simultaneously sent as aforesaid to Lenard &
Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067;
Attention: Allen D. Lenard, Esq. Until Merchandiser notifies ADNM otherwise, a
copy of all notices hereunder to Merchandiser shall be simultaneously sent as
aforesaid to Warner Music Group Inc., 3400 Riverside Drive, 6th Floor, Burbank,
CA 91505; Attention: Legal Department.
(b) No failure by a party hereto to perform any of its obligations
hereunder shall be deemed a breach of this Agreement, unless the party claiming
a breach has given the other party hereto notice of such alleged breach in
reasonable detail and such alleged breach is not cured within fifteen (15)
business days [ten (10) business days for non-payments] after the giving of such
notice, provided this sentence shall not apply to breaches incapable of being
cured (e.g., representations and warranties).
(c) No consent or approval under this Agreement shall be unreasonably
withheld or delayed. With respect to consents and approvals required under this
Agreement, the applicable party may elect to request such consent by notice to
the other. If the party whose consent or approval is required does not respond
to such notice within ten (10) business days thereafter, the party seeking to
obtain such consent or approval may give the other party a second notice making
such request, and the applicable party's consent or approval shall be deemed
granted unless it notifies the other party to the contrary, stating in
reasonable detail the basis thereof, within ten (10) business days after such
second notice.
16. Miscellaneous:
(a) All references to "this Agreement," "hereof," "herein" and words
of similar connotation include all exhibits attached hereto, unless specified
otherwise. This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties
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hereto with respect to the subject matter hereof. The parties acknowledge and
agree that neither party hereto has made any representations or promises in
connection with this Agreement or the subject matter hereof not contained
herein. Nothing in this Agreement shall be construed to require the commission
of any act contrary to law, and wherever there is a conflict between any
provisions of this Agreement and any statute, law, ordinance, order or
regulation contrary to which the parties hereto have no legal right to contract,
such statute, law, ordinance, order or regulation shall prevail; provided that,
in such event, (a) the provision of this Agreement so affected shall be limited
only to the extent necessary to permit the compliance with the minimum legal
requirements, (b) no other provisions of this Agreement shall be affected
thereby, and (c) all such other provisions shall remain in full force and
effect. The parties hereto shall negotiate in good faith to replace any invalid,
illegal or unenforceable provision (the "Invalid Provision") with a valid
provision, the effect of which comes as close as possible to that of the Invalid
Provision. This Agreement cannot be canceled, modified, amended or waived, in
part or in full, in any manner except by an instrument in writing signed by the
party to be charged. No waiver by ADNM, whether expressed or implied, of any
provision of this Agreement or default hereunder shall affect ADNM's right to
thereafter enforce such provision or to exercise the right or remedy set forth
in this Agreement in the event of any other default, whether or not similar.
Words in the singular number shall include the plural, and vice versa. Whenever
examples are used in this Agreement with the words "including," "for example,"
"e.g.," "such as," "etc." or any derivation thereof, such examples are intended
to be illustrative and not in limitation thereof. The paragraph headings herein
are used solely for convenience and shall not be used in the interpretation or
construction of this Agreement.
(b) In entering into this Agreement and providing services pursuant hereto,
Merchandiser and ADNM each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) Neither party hereto shall, without the prior written consent of the other
party, assign this Agreement, in whole or in part, to any person or entity other
than a subsidiary, affiliated or controlling entity, or to any person or entity
owning or acquiring a substantial portion of the stock or assets of such party
hereto.
(d) This Agreement shall be deemed to have been entered into in the State of
California and the validity, interpretation and legal affect of this Agreement
shall be governed by the laws of the State of California applicable to contracts
entered into and performed entirely within the State of California. The courts
located in the County of Los Angeles, California (state and federal), only, will
have jurisdiction of any controversy regarding this Agreement; any action or
other proceeding which involves such a controversy will be brought in those
courts, in California and not elsewhere.
ARTISTdirect New Media, LLC GIANT MERCHANDISING
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<PAGE> 11
By: ______/s/ Marc P. Geiger________ By: ________/s/ [Illegible]_______
(an authorized signatory) (an authorized signatory)
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EXHIBIT A
MERCHANDISER'S ARTISTS
Artist Agreement Territory
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GIANT MERCHANDISING
Music Roster
<S> <C>
[***] [***]
Aerosmith [***]
[***] Rage Against
[***] the Machine
[***] Rancid
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
Crystal Method [***]
[***] [***]
Def Leppard [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***]
[***]
[***]
[***]
[***]
Korn
[***]
[***]
Limp Bizkit
[***]
[***]
[***]
[***]
Metallica
[***]
[***]
[***]
The Offspring
[***]
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
12
<PAGE> 13
EXHIBIT B
ON-LINE STORE AGREEMENT
THIS AGREEMENT, dated as of ____________, 19__, by and between ARTISTdirect New
Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA 91316, and
[Company Name] ("you"), c/o __________________________ is being entered into in
consideration of the mutual benefits and covenants contained in this Agreement.
1. PURPOSE: Subject to your approval rights in this Agreement, ADNM will
develop, maintain and operate an Internet web site for you relating to the
musical group professionally known as "[ArtistName]" ("Artist") and the members
of Artist, to be known as "The Official [ArtistName] Superstore" (the "Store").
The Store will provide Internet and other online access for online and offline
distribution of products and services ("Product"). It is intended that the
Product will include records, digital downloads (subject to the consent of
Artist's record company), merchandise, tickets, tour memorabilia, collectible
items and special or limited edition items not available from any other source,
and special bundled packages including any or all of the foregoing items.
2. TERM: The term of this Agreement (the "Term") shall commence on the date set
forth above and shall extend for an initial contract period ending five (5)
years after the official launch of the Store. After the initial contract period,
the Term shall automatically continue for additional one (1) year contract
periods, subject to the following sentence. At any time between sixty (60) and
thirty (30) days prior to the expiration of any contract period of the Term,
either party may by notice to the other terminate the Term effective as of the
end of the then-current contract period.
3. MERCHANDISER AGREEMENTS.
(a) You are presently party to an agreement (the
"Artist/Merchandiser Agreement") with Winterland Concessions Company
("Merchandiser") pursuant to which you have granted Merchandiser the exclusive
right to manufacture (and license the manufacture of) merchandise bearing the
name, likenesses, biographical material and other personal identification of
Artist (collectively, "Personal Identification") for sale through retail
channels, including the right to sell such merchandise to retailers who solely
or primarily sell merchandise via the Internet (the "Rights").
(b) ADNM represents and warrants that it is party to an agreement
with Merchandiser pursuant to which Merchandiser has (i) granted to ADNM any
consents and licenses that may be required from Merchandiser as a result of the
Artist/Merchandiser Agreement in connection with the sale of Product hereunder,
and (ii) agreed to supply (or cause the supply of) merchandise on a consignment
basis to ADNM for resale on the Store (the "ADNM/Merchandiser Agreement"). You
acknowledge that certain Product items may be manufactured by or under the
control of Merchandiser's sublicensees, and that Merchandiser may or may not be
able to offer such Product items to ADNM on a consignment basis. All Product
supplied to ADNM by Merchandiser (or its sublicensees) on a consignment basis is
sometimes
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<PAGE> 14
referred to herein as "Merchandiser Product"; all other Product is sometimes
referred to herein as "Artist Product."
(c) If you (or Artist) enter into any agreement during the Term
(of this Agreement) pursuant to which you grant the Rights to any third party,
you shall cause such third party to grant to ADNM any consents and licenses that
may be required from such third party in connection with the sales of Product
hereunder. For the avoidance of doubt, no termination or expiration of the
Artist/Merchandiser Agreement or of the ADNM/Merchandiser Agreement shall affect
the Term (of this Agreement) or the rights granted to ADNM hereunder.
Accordingly, the only effect of either such termination or expiration will be
that the terms of this Agreement relating to Merchandiser Product will no longer
apply, and the terms of this Agreement relating to Artist Product will
thereafter apply to all Product hereunder.
4. DEVELOPMENT; HOSTING; CUSTOMER SERVICE:
(a) ADNM will design and develop the Store, including the source
code, the Product catalog, and the commerce system, and will be solely
responsible for the costs of such design and development. You shall have the
right to approve the design of the Store, including its "look and feel." The
parties hereto agree to use commercially reasonable best efforts (i) to cause
the beta version of the Store to be completed within 60 days after the complete
execution of this Agreement, and (ii) to officially launch the Store within 90
days after such execution.
(b) During the Term, ADNM will host (i.e., provide the server
for) and maintain the Store, including by providing periodic source code
programming updates and improvements in accordance with your reasonable
requests. In this regard, ADNM will use its commercially reasonable best efforts
to correct any material "bug" or defect as soon as reasonably possible after
ADNM becomes aware of such material "bug" or defect.
(c) ADNM shall handle all customer orders and inquiries, provide
all necessary credit card accounting and processing services and develop
payment, delivery and refund policies. To effect the foregoing, ADNM shall also
provide an on-line and toll-free telephone service center that will take orders
and respond to customer inquiries. On-line inquiries will be responded to within
24 hours of receipt and the telephone service will be operational Mondays
through Fridays from 9:00 a.m. to 7:00 p.m. Pacific Time (excluding holidays)
and will enable customers who prefer not to place orders on-line to place orders
by facsimile or telephone.
(d) Unless you and ADNM agree otherwise in writing, ADNM (or its
designee) shall process orders received from the Store and arrange to have the
ordered Product shipped to the customer (subject to Product availability).
5. PRODUCT SUPPLY AND INVENTORY:
(a) You will have the right to approve the Products that are to
be sold through the Store and the retail price of each Product item.
(b) You and ADNM agree to cooperate with each other and use their
commercially reasonable best efforts to make the necessary arrangements with the
manufacturers, distributors and providers of Product ("Suppliers"), on mutually
acceptable terms, to ensure the
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<PAGE> 15
timely supply of Product in sufficient quantities to fulfill Store customer
orders. You will be responsible for purchasing all Product from the Suppliers
and paying all related costs (including directly associated freight and
insurance costs) ("Product Costs"). If ADNM should nevertheless pay any Product
Costs on your behalf (which ADNM is not obligated to do), all such Product Costs
will be deducted from any and all monies otherwise payable to you hereunder and,
to the extent ADNM is at any time unable to do so, you agree to promptly
reimburse ADNM for the excess upon demand. In order to assist you with regard to
the foregoing, ADNM will provide inventory management services, taking into
account such inventory levels as you and ADNM may have mutually approved.
As between you and ADNM, you shall own and be solely responsible for all
Artist Product inventory. However, ADNM shall maintain (or cause the applicable
fulfillment center to maintain) at all times during the Term insurance to
protect you and ADNM from losses related to Artist Product inventory damaged or
otherwise lost while in the fulfillment center's possession. The coverage terms
of the insurance policy currently in effect are set forth on Exhibit 1 attached
to this Agreement.
(c) Upon the expiration of the Term, all Artist Product inventory
for which you have paid the Product Costs shall be shipped, at your sole cost
and expense, to a location designated or approved by you, which inventory shall
be free and clear of any encumbrances by ADNM or any third party deriving rights
through ADNM.
6. PRODUCT SALES AND STORE REVENUES:
(a) Merchandiser Product: Attached hereto as Exhibit 2 is an extract of
the ADNM/Merchandiser Agreement setting forth the license fee payable by ADNM to
Merchandiser in respect of Merchandiser Product sold hereunder. Company
acknowledges and agrees that it shall look solely to Merchandiser, and not to
ADNM, with respect to all monies due Company and/or Artist in respect of
Merchandiser Product sold hereunder.
(b) Artist Product:
(i) Upon ADNM's receipt of a verified order for a particular item of
Artist Product, ADNM shall purchase such item of Product from you. Upon such
purchase, title to such Product shall pass to ADNM and, as between you and ADNM,
ADNM will thereafter be responsible for the inventory of such Product item.
(ii) ADNM shall pay you a purchase price equal to [***] of the "Gross
Artist Product Revenue," which means the amount actually received by ADNM in
respect of Artist Product sold through the Store, less all related Deductible
Amounts. The term "Deductible Amounts" means all shipping and handling charges;
third party fulfillment fees and related charges; sales, use and value-added
taxes; credit card and other third party service fees; and any credits for
returns, rebates, cancellations and exchanges. A schedule setting forth the
fulfillment fees charged by the fulfillment center as of the date hereof is set
forth on Exhibit 1 attached hereto.
(iii) Notwithstanding anything to the contrary contained herein, as
between ADNM and you, [***] shall be solely responsible for all Product Costs
and Deductible Amounts
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
15
<PAGE> 16
associated with customer bad debts in respect of Product hereunder shipped by
ADNM (or its designee).
(c) Records: Notwithstanding paragraphs 5(c) and 6(b) above,
phonorecords that are supplied by ADNM's designated fulfillment center for sale
through the Store ("Records") shall be purchased by ADNM directly from such
fulfillment center, and ADNM (or the fulfillment center) shall be solely
responsible for all related Product Costs (subject to the next sentence) and
inventory. ADNM shall pay you [***] of the "Net Record Revenue, which means all
Gross Record Revenue less all Product Costs incurred for Records. The term
"Gross Record Revenue" means the amount actually received by ADNM in respect of
Records sold through the Store, less all related Deductible Amounts.
(d) UBL Store: ADNM may elect to make certain items of Product available
for sale on an Internet on-line store (the "UBL Store") operated by a company
affiliated with ADNM (the "UBL Affiliate"). To the extent any merchandise
offered for sale on the UBL Store is readily available in the Store inventory,
ADNM agrees to cause the UBL Affiliate to utilize such inventory to fulfill
orders for such merchandise placed on the UBL Store, rather than order such
merchandise from any third party source. However, for the avoidance of doubt, no
merchandise or other products (e.g. Records) that are obtained by the UBL
Affiliate from third party sources (i.e., other than from the Store's inventory)
and sold on the Store shall be deemed to constitute Product subject to this
Agreement. ADNM shall account to you pursuant to the terms of this Agreement
with respect to all Artist Product sold through the UBL Store, except that ADNM
(or the UBL Affiliate) shall purchase such Product for a price equal to [***] of
the applicable Gross Artist Product Revenue shall be computed "at the source"
(i.e., based upon the amount actually received by the UBL Affiliate, rather than
the amount actually received by ADNM), and shall be deemed received by ADNM for
purposes of paragraph 6(g) below within 30 days after it is received by the UBL
Affiliate.
(e) Database: As between ADNM and you, you will own the customer
database as specifically identified with the Store (the "Database"). However,
ADNM will have the exclusive right during the Term, subject to your consent in
each instance, to administer and license any third party uses of the Database,
and to collect all monies relating thereto accrued during the Term, regardless
of when payable, ADNM shall pay you [***] of the "Gross Database Revenue," which
means the amount actually received by ADNM in respect of sales and other
exploitations of the Database, less all related Deductible Amounts.
(f) Other Revenues: The term "Gross Exploitation Revenue" means the
amount actually received by ADNM in respect of activities contemplated in this
Agreement and not set forth above in this paragraph 6 including, for example,
income in respect of advertising contained on the Store (e.g., hyperlinks to,
and banners and other advertisements for, other Internet web sites), less all
agent commissions and other related Deductible Amounts. You shall have the right
to approve all such advertising and other activities. ADNM shall pay
Merchandiser [***] of the Gross Exploitation Revenue received by ADNM during the
term of the Artist/Merchandiser Agreement (and you agree to look solely to
Merchandiser, and not to ADNM, with respect to all monies, due you and/or Artist
in respect of such Gross Exploitation Revenue) and shall pay you [***] of the
Gross Exploitation Revenue received by ADNM after the expiration of the term or
the Artist/Merchandiser Agreement.
(g) Accounting: The term "Gross Income" means, individually and
collectively, Gross Artist Product, Revenue Gross Record Revenue, Gross Database
Revenue and Gross Exploitation Revenue. ADNM shall compute your share of Gross
Income and render statements thereof to you within 60 days after March 31, June
30, September 30 and December 31 for the preceding three-
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
16
<PAGE> 17
month period. ADNM shall deduct from your share of Gross Income all chargeable
amounts under this Agreement. Each such statement shall include an itemized
breakdown of the sources of the applicable revenue and shall be accompanied by
the payment of the amount of monies, if any, earned by you during the accounting
period to which the statement relates. ADNM shall be entitled from time to time
to withhold from payments otherwise due reserves against anticipated returns,
rebates, credits, cancellations and exchanges, provided that such reserves shall
be liquidated within two accounting periods following their establishment. You
or a certified public accountant on your behalf may, at ADNM's offices and at
your expense, examine ADNM's books and records relevant to the calculation of
your share of Gross Income solely for the purposes of verifying the accuracy of
statements rendered by ADNM to you. Such books and records may be examined as
aforesaid only (i) during ADNM's normal business hours, (ii) upon reasonable
notice to ADNM, and (iii) within two years after the date a statement is due
hereunder. Further, you shall not have the right to examine such books and
records more frequently than once in any twelve month period or more than once
with respect to any particular statement. Each statement shall be deemed final
and binding upon you as an account stated and shall not be subject to any claim
or objection by you (A) unless you notify ADNM of your specific written
objection to the applicable statement, stating the basis thereof in reasonable
detail within two years after the date such statement is due hereunder, and (B)
unless, within said two year period, you make proper service of process upon
ADNM in a suit instituted in a court of proper jurisdiction.
7. MARKETING.
(a) During the Term, ADNM shall cause the Ultimate Band List Internet
web site, located at www.ubl.com (the "UBL"), to contain a featured hyperlink
to, and prominently placed advertising for, the Store. Also, ADNM may include on
the Store a featured hyperlink to, and prominently placed advertising for the
UBL at no charge to the UBL Affiliate or ADNM. Other marketing activities in
respect of the Store shall be subject to your approval, and may involve the
development of strategic relationships with, for example, other Internet web
sites and/or Artist's record you to create Store hyperlinks. Any third party
marketing costs incurred with your approval shall be deducted from any monies
otherwise payable to you hereunder (except to the extent deducted from monies
otherwise payable by ADNM to Merchandiser, it being understood that all
marketing costs shall be subject to allocation by ADNM, in ADNM's reasonable
business judgment, between you and Merchandiser taking into account whether the
applicable costs related to Merchandiser Product and/or Artist Product).
(b) You agree to use your commercially reasonable best efforts to:
(i) Keep ADNM apprised of Artist's professional activities (e.g.,
touring and recording) and provide ADNM reasonable access to
Artist's professional relationships (e.g., with tour promoters
and record labels);
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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<PAGE> 18
(i) Cause the URL of the Store to be included on all
advertisements for Artist records released during the Term or for concerts to be
performed during the Term, and on the liner notes of Artist's records and
concert programs;
(ii) Cause on-line events and/or sites featuring Artist or any
member of Artist (e.g., the official Internet web site of Artist's fan club, any
official Internet web site relating to any member of Artist, any on-line "chats"
featuring Artist or any member(s) of Artist, cybercasts of Artist's live
performances, interviews or other audiovisal programs featuring Artist or any
member(s) of Artist) to prominently feature, on both the front and main event
page(s), a hyperlink to, and banner advertising for, the Store; and
(iii) Subject to Artist's other professional commitments, cause
Artist to be reasonably available during the Term for on-line "chats" hosted by
the Store.
8. Ownership; Grant of Rights; Post-Term Rights:
(a) Artist Content: As between you and ADNM, any and all artwork,
trademarks, logos, graphics, video, sound recordings, musical compositions,
text, data and other materials supplied by you to ADNM in connection with this
Agreement, as well as the URL and the domain name or names assigned to the Store
and/or the Artist Site (collectively, the "Artist Content"), shall remain your
sole and exclusive property. You hereby grant to ADNM during the Term and
throughout the universe (the "Territory") a non-exclusive, royalty-free license
to use, copy, modify (with your prior consent), distribute, publicly perform and
display and otherwise exploit the Artist Content in connection with the
development, maintenance and operation of the Store and/or the Artist Site and
the advertising and promotion of the Store and/or the Artist Site and of ADNM in
connection with the Store and/or the Artist Site.
(b) Developed Content: As between you and ADNM, any and all text,
graphics, audio, video, artwork and designs created by ADNM or its employees or
agents during the Term for use solely on the Store and/or the Artist Site,
including any additions to or modifications of Artist Content made by ADNM or
its employees or agents, (collectively, the "Developed Content"), shall be your
sole and exclusive property. All Developed Content shall be deemed included in
the license granted by you under paragraph 8(a) above.
(c) ADNM Content: As between you and ADNM, any and all commerce
technology, HTML formatting code, source and object code, programming code and
software, as well as all text, graphics, audio, video, artwork and designs
provided by ADNM in connection with this Agreement which does not constitute
Developed Content (collectively, the "ADNM Content") shall be ADNM's sole and
exclusive property. Notwithstanding the foregoing, upon the expiration of the
Term and provided you are not in breach of this Agreement, ADNM shall grant to
you a perpetual non-exclusive license throughout the Territory to use, modify,
publicly perform and display all ADNM Content used in the Store and owned and
controlled by ADNM, solely in connection with operating and maintaining the
Store. In consideration of such license, if you elect to so utilize any such
ADNM Content in connection with the Store after the Term,
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you agree to pay, or cause your licensee to pay, ADNM a royalty equal to [***]
of the gross revenues earned in connection with the Store after the expiration
of the Term, but only for as long as you continue to use any such ADNM Content.
In this regard, you shall account in the same fashion and within the same time
periods, and ADNM shall be accorded the same examination rights and be subject
to the same limitations and restrictions, as apply with respect to your
accountings under paragraph 6(g) above. Nothing contained in this Agreement
shall impose upon ADNM any obligation whatsoever to provide you with updates,
hosting, maintenance or support with respect to the Store or such ADNM Content
after the expiration of the Term. You shall not be entitled to use any name,
trademark or service mark of ADNM or its affiliates in any manner whatsoever
without obtaining the prior written consent of ADNM or the applicable affiliate
of ADNM.
(c) Artist Identification: You hereby grant to ADNM the non-exclusive
right during the Term throughout the Territory to use the names of Artist and
Artist's tours, and the names and approved photographs and other approved
likenesses of the members of Artist, on the Store and in advertisements and
promotions of the Store and of ADNM in connection with the Store. In this
regard, at no cost to ADNM, you agree to provide ADNM with all photographs,
graphics, logos and similar items reasonably required by ADNM to create the
Store and readily available to you promptly following ADNM's request.
(d) Inducement Terms and Guarantee: You shall cause the members of
Artist to execute the Inducement Terms and Guarantee attached to this Agreement
as Exhibit 3 concurrently with the execution of this Agreement.
9. THIRD PARTY CLEARANCES: You shall obtain all necessary third-party
clearances in connection with all Artist Content and Product (including the
payment of any associated fees, royalties and other costs). Without limiting the
generality of the foregoing, with respect to all uses of musical compositions,
sound recordings and audiovisual productions in connection with the Store, you
agree to grant or cause Artist and/or any applicable third parties (e.g., music
publishers, record companies and performing rights societies) to grant to ADNM
any and all required rights. However, ADNM shall not use any particular sound
recording, musical composition or audiovisual production on the Store, or
provide access to any feature or service on the Store which entails the public
performance of music (e.g., live audio streaming), except at your request or
with your approval. If ADNM nevertheless shall pay, with your approval, any
third party clearance cost relating to the Store (which ADNM is not obligated to
do), all such amounts shall be deducted from any and all monies otherwise
payable to you under this Agreement (except to the extent deducted from monies
otherwise payable by ADNM to Merchandiser, it being understood that such costs
shall be subject to allocation by ADNM, in ADNM's reasonable business judgment,
between you and Merchandiser taking into account whether the applicable costs
related to Merchandiser Product and/or Artist Product).
10. REPRESENTATIONS AND WARRANTIES: INDEMNITY:
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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(a) You represent and warrant as follows:
(i) You have the full right, power and authority to enter into and to
perform this Agreement and to grant to ADNM all rights and licenses set forth in
this Agreement. Neither you nor Artist are under any restriction or obligation
which may or will impair your full performance of this Agreement. No Artist
Content or the exploitation or use thereof or the sale of any Product shall
violate or infringe upon any common law or statutory rights of any party,
including contractual rights, copyrights, and rights of privacy or publicity or
shall defame any person or entity; and
(ii) ADNM shall have the exclusive right during the Term throughout the
Territory to develop and operate the only "official" Artist on-line store (i.e.,
the only Internet web site authorized by Artist with respect to products
relating primarily to Artist and/or any members of Artist. Accordingly, during
the Term, neither you, Artist nor any member of Artist shall grant any other
person or entity the right to develop and/or operate a web site that (A)
pertains primarily to Artist and/or one or more members of Artist and (B) sells
products using the mane of Artist and/or the names and likenesses of members of
Artist.
(b) You agree to indemnify and hold ADNM and its members, employees,
attorneys, agents, successors, assigns and licensees harmless against any claim,
liability, cost and expenses (including attorneys' and accountants' fees
reasonably incurred) in connection with any breach or alleged breach of this
Agreement by you. In this regard, ADNM shall not settle any claim without first
notifying you of the terms of any proposed settlement and obtaining your consent
thereto, provided you post within ten days after such notice, a bond,
satisfactory to ADNM in its reasonable discretion, to assure ADNM of
reimbursement for all damages, liabilities, costs and expenses (including legal
expenses and counsel fees reasonably incurred) that ADNM, in its reasonable
business judgment, incur as a result of such a claim, If you fail to post such a
bond, you shall be deemed to have consented to ADNM's settlement. You shall,
upon demand, pay the person or entity being indemnified hereunder for any
payment made or required to be made by such person or entity at any time
(including after the Term) in respect of any liability, damage, or expense to
which the foregoing indemnity relates. Without waiving any right or remedy
available to ADNM, if any such claim is made, ADNM shall have the right to
withhold monies otherwise payable to you under this Agreement in an amount
reasonably related to such claim and to deduct therefrom payments required under
this paragraph. ADNM shall not withhold monies otherwise payable to you after
you post a bond meeting the above-described conditions.
(c) You acknowledge that ADNM is making no representations and
warranties concerning anticipated success of the Store and/or the amount of
compensation payable to you hereunder. You warrant, represent and agree that
neither you nor Artist nor any third party shall make any claim, nor shall any
liability be imposed upon ADNM based upon any claim, that more sales could have
been made or better business could have been done in connection with the Store
than was actually made or done. You agree that ADNM shall not be liable for any
special, consequential, incidental or indirect damages in connection with or
arising out of this Agreement, however caused, under any theory of liability.
11. NOTICES; APPROVALS:
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(a) All notices, accounting statements and payments to either party
shall be sent to such party's address first mentioned in this Agreement, or such
other address as a party to this Agreement may hereafter designate by notice to
the other. All notices sent under this Agreement must be in writing to be
effective, and, except for statements and payments, must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until ADNM notifies you otherwise, a copy of all notices
hereunder to ADNM shall be simultaneously sent as aforesaid to Lenard & Gonzalez
LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067; Attention:
Allen D. Lenard, Esq.
(b) No failure by any party to this Agreement to perform any of its
obligations hereunder shall be deemed a breach of this Agreement, unless the
other party has given notice of such alleged breach in reasonable detail and
such alleged breach is not cured within 30 days after the giving of such notice.
(c) No consent or approval under this Agreement shall be unreasonably
withheld or delayed. ADNM may elect to request a consent or approval by notice
to you, or may send you a notice reflecting the availability of a test site of
the Store embodying the materials for which approval is sought. In each
instance, your consent or approval shall be deemed granted unless you notify
ADNM to the contrary within five (5) business days after ADNM sends the
aforesaid notice to you. No inadvertent failure by ADNM to obtain your consent
or approval shall be deemed a breach by ADNM of this Agreement, provided ADNM
shall use reasonable efforts to rectify such failure on a prospective basis
following receipt of notice from you specifying such failure. Notwithstanding
the provisions of paragraph 11(a) above, any notice described in this paragraph
11(c) may be sent by telecopier or electronic mail.
12. MISCELLANEOUS:
(a) This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with respect to the
subject matter hereof. The parties acknowledge and agree that neither party
hereto has made any representations or promises in connection with this
Agreement or the subject matter hereof not contained herein. The parties hereto
shall negotiate in good faith to replace any invalid, illegal or unenforceable
provision (the "Invalid Provision") with a valid provision, the effect of which
comes as close as possible to that of the Invalid Provision. This Agreement
cannot be canceled, modified, amended or waived, in part or in full, in any
manner except by an instrument in writing signed by the party to be charged. No
waiver by either party hereto, whether expressed or implied, of any provision of
this Agreement or default hereunder shall affect such party's right to
thereafter enforce such provision or to exercise the right or remedy set forth
in this Agreement in the event of any other default, whether or not similar.
Words in the singular number shall include the plural, and vice versa. Whenever
examples are used in this Agreement with the words "including," "for example,"
"e.g.," "such as," "etc." or any derivation thereof, such
21
<PAGE> 22
examples are intended to be illustrative and not in limitation thereof. The
paragraph headings herein are used solely for convenience and shall not be used
in the interpretation or construction of this Agreement. All exhibits attached
hereto are incorporated into this Agreement by reference.
(b) In entering into this Agreement and providing services pursuant
hereto, you and ADNM each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) This Agreement shall be deemed to have been entered into in the
State of California and the validity, interpretation and legal affect of this
Agreement shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely within the State of California.
The courts located in California (state and federal), only, will have
jurisdiction of any controversy regarding this Agreement; any action or other
proceeding which involves such a controversy will be brought in those courts, in
California and not elsewhere.
ARTISTDIRECT NEW MEDIA, LLC COMPANY NAME
A CALIFORNIA LIMITED LIABILITY COMPANY A CORPORATION
--------------
By : ARTISTdirect, LLC
Its: Member
By : /s/ Marc Geiger By:
------------------------------ -----------------------
Marc Geiger Its:
Its: Co-Chief Executive Officer -----------------------
By :
------------------------------
Don Muller
Its: Co-Chief Executive Officer
22
<PAGE> 23
EXHIBIT 1
SCHEDULE OF FULFILLMENT FEES
<TABLE>
<CAPTION>
Item Retail Price Fulfillment Fee
----------------- ---------------
<S> <C> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
In addition, the following packaging costs are applicable:
Box Size Packaging Cost
-------- --------------
[***] [***]
[***] [***]
[***] [***]
</TABLE>
SCHEDULE OF INSURANCE COVERAGE
ADNM currently carries property insurance with respect to all
inventory at the fulfillment center, covering up to $1,000,000 in damages
(subject to adjustments from time to time in accordance with then-current
inventory value), with a $5,000 deductible (except with respect to wind damage,
for which the deductible is $100,000). ADNM shall cause you to be named an
additional insured under said policy and provide you with a certificate of
insurance to such effect.
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
12
<PAGE> 24
EXHIBIT 2
[ADNM/MERCHANDISE AGREEMENT - LICENSE FEE]
13
<PAGE> 25
EXHIBIT 3
INDUCEMENT TERMS AND GUARANTEE
The undersigned hereby acknowledge that they have read and
understand all of the terms and conditions set forth in the agreement dated as
of ______ ___, 19__ (the "Agreement") by and between ARTISTdirect New Media, LLC
("ADNM") and CompanyName ("Company") to which these inducement Terms and
Guarantee are attached.
In consideration of Company's execution and delivery of the
Agreement, the benefit of which runs to the undersigned, undersigned hereby
represent, warrant and agree, jointly and severally that:
1. Company has the rights, insofar as the undersigned are
concerned, to enter into the Agreement and to assume all of the obligations,
warranties and undertakings to Company on the part of the undersigned contained
therein, and Company shall continue to have those rights until all of those
obligations, warranties and undertakings shall have been fully performed and
discharged.
2. All of the representations, warranties and agreements on the
part of Company contained in the Agreement that concern Company and/or the
undersigned are and shall remain true and correct.
3. The undersigned shall fully and to the best of their abilities
perform and discharge all of the obligations, warranties and undertakings
contained in the Agreement insofar as the same are required of the undersigned
and to the extent Company has undertaken to cause the performance and discharge
by the undersigned of those obligations and undertakings, and the undersigned
further guarantee the full and faithful performance of all other obligations of
Company under the Agreement, it being agreed and acknowledged that such
guarantee shall be applicable regardless of whether, for any reason whatsoever,
notwithstanding the provisions of paragraph 1 above, Company shall cease to have
the right to perform the obligations, warranties and undertakings to ADNM on the
part of Company contained in the Agreement.
4. The undersigned agree to look solely to Company (and not to
ADNM) with respect to all monies payable to the undersigned in connection with
the Agreement.
5. ADNM may, in its own name, institute any action or proceeding
against the undersigned to enforce its rights under the Agreement and/or this
agreement, and ADNM shall be entitled to equitable relief, including injunctive
relief, to enforce the provisions of said agreements, without the necessity of
first resorting to or exhausting any rights or remedies against Company.
Dated as of ______ ____, 19__
- -------------------------------- ---------------------------
1
<PAGE> 26
EXHIBIT C
MERCHANDISER'S STANDARD WHOLESALE PRICE LIST
Giant Merchandising
Wholesale Price List
April 1, 1999
Music
<TABLE>
<CAPTION>
Description Color Unit Price
- --------------------------------------------------------------
<S> <C> <C>
Basic 1-Sided White [***]
Basic 1-Sided Lights [***]
Basic 1-Sided Darks [***]
Basic 1-Sided Black [***]
Basic 2-Sided White [***]
Basic 2-Sided Lights [***]
Basic 2-Sided Darks [***]
Basic 2-Sided Black [***]
High Roy 1-Sided White [***]
High Roy 1-Sided Lights [***]
High Roy 1-Sided Darks [***]
High Roy 1-Sided Black [***]
High Roy 2-Sided White [***]
High Roy 2-Sided Lights [***]
High Roy 2-Sided Darks [***]
High Roy 2-Sided Black [***]
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 27
EXHIBIT D
FULFILLMENT FEE
<TABLE>
<CAPTION>
Item Retail Price Fulfillment Fee
----------------- ---------------
<S> <C> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
b. In addition, the following packaging costs are applicable:
Box Size Packaging Cost
[***] [***]
[***] [***]
[***] [***]
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 28
EXHIBIT E
<TABLE>
<CAPTION>
<S> <C>
Example I - T-shirt L/XL U.S. Priority Mail
Retail Price (sales tax excluded) [***]
Shipping/handling charge [***]
-------------
Gross Merchandiser Product Revenue [***]
-------------
Shipping cost [***]
Fulfillment fee/Packaging Cost [***]
Credit card fee [***] [***]
-------------
Deductible Amounts [***]
-------------
-------------
Adjusted GMPR [***]
-------------
License Fee Base [***] [***]
Wholesale price [***]
-------------
License Fee [***]
=============
Example II - Pocket Logo Mesh V Neck: 2nd Day Air
Retail Price (sales tax excluded) [***]
Shipping/handling charge [***]
-------------
Gross Merchandiser Product Revenue [***]
-------------
Shipping cost [***]
Fulfillment fee/Packaging Cost [***]
Credit card fee [***] [***]
-------------
Deductible Amounts [***]
-------------
-------------
Adjusted GMPR [***]
-------------
License Fee Base [***] [***]
Wholesale price [***]
-------------
License Fee [***]
=============
</TABLE>
- ----------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
1
<PAGE> 29
EXHIBIT F
ARTISTDIRECT, LLC
WARRANT TO PURCHASE 50,000 COMMON UNITS
WARRANT NO. 1999-1
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT IS FURTHER SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER CONTAINED HEREIN AND IN THAT CERTAIN AMENDED AND RESTATED OPERATING
AGREEMENT OF ARTISTDIRECT, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, DATED
JULY 28, 1998, AS AMENDED.
WARRANT TO PURCHASE
LIMITED LIABILITY COMPANY COMMON UNITS
This certifies that Giant Merchandising ("Merchandiser") is
entitled, on or after April 1 1999, to become a Member in ARTISTdirect, LLC, a
California limited liability company (the "Company"), on and subject to the
terms and conditions contained herein and in the "Operating Agreement" (as
defined below), with the number of Common Units in the Company set forth in
Section 1 below, in return for a capital contribution by Merchandiser to the
Company of cash consideration in an amount equal to Thirty-Four and 48/100
Dollars ($34.48) per Common Unit (subject to adjustment as hereinafter provided,
the "Warrant Price").
Except as otherwise specifically provided herein, terms used but
not otherwise defined herein shall have those meanings as set forth in that
certain Amended and Restated Operating Agreement of ARTISTdirect, LLC, dated
July 28, 1998, as amended (the "Operating Agreement"). A true and correct copy
of the Operating Agreement is attached hereto.
This Warrant is subject to the following terms and conditions:
1. Common Units Subject to Warrant Vesting.
(a) Definitions.
(i) "ADNM" means ARTISTdirect New Media, LLC, a Subsidiary of the
Company;
2
<PAGE> 30
(ii) "Determination Date" means April 30, 2003;
(iii) "Merchandiser Agreement" means that certain Merchandiser
Agreement dated as of April 1, 1999 between ADNM and
Merchandiser;
(iv) "Artist Store," "Merchandiser Artist," "Merchandiser
Product," "Merchandiser Terms," "Personal Identification,"
"Rights," "Store Agreement," and "Sublicensee" each have
the meaning ascribed thereto in the Merchandiser
Agreement;
(v) "Qualifying Revenue" means the "Adjusted Gross
Merchandiser Product Revenue" (as defined in the
Merchandiser Agreement); provided, however, that, for
purposes of this Warrant:
(a) Qualifying Revenue shall not include any amounts
received in respect of any merchandise sold through the
UBL Store.
(b) if Merchandiser's Rights to a particular Merchandiser
Artist terminate during the term of the Merchandiser
Agreement, then Qualifying Revenue shall nonetheless be
computed by deeming Merchandiser Product to include all
merchandise containing the Personal Identification of that
Merchandiser Artist and sold after such termination
through the applicable Artist Store, regardless of whether
such merchandise is provided by or on behalf of
Merchandiser or a Sublicensee, and regardless of whether
such merchandise is provided pursuant to the Merchandiser
Terms.
(vi) "Highest Sales" means the greatest Qualifying Revenue
during any period of twelve (12) consecutive calendar
months during the term of the Merchandiser Agreement
(i.e., between April 1, 1999 and March 31, 2003).
(b) This Warrant may be exercised with respect to:
(i) 5,000 Common Units at any time on or before March 31,
2004; and
(ii) an additional 5,000 Common Units for each full Five
Hundred Thousand Dollars ($500,000) in Highest Sales in
excess of Five Hundred Thousand Dollars ($500,000);
provided that the number of additional Common Units that
may be acquired pursuant to this Section 1(b)(ii) shall be
subject to a maximum of 45,000 (i.e., for Highest Sales of
Five Million Dollars ($5,000,000 or more).
On or before the Determination Date, the Company shall notify Merchandiser of
the Highest Sales.
3
<PAGE> 31
2. Term. Except for the rights conferred upon the Company pursuant to
Section 8 below, this Warrant, and Merchandiser's right to exercise this
Warrant, shall terminate immediately upon the first to occur of the
following:
(a) the close of business (i.e., 5:00 p.m., Los Angeles time) on
April 30, 2008;
(b) the termination of the Merchandiser Agreement prior to the
expiration of the full term thereof either i) by ADNM due to a
material breach thereof by Merchandiser, which breach remains
uncured for the period specified in Section 15(b) of the
Merchandiser Agreement, or (ii) by Merchandiser other than due to
a material breach thereof by ADNM, which breach remains uncured
for the period specified in Section 15(b) of the Merchandiser
Agreement; or
(c) the breach by Merchandiser of any material provision of this
Warrant.
3. Method of Exercise; Payment; Issuance of New Warrant; Transfer and
Exchange. This Warrant may be exercised by Merchandiser, in whole or in
part, by the surrender of this Warrant, properly endorsed, at the
principal office of the Company at 17835 Ventura Blvd., Suite 310,
Encino, CA 91316 (or at such other location within the State of
California or the State of New York as the Company may advise
Merchandiser in writing), and by (a) payment to the Company in cash or
immediately available funds of the Warrant Price of the Common Units
being purchased, and (b) delivery to the Company of a customary
investment letter executed by Merchandiser, representing and warranting
that the Common Units are being acquired for Merchandiser's own account,
for investment purposes only, and not with a view to the distribution,
resale or other distribution thereof in violation of applicable
securities laws, and acknowledging the issuance and transfer of the
Common Units are subject to the requirements of federal and state
securities laws. Merchandiser, in lieu of exercising this Warrant for a
specified number of Common Units (the "Exercised Units") and paying the
aggregate exercise price therefor (the "Exercise Price"), may elect to
receive a number of Common Units equal to the number of Exercised Units,
minus a number of Common Units having an aggregate "Fair Market Value"
(as defined below) equal to the Exercise Price. After any such election,
the number of Common Units covered by this Warrant shall be deemed
automatically reduced by the number of Exercised Shares. For purposes of
this Warrant, "Fair Market Value" means (a) if the Common Units are then
publicly traded, the closing sale price of the Common Units on its
principal stock exchange or market system (or the average of the closing
bid and asked prices, if closing sales prices are not reported) for the
ten (10) consecutive trading days immediately prior to the date of any
such "net exercise," or (b) in all other cases, as determined by the
Managers in their sole, good faith discretion. In the event of any
exercise, or any such "net exercise," of less than all of the rights
represented by this Warrant, the Company shall issue to Merchandiser a
new warrant evidencing the ability of Merchandiser to purchase the
balance of the number of Common Units from the Company, and shall
deliver such warrant to Merchandiser promptly following such partial
exercise. The Company agrees that the Common Units issuable to
Merchandiser upon exercise of this Warrant shall be issued to
Merchandiser as of the close of business on the date on which all of the
above-described conditions to exercise have be satisfied. Merchandiser
hereby covenants and agrees that, upon
4
<PAGE> 32
Merchandiser's exercise of all or a portion of this Warrant and
Merchandiser's making the applicable payment to the Company in respect
thereof, Merchandiser and the Common Units issued to Merchandiser with
respect to such exercise shall become subject to the terms and
conditions of the Operating Agreement, including without limitation, the
obligation to sell Common Units and the restrictions on transfer of
Common Units contained therein. In this regard, Merchandiser
acknowledges that it shall only become a Member and be entitled to the
rights as a Member once Merchandiser validly exercises this Warrant in
accordance with the terms hereof and executes a signature page to the
Operating Agreement whereby it agrees to be bound by all of the terms
thereof, excluding the non-competition covenant contained in Section
3.10 thereof, from which Merchandiser shall be exempted.
4. Due Authorization and Issuance. The Company covenants and agrees that
any and all of the Common Units issued to Merchandiser in accordance
with the terms hereof will, upon such issuance, be duly authorized,
validly issued and free from all preemptive rights of any holder of
Common Units in the Company, free and clear of all taxes, liens and
charges with respect to such issuance. The Company further covenants and
agrees that, during the period within which this Warrant may be
exercised, the Company will take no action that would prohibit the
issuance of Common Units required to be issued in accordance with the
terms and conditions hereof on such exercise.
5. Fractional Common Units. No fractional Common Units shall be issued in
connection with any exercise hereunder but in lieu of such fractional
Common Units, the Company shall make a cash payment therefor upon the
basis of the fair market value of the Common Units, as determined by the
Managers in their sole, good faith discretion.
6. Certain Adjustments.
(a) If the outstanding Common Units are changed into or exchanged
for a different number or kind of securities of the Company or a
successor entity (including a "C-corporation" that becomes the
successor or parent of the Company in connection with a roll-up
or similar exchange transaction in connection with an initial
public offering) through a capital reorganization or
reclassification, or if the number of outstanding Common Units
is changed through a split of Common Units, reverse split of
Common Units or issuance of a Common Unit dividend, then a
reasonable and appropriate adjustment shall be made by the
Company in (i) the number or kind of Common Units that may be
purchased pursuant to the exercise of this Warrant, and (ii) the
number, exercise price, or kind of securities subject to this
Warrant. Any such adjustment in this Warrant, however, shall be
made without a change in the total price applicable to the
unexercised portion of this Warrant but with a corresponding
adjustment in the price for each Common Unit covered by this
Warrant. In making such adjustments, or in determining that no
such adjustments are necessary, the Company may rely upon the
advice of counsel and accountants to the Company, and the
reasonable determination of the Company shall be binding.
5
<PAGE> 33
(b) Upon (i) the dissolution, liquidation, or sale of all or
substantially all of the business, properties and assets of the
Company, (ii) any reorganization, merger, consolidation, sale or
exchange of securities in which the Company does not survive,
(iii) any reorganization, merger, consolidation, sale or
exchange of securities in which the Company does survive and any
of the Company's members have the opportunity to receive cash,
securities of another entity and/or other property in exchange
for their Common Units (other than a "roll-up" or similar
exchange transaction in connection with an initial public
offering), or (iv) any acquisition by any person or group (as
defined in Section 13(d) of the Securities Exchange Act of 1934,
as amended), of beneficial ownership of more than fifty percent
(50%) of the Company's then outstanding Common Units (each of
the events described in clauses (i), (ii), (iii), or (iv) is
referred to herein as an "Extraordinary Event"), this Warrant
shall terminate unless it survives the Extraordinary Event
pursuant to Section 6(d) below.
(c) Merchandiser shall have the right until ten (10) days before the
effective date of any Extraordinary, Event to exercise, in whole
or in part, this Warrant, but only to the extent to which it is
exercisable pursuant to the provisions hereof. In this regard,
the Company shall notify Merchandiser in writing of the
Company's intent to engage in any Extraordinary Event on or
before the date (the "Notice Date") that is no less than thirty
(30) days before the effective date of such Extraordinary Event.
In addition, notwithstanding anything to the contrary contained
herein, if an Extraordinary Event shall occur during the term of
the Merchandiser Agreement, then, solely for purposes of
determining the extent to which this Warrant is exercisable in
accordance with this Section 6(c), Highest Sales shall be
determined either (i) with reference to each period of twelve
(12) consecutive calendar months of the term of the Merchandiser
Agreement prior to the Notice Date; or (ii) if fewer than twelve
(12) months have elapsed since the commencement of the term of
the Merchandiser Agreement, on an annualized basis.
(d) If an Extraordinary Event occurs during the term of the
Merchandiser Agreement, then the Company shall be obligated to
either, in its sole discretion: (i) cause this Warrant to
survive such Extraordinary Event or (ii) cause the surviving
entity (which may be the Company), or any other entity that,
after giving effect to the Extraordinary Event, owns, directly
or indirectly, fifty percent (50%) or more of the Company's then
outstanding Common Units, to tender to Merchandiser a substitute
warrant to purchase units or other equity interests in such
entity containing terms and provisions substantially preserving,
in the reasonable, good faith discretion of the Company, the
rights and benefits of this Warrant to the extent then
outstanding (a "Substitute Warrant"). If an Extraordinary Event
occurs after the term of the Merchandiser Agreement, in its sole
and absolute discretion, the Company may permit this Warrant to
survive such Extraordinary Event. In addition, if an
Extraordinary Event occurs after the term of the Merchandiser
Agreement, in its sole and absolute discretion, the surviving
entity (which may be the Company), or another entity, may, but
shall not be so obligated, tender to Merchandiser a Substitute
Warrant.
6
<PAGE> 34
(e) The grant of this Warrant shall not affect in any way the right
or power of the Company to make adjustments, reclassification or
changes in its capital or business structures or to merge,
consolidate, dissolve, or liquidate or to sell or transfer all
or any part of its business or assets or undertake any other
permitted limited liability company action.
(f) Upon the occurrence of each adjustment of this Warrant pursuant
to this Section 6, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the
terms hereof and furnish to Merchandiser a certificate setting
forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The
Company shall, upon the written request of Merchandiser, furnish
or cause to be furnished to Merchandiser a like certificate
setting forth: (i) such adjustments and readjustments; (ii) the
applicable Exercise Price at the time in effect; and (iii) the
number of Common Units, if any, and the amount, if any, of other
securities or property that at the time would be received upon
the exercise of this Warrant.
(g) Other Action Affecting Common Units. The Company will not, by
amendment of its Articles of Organization or the Operating
Agreement, or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, dividend or other distribution of cash or
property, or any other voluntary action, avoid or seek to avoid
the rights granted to Merchandiser hereunder or the observance
or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions hereof, and in
the taking of all such actions as may be necessary or
appropriate in order to protect the rights of Merchandiser as
set forth herein against impairment.
7. Payment of Taxes. The Company will pay all taxes (other than taxes based
upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of Common Units upon exercise of this
Warrant.
8. Drag-Along Obligation.
(a) Definition of Equity Securities. For purposes of this Warrant,
"Equity Securities" shall mean all (i) Units, all rights,
options or warrants to purchase Units, all securities of any
type, whatsoever that are convertible into or exchangeable for
Units, and all rights, options or warrants to purchase
securities that are convertible into or exchangeable for Units
and (ii) all shares, options, warrants, general or limited
partnership interests, limited liability company membership
interests, participations or other equivalents (regardless of
how designated) of or in a corporation, partnership, limited
liability company or equivalent entity that are issued in
exchange for any of the items described in the preceding clause
(ii).
(b) The Obligation. Notwithstanding anything to the contrary
contained herein, if the Managers find an acquirer for all or
any portion of their interest in the Company (whether such
acquisition is by way of purchase of assets or Common Units,
7
<PAGE> 35
merger, recapitalization or other form of transaction, and
including, without limitation, a roll-up transaction that is for
the purpose of a reorganization among the Company and its
Affiliates), then, at the request of the Managers, Merchandiser
shall sell or otherwise transfer a corresponding portion of any
Common Units (or successor Equity Securities) then held by
Merchandiser to such acquirer on the same terms and conditions
as apply to the sale or other transfer by the Managers. \
Merchandiser further agrees timely to take such other actions as
the Managers may reasonably request in connection with the
approval of the consummation of such sale or other transfer,
including, without limitation, voting in favor of such sale or
other transfer 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 or other transfer, and, in the event that
such sale or other transfer is structured as a recapitalization,
transferring and retaining such portion of Common Units (or
successor Equity Securities) and rights under this Warrant as
may be requested by the Managers.
9. Tag-along Right.
(a) Definition of Excluded Transferee. For purposes of this Warrant,
"Excluded Transferee" shall mean: (i) Marc Geiger; (ii) Donald
Muller; (iii) a spouse, descendant or parent of Marc Geiger or
Donald Muller; (iv) a descendant of any Person listed in clauses
(i), (ii) or (iii) above; (v) a trust for the sole benefit of
any one or more of the Persons listed in clauses (i), (ii),
(iii) or (iv) above; or (vi) any Affiliate of any Person listed
in clauses (i), (ii), (iii), (iv) or (v) above.
(b) The Right. If Marc Geiger, Donald Muller, or any direct or
indirect successor, assignee, heir, devisee, donee, legatee or
transferee of either of them (each a "Transferor'), proposes
alone or with others to Transfer, directly or indirectly, to any
Person that is not an Excluded Transferee, any Equity Securities
(each, a "Subject Interest') that represent a fully-diluted
Percentage of thirty percent (30%) or more, in a single
transaction or series of transactions, and the Common Units (or
substitute Equity Securities) issued to Merchandiser pursuant to
this (or any successor) Warrant (the "Securities") include (at
such time or upon exercise, conversion or exchange) any Equity
Securities of the same class as the Subject Interest (the
"Subject Interest Class"), the would-be Transferor shall provide
Merchandiser 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
Merchandiser 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 Equity Securities in
the Company. Merchandiser may sell all or any portion of the
Securities held by Merchandiser (or issuable to Merchandiser
upon exercise, conversion or exchange of any of the Securities)
that are of the class of Equity Securities that includes the
Subject
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Interest Class (the "Merchandiser's Securities") equal to the
product obtained by multiplying (i) the Subject Interest by (ii)
a fraction, the numerator of which is Merchandiser's Securities
and the denominator of which is the total number of Equity
Securities of the Subject Interest Class then owned by the
Transferor, Merchandiser, and any other Person that has
tag-along rights with respect to the proposed Transfer by
Transferor. To the extent Merchandiser, or any other Person that
has tag-along rights with respect to the proposed Transfer by
Transferor, shall exercise its tag-along right, the number of
Equity Securities that the Transferor may Transfer in the
transaction shall be correspondingly reduced.
(c) Expenses. In any transaction in which Merchandiser sells or
otherwise disposes of any of the Merchandiser's Securities
pursuant to this Section 9, Merchandiser shall bear its pro rata
share of the reasonable expenses incurred by the Transferor in
connection with the sale of the Subject Interest.
(d) Exempt Sales. The rights and obligations set forth in this
Section 9 shall not apply to any sale of Equity Securities made
in connection with or following an initial public offering of
common stock of the corporate successor of the Company.
10. Transferability of Warrant.
(a) Except as set forth in Section 10(b) below, this Warrant may not
be sold, conveyed, transferred, alienated, donated, encumbered
or otherwise disposed of by Merchandiser and, accordingly, any
purported such transaction in violation of this Section 10 shall
be void ab initio, of no force or effect.
(b) Notwithstanding Section 10(a) above, but subject to applicable
securities laws, Merchandiser may transfer all, but not less
than all, of this Warrant, to any Affiliate of Merchandiser,
provided that no such transfer shall be effective until the
transferee agrees in writing to be bound by all of the
provisions of this Warrant, including Section 8 above.
11. Investment Representation. Merchandiser represents and warrants to the
Company that Merchandiser is acquiring this Warrant for Merchandiser's
own account for investment and not with a view to, or for resale in
connection with, any distribution thereof. Merchandiser acknowledges
that this Warrant and the Common Units that may be purchased under this
Warrant have not been registered under the Securities Act, by reason of
a specific exemption from the registration provisions of the Securities
Act that depends upon, among other things, the bona fide nature of the
investment intent of Merchandiser as expressed herein.
12. Amendment and Waiver; Successors. This Warrant may only be amended or
supplemented, and any waiver or departure from the provisions hereof may
only be given, with the consent of the Managers and Merchandiser. All of
the covenants and provisions of this Warrant by or for the benefit of
the Company and Merchandiser shall
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bind and inure to the benefit of them and their respective permitted successors
and assigns hereunder.
13. Notices. All notices required by this Warrant to Merchandiser shall be
sent to Giant Merchandising, 5655 Union Pacific Avenue, Commerce, CA
90022, or such other address as Merchandiser may hereafter designate by
notice to the Company. All notices sent under this Agreement to the
Company or the Managers shall be sent to the address indicated in
Section 3 above. All notices required by this Warrant must be in writing
to be effective, and must be sent by a third party messenger, by air
courier service with a written acknowledgement of receipt, by registered
or certified mail, return receipt requested, or through a telegraph
office. The date of personal delivery, of mailing, or the date of
delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to
notices of change of address, the date of which will be the date of
receipt by the receiving party). Until the Company notifies Merchandiser
otherwise, a copy of all notices hereunder to the Company shall be
simultaneously sent as aforesaid to Lenard & Gonzalez LLP, 1900 Avenue
of the Stars, 25th Floor, Los Angeles, CA 90067; Attention: Allen D.
Lenard, Esq.
14. Descriptive Headings and Governing Law. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and
do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of California.
15. Lost Warrant. The Managers and the Company represent and warrant to
Merchandiser that upon receipt of evidence reasonably satisfactory to
the Managers and the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction upon receipt of an indemnity reasonably satisfactory to the
Managers and the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Managers and the Company
will make and deliver a new Warrant in lieu of the lost, stolen,
destroyed or mutilated Warrant.
IN WITNESS WHEREOF, Merchandiser, the Company and the Managers
have caused this Warrant to be duly executed and issued by their respective
officers thereunto duly authorized as of the 1st day of April, 1999.
"COMPANY" "MERCHANDISER"
ARTISTdirect, LLC Giant Merchandising
By: /s/ Marc Geiger By:
--------------------------------- -----------------------------
Its: Co-Chief Executive Officer (an authorized signatory)
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"MANAGERS"
By: /s/ Marc Geiger
--------------------------------------
Marc Geiger
By:
--------------------------------------
Donald Muller
11
<PAGE> 1
REDACTED
EXHIBIT 10.27
ADNM MERCHANDISER AGREEMENT
This Agreement, dated as of June 7, 1999, between Winterland
Concessions Company, a California corporation, doing business as "Winterland"
("Merchandiser"), 1951 Fairway Drive, San Leandro, CA 94577, and ARTISTdirect
New Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA 91316, is
being entered into in light of the following:
A. Merchandiser is in the business of acquiring the right to use the
names, photographs and other likenesses, biographical material and other
personal identification (collectively, "Personal Identification") of musical
artists in connection with the manufacture and sale of merchandise and the
licensing of such rights to third parties.
B. ADNM is in the business of developing and operating Internet retail
storefronts for musical artists ("Artist Stores") that, among other things, sell
merchandise containing the Personal Identification of the applicable artist.
C. Merchandiser and ADNM are entering into this Agreement in order to
set forth the terms and conditions upon which Merchandiser has agreed to
accommodate ADNM in respect of developing and opening new Artist Stores
featuring Merchandiser Artists (as defined below) and in the operation thereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits contained herein, the parties hereto agree as follows:
1. Term: The term of this Agreement (the "Term") shall be three (3)
years commencing on the date of this Agreement.
2. Signing Procedures:
(a) As used herein, "Merchandiser Artist" shall mean,
individually and collectively, each and every artist in respect of which
Merchandiser has the exclusive right (sometimes referred to herein as the
"Rights") to manufacture merchandise utilizing such artist's Personal
Identification (including any entity furnishing the Personal Identification of
such an artist). Merchandiser represents and warrants that (A) attached hereto
as Exhibit A is a true and complete list of Merchandiser Artists as of the
execution of this Agreement; and (B) the territory and duration of the Rights
set forth on said Exhibit A are true and complete.
(b) During the Term, Merchandiser agrees that, within a
reasonable period of time after Merchandiser enters into an agreement with
respect to a new Merchandiser Artist, Merchandiser shall notify ADNM of the
applicable artist name(s), territory and duration of Rights, if any. Upon such
notice, the applicable Merchandiser Artist shall be deemed added to said Exhibit
A.
(c) Merchandiser agrees to promptly notify ADNM if any of the
information on said Exhibit A should change during the Term, as well as soon as
the Rights in respect of an artist end (after which such artist shall be deemed
deleted from said Exhibit A.)
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(d) Said Exhibit A indicates with an asterisk (*) those
Merchandiser Artists in respect of which ADNM desires to enter into a Store
Agreement as of the execution of this Agreement. ADNM shall have the right from
time to time during the Term to notify Merchandiser that it desires to enter
into a Store Agreement with any other Merchandiser Artists. ADNM and
Merchandiser shall use their collective commercially reasonable efforts to cause
the applicable Merchandiser Artist to enter into an agreement with ADNM
substantially in the form attached hereto as Exhibit B, subject to any
modifications as the parties may mutually agree upon prior to the execution
thereof (a "Store Agreement").
(e) Merchandiser acknowledges that, prior to the execution
hereof, ADNM entered into agreements in respect of the development and operation
of Artist Stores for the artists set forth on Schedule A attached hereto
(individually and collectively, "Excluded Artists"). In respect of each Excluded
Artist, Merchandiser agrees (i) to continue to sell to ADNM (or the applicable
Excluded Artist or its furnishing company), for resale on the applicable Artist
Store and the UBL Store (as defined in paragraph 6 below), merchandise featuring
the Personal Identification of the applicable Excluded Artist on terms no less
favorable to ADNM than [***] terms; (ii) that no License Fee shall be payable
with respect to any such merchandise; (iii) that to the extent any Rights are
needed from Merchandiser to operate the applicable Artist Store, such Rights
shall be deemed granted to ADNM in consideration of ADNM entering into this
Agreement; and (iv) the Excluded Artists shall not be subject to this Agreement.
3. Sale of Merchandise Manufactured By or Under the Control of
Merchandiser: As used herein, the term "Merchandiser Product" means all
merchandise sold pursuant to a Store Agreement (whether through the applicable
Artist Store or the UBL Store) that is provided by or on behalf of Merchandiser
or a Sublicensee, as well as any "limited edition" or "one-of-a-kind" items of
merchandise sold pursuant to a Store Agreement (whether or not actually provided
by or on behalf or Merchandiser or a Sublicensee). During the term of each Store
Agreement (but only as long as Merchandiser has the Rights in respect of the
applicable Merchandiser Artist), Merchandiser agrees to sell to ADNM (or the
applicable Merchandiser Artist), for resale under the applicable Store
Agreement, Merchandiser Product manufactured by or under the control of
Merchandiser that contains the Personal Identification of the applicable
Merchandiser Artist upon the following terms:
(a) Merchandiser agrees to sell all such merchandise to ADNM at
Merchandiser's standard wholesale prices (i.e., the prices that Merchandiser
generally charges its other wholesale customers, it being understood that ADNM
to have the benefit of all quantity discounts customarily afforded by
Merchandiser to its other wholesale customers). Merchandiser represents and
warrants that attached hereto as Exhibit C are Merchandiser's standard wholesale
prices as of the execution of this Agreement. Upon notice from Merchandiser to
ADNM, Merchandiser shall have the right to change its standard wholesale prices
hereunder, provided such changes apply to all of Merchandiser's customers and
that such changes shall only apply to Merchandiser Product ordered by ADNM after
its receipt of such notice from Merchandiser.
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portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
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Notwithstanding the foregoing, the parties agree and acknowledge that
Merchandiser may not have standard wholesale prices for certain collectibles and
limited edition items, in which case the wholesale price shall be negotiated in
good faith.
(b) Subject to paragraph 4 below, all such sales shall be on a
consignment basis [i.e., the applicable Merchandiser Product shall not be deemed
sold to ADNM until ADNM has received a verified order therefor from a customer
of an Artist Store (or the UBL Store), and ADNM shall have the right to return
to Merchandiser, for a full credit, any Merchandiser Product that is unsold or
has been returned by such a customer in accordance with the return policies of
the Artist Store (or the UBL Store, as applicable)]. Payment to Merchandiser
shall be made within fifteen (15) days after the end of the month during which
ADNM has sold the applicable item of Merchandiser Product.
(c) ADNM and Merchandiser shall in their good faith business
judgment mutually determine on an item-by-item basis the amount of inventory
that Merchandiser will ship to the ADNM's fulfillment center(s) (the "Center").
In this regard, Merchandiser agrees that it will ship on a timely basis an
amount of Merchandiser Product reasonably sufficient to cover the anticipated
orders through the applicable Store. During the Term, ADNM agrees to provide
Merchandiser within five (5) business days after the last day of each month (and
at such other times as Merchandiser reasonably requests, but no more frequently
than twice during any 30-day period of the Term), with a computer run of the
inventory held as of the end of the preceding month at the Center of
Merchandiser Product supplied by Merchandiser. Merchandiser shall have the right
from time to time to require ADNM to return inventory of Merchandiser Product
that exceeds the inventory level deemed likely to be sold within a reasonable
period of time, as mutually agreed among the parties.
(d) ADNM shall pay all third party costs (including all
associated freight and insurance costs) of shipping the Merchandiser Product
supplied by Merchandiser to the Centers and returning any such unsold
Merchandiser Product from the Center to Merchandiser's closest warehouse to the
Center.
4. Sale of Merchandise Manufactured By or Under the Control of a
Sublicensee: As used herein, the term "Sublicensee" means any person or entity
who has obtained prior to the date of this Agreement, or during the Term
obtains, from Merchandiser the right to manufacture and distribute merchandise
bearing the Personal Identification of a Merchandiser Artist.
(a) During the term of each Store Agreement, Merchandiser shall
use its commercially reasonable efforts to cause each Sublicensee to sell on a
timely basis to ADNM (or the applicable Merchandiser Artist), for resale under
the applicable Store Agreement, Merchandiser Product manufactured by such
Sublicensee at no more than the Sublicensee's standard wholesale prices and
otherwise in accordance with the terms of paragraph 2(e) above (e.g., on a
consignment basis). Subject to paragraph 4(b) below, if, despite Merchandiser's
commercially reasonable efforts, a Sublicensee refuses to sell Merchandiser
Product on a consignment basis, Merchandiser shall use its commercially
reasonable efforts to cause such
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<PAGE> 4
Sublicensee to agree that payment for the applicable Merchandiser Product will
not be due until at least [***] after the applicable Merchandiser Product is
received at the Center from the Sublicensee. Subject to paragraph 4(b) below,
if, despite Merchandiser's commercially reasonable efforts, a Sublicensee
refuses to sell Merchandiser Product on [***] terms, Merchandiser shall use its
commercially reasonable efforts to cause such Sublicensee to agree that payment
for the applicable Merchandiser Product will not be due until at least [***]
after the applicable Merchandiser Product is received at the Center from the
Sublicensee.
(b) If a Sublicensee refuses to sell Merchandiser Product to
ADNM (or the applicable Merchandiser Artist) on terms acceptable to ADNM,
Merchandiser may elect to purchase such Merchandiser Product from the
Sublicensee and sell such Merchandiser Product to ADNM in accordance with the
terms set forth in paragraph 3(b) above. If the Sublicensee or Merchandiser
furnishes a Sublicensee's merchandise to ADNM (or the applicable Merchandiser
Artist) on a consignment basis, then the License Fee with respect to such
Merchandiser Product shall be paid by ADNM to Merchandiser. If such Merchandise
Product is not supplied on a consignment basis (i.e., ADNM and/or the applicable
Merchandiser Artist do not have the right to return such Product against a full
credit), then, notwithstanding anything contained in this Agreement to the
contrary, the License Fee with respect to such Merchandiser Product shall be
paid by ADNM to the applicable Merchandiser Artist under the applicable Store
Agreement.
5. Winterland Store:
(a) During the Term, ADNM will design, develop, maintain and
operate for Merchandiser an Internet retail storefront for the sale of
merchandise containing the Personal Identification of certain Merchandiser
Artists to be mutually selected by ADNM and Merchandiser (the "Winterland
Store"), to be integrated with Merchandiser's web site currently located at
www.winterland.com (the "Winterland Site"). ADNM will design and develop the
Winterland Store pursuant to a mutually approved design concept. ADNM shall be
solely responsible for all costs incurred by ADNM in connection with developing
the Winterland Store; however, Merchandiser agrees to cooperate with ADNM,
including by providing technical assistance and such other resources as may be
reasonably required, to integrate the Winterland Store into the existing
Winterland Site. Merchandiser shall provide ADNM with all photographs, graphics,
logos and similar items reasonably required by ADNM to create the Winterland
Store and readily available to Merchandiser promptly following ADNM's request
and at no cost to ADNM.
(b) During the Term, ADNM will host (i.e., provide the server
for) and maintain the Winterland Store, including by providing periodic source
code programming updates and improvements. In this regard, ADNM will use its
commercially reasonable efforts to correct any material "bug" or defect as soon
as reasonably possible after ADNM becomes aware of such material "bug" or
defect.
(c) ADNM and Merchandiser shall mutually approve the merchandise
to be sold over the Winterland Store. Merchandiser shall have the right to
approve the retail price of
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portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
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<PAGE> 5
merchandise sold over the Winterland Store. ADNM (or its designee) shall process
all orders received from the Winterland Store and arrange to have the ordered
merchandise shipped to the customer (subject to availability).
(d) All merchandise to be offered for sale on the Winterland
Store shall be supplied to ADNM in accordance with the terms of paragraphs 2(e)
and 4 above. In addition, with respect to merchandise supplied by Merchandiser
or a Sublicensee and sold over the Winterland Store, ADNM agrees to account to
Merchandiser in the same manner as ADNM accounts to Merchandiser for
Merchandiser Product sold over an Artist Store (i.e., pursuant to paragraphs
8(b)(i)(A) and 8(b)(i)(C) below, but subject to the last sentence of paragraph
4(b) above). However, any merchandise containing the Personal Identification of
a Merchandiser Artist who is not subject to a Store Agreement that is offered
for sale on the Winterland Store and sold through the UBL Store shall not be
deemed a sale under this Agreement (i.e., shall not be subject to the License
Fee). Rather such sale shall be deemed a sale under the UBL Merchandiser
Agreement between Merchandiser and The Ultimate Band List, LLC being entered
into concurrently herewith (the "UBL Agreement").
(e) During the Term, ADNM shall handle all customer orders and
inquiries in respect of the Winterland Store, provide all necessary credit card
accounting and processing services and develop payment, delivery and refund
policies. To effect the foregoing, ADNM shall also provide an on-line and
toll-free telephone service center that will take orders and respond to customer
inquiries. On-line inquiries will be responded to within 24 hours of receipt and
the telephone service will be operational Mondays through Fridays from 9:00 a.m.
to 7:00 p.m. Pacific Time (excluding holidays) and will enable customers who
prefer not to place orders on-line to place orders by facsimile or telephone.
(f) As between ADNM and Merchandiser, Merchandiser will own the
customer database specifically identified with the Winterland Store (the
"Winterland Database"). However, ADNM will have the exclusive right during the
Term, subject to Merchandiser's consent in each instance, to administer and
license any third party uses of the Winterland Database, and to collect all
monies relating thereto accrued during the Term, regardless of when payable.
ADNM shall pay Merchandiser [***] of the "Gross Database Revenue," which means
the amount actually received by ADNM in respect of sales and other exploitations
of the Winterland Database, less all related Deductible Amounts.
(g) ADNM shall pay Merchandiser [***] of the "Gross Exploitation
Revenue," which means the amount actually received by ADNM in respect of
ancillary income from the Winterland Store, for example, income in respect of
advertising contained on the Winterland Store (e.g., hyperlinks to, and banners
and other advertisements for, other Internet web sites), less all agent
commissions and other related Deductible Amounts. Merchandiser shall have the
right to approve all such ancillary activities.
(h) As between ADNM and Merchandiser, Merchandiser shall be
solely responsible for all costs of marketing the Winterland Store, and ADNM
shall not incur any such
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portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
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<PAGE> 6
costs without Merchandiser's written approval. If ADNM incurs any marketing
costs with Merchandiser's written approval, such costs shall be recoupable out
of all monies payable to Merchandiser under this Agreement, other than (i) the
wholesale purchase price for the Merchandiser Product and merchandise purchased
for sale through the Winterland Store and (ii) the monies payable under
paragraph 3(d) above.
(i) As between Merchandiser and ADNM, any and all artwork,
trademarks, logos, graphics, video, sound recordings, musical compositions,
text, data and other materials supplied by Merchandiser to ADNM in connection
with the Winterland Store, as well as the URL and the domain name or names
assigned to the Winterland Store (collectively, the "Winterland Content"), shall
remain Merchandiser's sole and exclusive property. Merchandiser hereby grants to
ADNM during the Term and throughout the universe a non-exclusive, royalty-free
license to use, copy, modify (with Merchandiser's consent), distribute, publicly
perform and display and otherwise exploit the Winterland Content and the
Personal Identification of each applicable Merchandiser Artist in connection
with the development, maintenance and operation of the Winterland Store and the
advertising and promotion thereof and of ADNM in connection with the Winterland
Store. No Winterland Content or the exploitation or use thereof or the sale of
any Merchandiser Product shall violate or infringe upon any common law or
statutory rights of any party, including contractual rights, copyrights, and
rights of privacy or publicity or shall defame any person or entity.
(j) As between Merchandiser and ADNM, any and all text,
graphics, audio, video, artwork and designs created by ADNM or its employees or
agents during the Term for use solely on the Winterland Store, including any
additions to or modifications of Winterland Content made by ADNM or its
employees or agents, (collectively, the "Developed Content"), shall be
Winterland's sole and exclusive property. All Developed Content shall be deemed
included in the license granted by Merchandiser under paragraph 5(i) above. Upon
Merchandiser's reasonable request and at Merchandiser's sole expense, ADNM shall
assist Merchandiser in the procurement and maintenance of Merchandiser's rights
in the Developed Content (including all intellectual property rights, whether
recognized currently or in the future).
(k) As between Merchandiser and ADNM, any and all commerce
technology, HTML formatting code, source and object code, programming code and
software, as well as all text, graphics, audio, video, artwork and designs
provided by ADNM in connection with this Agreement which does not constitute
Developed Content (collectively, the "ADNM Content") shall be ADNM's sole and
exclusive property. Notwithstanding the foregoing, upon the expiration of the
Term and provided Merchandiser is not in breach of this Agreement, ADNM shall
grant to Merchandiser a perpetual non-exclusive license throughout the universe
to use, modify, publicly perform and display all ADNM Content used in the
Winterland Store and owned and controlled by ADNM, solely in connection with
operating and maintaining the Winterland Store. In consideration of such
license, if Merchandiser elects to so utilize any such ADNM Content in
connection with the Winterland Store after the Term, Merchandiser agrees to pay,
or cause its licensee(s) to pay, ADNM a royalty equal to [***] of the gross
revenues earned in connection with the Winterland Store after the expiration of
the Term, but only for as long as
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portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
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Merchandiser continue to use any such ADNM Content. In this regard, Merchandiser
shall account in the same fashion and within the same time periods, and ADNM
shall be accorded the same examination rights and be subject to the same
limitations and restrictions, as apply with respect to Merchandiser's
accountings under paragraph 11 below. Nothing contained in this Agreement shall
impose upon ADNM any obligation whatsoever to provide Merchandiser with updates,
hosting, maintenance or support with respect to the Winterland Store or such
ADNM Content after the Term. Merchandiser shall not be entitled to use any name,
trademark or service mark of ADNM or its affiliates in any manner whatsoever
without obtaining the prior written consent of ADNM or the applicable affiliate
of ADNM.
(l) Merchandiser shall obtain all necessary third-party
clearances in connection with all Winterland Content and merchandise offered for
sale on the Winterland Store (including the payment of any associated fees,
royalties and other costs). If ADNM nevertheless shall pay, with Merchandiser's
approval, any third party clearance cost relating to the Winterland Store (which
ADNM is not obligated to do), all such amounts shall be deducted from any and
all monies otherwise payable to Merchandiser under this Agreement.
(m) ADNM represents and warrants that no exploitation or use by
ADNM or Merchandiser of the ADNM Content or Developed Content in accordance with
the terms of this Agreement shall violate or infringe upon any common law or
statutory rights of any party, including contractual rights, copyrights, and
rights of privacy or publicity. ADNM shall indemnify Merchandiser in accordance
with the terms of paragraph 14(c) below in respect of any claim contrary to the
foregoing; other than with respect to any claim subject to the foregoing
indemnity obligation, Merchandiser agrees that ADNM shall not be liable for any
special, consequential, incidental or indirect damages in connection with the
development or operation of the Winterland Store, however caused, under any
theory of liability.
6. UBL Store: Merchandiser agrees and acknowledges that ADNM may elect
to make available for sale on an Internet on-line store (the "UBL Store")
operated by a company affiliated with ADNM certain items of Merchandiser Product
offered for sale through an Artist Store.
7. Grant of Rights: With respect to each Store Agreement (and subject to
the terms and conditions set forth therein), Merchandiser shall be deemed to
have granted to ADNM, in consideration for the License Fee, the irrevocable
right and license, insofar as Merchandiser has such Rights and for the territory
Merchandiser has such Rights, during the term of such Store Agreement (but only
as long as Merchandiser has the Rights in respect of the applicable Merchandiser
Artist), to develop and operate the only "official" Internet store for the
applicable Merchandiser Artist, and the non-exclusive (subject to paragraph 12
below) right and license to utilize such Merchandiser Artist's Personal
Identification in connection with the applicable Artist Store.
8. License Fee:
(a) Unless otherwise provided in the applicable Store Agreement,
in consideration for the rights licensed pursuant to paragraph 7 above, ADNM
agrees to pay Merchandiser a License Fee with respect to all Merchandiser
Product sold at any time (including after the Term) under a Store Agreement,
subject to the last sentence of paragraph 4(b) above.
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(b) As used herein:
(i) "License Fee" shall mean [***] :
(A) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to Merchandiser Product (other than High-End
Collectibles) sold through an Artist Store and with respect to High-End
Collectibles sold through the UBL Store;
(B) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to Merchandiser Product (other than High-End
Collectibles) sold through the UBL Store; and
(C) [***] of the Adjusted Gross Merchandiser
Product Revenue with respect to High-End Collectibles sold through an Artist
Store.
(ii) "Adjusted Gross Merchandiser Product Revenue" shall
mean [***].
(iii) "Deductible Amounts" shall mean all amounts paid
by ADNM pursuant to paragraph 3(d) above, third party fulfillment fees, third
party warehouse charges and third party related charges (e.g., box charges and
return processing fees); sales, use and value-added taxes; credit card and other
third party service fees; agent commissions; and any credits for returns,
cancellations and exchanges. Merchandiser shall have the right to approve the
amount of (A) third party fulfillment fees (but only if such fees are in excess
of the fees set forth on Exhibit D attached hereto, (B) the third party service
fees (other than credit card fees), and (C) agent commissions, provided that
once such approval is given with respect to a particular artist, ADNM will not
be obligated to obtain Merchandiser's approval of any other third party
fulfillment fees, third party service fees or agent commissions for such
Merchandiser Artist or any other Merchandiser Artist so long as such fees or
commissions, as the case my be, are not in excess of the fees and commissions
previously approved by Merchandiser. Notwithstanding anything to the contrary
contained herein, as between ADNM and Merchandiser, [***] shall be solely
responsible for all customer bad debts in respect of Merchandiser Product
shipped by ADNM (or its designee), including all associated Deductible Amounts.
(iv) "High-End Collectibles" means any single item of
Merchandiser Product sold pursuant to a Store Agreement (whether through the
applicable Artist Store or the UBL Store) for a retail price in excess of [***].
(c) For the avoidance of doubt, Merchandiser agrees and
acknowledges that Artist Product will be sold on the Artist Stores and that no
License Fee shall be payable to Merchandiser in respect of any Artist Product.
As used herein, "Artist Product" means all merchandise and other products sold
pursuant to a Store Agreement (whether through the applicable Artist Store or
the UBL Store) other than Merchandiser Product (e.g., records, concert tickets,
etc.). During the period Merchandiser has the Rights to a particular
Merchandiser Artist that is party to a Store Agreement, ADNM shall advise
Merchandiser of ADNM's intention to sell on the applicable Artist Store any
Artist Product (other than records and concert tickets) within a reasonable
period of time prior to the intended sale.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
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<PAGE> 9
9. ARTISTdirect Warrant: In further consideration for Merchandiser
entering into and fully performing its obligations undertaken by Merchandiser in
this Agreement and under the UBL Agreement, promptly following the execution
hereof, ADNM shall cause ARTISTdirect, LLC to grant to Merchandiser a warrant
substantially in the form of Exhibit E attached hereto in exchange for the
payment by Merchandiser to ARTISTdirect, LLC of one hundred dollars ($100.00).
10. Execution Payment: In consideration of the rights granted and other
covenants and agreements made by Merchandiser in this Agreement and in the UBL
Agreement, ADNM agrees to pay to Merchandiser, upon the complete execution of
both this Agreement and the UBL Agreement, a one-time, non-returnable,
non-recoupable fee of [***].
11. Accountings:
(a) ADNM shall compute the License Fee payable to Merchandiser
and render an accounting statement to Merchandiser within thirty (30) days after
March 31, June 30, September 30 and December 31 for the three-month period
preceding March 31, June 30, September 30 or December 31, as the case may be.
Each such statement shall include an itemized breakdown of the sources of the
applicable revenue, Deductible Amounts and all other reductions in computing the
License Fee and shall be accompanied by the payment of the amount of the License
Fees, if any, earned by Merchandiser during the accounting period to which the
statement relates. With respect to the last two (2) accounting periods before
the end of the Term, ADNM shall be entitled to withhold from payments otherwise
due reasonable reserves against anticipated returns, rebates, credits,
cancellations and exchanges related to the Winterland Store, provided that such
reserves shall consistent with the average amount of actual returns, rebates,
credits, cancellations and exchanges during the accounting period concerned, and
provided further that all such reserves shall be liquidated with the first
accounting period after the Term.
(b) Merchandiser or a certified public accountant on
Merchandiser's behalf may, at ADNM's offices and at Merchandiser's expense,
examine ADNM's books and records relevant to the calculation of the License Fee
solely for the purposes of verifying the accuracy of statements rendered by ADNM
to Merchandiser. Such books and records may be examined as aforesaid only (i)
during ADNM's normal business hours, (ii) upon reasonable notice to ADNM, and
(iii) within two years after the date a statement is due hereunder. Further,
Merchandiser shall not have the right to examine such books and records more
frequently than once in any twelve month period or more than once with respect
to any particular statement. Each statement shall be deemed final and binding
upon Merchandiser as an account stated and shall not be subject to any claim or
objection by Merchandiser (A) unless Merchandiser notifies ADNM of
Merchandiser's specific written objection to the applicable statement, stating
the basis thereof in reasonable detail within two (2) years after the date such
statement is due hereunder, and (B) unless, within said two (2)-year period,
Merchandiser make proper service of process upon ADNM in a suit instituted in a
court of proper jurisdiction.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
9
<PAGE> 10
12. Exclusivity:
(a) Insofar as ADNM is concerned, Merchandiser shall have the
right to sell and authorize others to sell merchandise containing a Merchandiser
Artist's Personal Identification over the Internet. However, during the Term,
Merchandiser shall not, without ADNM's consent, develop or maintain a web site,
or license or otherwise authorize any other web site provider to develop or
maintain a web site, that is identified solely with a single Merchandiser Artist
(e.g., a web site that is the "official" merchandise web site for a Merchandiser
Artist).
(b) Except with respect to collectibles and limited edition
items supplied by the Merchandiser Artist, records, and concert tickets, ADNM
agrees that, so long as Merchandiser has the Rights, ADNM shall not purchase
within the territory of Merchandiser's exclusivity merchandise bearing the
Personal Identification of a Merchandiser Artist from anyone other than
Merchandiser or a Sublicensee; provided that Merchandiser will consider in good
faith each request by ADNM and/or a Merchandiser Artist who is party to a Store
Agreement to manufacture, or cause the manufacture by a Sublicensee, of
merchandise not otherwise manufactured by Merchandiser or a Sublicensee. If
Merchandiser is unable to timely supply sufficient quantities of any item of
merchandise manufactured by or under the control of Merchandiser (it being
understood that merchandise manufactured by a Sublicensee shall not be deemed
manufactured under the control of Merchandiser) for sixty (60) consecutive days
then, without limiting any other right or remedy available to ADNM, ADNM shall
be entitled to make arrangements with another manufacturer for the manufacture
of such merchandise.
13. Tour Merchandising and Sublicensing Rights: During the Term, ADNM
agrees that it and its affiliates shall refrain from seeking from any artist (a)
tour merchandising rights, or (b) the right to sublicense merchandising rights
to third parties, or (c) the right to manufacture merchandise containing such
artist's Personal Identification.
14. Representations and Warranties; Indemnity:
(a) Each party hereto represents and warrants that: (i) it has
the full right, power and authority to enter into and to perform this Agreement;
(ii) it is not under any restriction or obligation that may or will impair such
party's full performance of this Agreement; and (iii) it shall not at any time
do or authorize any person or entity to do anything inconsistent with, or
anything that might diminish, impair or interfere with any of the other party's
rights hereunder.
(b) Merchandiser agrees to indemnify and hold ADNM and its
members, employees, attorneys, agents, successors, affiliates, assigns and
licensees harmless against any claim, liability, cost and expenses (including
attorneys' and accountants' fees reasonably incurred) in connection with any
breach or alleged breach of this Agreement by Merchandiser. In this regard, ADNM
shall not settle any claim without first notifying Merchandiser of the terms of
any proposed settlement and obtaining Merchandiser's consent thereto.
(c) ADNM agrees to indemnify and hold Merchandiser and its
members, employees, attorneys, agents, successors, affiliates, assigns and
licensees harmless against any claim, liability, cost and expenses (including
attorneys' and accountants' fees reasonably incurred) in connection with any
breach or alleged breach of this Agreement by ADNM. In this
10
<PAGE> 11
regard, Merchandiser shall not settle any claim without first notifying ADNM of
the terms of any proposed settlement and obtaining ADNM's consent thereto.
(d) Merchandiser acknowledges that ADNM is making no
representations and warranties concerning anticipated success of the Stores or
the Winterland Store, the amount of compensation payable to Merchandiser
hereunder, and/or the current or future value of ADNM or the warrants described
in paragraph 9 above. Likewise, ADNM acknowledges that Merchandiser is making no
representations and warranties concerning anticipated success of the Stores or
the Winterland Stores or the amount of compensation payable to ADNM with respect
thereto.
15. [***]
16. Notices; Approvals:
(a) All notices and payments to either party hereto shall be
sent to such party's address first mentioned herein, or such other address as a
party hereto may hereafter designate by notice to the other. All notices sent
under this Agreement must be in writing to be effective, and must be sent by a
third party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or by
facsimile provided receipt is confirmed by telephone call to the recipient. The
date of personal delivery or faxing, or the date of delivery to a telegraph
office, as the case may be, of any such notice shall be deemed the date of the
giving thereof; and the date two (2) days following deposit with any air courier
service, or five (5) days following deposit with the United States Postal
Service, of any such notice shall be deemed the date of the giving thereof
(except, with respect to notices of change of address, the date of which will be
the date of receipt by the receiving party). Until ADNM notifies Merchandiser
otherwise, a copy of all notices hereunder to ADNM shall be simultaneously sent
as aforesaid to Lenard & Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los
Angeles, CA 90067; Attention: Allen D. Lenard, Esq.
(b) No failure by a party hereto to perform any of its
obligations hereunder shall be deemed a breach of this Agreement, unless the
party claiming a breach has given the other party hereto notice of such alleged
breach in reasonable detail and such alleged breach is not cured within fifteen
(15) business days [five (5) business days for non-payments] after the giving of
such notice, provided that if it is not reasonably possible to cure such breach
within such time period, then such failure shall not be deemed a breach if
within such period such party commences the curing of such breach and cures such
breach within a reasonable period of time thereafter. The foregoing provisions
of this paragraph shall not delay or prohibit either party from seeking and
obtaining injunctive and other equitable relief.
(c) No consent or approval under this Agreement shall be
unreasonably withheld or delayed. With respect to consents and approvals of
Merchandiser required under this Agreement, ADNM may elect to request such
consent by notice to Merchandiser. If Merchandiser does not respond to such
notice within ten (10) business days thereafter, ADNM may give Merchandiser a
second notice making such request, and Merchandiser's consent or
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
11
<PAGE> 12
approval shall be deemed granted unless Merchandiser notifies ADNM to the
contrary, stating in reasonable detail the basis thereof, within five (5)
business days after such second notice.
17. Miscellaneous:
(a) All references to "this Agreement," "hereof," "herein" and
words of similar connotation include all exhibits attached hereto, unless
specified otherwise. This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with respect to the
subject matter hereof. The parties acknowledge and agree that neither party
hereto has made any representations or promises in connection with this
Agreement or the subject matter hereof not contained herein. Nothing in this
Agreement shall be construed to require the commission of any act contrary to
law, and wherever there is a conflict between any provisions of this Agreement
and any statute, law, ordinance, order or regulation contrary to which the
parties hereto have no legal right to contract, such statute, law, ordinance,
order or regulation shall prevail; provided that, in such event, (a) the
provision of this Agreement so affected shall be limited only to the extent
necessary to permit the compliance with the minimum legal requirements, (b) no
other provisions of this Agreement shall be affected thereby, and (c) all such
other provisions shall remain in full force and effect. The parties hereto shall
negotiate in good faith to replace any invalid, illegal or unenforceable
provision (the "Invalid Provision") with a valid provision, the effect of which
comes as close as possible to that of the Invalid Provision. This Agreement
cannot be canceled, modified, amended or waived, in part or in full, in any
manner except by an instrument in writing signed by the party to be charged. No
waiver by either party, whether expressed or implied, of any provision of this
Agreement or default hereunder shall affect such party's right to thereafter
enforce such provision or to exercise the right or remedy set forth in this
Agreement in the event of any other default, whether or not similar. Words in
the singular number shall include the plural, and vice versa. Whenever examples
are used in this Agreement with the words "including," "for example," "e.g.,"
"such as," "etc." or any derivation thereof, such examples are intended to be
illustrative and not in limitation thereof. The paragraph headings herein are
used solely for convenience and shall not be used in the interpretation or
construction of this Agreement.
(b) In entering into this Agreement and providing services
pursuant hereto, Merchandiser and ADNM each have and shall have the status of
independent contractors. Nothing herein contained shall contemplate or
constitute either party being an agent or employee of the other party, and
nothing herein shall constitute a partnership, joint venture or fiduciary
relationship between the parties.
(c) Neither party hereto shall, without the prior written
consent of the other party (not to be unreasonably withheld), assign this
Agreement, in whole or in part, to any person or entity other than a subsidiary,
affiliated or controlling entity, or to any person or entity owning or acquiring
a substantial portion of the stock or assets of such party hereto.
(d) This Agreement shall be deemed to have been entered into in
the State of California and the validity, interpretation and legal affect of
this Agreement shall be governed by the laws of the State of California
applicable to contracts entered into and performed entirely
12
<PAGE> 13
within the State of California. The courts located in the County of Los Angeles,
California (state and federal), only, will have jurisdiction of any controversy
regarding this Agreement; any action or other proceeding which involves such a
controversy will be brought in those courts, in California and not elsewhere.
18. (a) Each party to this Agreement expressly undertakes to retain in
confidence, and to require and cause its subsidiaries and affiliates and its and
their respective employees, contractors and agents to retain in confidence, all
information and know how transmitted to such party (the "Receiving Party") (i)
which the disclosing party hereunder (the "Disclosing Party") has identified in
writing as being proprietary and/or confidential or (ii) which the Receiving
Party reasonably should know, based upon the nature of the information being
disclosed, ought to be treated as confidential (collectively "Confidential
Information"). The Receiving Party will make no use of such Confidential
Information except as expressly authorized under this Agreement. Either party
may, however, disclose Confidential Information if required by law or legal
process, provided such party shall undertake to give the other reasonable notice
prior to such disclosure and shall comply with any applicable protective order
or equivalent.
(b) ADNM hereby specifically acknowledges and agrees that the terms
of the Rights applicable to each Merchandiser Artist constitute Confidential
Information of Merchandiser under this Agreement.
(c) Both parties acknowledge that unauthorized disclosure or use of
Confidential Information could cause irreparable harm and significant injury
which may be difficult to ascertain. Accordingly, both parties agree that the
aggrieved party will have the right to seek and obtain injunctive relief from
breaches of this paragraph 18, in addition to any other rights and remedies it
may have. Both parties agree that each has and shall retain ownership rights to
its own Confidential Information, and that upon expiration or termination of the
Term each party shall return and shall not retain the Confidential Information
of the other party.
(d) Notwithstanding anything in this paragraph 18 to the contrary,
Confidential Information shall not be construed to mean any information which
the Receiving Party can show: (i) is, or subsequently becomes, publicly
available other than as a result of the Receiving Party's breach of any
obligation owed to the Disclosing Party or a third party; (ii) became known to
the Receiving Party prior to the Disclosing Party's disclosure of such
information to the Receiving Party, (iii) became known to the Receiving Party
from a source other than the Disclosing Party other than as a result of such
source's breach of an obligation of confidentiality owed to the Disclosing
Party, (iv) is independently developed by the Receiving Party, or (v) has been
authorized for disclosure by the Disclosing Party.
(e) The provisions of this paragraph 18 shall survive termination
or expiration of the Term.
ARTISTdirect New Media, LLC Winterland Concessions Company,
a California corporation, doing
business as
"Winterland"
By: /s/ Marc P. Geiger
---------------------------------
(an authorized signatory)
13
<PAGE> 14
By: /s/ [Illegible]
---------------------------------
(an authorized signatory)
14
<PAGE> 15
SCHEDULE A
EXCLUDED ARTISTS
Backstreet Boys
Led Zeppelin
Marilyn Manson
Pantera
Primus
Rob Zombie
Slayer
Stabbing Westward
Tom Petty
15
<PAGE> 16
EXHIBIT A
MERCHANDISER'S ARTISTS
<TABLE>
<CAPTION>
Term of
Artist Agreement Territory Merchandiser's Rights
------ --------- --------- ---------------------
<S> <C> <C> <C>
</TABLE>
- ----------
* Artists with whom ARTISTdirect Stores, LLC desires to enter a Store Agreement.
x Artists for whom Winterland does not have the Rights.
16
<PAGE> 17
EXHIBIT B
ONLINE STORE AGREEMENT
THIS AGREEMENT, dated as of ____________, 19__, by and between ARTISTdirect New
Media, LLC ("ADNM"), 17835 Ventura Blvd., Suite 310, Encino, CA 91316, and
[Company Name] ("you"), c/o __________________________ is being entered into in
consideration of the mutual benefits and covenants contained in this Agreement.
1. Purpose: Subject to your approval rights in this Agreement, ADNM will
develop, maintain and operate an Internet web site for you relating to the
musical group professionally known as "[ArtistName]" ("Artist") and the members
of Artist, to be known as "The Official [ArtistName] Superstore" (the "Store").
The Store will provide Internet and other online access for online and offline
distribution of products and services ("Product"). It is intended that the
Product will include records, digital downloads (subject to the consent of
Artist's record company), merchandise, tickets, tour memorabilia, collectible
items and special or limited edition items not available from any other source,
and special bundled packages including any or all of the foregoing items.
2. Term: The term of this Agreement (the "Term") shall commence on the date set
forth above and shall extend for an initial contract period ending three (3)
years after the official launch of the Store. After the initial contract period,
the Term shall automatically continue for additional one (1) year contract
periods, subject to the following sentence. At any time between ninety (90) and
thirty (30) days prior to the expiration of any contract period of the Term,
either party may by notice to the other terminate the Term effective as of the
end of the then-current contract period.
3. Merchandiser Agreements.
(a) You are presently party to an agreement (the "Artist/Merchandiser
Agreement") with Winterland Concessions Company ("Merchandiser") pursuant to
which you have granted Merchandiser the exclusive right to manufacture (and
license the manufacture of) merchandise bearing the name, likenesses,
biographical material and other personal identification of Artist (collectively,
"Personal Identification") for sale through retail channels, including the right
to sell such merchandise to retailers who solely or primarily sell merchandise
via the Internet (the "Rights").
(b) ADNM represents and warrants that it is party to an agreement with
Merchandiser pursuant to which Merchandiser has (i) granted to ADNM any consents
and licenses that may be required from Merchandiser as a result of the
Artist/Merchandiser Agreement in connection with the sale of Product hereunder,
and (ii) agreed to supply (or cause the supply of) merchandise on a consignment
basis to ADNM for resale on the Store (the "ADNM/Merchandiser Agreement"). You
acknowledge that certain Product items may be manufactured by or under the
control of Merchandiser's sublicensees, and that Merchandiser may or may not be
able to offer such Product items to ADNM on a consignment basis. All Product
supplied to ADNM by
1
<PAGE> 18
Merchandiser (or its sublicensees) on a consignment basis is sometimes referred
to herein as "Merchandiser Product"; all other Product is sometimes referred to
herein as "Artist Product."
(c) If you (or Artist) enter into any agreement during the Term (of this
Agreement) pursuant to which you grant the Rights to any third party, you shall
cause such third party to grant to ADNM any consents and licenses that may be
required from such third party in connection with the sales of Product
hereunder. For the avoidance of doubt, no termination or expiration of the
Artist/Merchandiser Agreement or of the ADNM/Merchandiser Agreement shall affect
the Term (of this Agreement) or the rights granted to ADNM hereunder.
Accordingly, the only effect of either such termination or expiration will be
that the terms of this Agreement relating to Merchandiser Product will no longer
apply, and the terms of this Agreement relating to Artist Product will
thereafter apply to all Product hereunder.
4. Development; Hosting; Customer Service:
(a) ADNM will design and develop the Store, including the source code,
the Product catalog, and the commerce system, and will be solely responsible for
the costs of such design and development. You shall have the right to approve
the design of the Store, including its "look and feel." The parties hereto agree
to use commercially reasonable best efforts (i) to cause the beta version of the
Store to be completed within 60 days after the complete execution of this
Agreement, and (ii) to officially launch the Store within 90 days after such
execution.
(b) During the Term, ADNM will host (i.e., provide the server for) and
maintain the Store, including by providing periodic source code programming
updates and improvements in accordance with your reasonable requests. In this
regard, ADNM will use its commercially reasonable best efforts to correct any
material "bug" or defect as soon as reasonably possible after ADNM becomes aware
of such material "bug" or defect.
(c) ADNM shall handle all customer orders and inquiries, provide all
necessary credit card accounting and processing services and develop payment,
delivery and refund policies. To effect the foregoing, ADNM shall also provide
an on-line and toll-free telephone service center that will take orders and
respond to customer inquiries. On-line inquiries will be responded to within 24
hours of receipt and the telephone service will be operational Mondays through
Fridays from 9:00 a.m. to 7:00 p.m. Pacific Time (excluding holidays) and will
enable customers who prefer not to place orders on-line to place orders by
facsimile or telephone.
(d) Unless you and ADNM agree otherwise in writing, ADNM (or its
designee) shall process orders received from the Store and arrange to have the
ordered Product shipped to the customer (subject to Product availability).
(e) Within a reasonable time after your written request during the Term,
ADNM will, without charge or cost to you, design and develop a non-commerce
Internet web site solely related to Artist (the "Artist Site"), including the
source code, or, if the Artist Site already exists, ADNM will redesign and
- ----------
2
<PAGE> 19
redevelop it for you. ADNM will be solely responsible for the costs of such
design and development. You shall have the right to approve the design of the
Artist Site, including its "look and feel." During the Term, ADNM will host and
maintain the Artist Site, including by providing periodic source code
programming updates and improvements in accordance with your reasonable
requests.
5. Product Supply and Inventory:
(a) Product Selection: You will have the right to approve the Products
that are to be sold through the Store and the retail price of each Product item.
(b) Merchandiser Product: ADNM will be responsible for purchasing all
Merchandiser Product from Merchandiser and paying all related costs (including
directly associated freight and insurance costs) ("Product Costs"). As between
you and ADNM, ADNM will be solely responsible for all inventory of Merchandiser
Product.
(c) Artist Product:
(i) You and ADNM agree to cooperate with each other and use
their commercially reasonable best efforts to make the necessary arrangements
with the manufacturers, distributors and providers manufacturers, distributors
and providers of Artist Product ("Suppliers"), on mutually acceptable terms, to
ensure the timely supply of Artist Product in sufficient quantities to fulfill
Store customer orders. You will be responsible for purchasing all Artist Product
from the Suppliers and paying all related Product Costs. If ADNM should
nevertheless pay any Product Costs on your behalf (which ADNM is not obligated
to do), all such Product Costs will be deducted from any and all monies
otherwise payable to you hereunder and, to the extent ADNM is at any time unable
to do so, you agree to promptly reimburse ADNM for the excess upon demand. In
order to assist you with regard to the foregoing, ADNM will provide inventory
management services, taking into account such inventory levels as you and ADNM
may have mutually approved.
(ii) As between you and ADNM, you shall own and be solely
responsible for all Artist Product inventory. However, ADNM shall maintain (or
cause the applicable fulfillment center to maintain) at all times during the
Term insurance to protect you and ADNM from losses related to Artist Product
inventory damaged or otherwise lost while in the fulfillment center's
possession. The coverage terms of the insurance policy currently in effect are
set forth on Exhibit 1 attached to this Agreement.
(d) Upon the expiration of the Term, all Artist Product inventory for
which you have paid the Product Costs shall be shipped, at your sole cost and
expense, to a location designated or approved by you, which inventory shall be
free and clear of any encumbrances by ADNM or any third party deriving rights
through ADNM.
6. Product Sales and Store Revenues:
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<PAGE> 20
(a) Merchandiser Product: Attached hereto as Exhibit 2 is an extract of
the ADNM/Merchandiser Agreement setting forth the license fee payable by ADNM to
Merchandiser in respect of Merchandiser Product sold hereunder. Company
acknowledges and agrees that it shall look solely to Merchandiser, and not to
ADNM, with respect to all monies due Company and/or Artist in respect of
Merchandiser Product sold hereunder.
(b) Artist Product:
(i) Upon ADNM's receipt of a verified order for a particular
item of Artist Product, ADNM shall purchase such item of Product from you. Upon
such purchase, title to such Product shall pass to ADNM and, as between you and
ADNM, ADNM will thereafter be responsible for the inventory of such Product
item.
(ii) ADNM shall pay you a purchase price equal to [***]of the
"Gross Artist Product Revenue," which means the amount actually received by ADNM
in respect of Artist Product sold through the Store, less all related Deductible
Amounts. The term "Deductible Amounts" means all shipping and handling charges;
third party fulfillment fees and related charges; sales, use and value-added
taxes; credit card and other third party service fees; and any credits for
returns, rebates, cancellations and exchanges. A schedule setting forth the
fulfillment fees charged by the fulfillment center as of the date hereof is set
forth on Exhibit 1 attached hereto.
(iii) Notwithstanding anything to the contrary contained herein,
as between ADNM and you, [***] shall be solely responsible for all Product Costs
and Deductible Amounts associated with customer bad debts in respect of Product
hereunder shipped by ADNM (or its designee).
(c) Records: Notwithstanding paragraphs 5(c) and 6(b) above,
phonorecords that are supplied by ADNM's designated fulfillment center for sale
through the Store ("Records") shall be purchased by ADNM directly from such
fulfillment center, and ADNM (or the fulfillment center) shall be solely
responsible for all related Product Costs (subject to the next sentence) and
inventory. ADNM shall pay you [***] of the "Net Record Revenue," which means
all Gross Record Revenue less all Product Costs incurred for Records. The term
"Gross Record Revenue" means the amount actually received by ADNM in respect of
Records sold through the Store, less all related Deductible Amounts. For the
avoidance of doubt, if you elect to supply phonorecords directly to ADNM for
sale through the Store, such phonorecords shall be subject to paragraphs 5(c)
and 6(b) above rather than this paragraph 6(c).
(d) UBL Store: To the extent any merchandise offered for sale on an
Internet on-line store (the "UBL Store") operated by a company affiliated with
ADNM (the "UBL Affiliate") is readily available in the Store inventory, ADNM
agrees to cause the UBL Affiliate to utilize such inventory to fulfill orders
for such merchandise placed on the UBL Store. ADNM shall account to you pursuant
to the terms of this Agreement with respect to all such Artist Product sold
through the UBL Store, except that ADNM (or the UBL Affiliate) shall purchase
such Artist Product for a price equal to [***] of the applicable Gross Artist
Product Revenue, rather than the price set forth in paragraph 6(b)(ii) above.
Such Artist Product Revenue shall be computed "at the source" (i.e., based upon
the amount actually received by the UBL Affiliate, rather than the amount
actually received by ADNM), and shall be deemed received by ADNM for purposes of
paragraph 6(g) below within 30 days after it is received by the UBL Affiliate.
For the avoidance of doubt, no merchandise or other products (including Records)
that are obtained by the UBL Affiliate from
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
4
<PAGE> 21
third party sources (i.e., other than from the Store's inventory) and sold on
the UBL Store shall be deemed to constitute Product subject to this Agreement.
(e) Database: As between ADNM and you, you will own the customer
database as specifically identified with the Store (the "Store Database"). ADNM
will maintain and update the Store Database during the Term, including by
inputting additional names and associated data compiled from contests and
similar activities of the Store. ADNM will also input into the Store Database
any supplemental data about the persons contained in the Store Database (such as
demographic and lifestyle information) that may be included, in other databases
owned, controlled or accessed by ADNM or the UBL Affiliate (collectively, the
"ADNM Database"), and may also seek to obtain such supplemental information
through data sharing arrangements with third parties. ADNM will attempt to
develop revenue sources in respect of the Store Database during the Term,
subject to your consent in each instance, and shall pay you [***] of the
associated "Gross Database Revenue" (i.e., the amount actually received by ADNM
in respect of sales and other exploitations of the Store Database, less all
related Deductible Amounts). ADNM will make the ADNM Database available for
mutually approved Store promotions during the Term, in exchange for which you
agree that ADNM may supplement the ADNM Database with names and associated data
(but specifically excluding any references to you, Artist or the Store) derived
from the Store Database. Neither you nor Artist shall have any interest in and
to the ADNM Database or any revenues that may be generated in respect thereof.
(f) Other Revenues: ADNM shall pay you [***] of the "Gross Exploitation
Revenue," which means the amount actually received by ADNM in respect of
activities contemplated in this Agreement and not set forth above in this
paragraph 6, including, for example, income in respect of advertising contained
on the Store (e.g., hyperlinks to, and banners and other advertisements for,
other Internet web sites), less all agent commissions and other related
Deductible Amounts. You shall have the right to approve all such advertising and
other activities.
(g) Accounting: The term "Gross Income" means, individually and
collectively, Gross Artist Product Revenue, Gross Record Revenue, Gross Database
Revenue and Gross Exploitation Revenue. ADNM shall compute your share of Gross
Income and render statements thereof to you within 60 days after March 31, June
30, September 30 and December 31 for the preceding three-month period. ADNM
shall deduct from your share of Gross Income all chargeable amounts under this
Agreement. Each such statement shall include an itemized breakdown of the
sources of the applicable revenue and shall be accompanied by the payment of the
amount of monies, if any, earned by you during the accounting period to which
the statement relates. ADNM shall be entitled from time to time to withhold from
payments otherwise due reasonable reserves against anticipated returns, rebates,
credits, cancellations and exchanges, provided that such reserves shall be
liquidated within two accounting periods following their establishment. You or a
certified public accountant on your behalf may, at ADNM's offices and at your
expense, examine ADNM's books and records relevant to the calculation of your
share of Gross Income solely for the purposes of verifying the accuracy of
statements rendered by ADNM to you. Such books and records may be examined as
aforesaid only (i) during ADNM's normal business hours, (ii) upon reasonable
notice to ADNM, and (iii) within two years after the date a statement is
rendered hereunder. Further, you shall not have the right to examine such books
and records more frequently than once in any twelve month period or more than
once with respect to any particular statement. Each statement shall be deemed
final and binding upon you as an account stated and shall not be subject to any
claim or objection by you (A) unless you notify ADNM of
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
5
<PAGE> 22
your specific written objection to the applicable statement, stating the basis
thereof in reasonable detail within two years after the date such statement is
rendered hereunder, and (B) unless, within said two year period, you make proper
service of process upon ADNM in a suit instituted in a court of proper
jurisdiction.
7. Marketing.
(a) During the Term, ADNM shall cause the Ultimate Band List Internet
web site, located at www.ubl.com (the "UBL"), to contain a featured hyperlink
to, and prominently placed advertising for, the Store. Similarly, you agree that
ADNM may include on the Store a featured hyperlink to, and prominently placed
advertising for the UBL at no charge. Other marketing activities in respect of
the Store shall be subject to your approval, and may involve the development of
strategic relationships with, for example, other Internet web sites and/or
Artist's record company to create Store hyperlinks. Any third party marketing
costs incurred with your approval shall be deducted from any monies otherwise
payable to you hereunder (except to the extent deducted from monies otherwise
payable by ADNM to Merchandiser, it being understood that all marketing costs
shall be subject to allocation by ADNM, in ADNM's reasonable business judgment,
between you and Merchandiser taking into account whether the applicable costs
related to Merchandiser Product and/or Artist Product).
(b) You agree to use your commercially reasonable efforts to:
(i) Keep ADNM apprised of Artist's professional activities
(e.g., touring and recording) and provide ADNM reasonable access to Artist's
professional relationships (e.g., with tour promoters and record labels);
(ii) Cause the URL of the Store to be included on all
advertisements for Artist records released during the Term or for concerts to be
performed during the Term, and on the liner notes of Artist's records and
concert programs;
(iii) Provide ADNM with a minimum of [***] complimentary tickets
to each concert held by Artist during the Term to be given away in connection
with Store promotions;
(iv) Cause a minimum of [***] special or limited edition
Products to be the manufactured and supplied during the course of the Term for
sale exclusively on the Store, and not through any other source;
(v) Cause a minimum of [***] unique and/or collectible items of
Product to be sold through auctions conducted auctioned on the Store;
(vi) Cause Artist to autograph records from time to time for
sale or promotional use on the Store, provided Artist shall not be required to
autograph more than [***] records in the aggregate during the Term;
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
6
<PAGE> 23
(vii) Cause on-line events and/or sites featuring Artist or any
member of Artist (e.g., the official Internet web site of Artist's fan club, any
official Internet web site relating to any member of Artist, any on-line "chats"
featuring Artist or any member(s) of Artist, cybercasts of Artist's live
performances, interviews or other audiovisual programs featuring Artist or any
member(s) of Artist) to prominently feature, on both the front and main event
page(s), a hyperlink to, and banner advertising for, the Store;
(viii) Subject to Artist's other professional commitments, cause
Artist to be reasonably available during the Term for on-line "chats" hosted by
the Store.
8. Ownership; Grant of Rights; Post-Term Rights:
(a) Artist Content: As between you and ADNM, any and all artwork,
trademarks, logos, graphics, video, sound recordings, musical compositions,
text, data and other materials supplied by you to ADNM in connection with this
Agreement, as well as the URL and the domain name or names assigned to the Store
and/or the Artist Site (collectively, the "Artist Content"), shall remain your
sole and exclusive property. You hereby grant to ADNM during the Term and
throughout the universe (the "Territory") a non-exclusive, royalty-free license
to use, copy, modify (with your prior consent), distribute, publicly perform and
display and otherwise exploit the Artist Content in connection with the
development, maintenance and operation of the Store and/or the Artist Site and
the advertising and promotion of the Store and/or the Artist Site and of ADNM in
connection with the Store and/or the Artist Site.
(b) Developed Content: As between you and ADNM, any and all text,
graphics, audio, video, artwork and designs created by ADNM or its employees or
agents during the Term for use solely on the Store and/or the Artist Site,
including any additions to or modifications of Artist Content made by ADNM or
its employees or agents, (collectively, the "Developed Content"), shall be your
sole and exclusive property. All Developed Content shall be deemed included in
the license granted by you under paragraph 8(a) above.
(c) ADNM Content: As between you and ADNM, any and all commerce
technology, HTML formatting code, source and object code, programming code and
software, as well as all text, graphics, audio, video, artwork and designs
provided by ADNM in connection with this Agreement which does not constitute
Developed Content (collectively, the "ADNM Content") shall be ADNM's sole and
exclusive property.
(d) Post-Term Rights: Upon expiration of the Term, you shall continue to
have the ownership of or right to use, as applicable, the Artist Content and
Developed Content in accordance with the terms of this paragraph 8 free and
clear of any claim or encumbrance by ADNM or any third party deriving rights
through ADNM. Upon your request after the expiration of the Term, ADNM will
negotiate with you in good faith to: (i) license certain ADNM Content to you;
(ii) assist you in the transition of the Store and the Artist Site from any
third-party vendors or licensors used by ADNM to any entity or entities of your
choice to provide the same functions for you; and (iii) provide you with
updates, hosting, maintenance or support with respect to the Store or the Artist
Site. For the avoidance of doubt, you shall not be entitled to use any name,
trademark or service mark of ADNM or its affiliates in any manner
7
<PAGE> 24
whatsoever without obtaining the prior written consent of ADNM or the applicable
affiliate of ADNM.
(e) Artist Identification: You hereby grant to ADNM the non-exclusive
right during the Term throughout the Territory to use the names of Artist and
Artist's tours, and the names and approved photographs and other approved
likenesses of the members of Artist, and any trademark or service mark owned by
you, Artist or any of your respective Affiliates ("Artist Identification"),
solely on the Store and/or the Artist Site and in advertisements and promotions
of the Store and for the Artist Site, and of ADNM in connection with the Store
and/or the Artist Site. In this regard, at no cost to ADNM, you agree to provide
ADNM with all photographs, graphics, logos and similar items reasonably required
by ADNM to create the Store and/or the Artist Site, and readily available to you
promptly following ADNM's request. For the avoidance of doubt, ADNM shall not
use the Artist Identification in any manner whatsoever after the Term without
obtaining your prior written consent.
(f) Inducement Terms and Guarantee: You shall cause the members of
Artist to execute the Inducement Terms and Guarantee attached to this Agreement
as Exhibit 3 concurrently with the execution of this Agreement.
9. Third Party Clearances: You shall obtain all necessary third-party clearances
in connection with all Artist Content and Product (including the payment of any
associated fees, royalties and other costs). Without limiting the generality of
the foregoing, with respect to all uses of musical compositions, sound
recordings and audiovisual productions in connection with the Store, you agree
to grant or cause Artist and/or any applicable third parties (e.g., music
publishers, record companies and performing rights societies) to grant to ADNM
any and all required rights. However, ADNM shall not use any particular sound
recording, musical composition or audiovisual production on the Store or the
Artist Site, or provide access to any feature or service on the Store or the
Artist Site which entails the public performance of music (e.g., live audio
streaming), except at your request or with your approval. If ADNM nevertheless
shall pay, with your approval, any third party clearance cost relating to the
Store and/or the Artist Site (which ADNM is not obligated to do), all such
amounts shall be deducted from any and all monies otherwise payable to you under
this Agreement (except to the extent deducted from monies otherwise payable by
ADNM to Merchandiser, it being understood that such costs shall be subject to
allocation by ADNM, in ADNM's reasonable business judgment, between you and
Merchandiser taking into account whether the applicable costs related to
Merchandiser Product and/or Artist Product).
10. Representations and Warranties: Indemnity:
(a) You represent and warrant as follows:
(i) You have the full right, power and authority to enter into
and to perform this Agreement and to grant to ADNM all rights and licenses set
forth in this Agreement. Neither you nor Artist are under any restriction or
obligation which may or will impair your full performance of this Agreement. No
Artist Content or the exploitation or use thereof or the sale of any Product
shall violate or infringe upon any common law or statutory rights of any party,
8
<PAGE> 25
including contractual rights, copyrights, and rights of privacy or publicity or
shall defame any person or entity; and
(ii) ADNM shall have the exclusive right during the Term
throughout the Territory to develop and operate the only "official" Artist
on-line store (i.e., the only Internet web site authorized by Artist with
respect to products relating primarily to Artist and/or any member(s) of Artist
(acting in the capacity of Artist members, rather than in connection with any
member's professional endeavors unrelated to Artist). Accordingly, during the
Term, neither you, Artist nor any member of Artist shall grant any other person
or entity the right to develop and/or operate a web site that (A) pertains
primarily to Artist (B) sells products featuring the Artist identification and
(C) is promoted or otherwise officially sanctioned by Artist (e.g., by featuring
a hyperlink to such web site on the Artist Site).
(b) ADNM represents and warrants as follows: It has the full right,
power and authority to enter into and to perform this Agreement and to grant to
you all rights and licenses set forth in this agreement. No ADNM Content or
Developed Content, or the exploitation or use thereof in accordance with the
terms of this Agreement shall violate or infringe upon any common law or
statutory rights of any party, including contractual rights, copyrights, and
rights of privacy or publicity.
(c) You agree to indemnify and hold ADNM and its members, employees,
attorneys, agents, successors, assigns and licensees harmless against any claim,
liability, cost and expenses (including attorneys' and accountants' fees
reasonably incurred) in connection with any breach or alleged breach of this
Agreement by you. In this regard, ADNM shall not settle any claim without first
notifying you of the terms of any proposed settlement and obtaining your consent
thereto, provided you post within ten days after such notice, a bond,
satisfactory to ADNM in its reasonable discretion, to assure ADNM of
reimbursement for all damages, liabilities, costs and expenses (including legal
expenses and counsel fees reasonably incurred) that ADNM, in its reasonable
business judgment, incur as a result of such a claim. If you fail to post such a
bond, you shall be deemed to have consented to ADNM's settlement. You shall,
upon demand, pay the person or entity being indemnified hereunder for any
payment made or required to be made by such person or entity at any time
(including after the Term) in respect of any liability, damage, or expense to
which the foregoing indemnity relates. Without waiving any right or remedy
available to ADNM, if any such claim is made, ADNM shall have the right to
withhold monies otherwise payable to you under this Agreement in an amount
reasonably related to such claim and to deduct therefrom payments required under
this paragraph. ADNM shall not withhold monies otherwise payable to you after
you post a bond meeting the above-described conditions.
(d) (i) You acknowledge that ADNM is making no representations and
warranties concerning the anticipated success of the Store, the Artist Site
and/or the amount of compensation payable to you hereunder. You warrant,
represent and agree that neither you nor Artist nor any third party shall make
any claim, nor shall any liability be imposed upon ADNM based upon any claim,
that more sales could have been made or better business could have been done in
connection with the Store and/or the Artist Site than was actually made or done.
Except as may be specifically set forth herein, ADNM disclaims all other
warranties, whether express, implied or statutory, including the implied
warranties of merchantability and fitness for a
9
<PAGE> 26
particular purpose. ADNM does not warrant that the Store, the Artist Site and/or
services herein will be error-free or without interruption.
(ii) You agree that ADNM shall not be liable for any special,
consequential, incidental or indirect damages in connection with or arising out
of this Agreement, however caused, under any theory of liability, including (i)
any loss of profits or loss of revenue resulting from the use of ADNM's services
and/or ADNM Content even if ADNM has been advised of the possibility thereof,
and/or (ii) any loss of data resulting from delays, non-deliveries,
mis-deliveries or service interruptions caused by either party.
11. Notices; Approvals:
(a) All notices, accounting statements and payments to either party
shall be sent to such party's address first mentioned in this Agreement, or such
other address as a party to this Agreement may hereafter designate by notice to
the other. All notices sent under this Agreement must be in writing to be
effective, and, except for statements and payments, must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until ADNM notifies you otherwise, a copy of all notices
hereunder to ADNM shall be simultaneously sent as aforesaid to Lenard & Gonzalez
LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067; Attention:
Allen D. Lenard, Esq.
(b) No failure by any party to this Agreement to perform any of its
obligations hereunder shall be deemed a breach of this Agreement, unless the
other party has given notice of such alleged breach in reasonable detail and
such alleged breach is not cured within 30 days after the giving of such notice.
(c) No consent or approval under this Agreement shall be unreasonably
withheld or delayed. ADNM may elect to request a consent or approval by notice
to you, or may send you a notice reflecting the availability of a test site of
the Store embodying the materials for which approval is sought. In each
instance, your consent or approval shall be deemed granted unless you notify
ADNM to the contrary within five (5) business days after ADNM's sends the
aforesaid notice to you. No inadvertent failure by ADNM to obtain your consent
or approval shall be deemed a breach by ADNM of this Agreement, provided ADNM
shall use reasonable efforts to rectify such failure on a prospective basis
following receipt of notice from you specifying such failure. Notwithstanding
the provisions of paragraph 11(a) above, any notice described in this paragraph
11(c) may be sent by telecopier or electronic mail.
12. Miscellaneous:
(a) This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof,
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with
10
<PAGE> 27
respect to the subject matter hereof. The parties acknowledge and agree that
neither party hereto has made any representations or promises in connection with
this Agreement or the subject matter hereof not contained herein. The parties
hereto shall negotiate in good faith to replace any invalid, illegal or
unenforceable provision (the "Invalid Provision") with a valid provision, the
effect of which comes as close as possible to that of the Invalid Provision.
This Agreement cannot be canceled, modified, amended or waived, in part or in
full, in any manner except by an instrument in writing signed by the party to be
charged. No waiver by either party hereto, whether expressed or implied, of any
provision of this Agreement or default hereunder shall affect such party's right
to thereafter enforce such provision or to exercise the right or remedy set
forth in this Agreement in the event of any other default, whether or not
similar. Words in the singular number shall include the plural, and vice versa.
Whenever examples are used in this Agreement with the words "including," `for
example," "e.g.," "such as," "etc." or any derivation thereof, such examples are
intended to be illustrative and not in limitation thereof. The paragraph
headings herein are used solely for convenience and shall not be used in the
interpretation or construction of this Agreement. All exhibits attached hereto
are incorporated into this Agreement by reference.
(b) In entering into this Agreement and providing services pursuant
hereto, you and ADNM each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) This Agreement shall be deemed to have been entered into in the
State of California and the validity, interpretation and legal affect of this
Agreement shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely within the State of California.
The courts located in California (state and federal), only, will have
jurisdiction of any controversy regarding this Agreement; any action or other
proceeding which involves such a controversy will be brought in those courts, in
California and not elsewhere.
ARTISTdirect New Media, LLC
a California limited liability company
By: ARTISTdirect, LLC [Company Name]
Its: Member a __________ Corporation
By: ___________________________
Its: ___________________________
By: ___________________________
Marc Geiger
Its: Co-Chief Executive Officer
11
<PAGE> 28
By: ___________________________
Don Muller
Its: Co-Chief Executive Officer
12
<PAGE> 29
EXHIBIT 1
SCHEDULE OF FULFILLMENT FEES
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Item Retail Price Fulfillment Fee
--------------------------------------- ---------------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- ---------------------------------------
</TABLE>
In addition, the following packaging costs are applicable:
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Box Size Packaging Cost
--------------------------------------- ---------------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- ---------------------------------------
</TABLE>
SCHEDULE OF INSURANCE COVERAGE
ADNM currently carries property insurance with respect to all inventory
at the fulfillment center, covering up to $1,000,000 in damages (subject to
adjustments from time to time in accordance with then-current inventory value),
with a $5,000 deductible (except with respect to wind damage, for which the
deductible is $100,000). ADNM shall cause you to be named an additional insured
under said policy and provide you with a certificate of insurance to such
effect.
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[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE> 30
EXHIBIT 2
[ADNM/MERCHANDISE AGREEMENT - LICENSE FEE]
<PAGE> 31
EXHIBIT 3
INDUCEMENT TERMS AND GUARANTEE
The undersigned hereby acknowledge that they have read and understand
all of the terms and conditions set forth in the agreement dated as of _________
___, 19___, by and (the "Agreement") by and between ARTISTdirect New Media, LLC
("ADNM") and [CompanyName] ("Company"), to which these Inducement Terms and
Guarantee are attached.
In consideration of Company's execution and delivery of the Agreement,
the benefit of which runs to the undersigned, the undersigned hereby represent,
warrant and agree, jointly and severally that:
1. Company has the right, insofar as the undersigned are concerned, to
enter into the Agreement and to assume all of the obligations, warranties and
undertakings to Company on the part of the undersigned contained therein, and
Company shall continue to have those rights until all of those obligations,
warranties and undertakings shall have been fully performed and discharged.
2. All of the representations, warranties and agreements on the part of
Company contained in the Agreement that concern Company and/or the undersigned
are and shall remain true and correct.
3. The undersigned shall fully and to the best of their abilities
perform and discharge all of the obligations, warranties and undertakings
contained in the Agreement insofar as the same are required of the undersigned
and to the extent Company has undertaken to cause the performance and discharge
by the undersigned of those obligations and undertakings, and the undersigned
further guarantee the full and faithful performance of all other obligations of
Company under the Agreement, it being agreed and acknowledged that such
guarantee shall be applicable regardless of whether, for any reason whatsoever,
notwithstanding the provisions of paragraph 1 above, Company shall cease to have
the right to perform the obligations, warranties and undertakings to ADNM on the
part of Company contained in the Agreement.
4. The undersigned agree to look solely to Company (and not to ADNM)
with respect to all monies payable to the undersigned in connection with the
Agreement.
5. ADNM may, in its own name, institute any action or proceeding against
the undersigned to enforce its rights under the Agreement and/or this agreement,
and ADNM shall be entitled to equitable relief, including injunctive relief, to
enforce the provisions of said agreements, without the necessity of first
resorting to or exhausting any rights or remedies against Company.
Dated as of _______ ___, 19___, by and
______________________
______________________
<PAGE> 32
EXHIBIT C
MERCHANDISER'S STANDARD WHOLESALE PRICE LIST
MERCHANDISER'S STANDARD
WHOLESALE PRICE LIST
(as of June 11, 1999)
<TABLE>
<CAPTION>
--------------------------------- ----------------
ITEM PRICE
--------------------------------- ----------------
<S> <C>
T-shirt (adult) [***]
--------------------------------- ----------------
T-shirt (youth) [***]
--------------------------------- ----------------
Baby T [***]
--------------------------------- ----------------
Tank top (women's) [***]
--------------------------------- ----------------
Long-sleeve shirt [***]
(men's/women's)
--------------------------------- ----------------
Football jersey [***]
--------------------------------- ----------------
Tie-dye shirt [***]
--------------------------------- ----------------
Baseball jersey (men's) [***]
--------------------------------- ----------------
Baseball jersey (women's) [***]
--------------------------------- ----------------
Poly T (women's) [***]
--------------------------------- ----------------
Hats [***]
--------------------------------- ----------------
</TABLE>
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[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
1
<PAGE> 33
EXHIBIT D
PRE-APPROVED FULFILLMENT FEES
<TABLE>
<CAPTION>
--------------------------------------- -----------------------------------
Item Retail Price Fulfillment Fee
--------------------------------------- -----------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- -----------------------------------
</TABLE>
IN ADDITION, THE FOLLOWING PACKAGING COSTS ARE APPLICABLE:
<TABLE>
<CAPTION>
--------------------------------------- -----------------------------------
Box Size Packaging Cost
--------------------------------------- -----------------------------------
<S> <C>
[***] [***]
[***] [***]
[***] [***]
--------------------------------------- -----------------------------------
</TABLE>
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
1
<PAGE> 34
EXHIBIT E
ARTISTDIRECT, LLC
WARRANT TO PURCHASE 1,370,558 COMMON UNITS
WARRANT NO. 1999-3
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT IS FURTHER SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER CONTAINED HEREIN AND IN THAT CERTAIN SECOND AMENDED AND RESTATED
OPERATING AGREEMENT OF ARTISTDIRECT, LLC, A CALIFORNIA LIMITED LIABILITY
COMPANY, DATED MAY 18, 1999, AS THE SAME MAY BE AMENDED FROM TIME TO TIME.
WARRANT TO PURCHASE
LIMITED LIABILITY COMPANY COMMON UNITS
This certifies that Winterland Concessions Company, a California
corporation, doing business as "Winterland" ("Merchandiser) is entitled, on or
after the date hereof, to become a Member in ARTISTdirect, LLC, a California
limited liability company (the "Company"), on and subject to the terms and
conditions contained herein and in the "Operating Agreement" (as defined below),
with the number of Common, Units in the Company set forth in Section 1 below, in
return for a capital contribution by Merchandiser to the Company of cash
consideration in an amount equal to One Dollar ($1.00) per Common Unit (subject
to adjustment as hereinafter provided, the "Warrant Price").
Except as otherwise specifically provided herein, terms used but not
otherwise defined herein shall have those meanings as set forth in that certain
Second Amended and Restated Operating Agreement of ARTISTdirect, LLC, dated May
18, 1999, as the same may be amended from time to time (the "Operating
Agreement"). A true and correct copy of the Operating Agreement is attached
hereto.
This Warrant is subject to the following terms and conditions:
1. Common Units Subject to Warrant: Vesting.
- ----------
[***] Confidential treatment has been requested for the bracketed
portion. The confidential redacted portion has been omitted and filed
separately with the Securities and Exchange Commission.
2
<PAGE> 35
(a) Definitions.
(i) "ADNM" means ARTISTdirect New Media, LLC, a Subsidiary of
the Company;
(ii) "ADNM Merchandiser Agreement" means that certain
Merchandiser Agreement dated June 7, 1999 between ADNM and Merchandiser,
(iii) "ADNM Qualifying Revenue" means the "Adjusted Gross
Merchandiser Product Revenue" (as defined in the ADNM Merchandiser
Agreement), excluding, however, all amounts received in respect of
"Merchandiser Product" (as defined in the ADNM Merchandiser Agreement)
sold in respect of orders placed through the UBL Store.
(iv) "UBL" means The Ultimate Band List, LLC, a Subsidiary of
the Company;
(v) "UBL Merchandiser Agreement" means that certain Merchandiser
Agreement dated June 7, 1999 between UBL and Merchandiser;
(vi)"UBL Store" has the meaning ascribed thereto in the ADNM
Merchandiser Agreement;
(vii) "UBL Qualifying Terms" means on a consignment basis or on
terms requiring payment no earlier than the date ninety (90) days after
the receipt by UBL's fulfillment center(s) of the applicable product
items and UBL's receipt of an invoice from Merchandiser therefor;
(viii) "UBL Merchandiser Product" means merchandise provided to
UBL on UBL Qualifying Terms by either Merchandiser or any "Sublicensee"
(as defined in the UBL Merchandiser Agreement);
(ix) "UBL Gross Merchandiser Product Revenue" means the amount
actually received by UBL in respect of UBL Merchandiser Product sold to
customers who place orders through the UBL Store, including any directly
related shipping and handling revenues collected by UBL from such
customers;
(x) "UBL Deductible Amounts" means all third party costs
(including all associated freight and insurance costs) of shipping the
applicable merchandise to UBL's fulfillment center(s); all third party
fulfillment fees, third party warehouse charges and third party related
charges (e.g., box charges and return processing fees); sales, use and
value-added taxes; credit card and other third party service fees; agent
commissions; and any credits for returns, cancellations and exchanges;
provided, however that, in order for any of the foregoing to constitute
a "UBL Deductible Amount," it must be approved by Merchandiser in
accordance with the provisions of Section 8(b)(iii) of the ADNM
Merchandiser Agreement, if applicable.
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<PAGE> 36
(xi) "UBL Qualifying Revenue" means UBL Gross Merchandiser
Product Revenue less the UBL Deductible Amounts; and
(xii) "Highest Sales" means the greatest aggregate ADNM
Qualifying Revenue and UBL Qualifying Revenue during any period of
twelve (12) consecutive calendar months of the term of each of the ADNM
Merchandiser Agreement and the UBL Merchandiser Agreement between June
7, 1999 and June 6, 2002);
(b) This Warrant may be exercised with respect to:
(i) Nine Hundred Thirteen Thousand Seven Hundred Five (913,705)
Common Units at any time on or before June 6, 2004; and
(ii) an additional Four Hundred Fifty-Six Thousand Eight Hundred
Fifty-Three (456,853) Common Units if Highest Sales equal or exceed Ten
Million Dollars ($10,000,000). In this regard, the Company shall notify
Merchandiser within sixty (60) days following the date upon which such
level of Highest Sales is achieved, if at all.
2. Term. Except for the rights conferred upon the Company pursuant to Section
7(a) below, this Warrant, and Merchandiser's right to exercise this Warrant,
shall terminate immediately upon the first to occur of the following:
(a) the close of business (i.e., 5:00 p.m., Los Angeles time) on June 6,
2007;
(b) the termination of the ADNM Merchandiser Agreement prior to the
expiration of the full term thereof either (i) by ADNM due to a material breach
thereof by Merchandiser, which breach remains uncured for the period specified
in Section 16(b) of the ADNM Merchandiser Agreement, or (ii) by Merchandiser
other than due to a material breach thereof by ADNM, which breach remains
uncured for the period specified in Section 16(b) of the ADNM Merchandiser
Agreement;
(c) the termination of the UBL Merchandiser Agreement prior to the
expiration of the full term thereof either (i) by UBL due to a material breach
thereof by Merchandiser, which breach remains uncured for the period specified
in Section 4(b) of the UBL Merchandiser Agreement, or (ii) by Merchandiser other
than due to a material breach thereof by UBL, which breach remains uncured for
the period specified in Section 4(b) of the UBL Merchandiser Agreement; or
(d) the breach by Merchandiser of any material provision of this
Warrant.
3. Method of Exercise; Payment; Issuance of New Warrant; Transfer and Exchange.
This Warrant may be exercised by Merchandiser, in whole or in part, by the
surrender of this Warrant, properly endorsed, at the principal office of the
Company at 17835 Ventura Blvd., Suite 310, Encino, CA 91316 (or at such other
location as the Company may advise Merchandiser in writing), and by (a) payment
to the Company in cash or immediately available funds of the Warrant Price of
the Common Units being purchased, and (b) delivery to the Company of a customary
investment letter executed by Merchandiser, representing and warranting that the
Common Units are being acquired for Merchandiser's own account, for investment
purposes only, and not with a view to the distribution, resale or other
distribution thereof, and acknowledging the issuance and transfer of the Common
Units are subject to the requirements of
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<PAGE> 37
federal and state securities laws. Merchandiser, in lieu of exercising this
Warrant for a specified number of Common Units (the "Exercised Units") and
paying the aggregate exercise price therefor (the "Exercise Price"), may elect
to receive a number of Common Units equal to the number of Exercised Units,
minus a number of Common Units having an aggregate "Fair Market Value" (as
defined below) equal to the Exercise Price. After any such election, the number
of Common Units covered by this Warrant shall be deemed automatically reduced by
the number of Exercised Units. For purposes of this Warrant, "Fair Market Value"
means (a) if the Common Units are then publicly traded, the closing sale price
of the Common Units on its principal stock exchange or market system (or the
average of the closing bid and asked prices, if closing sales prices are not
reported) for the ten (10) consecutive trading days immediately prior to the
date of any such "net exercise," or (b) in all other cases, as determined by the
Managers in their sole, good faith discretion. In the event of any exercise, or
any such "net exercise," of less than all of the rights represented by this
Warrant, the Company shall issue to Merchandiser a new warrant evidencing the
ability of Merchandiser to purchase the balance of the number of Common Units
from the Company, and shall deliver such warrant to Merchandiser promptly
following such partial exercise. The Company agrees that the Common Units
issuable to Merchandiser upon exercise of this Warrant shall be issued to
Merchandiser as of the close of business on the date on which all of the
above-described conditions to exercise have be satisfied. Merchandiser hereby
covenants and agrees that, upon Merchandiser's exercise of all or a portion of
this Warrant and Merchandisers making the applicable payment to the Company in
respect thereof, Merchandiser and the Common Units issued to Merchandiser with
respect to such exercise shall become subject to the terms and conditions of the
Operating Agreement, including without limitation, the obligation to sell Common
Units and the restrictions on transfer of Common Units contained therein. In
this regard, Merchandiser acknowledges that it shall only become a Member and be
entitled to the rights as a Member once Merchandiser validly exercises this
Warrant in accordance with the terms hereof and executes a signature page to the
Operating Agreement whereby it agrees to be bound by all of the terms thereof,
excluding the non-competition covenant contained in Section 3.10 thereof, from
which Merchandiser shall be exempted.
4. Due Authorization and Issuance. The Company covenants and agrees that any and
all of the Common Units issued to Merchandiser in accordance with the terms
hereof will, upon such issuance, be duly authorized, validly issued and free
from all preemptive rights of any holder of Common Units in the Company, free
and clear of all taxes, liens and charges with respect to such issuance. The
Company further covenants and agrees that, during the period within which this
Warrant may be exercised, the Company will take no action that would prohibit
the issuance of Common Units required to be issued in accordance with the terms
and conditions hereof on such exercise. The Company hereby represents and
warrants that, as of May 18, 1999, 1,370,558 Common Units represented a
fully-diluted Percentage equal to one and one-half percent (1.5%).
5. Fractional Common Units. No fractional Common Units shall be issued in
connection with any exercise hereunder but in lieu of such fractional Common
Units, the Company shall make a cash payment therefor upon the basis of the fair
market value of the Common Units, as determined by the Managers in their sole,
good faith discretion.
6. Certain Adjustments.
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<PAGE> 38
(a) If the outstanding Common Units are changed into or exchanged for a
different number or kind of securities of the Company or a successor entity
(including a `C-corporation" that becomes the successor or parent of the Company
in connection with a roll-up or similar exchange transaction in connection with
an initial public offering) through a capital reorganization or
reclassification, or if the number of outstanding Common Units is changed
through a split of Common Units, reverse split of Common Units or issuance of a
Common Unit dividend, then an appropriate adjustment shall be made by the
Company in (i) the number or kind of Common Units that may be purchased pursuant
to the exercise of this Warrant, and (ii) the number, exercise price, or kind of
securities subject to this Warrant. Any such adjustment in this Warrant,
however, shall be made without a change in the total price applicable to the
unexercised portion of this Warrant but with a corresponding adjustment in the
price for each Common Unit covered by this Warrant. In making such adjustments,
or in determining that no such adjustments are necessary, the Company may rely
upon the advice of counsel and accountants to the Company, and the determination
of the Company shall be binding.
(b) Upon (i) the dissolution, liquidation, or sale of all or
substantially all of the business, properties and assets of the Company, (ii)
any reorganization, merger, consolidation, sale or exchange of securities in
which the Company does not survive, (iii) any reorganization, merger,
consolidation, sale or exchange of securities in which the Company does survive
and any of the Company's members have the opportunity to receive cash,
securities of another entity and/or other property in exchange for their Common
Units (other than a "roll-up" or similar exchange transaction in connection with
an initial public offering), or (iv) any acquisition by any person or group (as
defined in Section 13(d)) of the Securities Exchange Act of 1934, as amended),
of beneficial ownership of more than fifty percent (50%) of the Company's then
outstanding Common Units (each of the events described in clauses (i), (ii),
(iii), or (iv) is referred to herein as an "Extraordinary Event"), this Warrant
shall terminate unless it survives the Extraordinary Event pursuant to Section
6(d) below.
(c) Merchandiser shall have the right until ten (10) days before the
effective date of any Extraordinary Event to exercise, in whole or in part, this
Warrant, but only to the extent to which it is exercisable pursuant to the
provisions hereof. In this regard, the Company shall notify Merchandiser in
writing of the Company's intent to engage in any Extraordinary Event on or
before the date (the "Notice Date") that is no less than twenty (20) days before
the effective date of such Extraordinary Event. In addition, notwithstanding
anything to the contrary contained herein, if an Extraordinary Event shall occur
during the term of the Merchandiser Agreement, then, solely for purposes of
determining the extent to which this Warrant is exercisable in accordance with
this Section 6(c), Highest Sales shall be determined either: (i) with reference
to each period of twelve (12) consecutive calendar months of the term of the
Merchandiser Agreement prior to the Notice Date; or (ii) if fewer than twelve
(12) months have elapsed since the commencement of the term of the Merchandiser
Agreement, on an annualized basis.
(d) If an Extraordinary Event occurs during the term of the Merchandiser
Agreement, then the Company shall be obligated to either, in its sole
discretion: (i) cause this Warrant to survive such Extraordinary Event or (ii)
cause the surviving entity (which may be the Company), or any other entity that,
after giving effect to the Extraordinary Event, owns, directly or indirectly,
fifty percent (50%) or more of the Company's then outstanding Common Units, to
tender to Merchandiser a substitute warrant to purchase units or other equity
interests in such
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<PAGE> 39
entity containing terms and provisions substantially preserving, in the sole and
absolute, good faith discretion of the Company, the rights and benefits of this
Warrant to the extent then outstanding (a "Substitute Warrant"). If an
Extraordinary Event occurs after the term of the Merchandiser Agreement, in its
sole and absolute discretion, the Company may permit this Warrant to survive
such Extraordinary Event. In addition, if an Extraordinary Event occurs after
the term of the Merchandiser Agreement, in its sole and absolute discretion, the
surviving entity (which may be the Company), or another entity, may, but shall
not be so obligated, tender to Merchandiser a Substitute Warrant.
(e) The grant of this Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassification or changes in its
capital or business structures or to merge, consolidate, dissolve, or liquidate
or to sell or transfer all or any part of its business or assets or undertake
any other permitted limited liability company action.
(f) Upon the occurrence of each adjustment of this Warrant pursuant to
this Section 6, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
Merchandiser a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request of Merchandiser, furnish or cause to
be furnished to Merchandiser a like certificate setting forth: (i) such
adjustments and readjustments; (ii) the applicable Exercise Price at the time in
effect; and (iii) the number of Common Units, if any, and the amount, if any, of
other securities or property that at the time would be received upon the
exercise of this Warrant.
7. Payment of Taxes. The Company will pay all taxes (other than taxes based upon
income) and other governmental charges that may be imposed with respect to the
issue or delivery of Common Units upon exercise of this Warrant.
(a) Drag-Along Obligation. Notwithstanding anything to the contrary
contained herein, if the Managers find an acquirer for all or any portion of
their interest in the Company (whether such acquisition is by way of purchase of
assets or Common Units or successor equity securities, merger, recapitalization
or other form of transaction, and including, without limitation, a roll-up
transaction that is for the purpose of a reorganization among the Company and
its Affiliates), then, at the request of the Managers, Merchandiser shall sell
or otherwise transfer a corresponding portion of any Common Units (or successor
equity securities) then held by Merchandiser to such acquirer on the same terms
and conditions as apply to the sale or other transfer by the Managers.
Merchandiser further agrees timely to take such other actions as the Managers
may reasonably request in connection with the approval of the consummation of
such sale or other transfer, including, without limitation, voting in favor of
such sale or other transfer 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 or other
transfer, and, in the event that such sale or other transfer is structured as a
recapitalization, transferring and retaining such portion of Common Units (or
successor equity securities) and rights under this Warrant as may be requested
by the Managers.
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<PAGE> 40
8. Transferability of Warrant. This Warrant may not be sold, conveyed,
transferred, alienated, donated, encumbered or otherwise disposed of by
Merchandiser and, accordingly, any purported such transaction shall be void ab
initio, of no force or effect.
9. Investment Representation. Merchandiser represents and warrants to the
Company that Merchandiser is acquiring this Warrant for Merchandiser's own
account for investment and not with a view to, or for resale in connection with
any distribution thereof. Merchandiser acknowledges that this Warrant and the
Common Units that may be purchased under this Warrant have not been registered
under the Securities Act, by reason of a specific exemption from the
registration provisions of the Securities Act that depends upon, among other
things, the bona fide nature of the investment intent of Merchandiser as
expressed herein.
10. Amendment and Waiver; Successors. This Warrant may only be amended or
supplemented, and any waiver or departure from the provisions hereof may only be
given, with the consent of the Managers and Merchandiser. All of the covenants
and provisions of this Warrant by or for the benefit of the Company and
Merchandiser shall bind and inure to the benefit of them and their respective
permitted successors and assigns hereunder.
11. Notices. All notices required by this Warrant to Merchandiser shall be sent
to Winterland Concessions Company, 1951 Fairway Drive, San Leandro, CA 94577, or
such other address as Merchandiser may hereafter designate by notice to the
Company. All notices sent under this Agreement to the Company or the Managers
shall be sent to the address indicated in Section 3 above. All notices required
by this Warrant must be in writing to be effective, and must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing, or the date of
delivery to a telegraph office, as the case may be, of any such notice shall be
deemed the date of the giving thereof (except, with respect to notices of change
of address, the date of which will be the date of receipt by the receiving
party). Until the Company notifies Merchandiser otherwise, a copy of all notices
hereunder to the Company shall be simultaneously sent as aforesaid to Lenard &
Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067;
Attention: Allen D. Lenard, Esq.
12. Descriptive Headings and Governing Law. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. This Warrant shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the laws
of the State of California.
13. Lost Warrant. The Managers and the Company represent and warrant to
Merchandiser that upon receipt of evidence reasonably satisfactory to the
Managers and the Company of the loss, theft, destruction, or mutilation of this
Warrant and, in the case of any such loss, theft or destruction upon receipt of
an indemnity reasonably satisfactory to the Managers and the Company, or in the
case of any such mutilation upon surrender and cancellation of such Warrant, the
Managers and the Company will make and deliver a new Warrant in lieu of the
lost, stolen, destroyed or mutilated Warrant.
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<PAGE> 41
IN WITNESS WHEREOF, Merchandiser, the Company and the Managers have
caused this Warrant to be duly executed and issued as of June 7, 1999.
"COMPANY" "MERCHANDISER"
ARTISTdirect, LLC Winterland Concessions Company, a
California corporation, doing
business as "Winterland"
By: __________________________
Its: Co-Chief Executive Officer
By: ______________________________
(an authorized signatory)
"MANAGERS"
__________________________________
Marc Geiger
__________________________________
Donald Muller
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<PAGE> 1
EXHIBIT 10.28
UBL MERCHANDISER AGREEMENT
This Agreement, dated as of April 1, 1999, between Giant Merchandising
("Merchandiser"), 5655 Union Pacific Avenue, Commerce, CA 90022, and The
Ultimate Band List, LLC ("UBL"), 17835 Ventura Blvd., Suite 310, Encino, CA
91316, is being entered into in light of the following:
A. Merchandiser is in the business of manufacturing and selling
merchandise containing the names, photographs and other likenesses, biographical
material and other personal identification (collectively, "Personal
Identification") of artists.
B. UBL is in the business of operating an Internet web site (the "UBL
Store") that, among other things, sells merchandise containing the Personal
Identification of the various artists.
C. Merchandiser and UBL are entering into this Agreement in order to set
forth the terms and conditions upon which Merchandiser has agreed to sell
merchandise to UBL for resale over the UBL Site.
NOW, THEREFORE, in consideration of the foregoing and the mutual
benefits contained herein, the parties hereto agree as follows:
1. Term: The term of this Agreement (the "Term") shall be four (4) years
commencing on the date of this Agreement.
2. Merchandise Sales:
(a) Merchandiser agrees to sell to UBL during the Term, for resale
over the UBL Site upon the terms and conditions set forth below, all merchandise
manufactured by or under the control of Merchandiser, except to the extent
Merchandiser does not have the right to sell such merchandise to web site retail
outlets. Merchandiser agrees to use reasonable efforts to diligently and timely
fulfill UBL's orders of merchandise under this Agreement.
(b) Merchandiser agrees to sell all such merchandise to UBL at
Merchandiser's standard wholesale prices (i.e., the prices that Merchandiser
generally charges its other wholesale customers, subject to Merchandiser's
customary volume discounts). Merchandiser represents and warrants that attached
hereto as Exhibit A are Merchandiser's standard wholesale prices as of the
execution of this Agreement. Merchandiser shall notify UBL of any changes to its
standard wholesale prices, which changes shall only apply to merchandise ordered
by UBL after its receipt of such notice from Merchandiser. Notwithstanding the
foregoing, the parties agree and acknowledge that Merchandiser may not have
standard wholesale prices for certain collectible or limited edition items, in
which case the wholesale price shall be reasonably determined by Merchandiser.
(c) UBL shall remit payment to Merchandiser for all product
purchased from Merchandiser under this Agreement pursuant to invoices therefor
rendered to UBL, it being
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<PAGE> 2
understood that payment shall not be due earlier than the date [***] after the
arrival at the Center of the applicable product items and UBL's receipt of an
invoice from Merchandiser therefor.
(d) Merchandiser shall use reasonable efforts to cause each person
or entity who manufactures and distributes product under license from
Merchandiser (a "Sublicensee") to sell merchandise to UBL hereunder upon [***]
payment terms and at no more than the Sublicensee's standard wholesale prices.
If a Sublicensee is unwilling to do so, Merchandiser may elect (in its
discretion) to purchase the applicable merchandise from such Sublicensee and
sell same to UBL pursuant to [***] payment terms, provided that the purchase
price charged by Merchandiser to UBL shall not be greater than the lesser of (i)
the price Merchandiser paid for such merchandise, or (ii) the lowest price the
applicable Sublicensee offered the merchandise to UBL.
(e) Merchandiser agrees that UBL may at any time return (not for
credit) to Merchandiser any unsold products sold to UBL by Merchandiser or a
Sublicensee. [***] shall pay all costs (including all associated freight and
insurance costs) of returning any unsold products from the Center to
Merchandiser's warehouse. Merchandiser agrees to use its commercially reasonably
efforts to promptly sell such returned product at liquidation prices (subject to
Merchandiser's commercially reasonable efforts to maximize the liquidation
proceeds) and to remit to UBL, within [***] after each such sale, [***] of the
net proceeds thereof. As used in this paragraph 2(e), the term "net proceeds"
shall mean the gross amount payable or credited to Merchandiser from such sales
less Merchandiser's verifiable direct third party out-of-pocket costs in
connection with such sales.
(f) Notwithstanding anything to the contrary contained herein, any
"Merchandiser Product" sold on the UBL Site pursuant to a particular "Store
Agreement" [as such terms are defined in the agreement between Merchandiser and
ARTISTdirect New Media, LLC, of even date herewith (the "ADMN Agreement")] shall
not be subject to this Agreement, it being the intention of the parties that all
such Merchandiser Product shall be subject to the terms and conditions of the
ADMN Agreement and the applicable Store Agreement.
3. Warrant. In further consideration of Merchandiser's entering into and
fully performing its obligations under this Agreement, and in exchange for the
payment by Merchandiser to ARTISTdirect, LLC ("AD") of one dollar ($1.00), upon
the consummation of the transaction that currently is contemplated to occur
whereby AD will become the beneficial owner of one hundred percent 100% of the
outstanding membership interests of UBL (the "Rollup"), UBL shall cause AD to
grant to Merchandiser a warrant to acquire common units of AD representing
approximately one percent (1%) of AD's outstanding membership interests for an
aggregate exercise price not to exceed One Million Twenty-One Thousand
Forty-Five Dollars ($1,021,045), which warrant shall be subject to the terms
generally set forth in Exhibit B attached hereto; provided, however, that if the
Rollup shall not occur prior to July 31, 1999, then UBL shall then grant to
Merchandiser a warrant substantially in the form of Exhibit B attached hereto.
4. Representations and Warranties; Indemnity:
- --------------------------
[***] Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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<PAGE> 3
(a) Each party hereto represents and warrants that: (i) it has the
full right, power and authority to enter into and to perform this Agreement;
(ii) it is not under any restriction or obligation that may or will impair such
party's full performance of this Agreement; and (iii) it shall not at any time
do or authorize any person or entity to do anything inconsistent with, or
anything that might diminish, impair or interfere with any of the other party's
rights hereunder.
(b) Each party hereto agrees to indemnify and hold the other and its
members, employees, attorneys, agents, successors, affiliates, assigns and
licensees harmless against any claim, liability, cost and expenses (including
attorneys' and accountants' fees reasonably incurred) in connection with any
breach or alleged breach of this Agreement the indemnifying party. In this
regard, the indemnified party shall not settle any claim without first notifying
the indemnifying party of the terms of any proposed settlement and obtaining its
consent thereto.
(c) Merchandiser acknowledges that UBL is making no representations
and warranties concerning anticipated success of the UBL Store, the amount of
compensation payable to Merchandiser hereunder, and/or the current or future
value of UBL or the warrants described in paragraph 3 above. Likewise, UBL
acknowledges that Merchandiser is making no representations and warranties
concerning anticipated success of the UBL Store or the amount of compensation
payable to UBL with respect thereto.
5. Notices:
(a) All notices and payments to either party hereto shall be sent to
such party's address first mentioned herein, or such other address as a party
hereto may hereafter designate by notice to the other. All notices sent under
this Agreement must be in writing to be effective, and must be sent by a third
party messenger, by air courier service with a written acknowledgment of
receipt, by registered or certified mail, return receipt requested, or through a
telegraph office. The date of personal delivery, of mailing or faxing, or the
date of delivery to a telegraph office, as the case may be, of any such notice
shall be deemed the date of the giving thereof (except, with respect to notices
of change of address, the date of which will be the date of receipt by the
receiving party). Until UBL notifies Merchandiser otherwise, a copy of all
notices hereunder to UBL shall be simultaneously sent as aforesaid to Lenard &
Gonzalez LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles, CA 90067;
Attention: Allen D. Lenard, Esq. Until Merchandiser notifies UBL otherwise, a
copy of all notices hereunder to Merchandiser shall be simultaneously sent as
aforesaid to Warner Music Group Inc., 3400 Riverside Drive, 6th Floor, Burbank,
CA 91505; Attention: Legal Department.
(b) No failure by a party hereto to perform any of its obligations
hereunder shall be deemed a breach of this Agreement, unless the party claiming
a breach has given the other party hereto notice of such alleged breach in
reasonable detail and such alleged breach is not cured within fifteen (15)
business days [ten (10) business days for non-payments] after the giving of such
notice, provided this sentence shall not apply to breaches incapable of being
cured (e.g., representations and warranties).
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<PAGE> 4
6. Miscellaneous:
(a) All references to "this Agreement," "hereof," "herein" and words
of similar connotation include all exhibits attached hereto, unless specified
otherwise. This Agreement is intended by the parties hereto as a final
expression of their understanding and agreement with respect to the subject
matter hereof and as a complete and exclusive statement of the terms thereof;
this Agreement supersedes all prior and contemporaneous negotiations,
understandings, and agreements between the parties hereto with respect to the
subject matter hereof. The parties acknowledge and agree that neither party
hereto has made any representations or promises in connection with this
Agreement or the subject matter hereof not contained herein. Nothing in this
Agreement shall be construed to require the commission of any act contrary to
law, and wherever there is a conflict between any provisions of this Agreement
and any statute, law, ordinance, order or regulation contrary to which the
parties hereto have no legal right to contract, such statute, law, ordinance,
order or regulation shall prevail; provided that, in such event, (a) the
provision of this Agreement so affected shall be limited only to the extent
necessary to permit the compliance with the minimum legal requirements, (b) no
other provisions of this Agreement shall be affected thereby, and (c) all such
other provisions shall remain in full force and effect. The parties hereto shall
negotiate in good faith to replace any invalid, illegal or unenforceable
provision (the "Invalid Provision") with a valid provision, the effect of which
comes as close as possible to that of the Invalid Provision. This Agreement
cannot be canceled, modified, amended or waived, in part or in full, in any
manner except by an instrument in writing signed by the party to be charged. No
waiver by UBL, whether expressed or implied, of any provision of this Agreement
or default hereunder shall affect UBL's right to thereafter enforce such
provision or to exercise the right or remedy set forth in this Agreement in the
event of any other default, whether or not similar. Words in the singular number
shall include the plural, and vice versa. Whenever examples are used in this
Agreement with the words "including," "for example," "e.g.," "such as," "etc."
or any derivation thereof, such examples are intended to be illustrative and not
in limitation thereof. The paragraph headings herein are used solely for
convenience and shall not be used in the interpretation or construction of this
Agreement.
(b) In entering into this Agreement and providing services pursuant
hereto, Merchandiser and UBL each have and shall have the status of independent
contractors. Nothing herein contained shall contemplate or constitute either
party being an agent or employee of the other party, and nothing herein shall
constitute a partnership, joint venture or fiduciary relationship between the
parties.
(c) This Agreement shall be deemed to have been entered into in the
State of California and the validity, interpretation and legal affect of this
Agreement shall be governed by the laws of the State of California applicable to
contracts entered into and performed entirely within the State of California.
The courts located in the County of Los Angeles, California (state and federal),
only, will have jurisdiction of any controversy regarding this Agreement; any
action or other proceeding which involves such a controversy will be brought in
those courts, in California and not elsewhere.
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<PAGE> 5
THE ULTIMATE BAND LIST, LLC GIANT MERCHANDISING
By: /s/ Marc P. Geiger By: /s/ [Illegible]
------------------------- -------------------------
(an authorized signatory) (an authorized signatory)
(i)
5
<PAGE> 6
EXHIBIT A
MERCHANDISER'S STANDARD WHOLESALE PRICE LIST
1
<PAGE> 7
EXHIBIT B
THE ULTIMATE BAND LIST, LLC
WARRANT TO PURCHASE 385,300 COMMON UNITS
WARRANT NO. 1999-1
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS
WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT IS FURTHER SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER CONTAINED HEREIN AND IN THAT CERTAIN AMENDED AND RESTATED OPERATING
AGREEMENT OF THE ULTIMATE BAND LIST, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY
DATED JULY 28, 1998, AS AMENDED.
WARRANT TO PURCHASE
LIMITED LIABILITY COMPANY COMMON UNITS
This certifies that Giant Merchandising ("Merchandiser") is entitled, on
or after April 1, 1999, to become a Member in The Ultimate Band List, LLC, a
California limited liability company (the "Company"), on and subject to the
terms and conditions contained herein and in the "Operating Agreement" (as
defined below), with the number of Common Units in the Company set forth in
Section 1 below, in return for a capital contribution by Merchandiser to the
Company of cash consideration in an amount equal to Two and 65/100 Dollars
($2.65) per Common Unit (subject to adjustment as hereinafter provided, the
"Warrant Price").
Except as otherwise specifically provided herein, terms used by not
otherwise defined herein shall have those meanings as set forth in that certain
Amended and Restated Operating Agreement of The Ultimate Band List, LLC, a
California limited liability company dated July 28, 1998, as amended (the
"Operating Agreement"). A true and correct copy of the Operating Agreement is
attached hereto.
This Warrant is subject to the following terms and conditions:
1. Common Units Subject to Warrant: Vesting.
(a) Definitions.
(i) "Determination Date" means April 30, 2003;
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(ii) "Merchandiser Agreement" means that certain Merchandiser
Agreement dated as of April 1, 1999 between the Company and Merchandiser;
(iii) "Qualifying Terms" means on a consignment basis or on terms
requiring payment no earlier than the date [***] after the receipt by the
"Center" (as defined in the Merchandiser Agreement) of the applicable product
items;
(iv) "Merchandiser Product" means merchandise provided to the
Company on Qualifying Terms by either Merchandiser or any "Sublicensee" (as
defined in the Merchandiser Agreement);
(v) "Gross Merchandiser Product Revenue" shall mean the amount
actually received by the Company in respect of Merchandiser Product sold to
customers who place orders through the "UBL Store" (as defined in the
Merchandiser Agreement), including any directly related shipping and handling
revenues collected by the Company from such customers;
(vi) "Deductible Amounts" shall mean all shipping and handling
costs; third party fulfillment fees, warehouse charges and related charges;
sales, use and value-added taxes; credit card and other third party service
fees; agent commissions; and any credits for returns, rebates, cancellations and
exchanges;
(vii) "Adjusted Gross Merchandiser Product Revenue" shall mean Gross
Merchandiser Product Revenue less the Deductible Amounts; and
(viii) "Highest Sales" means the greatest Adjusted Gross
Merchandiser Product Revenue during any period of twelve (12) consecutive
calendar months of the term of the Merchandiser Agreement (i.e., between April
1, 1999 and March 31, 2003).
(b) This Warrant may be exercised with respect to:
(i) 192,650 Common Units at any time on or before March 31, 2004;
and
(ii) an additional 96,325 Common Units for each full Five Hundred
Thousand Dollars ($500,000) in Highest Sales in excess of One Million Dollars
($1,000,000); provided that the number of additional Common Units that may be
acquired pursuant to this Section 1(b)(ii) shall be subject to a maximum of
192,650 (i.e., for Highest Sales of Two Million Dollars ($2,000,000) or more).
On or before the Determination Date, the Company shall notify Merchandiser of
the Highest Sales.
2. Term. Except for the rights conferred upon the Company pursuant to
Section 8 below, this Warrant, and Merchandiser's right to exercise this
Warrant, shall terminate immediately upon the first to occur of the
following:
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(a) the close of business (i.e., 5:00 p.m., Los Angeles time) on April
30, 2008;
(b) the termination of the Merchandiser Agreement prior to the
expiration of the full term thereof either (i) by the Company due to a material
breach thereof by Merchandiser, which breach remains uncured for the period
specified in Section 5(b) of the Merchandiser Agreement or (ii) by Merchandiser
other than due to a material breach thereof by the Company, which breach remains
uncured for the period specified in Section 5(b) of the Merchandiser Agreement;
or
(c) the breach by Merchandiser of any material provision of this
Warrant.
3. Method of Exercise; Payment; Issuance of New Warrant: Transfer and
Exchange. This Warrant may be exercised by Merchandiser, in whole or in
part, by the surrender of this Warrant, properly endorsed, at the
principal office of the Company at 17835 Ventura Blvd., Suite 310,
Encino, CA 91316 (or at such other location within the State of
California or the State of New York as the Manager may advise
Merchandiser in writing), and by (a) payment to the Company in cash or
immediately available funds of the Warrant Price of the Common Units
being purchased, and (b) delivery to the Company of a customary
investment letter executed by Merchandiser, representing and warranting
that the Common Units are being acquired for Merchandiser's own account,
for investment purposes only, and not with a view to the distribution,
resale or other distribution thereof in violation of applicable
securities laws, and acknowledging the issuance and transfer of the
Common Units are subject to the requirements of federal and state
securities laws. Merchandiser, in lieu of exercising this Warrant for a
specified number of Common Units (the "Exercised Units") and paying the
aggregate exercise price therefor (the "Exercise Price"), may elect to
receive a number of Common Units equal to the number of Exercised Units,
minus a number of Common Units having an aggregate "Fair Market Value"
(as defined below) equal to the Exercise Price. After any such election,
the number of Common Units covered by this Warrant shall be deemed
automatically reduced by the number of Exercised Shares. For purposes of
this Warrant, "Fair Market Value" means (a) if the Common Units are then
publicly traded, the closing sale price of the Common Units on its
principal stock exchange or market system (or the average of the closing
bid and asked prices, if closing sales prices are not reported) for the
ten (10) consecutive trading days immediately prior to the date of any
such "net exercise," or (b) in all other cases, as determined by the
Manager in its sole, good faith discretion. In the event of any
exercise, or any such "net exercise," of less than all of the rights
represented by this Warrant, the Company shall issue to Merchandiser a
new warrant evidencing the ability of Merchandiser to purchase the
balance of the number of Common Units from the Company, and shall
deliver such warrant to Merchandiser promptly following such partial
exercise. The Company agrees that the Common Units issuable to
Merchandiser upon exercise of this Warrant and Merchandiser's making the
applicable payment to the Company in respect thereof, Merchandiser and
the Common Units issued to Merchandiser with respect to such exercise
shall become subject to the terms and conditions of the Operating
Agreement, including without limitation, the obligation to sell Common
Units and the restrictions on transfer of Common Units contained
therein. In this regard, Merchandiser acknowledges that it shall only
become a Member and be entitled to the rights as a Member once
Merchandiser validly exercises
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this Warrant in accordance with the terms hereof and executes a
signature page to the Operating Agreement whereby it agrees to be bound
by all of the terms thereof, excluding the non-competition covenant
contained in Section 3.10 thereof, from which Merchandiser shall be
exempted.
4. Due Authorization and Issuance. The Company covenants and agrees that
any and all of the Common Units issued to Merchandiser in accordance
with the terms hereof will, upon such issuance, be duly authorized,
validly issued and free from all preemptive rights of any holder of
Common Units in the Company, free and clear of all taxes, liens and
charges with respect to such issuance. The Company further covenants and
agrees that, during the period within which this Warrant may be
exercised, the Company will take no action that would prohibit the
issuance of Common Units required to be issued in accordance with the
terms and conditions hereof on such exercise.
5. Fractional Common Units. No fractional Common Units shall be issued in
connection with any exercise hereunder but in lieu of such fractional
Common Units, the Company shall make a cash payment therefor upon the
basis of the fair market value of the Common Units, as determined by the
Manager in its sole, good faith discretion.
6. Certain Adjustments.
(a) If the outstanding Common Units are changed into or exchanged for a
different number or kind of securities of the Company or a successor entity
(including a "C-corporation" that becomes the successor or parent of the Company
in connection with a roll-up or similar exchange transaction in connection with
an initial public offering) through a capital reorganization or
reclassification, or if the number of outstanding Common Units is changed
through a split of Common Units, reverse split of Common Units or issuance of a
Common Unit dividend, then a reasonable and appropriate adjustment shall be made
by the Company in (i) the number or kind of Common Units that may be purchased
pursuant to the exercise of this Warrant, and (ii) the number, exercise price,
or kind of securities subject to this Warrant. Any such adjustment in this
Warrant, however, shall be made without a change in the total price applicable
to the unexercised portion of this Warrant but with a corresponding adjustment
in the price for each Common Unit covered by this Warrant. In making such
adjustments, or in determining that no such adjustments are necessary, the
Company may rely upon the advice of counsel and accountants to the Company, and
the reasonable determination of the Company shall be binding.
(b) Upon (i) the dissolution, liquidation, or sale of all or
substantially all of the business, properties and assets of the Company, (ii)
any reorganization, merger, consolidation, sale or exchange of securities in
which the Company does not survive, (iii) any reorganization, merger,
consolidation, sale or exchange of securities in which the Company does survive
and any of the Company's members have the opportunity to receive cash,
securities of another' entity and/or other property in exchange for their Common
Units (other than a "roll-up" or similar exchange transaction in connection with
an initial public offering), or (iv) any acquisition by any person or group (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), of
beneficial ownership of more than fifty percent (50%) of the Company's then
outstanding Common Units (each of the events described in clauses (i), (ii),
(iii), or (iv) is
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referred to herein as an "Extraordinary Event"), this Warrant shall terminate
unless it survives the Extraordinary Event pursuant to Section 6(d) below.
(c) Merchandiser shall have the right until ten (10) days before the
effective date of any Extraordinary Event to exercise, in whole or in part, this
Warrant, but only to the extent to which it is exercisable pursuant to the
provisions hereof. In this regard, the Company shall notify Merchandiser in
writing of the Company's intent to engage in any Extraordinary Event on or
before the date (the "Notice Date") that is no less than thirty (30) days before
the effective date of such Extraordinary Event. In addition, notwithstanding
anything to the contrary contained herein, if an Extraordinary Event shall occur
during the term of the Merchandiser Agreement, then, solely for purposes of
determining the extent to which this Warrant is exercisable in accordance with
this Section 6(c), Highest Sales shall be determined either: (i) with reference
to each period of twelve (12) consecutive calendar months of the term of the
Merchandiser Agreement prior to the Notice Date; or (ii) if fewer than twelve
(12) months have elapsed since the commencement of the term of the Merchandiser
Agreement, on an annualized basis.
(d) If an Extraordinary Event occurs during the term of the Merchandiser
Agreement, then the Company shall be obligated to either, in its sole
discretion: (i) cause this Warrant to survive such Extraordinary Event or (ii)
cause the surviving entity (which may be the Company), or any other entity that,
after giving effect to the Extraordinary Event, owns, directly or indirectly,
fifty percent (50%) or more of the Company's then outstanding Common Units, to
tender to Merchandiser a substitute warrant to purchase units or other equity
interests in such entity containing terms and provisions substantially
preserving, in the reasonable, good faith discretion of the Company, the rights
and benefits of this Warrant to the extent then outstanding (a "Substitute
Warrant"). If an Extraordinary Event occurs after the term of the Merchandiser
Agreement, in its sole and absolute discretion, the Company may permit this
Warrant to survive such Extraordinary Event. In addition, if an Extraordinary
Event occurs after the term of the Merchandiser Agreement, in its sole and
absolute discretion, the surviving entity (which may be the Company), or another
entity, may, but shall not be so obligated, tender to Merchandiser a Substitute
Warrant.
(e) The grant of this Warrant shall not affect in any way the right or
power of the Company to make adjustments, reclassification or changes in its
capital or business structures or to merge, consolidate, dissolve, or liquidate
or to sell or transfer all or any part of its business or assets or undertake
any other permitted limited liability company action.
(f) Upon the occurrence of each adjustment of this Warrant pursuant to
this Section 6, the Company at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
Merchandiser a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request of Merchandiser, furnish or cause to
be furnished to Merchandiser a like certificate setting forth: (i) such
adjustments and readjustments; (ii) the applicable Exercise Price at the time in
effect; and (iii) the number of Common Units, if any, and the amount, if any, of
other securities or property that at the time would be received upon the
exercise of this Warrant.
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(g) Other Action Affecting Common Units. The Company will not, by
amendment of its Articles of Organization or the Operating Agreement, or through
any reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, dividend or other distribution of cash
or property, or any other voluntary action, avoid or seek to,: avoid the rights
granted to Merchandiser hereunder or the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provisions hereof, and
in the taking of all such actions as may be necessary or appropriate in order to
protect the rights of Merchandiser as set forth herein against impairment.
7. Payment of Taxes. The Company will pay all taxes (other than taxes based
upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of Common Units upon exercise of this
Warrant.
8. Drag-Along Obligation.
(a) Definition of Equity Securities. For purposes of this Warrant,
"Equity Securities" shall mean all (i) Units, all rights, options or warrants to
purchase Units, all securities of any type whatsoever that are convertible into
or exchangeable for Units, and all rights, options or warrants to purchase
securities that are convertible into or exchangeable for Units and (ii) all
shares, options, warrants, general or limited partnership interests, limited
liability company membership interests, participations or other equivalents
(regardless of how designated) of or in a corporation, partnership, limited
liability company or equivalent entity that are issued in exchange for any of
the items described in the preceding clause (ii).
(b) The Obligation. Notwithstanding anything to the contrary contained
herein, if the Manager finds an acquirer for all or any portion of its interest
in the Company (whether such acquisition is by way of purchase of assets, Common
Units or successor Equity SECURITIES, merger, recapitalization or other form of
transaction, and including, without limitation, a roll-up transaction that is
for the purpose of a reorganization among the Company and its Affiliates), then,
at the request of the Manager, Merchandiser shall sell or otherwise transfer a
corresponding portion of any Common Units (or successor Equity Securities) then
held by Merchandiser to such acquirer on the same terms and conditions as apply
to the sale or other transfer by the Manager. Merchandiser to such acquirer on
the same terms and conditions as apply to the sale or other transfer by the
Manager. Merchandiser further agrees timely to take such other actions as the
Manager may reasonably request in connection with the approval of the
consummation of such sale or other transfer, including, without limitation,
voting in favor of such sale or other transfer 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 or other transfer, and, in the event that such sale or other transfer is
structured as a recapitalization, transferring and retaining such portion of
Common Units (or successor Equity Securities) and rights under this Warrant as
may be requested by the Manager.
9. Tag-along Right.
(a) Definition of Excluded Transferee. For purposes of this Warrant,
"Excluded Transferee" shall mean: (i) Marc Geiger; (ii) Donald Muller; (iii) a
spouse, descendant or parent
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of Marc Geiger or Donald Muller; (iv) a descendant of any Person listed in
clauses (i), (ii) or (iii) above; (v) a trust for the sole benefit of any one or
more of the Persons listed in clauses (i), (ii), (iii) or (iv) above; (vi)
ARTISTdirect New Media, LLC ("ADNM"); or (vii) any Affiliate of any Person
listed in clauses (i), (ii), (iii), (iv), (v) or (vi) above.
(b) The Right. If ADNM, or any direct or indirect successor, assignee or
transferee of ADNM (each a "Transferor"), proposes alone or with others to
Transfer, directly or indirectly, to any Person that is not an Excluded
Transferee, any Equity Securities (each, a "Subject Interest") that represent a
fully-diluted Percentage of twenty percent (20%) or more, in a single
transaction or series of transactions, and the Common Units (or substitute
Equity Securities) issued to Merchandiser) pursuant to this (or any successor)
Warrant (the "Securities") include (at such time or upon exercise, conversion or
exchange) any Equity Securities of the same class as the Subject Interest (the
"Subject Interest Class"), the would-be Transferor shall provide Merchandiser
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
Merchandiser 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 Equity Securities in the Company.
Merchandiser may sell all or any portion of the Securities held by Merchandiser
(or issuable to Merchandiser upon exercise, conversion or exchange of any of the
Securities) that are of the class of Equity Securities that includes the Subject
Interest Class (the "Merchandiser's Securities") equal to the product obtained
by multiplying (i) the Subject Interest by (ii) a fraction, the numerator of
which is Merchandiser's Securities and the denominator of which is the total
number of Equity Securities of the Subject Interest Class then owned by the
Transferor, Merchandiser, and any other Person that has tag-along rights with
respect to the proposed Transfer by Transferor. To the extent that Merchandiser,
or any other Person that has tag-along rights with respect to the proposed
Transfer by Transferor, shall exercise its tag-along right, the number of Equity
Securities that the Transferor may Transfer in the transaction shall be
correspondingly reduced.
(c) Expenses. In any transaction in which Merchandiser sells or
otherwise disposes of any of the Merchandiser's Securities pursuant to this
Section 9, Merchandiser shall bear its pro rata share of the reasonable expenses
incurred by the Transferor in connection with the sale of the Subject Interest.
(d) Exempt Sales. The rights and obligations set forth in this Section 9
shall not apply to any sale of Equity Securities made in connection with or
following an initial public offering of common stock of the corporate successor
of the Company.
10. Transferability of Warrant.
(a) Except as set forth in Section 10(b) below, this Warrant may not be
sold, conveyed, transferred, alienated, donated, encumbered or otherwise
disposed of by Merchandiser and, accordingly, any purported such transaction in
violation of this Section 10 shall be void ab initio, of no force or effect.
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(b) Notwithstanding Section 10(a) above, but subject to applicable
securities laws, Merchandiser may transfer all, but not less than all, of this
Warrant, to any Affiliate of Merchandiser, provided that no such transfer shall
be effective until the transferee agrees in writing to be bound by all of the
provisions of this Warrant, including Section 8 above.
11. Investment Representation. Merchandiser represents and warrants to the
Company that Merchandiser is acquiring this Warrant for Merchandiser's
own account for investment and not with a view to, or for resale in
connection with, any distribution thereof. Merchandiser acknowledges
that this Warrant and the Common Units that may be purchased under this
Warrant have not been, registered under the Securities Act, by reason of
a specific exemption from the registration provisions of the Securities
Act that depends upon, among other things, the bona fide nature of the
investment intent of Merchandiser as expressed herein.
12. Representation Regarding Exercise Price. The Company hereby represents
and warrants to Merchandiser that the Exercise Price was calculated by
applying a value of the Company that does not exceed the value of the
Company that applied in the Company's most recent issuance of Common
Units to an unrelated third party.
13. Amendment and Waiver; Successors. This Warrant may only be amended or
supplemented, and any waiver or departure from the provisions hereof may
only be given, with the consent of the Manager and Merchandiser. All of
the covenants and provisions of this Warrant by or for the benefit of
the Company and Merchandiser shall bind and inure to the benefit of them
and their respective permitted successors and assigns hereunder.
14. Notices. All notices required by this Warrant to merchandiser shall be
sent to Giant Merchandising, 5655 Union Pacific Avenue, Commerce, CA
90022, or such other address as Merchandiser may hereafter designate by
notice to the Company. All notices sent under this Agreement to the
Company or the Manager shall be sent to the address indicated in Section
3 above. All notices required by this Warrant must be in writing to be
effective, and must be sent by a third party messenger, by air courier
service with a written acknowledgment of receipt, by registered or
certified mail, return receipt requested, or through a telegraph office.
The date of personal delivery, of mailing, or the date of delivery to a
telegraph office. The date of any such notice shall be deemed the date
of the giving thereof (except, with respect to notices of change of
address, the date of which will be the date of receipt by the receiving
party). Until the Company notifies Merchandiser otherwise, a copy of all
notice hereunder to the Company shall be simultaneously sent as
aforesaid to Lenard & Gonzalez LLP, 1900 Avenue of the Stars, 25th
Floor, Los Angeles, CA 90067; Attention: Allen D. Lenard, Esq.
15. Descriptive Headings and Governing Law. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and
do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of California.
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16. Lost Warrant. The Manager and the Company represent and warrant to
Merchandiser that upon receipt of evidence reasonably satisfactory to
the Manager and the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction upon receipt of an indemnity reasonably satisfactory to the
Manager and the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Manager and the Company
will make and deliver a new Warrant in lieu of the lost, stolen,
destroyed or mutilated Warrant.
IN WITNESS WHEREOF, Merchandiser, the Company and the Manager
have caused this Warrant to be duly executed and issued by their respective
officers thereunto duly authorized as of the 1st day of April, 1999.
"COMPANY" "MERCHANDISER"
THE ULTIMATE BAND LIST, LLC Giant Merchandising
By: /s/ Marc P. Geiger By:
------------------------------- ------------------------------
Its: Co-Chief Executive Officer (an authorized signatory)
"MANAGER"
ARTISTdirect New Media, LLC
By: /s/ Marc P. Geiger
-------------------------------
Its: Co-Chief Executive Officer
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EXHIBIT 10.32
12.15.99
INTERNET VIDEO LICENSE AGREEMENT
THIS AGREEMENT is made as of the 20th day of December, 1999 BETWEEN:
1. MAVERICK RECORDING COMPANY ("Maverick") of 9348 Civic Center Drive,
Beverly Hills, California 90210; and
2. ARTISTdirect, INC. ("ADI") of 17835 Ventura Boulevard, Suite 310,
Encino, California 91316.
BACKGROUND
A. WHEREAS, Maverick, in order to promote the sale and distribution of
phonorecords and audio-visual music products throughout the "Territory"
(as hereinafter defined in subparagraph 1.01(o)), licenses the use of
"Maverick Videos" (as hereinafter defined in subparagraph 1.01(q)); and
B. WHEREAS, ADI intends to "Stream" (as hereinafter defined in
subparagraph 1.01(l)) Maverick Videos from "Licensed Music Sites" (as
hereinafter defined in subparagraph 1.01(e)).
C. NOW THEREFORE, the parties hereto have agreed to the terms and
conditions set forth below with respect to the non-exclusive use by ADI
of Maverick Videos on Licensed Music Sites.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.01 Definitions Unless defined elsewhere in this Agreement, capitalized
terms shall have the meanings ascribed to them below:
(a) "ENDUSER DEVICE": any device (such as a computer or a Web TV) which is
capable of receiving and playing/displaying the audio-visual output of
a Streamed Video.
(b) "EXCERPT": means a continuous audio-visual portion of a Maverick Video
where no more than 30 seconds thereof may be accessed by the enduser or
viewed by a viewer.
(c) Intentionally deleted.
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(d) "INTERNET": the wide area cooperative network of university, corporate,
government and private computer networks communicating through
Transmission Control Protocol/Internet Protocol which is commonly
referred to as the Internet.
(e) "LICENSED MUSIC SITE": any Music Site which: (i) (A) is either wholly-
or partially-owned by ADI; and (B) is wholly-programmed and operated by
ADI; and (C) is prominently and exclusively branded with the tradename,
trademark or logo of ADI; or (ii) (A) is operated and managed by ADI
and (B) is subject to a comprehensive written web site agreement
between ADI and a recording artist (or such recording artist's
furnishing company) ("Artist") of the type which ADI typically enters
into with recording artists as of the date hereof; provided, that such
Artist is a recording artist then-currently signed to an exclusive
recording agreement with Maverick, which such Music Site on a gratis
basis (A) Streams Videos in a sequence designated by ADI on a
continuous 24-hour, seven-day-a-week basis (i.e., as part of a
"Pre-Programmed Stream") or (B) Streams particular Videos at the demand
of an enduser (i.e., as part of an "On-Demand Stream"). Without
limiting the foregoing, "Licensed Music Site" shall include all of
those "pages" on a Music Site: (w) that constitute "home pages"; (x)
that direct an enduser to a Video; (y) through which an enduser
navigates in order to view a Video; or (z) from which an enduser can
Stream a Video.
(f) "MASTER": a first generation color copy of the fully-edited titled and
assembled electronic master of a Maverick Video (a "Videotape Copy")
or, at Maverick's election, a copy of such electronic master digitized
by Maverick in a format compatible with ADI's technical requirements (a
"Digitized Copy").
(g) "MUSIC SITE": a non-subscription, music audio-visual programming
service which may be advertiser-supported, which: (i) is delivered over
the Internet (which may also include delivery via broadband
technology); (ii) is transmitted from fileservers exclusively located
in the United States using Streaming technologies; (iii) uses English
as the principal language spoken by hosts or used in textual, graphic
or interstitial programming; and (iv) if such service transmitted
digital audio data only, rather than digital audio-visual data (other
than with respect to On-Demand Streams) would be subject to statutory
licensing pursuant to Paragraph 2, Subsection d, Section 114 of title
17, United States Code (the "Digital Millennium Copyright Act").
(h) "ON-DEMAND STREAM FRACTION": a fraction, the numerator of which is that
number of transmissions to an individual enduser of Maverick Videos (in
whole or in part) other than Excerpts on a particular Licensed Music
Site as part of an On-Demand Stream and the denominator of which is
that number of transmissions to an individual enduser of Videos (in
whole or in part),
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including Maverick Videos, on such particular Licensed Music Site as
part of an On-Demand Stream, as determined in a calendar quarter.
(i) "ON-DEMAND STREAM RECEIPTS": gross advertising monies (or the
monetary value of any non-monetary advertising consideration) actually
received, directly or indirectly, by ADI or ADI's affiliates in
connection with the page of a Licensed Music Site that provides an
On-Demand Stream of one or more Maverick Videos less any actual
advertising agency or media sales fees directly related thereto.
(j) "PRE-PROGRAMMED STREAM FRACTION": a fraction, the numerator of which is
that number of transmissions to an individual enduser of Maverick
Videos (in whole or in part) other than Excerpts on a particular
Licensed Music Site as part of a Pre-Programmed Stream and the
denominator of which is that number of transmissions to an individual
enduser of Videos (in whole or in part), including Maverick Videos, on
such particular Licensed Music Site as part of a Pre-Programmed Stream,
as determined in a calendar quarter.
(k) "PRE-PROGRAMMED STREAM RECEIPTS": gross advertising monies (or the
monetary value of any non-monetary advertising consideration) actually
received, directly or indirectly, by ADI or ADI's affiliates in
connection with the page of a Licensed Music Site that provides a
Pre-Programmed Stream of one or more Maverick Videos less any actual
advertising agency or media sales fees directly related thereto.
(l) "STREAM(s)(ed)(ing)": a public performance of any duration via the
Internet that permits an enduser to view data contemporaneously with
its reception by an Enduser Device in such a manner that the data is
not copied, duplicated or stored in such Enduser Device except by way
of temporary buffering.
(m) "TERM": shall commence on the date of this Agreement and end on
December 31, 2001, unless sooner terminated as set forth herein.
(n) "TERM YEAR": each separate, consecutive 12-month period of the Term.
(o) "TERRITORY": worldwide.
(p) "VIDEO": an audio-visual work embodying the sound recording of a single
musical composition in synchronization with visual images intended
primarily for promotional use.
(q) "MAVERICK VIDEO": any Video with respect to which Maverick has
promotional exhibition rights in the Territory (a "Controlled Video")
that Maverick wishes to license to unaffiliated third parties for
broadcast television exhibition or to unaffiliated third party Music
Sites for Streaming, provided that the soundtrack of such Video is a
duplicate of a sound recording owned or controlled for the Territory by
Maverick. "Maverick Videos" shall not include: (i) any Videos
commercially exhibited prior to the commencement of the Term; or (ii)
any Video which is part of a long-form audio-visual program and is not
distributed or licensed by Maverick separately therefrom. Maverick
shall have the right to elect in Maverick's sole discretion that
Controlled Videos from up to [***]* albums released in any Term Year
not become Maverick Videos for the purposes of this Agreement until 90
days following the date which is the earlier of: (A) the date on which
the Video is initially Streamed under Maverick's authority by an
unaffiliated third party; or (B) the date on which the Video is
initially exhibited under Maverick's authority on television in the
U.S.
- ----------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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1.02 Headings The headings used in this Agreement are for ease of
reference only and shall have no effect on the interpretation or
construction of this Agreement.
1.03 Plural/Singular/References The plural may include the singular and the
singular may include the plural and this Agreement shall be interpreted
in this regard as the context may require. References to paragraphs and
subparagraphs are to paragraphs and subparagraphs of this Agreement,
and references to any agreement or other instrument shall be deemed to
include references to that agreement or other instrument as varied or
replaced from time to time.
2. GRANT OF RIGHTS
2.01 Duplication Rights During the Term, subject to the terms and conditions
of this Agreement, Maverick grants to ADI a non-exclusive license to
digitally encode and duplicate Maverick Videos in their entirety for
duplication on ADI's fileservers for the sole purpose of producing
programming containing Maverick Videos for Streaming on Licensed Music
Sites.
2.02 Streaming Right Subject to the terms and conditions of this Agreement
and any contractual restrictions imposed upon Maverick in connection
with Maverick Videos of which Maverick has advised ADI in writing with
reasonable advance notice, during the Term Maverick grants to ADI a
non-exclusive license: (a) to permit endusers to access via Streaming
Maverick Videos in their entirety as part of a Pre-Programmed Stream on
a Licensed Music Site; and (b) to permit endusers to access via
Streaming Maverick Videos in their entirety as part of an On-Demand
Stream on a Licensed Music Site; provided, however, that endusers shall
not be able to Stream more than one Maverick Video at a time as part of
a continuous transmission (i.e., endusers shall not be able to Stream a
series of Maverick Videos as part of one continuous transmission).
Continuously during the Streaming of any Maverick Video as part of an
On-Demand Stream and in a space that is "above the fold," near or
adjacent to, and on the same page as such Maverick Video, ADI shall, at
ADI's sole cost and expense, provide a button permitting an enduser
"one-click" access to the "home page" for Maverick's official site of
the applicable artist (or, if the artist does not have an official
site, Maverick's site), provided that Maverick delivers to ADI, prior
to or no later than Maverick's delivery of the applicable Maverick
Video, the foregoing "home page" information. If other links are
provided to third-party sites for the same artist, then Maverick's link
shall be the first listed and the most prominent.
2.03 Advertising and Promotion Subject to the terms and conditions of this
Agreement and any contractual restrictions imposed upon Maverick in
connection with Maverick Videos of which Maverick has advised ADI in
writing, during the Term, ADI may utilize Excerpts in any and all media
to
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advertise, promote and publicize the exhibition of Maverick Videos on
the Licensed Music Sites; provided, however, that, without Maverick's
written consent, no more than one Excerpt per artist may be used for
such purpose.
2.04 Names and Likenesses Subject to the terms and conditions of this
Agreement and any contractual restrictions imposed upon Maverick in
connection with Maverick Videos of which Maverick has advised ADI in
writing with reasonable advance notice, during the Term, ADI may use
the name and Maverick-approved or -supplied likenesses, such approval
not to be unreasonably withheld or delayed, of such artist for the
purposes of advertising, promoting or publicizing the Streaming by ADI
of such Maverick Video on the applicable Licensed Music Site, but not
in a manner which implies an endorsement of any service (including,
without limitation, Licensed Music Sites) or product without Maverick's
prior consent.
2.05 Reservation of Rights
(a) As between Maverick and ADI, Maverick retains all ownership rights in
Masters and Maverick Videos including, without limitation, all
copyrights and trademarks in Masters and Maverick Videos; provided,
however, that Maverick shall not use in any manner any Digitized Copy
of a Maverick Video created by or at the direction of ADI, unless
Maverick has made payment therefor in accordance with paragraph 4.01.
(b) ADI shall not have any rights in Maverick Videos other than as
expressly provided in this Agreement.
2.06 Withdrawal Rights
ADI agrees that ADI's rights to Stream any Maverick Video may be
terminated by Maverick upon one week's prior written notice to ADI if
any of the following conditions are met:
(a) If Maverick, in Maverick's good faith business judgment believes that
such termination is necessary for significant artist relations
purposes; or
(b) If Maverick's rights in the Maverick Video terminate; or
(c) If Maverick is notified or otherwise becomes aware of an apparently
bona fide third-party claim that the transmission of the Maverick Video
infringes rights owned by others.
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3. PROHIBITIONS ON ADI
ADI shall only have the right to exploit or use Maverick Videos as
specifically authorized in Paragraph 2 of this Agreement, or as
otherwise agreed to by Maverick in writing in its sole discretion, and
may not exploit or use Maverick Videos in any other manner. Without
limiting the foregoing, unless Maverick agrees otherwise in writing,
during the Term, neither ADI nor any party acting on behalf of ADI
shall, directly or indirectly:
(a) copy or duplicate any Maverick Video except as ADI may reasonably
require to exercise ADI's rights under this Agreement;
(b) Stream (or encode to permit the Streaming of) the audio portion of any
Maverick Video at a transmission rate greater than [***]* or the video
portion of any Maverick Video at a transmission rate greater than
[***]*;
(c) Stream the soundtrack of any Maverick Video separately from the visual
portion thereof;
(d) Stream the visual portion of any Maverick Video separately from the
soundtrack thereof, except to the extent that ADI uses only the visual
portion of an Excerpt to exercise ADI's rights under subparagraph 2.03
above without any soundtrack whatsoever;
(e) Stream any Maverick Video other than in conjunction with the sequence
of images originally synchronized with the sound recording included
thereon;
(f) Stream any Maverick Video on a "pay-per-view" or "pay-per-play" basis;
(g) exhibit any advertisement or commercial of any nature during or
associated with the Streaming of any Maverick Video in a manner which
reasonably implies an endorsement by the artist whose performances are
contained on such Maverick Video;
(h) license or authorize a third party (whether or not affiliated with ADI)
to "deep link" to a non-Licensed Music Site for the purpose of
Streaming a Maverick Video; or
(i) except as expressly set forth in Paragraph 5, edit or otherwise alter
any Maverick Video, including, without limitation, the deletion or
erasing of any signal now or hereafter contained therein to facilitate
the automatic identification and/or logging of Maverick Videos so
Streamed and/or to restrict
- ----------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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the reproduction of Maverick Videos so Streamed (a "Protective
Signal").Should ADI become aware that any party (whether or not acting
on behalf of ADI) is circumventing the provisions of this Paragraph 3
(a "Circumvention Event"), ADI shall promptly notify Maverick in
writing thereof and ADI shall, at ADI's sole cost and expense, use
ADI's commercially reasonable efforts to prevent such circumvention.
4. MAVERICK VIDEOS
4.01 Servicing of Masters In respect of each Maverick Video, Maverick shall
make a Master available to ADI for collection at ADI's expense, no
later than the date Maverick makes the applicable Maverick Video
available for delivery to other unaffiliated third parties. Should
Maverick provide ADI with a Master in Videotape Copy form, ADI shall
provide Maverick, at Maverick's request, with a Digitized Copy of such
Master provided that Maverick pays ADI's actual duplication and
shipping expenses in connection therewith.
4.02 Treatment of Maverick Videos and Masters
ADI shall:
(a) maintain all Masters and all copies of Masters on ADI's premises and
safeguard the same from any loss, damage, theft, unauthorized use,
copying, storage or duplication by others;
(b) be solely responsible for any loss, theft or damage to Masters and
copies of Masters in their possession and any unauthorized use,
copying, storage or duplication by others thereof; and
(c) upon the expiration of the Term or termination of this Agreement, at
Maverick's election, ADI shall either: (i) (A) to the extent that
Maverick made Digitized Copies of any Masters and provided them to ADI
hereunder, return all such Masters and copies of such Masters to
Maverick at ADI's expense; (B) to the extent that ADI made Digitized
Copies of any Masters hereunder, but has not provided Digitized Copies
of such Masters to Maverick pursuant to subparagraph 4.01 above, return
all such Masters and copies of such Masters to Maverick and Maverick
shall pay ADI's actual duplication and shipping expenses; and (C) to
the extent that ADI made Digitized Copies of any Masters hereunder and
has provided Digitized Copies of such Masters to Maverick pursuant to
subparagraph 4.01 above, return all such Masters and copies of such
Masters to Maverick at ADI's expense; or (ii) or destroy all Masters
and all copies of Masters at ADI's sole cost and expense, and provide
Maverick with a written affidavit verifying such destruction.
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5. ADI'S UNDERTAKINGS
During the Term, ADI shall have the obligation, at ADI's sole cost and
expense:
(a) to exhibit the following information continuously during the Streaming
of each Maverick Video in a space adjacent to the Maverick Video,
provided that Maverick submits such information to ADI in a timely
manner:
(i) the title of the musical composition on the Maverick Video;
(ii) the title of the record or home video that includes the
performance of the musical composition contained in the Maverick
Video;
(iii) the name of the artist performing the musical composition
contained in the Maverick Video;
(iv) the name of the record company and the URL of its "home page";
and
(v) the name of the motion picture, if any, from which the Maverick
Video is derived.
(b) to obtain public performance rights licenses, if necessary, covering
the performance of the musical compositions in Maverick Videos; and
(c) to transmit as part of each Maverick Video Streamed on Licensed Music
Sites any Protective Signal contained in the Maverick Videos; provided,
however, that the transmission of such Protective Signal does not
represent a recurrent and unreasonable cost to ADI and in no way leads
to the deterioration of Streaming quality of Maverick Videos.
6. MAVERICK'S UNDERTAKINGS
Maverick shall deliver to ADI, at Maverick's expense (where available
and reasonably contemporaneously with the delivery of the relevant
Masters) artwork, promotional material, biographical material and other
information in relation to Maverick Videos and the relevant artists, to
be used by ADI solely for promotional purposes on Licensed Music Sites.
7. COMPENSATION
7.01 Royalties ADI shall pay to Maverick royalties equal to: [***]*.
- ----------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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7.02 Banner Ads
ADI shall make "Banner Ads" (the "Banner Ads") available to Maverick at
ADI's standard rate card cost therefor, or at such other rate as the
parties shall mutually agree.
8. ACCOUNTING AND PAYMENTS; MARKET RESEARCH
8.01 Accounting Within 30 days following each calendar quarter of the Term,
ADI shall account for and pay to Maverick any royalties payable in
respect of such quarter and shall furnish to Maverick a statement
setting forth:
(a) a listing of all Maverick Videos Streamed on each Licensed Music Site
during such quarter;
(b) the number of Maverick Videos Streamed on each Licensed Music Site as
compared to the total number of Videos Streamed on each such Licensed
Music Site during such quarter;
(c) Pre-Programmed Stream Receipts and On-Demand Stream Receipts for such
quarter and the sources thereof;
(d) the number of times that Maverick Videos were Streamed on each Licensed
Music Site as compared to the total number of times that Videos were
Streamed on each such Licensed Music Site during such quarter;
(e) the number of "pageviews" of the Banner Ads during such quarter and the
number of "clickthroughs" from the Banner Ads to URLs designated by
Maverick during such quarter. ADI shall also furnish Maverick with the
information described in subparagraphs 8.01(a), (b) and (d) on a weekly
basis within 10 days following the end of each week during the Term.
8.02 Audit Rights
(a) ADI shall keep complete and accurate books and records of account
relating to the Streaming of Maverick Videos and Videos maintained to a
standard sufficient to enable an audit trail to be established.
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(b) Maverick shall have the right during the Term and during the two-year
period following the termination or expiration of the Term, at
Maverick's sole cost and expense, to have a certified public accountant
inspect ADI's books and records no more than once during any year. This
inspection shall take place at ADI's office, during normal business
hours on not less than 30 days' written notice. The auditor appointed
by Maverick may inspect and take copies of the books and records of ADI
solely for the purpose of verifying the calculation of royalties
accruing to Maverick under this Agreement and verifying ADI's
compliance with Paragraph 7.
(c) Each statement rendered under this Agreement shall be deemed final and
binding upon Maverick as an account stated and shall not be subject to
any claim or objection by Maverick unless Maverick notifies ADI of
Maverick's objection to the applicable statement, stating the basis
thereof in reasonable detail within three (3) years after the date such
statement was rendered to Maverick hereunder.
8.03 Market Research
ADI and Maverick shall cooperate with each other in conducting market
research, at Maverick's sole cost and expense, designed to determine
the effect of the Licensed Music Sites on consumer awareness of artists
featured in Maverick Videos and sales of such artist's records. ADI and
Maverick shall use the results of such research for internal purposes
only. Such market research shall be subject to the approval of any
applicable artists (but only if required by written agreement between
ADI and such artist) and shall be subject to the published privacy
policy of the applicable Licensed Music Site (if any). Nothing
contained herein shall be deemed to require Maverick to conduct any
such market research.
9. WARRANTIES AND INDEMNITY
9.01 ADI's Warranties
ADI represents and warrants that:
(a) ADI has full right and authority to enter into and to fulfill all of
ADI's obligations under this Agreement; and
(b) ADI shall comply with all licenses, laws and regulations relating to
its maintenance and transmission of Licensed Music Sites.
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9.02 Maverick's Warranties
(a) Maverick represents and warrants that Maverick has the right to enter
into and fulfill all of Maverick's obligations under this Agreement;
and
(b) Maverick makes no representation or warranty whatsoever with respect to
the non-dramatic performing rights in the musical compositions embodied
in the Maverick Videos.
9.03 Indemnity
(a) ADI does hereby indemnify, save and hold harmless Maverick and
Maverick's subsidiaries, affiliates, licensees, assigns, officers and
employees from any and all loss and damage (including, without
limitation, reasonable fees and disbursements of counsel incurred by
Maverick in any action or proceeding between ADI and Maverick or
between Maverick and any third party or otherwise) arising out of or
connected with any claim or act or omission by ADI which is
inconsistent with any of the representations or agreements made by ADI
in this Agreement or any breach of ADI's obligations hereunder or any
unauthorized use by ADI or any party acting on behalf of ADI of Masters
or Maverick Videos in connection with the advertising, promotion or
publicity of each Maverick Video or the name or likeness of any artist
who rendered services in connection with such Maverick Videos. Maverick
shall have the right at all times, in Maverick's sole discretion and at
Maverick's sole cost and expense, to retain or resume control of the
conduct relative to the defense of any claim to which the foregoing
indemnity applies. The foregoing indemnity shall be limited to claims
reduced to judgment or settled with ADI's prior written consent not to
be unreasonably withheld.
(b) Maverick does hereby indemnify, save and hold harmless ADI and ADI's
subsidiaries, affiliates, licensees, assigns, officers and employees
from any and all loss and damage (including, without limitation,
reasonable fees and disbursements of counsel incurred by ADI in any
action or proceeding between ADI and Maverick or between ADI and any
third party or otherwise) arising out of our connected with any claim
or act or omission by Maverick which is inconsistent with any of the
representations or agreements made by Maverick in this Agreement or any
breach of its obligations hereunder or any claim that any Maverick
Video or the content thereof violates the rights of any third party,
including, without limitation, libel, slander, defamation, copyright,
trademark, and rights of privacy and publicity. ADI shall have the
right at all times, in ADI's sole discretion and at ADI's sole cost and
expense, to retain or resume control of the conduct relative to the
defense of any claim to which the foregoing indemnity applies. The
foregoing indemnity shall be limited to
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claims reduced to judgment or settled with Maverick's prior written
consent not to be unreasonably withheld.
(c) The indemnitor shall give the indemnitee prompt written notice of any
claim to which the foregoing indemnity applies, and the indemnitor
shall have the right to participate in the defense of any such claim
through counsel of the indemnitor's own choice and at the indemnitor's
cost and expense.
10. TERMINATION
10.01 Maverick's Termination RightsMaverick may terminate this Agreement
immediately by written notice to ADI if, at any time during the Term:
(a) ADI goes in liquidation, receivership or administration or becomes
bankrupt, makes any arrangement for the benefit of ADI's creditors or
has a receiver appointed for any of ADI's assets; provided, that if
such proceeding is involuntary, then Maverick shall not have the right
to terminate the Term unless such proceeding is not dismissed within 90
days of the filing thereof;
(b) ADI breaches any material term or provision of this Agreement;
(c) the Licensed Music Sites cease, except for any instance of force
majeure, to be transmitted for a continuous period of 10 days; or
(d) if ADI does not succeed in preventing a Circumvention Event within 60
days following ADI's becoming aware thereof; provided, in the case of
any event set forth in subparagraph (b) above, Maverick shall have
given ADI written notice of such event and ADI shall have failed to
cure same within 30 days after ADI's receipt of such notice (or 10
business days if the event is ADI's failure to pay Maverick a sum
certain).
10.02 ADI's Termination Rights
ADI may terminate this Agreement immediately by written notice to
Maverick if: (a) at any time during the Term, Maverick goes into
liquidation, receivership or administration or becomes bankrupt, makes
any arrangement for the benefit of Maverick's creditors or has a
receiver appointed for any of Maverick's assets; provided, that if such
proceeding is involuntary, then ADI shall not have the right to
terminate the Term unless such proceeding is not dismissed within 90
days of the filing thereof; or (b) if Maverick breaches any material
term or provision of this Agreement and fails to cure such breach
within 30 days after ADI's written notice to Maverick of such breach.
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11. PROCEDURE UPON TERMINATION. Upon the expiration or termination of this
Agreement:
(a) ADI shall cease the Streaming of Maverick Videos on Licensed Music
Sites;
(b) ADI shall perform in accordance with the provisions of subparagraph
4.02(c); and
(c) should ADI terminate this Agreement pursuant to subparagraph 10.02
above, ADI shall have no further obligations to Maverick and Maverick
shall have no further obligations to ADI.
12. MISCELLANEOUS
12.01 Relationship of the Parties In performing its obligations under this
Agreement, each of the parties hereto shall be deemed an independent
contractor, and nothing in this Agreement shall in any way constitute
either party, or any of such party's officer or directors, an agent or
employee of the other party and this Agreement shall not be deemed to
constitute a partnership, joint venture or contract of employment
between the parties.
12.02 Service of Notices Any notice which either party hereto may desire to
give or which is required under the terms of this Agreement shall be
given in writing by registered or certified mail, return receipt
requested, or by telefax or by personal service (in all cases, all
charges prepaid) to ADI at the address first noted in the preamble to
this Agreement, Attn: Chief Financial Officer, or to such other address
to which ADI notifies Maverick in writing, with copies to Lenard &
Gonzalez, LLP, 1900 Avenue of the Stars, 25th Floor, Los Angeles,
California 90067, Attn: Allen D. Lenard, Esq., and to Maverick to the
address first noted in the preamble to this Agreement, Attn: General
Counsel. In the event any such notice is given by mail, such notice
shall be deemed to be given on the date five business days following
the date of such mailing. In the event any such notice is given by
personal delivery, such notice shall be deemed to be given on the date
personal delivery is made.
12.03 Confidentiality/Press Announcements Neither ADI nor Maverick nor their
respective affiliates may disclose to any third party (other than each
party's employees and professional advisors, in their capacity as such)
any information regarding the terms and conditions of this Agreement
without the prior written consent of the other party except:
(a) to the extent necessary to comply with the law or the legal process of
a court of competent jurisdiction or in administrative proceedings, in
which event the party making such disclosure must use its commercially
reasonable efforts to procure confidential treatment of such
information;
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(b) as part of its normal reporting or review procedure to its parent
companies, its auditors and its attorneys, provided that ADI and
Maverick inform these parties of the provisions of this subparagraph
12.03;
(c) to the extent necessary to comply with Maverick's contractual
obligations to third parties;
(d) to make press announcements approved in writing by both of the parties;
and
(e) to the extent such terms become public through no breach by either
party of this subparagraph 12.03.
In addition to the foregoing, ADI shall not disclose to any third party
(other than to ADI's employees, in their capacity as such): (i) the
identity of the Maverick Videos Streamed on a Licensed Music Site; (ii)
the number of Maverick Videos Streamed on a Licensed Music Site; or
(iii) the number of times that any Maverick Video was Streamed on a
Licensed Music Site.
12.04 Assignment/Sublicense Maverick may not assign, sublicense or
effectively assign or sublicense Maverick's rights or obligations under
this Agreement except to an affiliated or associated company or to a
person or entity acquiring all or substantially all of the stock or
assets of Maverick and subject to the assignee assuming Maverick's
obligations hereunder. ADI may not assign, sublicense or effectively
assign or sublicense any of ADI's rights or obligations under this
Agreement to any party. For the avoidance of doubt, ADI may not
syndicate ADI's programming containing Maverick Videos.
12.05 No Waiver No failure to exercise or delay in exercising any right,
power or privilege under this Agreement by either party shall operate
as a waiver of that right, power or privilege. Similarly, a single or
partial exercise of any right, power or privilege by either party shall
not preclude any other or further exercise of that right, power or
privilege.
12.06 Remedies Cumulative/Severability The rights and remedies contained in
this Agreement are cumulative and are not exclusive of any rights and
remedies provided by law, in equity or otherwise. If any provision of
this Agreement is prohibited by or contravenes any applicable law, or
is held by any court of competent jurisdiction or any other legally
constituted body having jurisdiction to make this determination to be
void, unlawful or unenforceable then that provision shall be severed
from the Agreement and rendered ineffective, as far as possible,
without modifying the remaining provisions of this Agreement.
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12.07 Entire Agreement/Amendments/Counterparts This Agreement contains the
entire agreement between the parties with respect to its subject matter
and supersedes any prior agreement or negotiation between the parties
on the subject matter of this Agreement. There are no representations,
agreements or understandings, oral or written, between the parties
relating to the subject matter of this Agreement which are not fully
expressed in this Agreement. No amendment, termination, waiver,
discharge or modification of this Agreement shall be effective unless
it is in writing and is signed by an authorized signatory of both
Maverick and ADI. This Agreement may be executed in one or more
counterparts and by facsimile signature, each of which shall be deemed
an original and all of which together shall be deemed one Agreement.
12.08 Litigation ADI shall notify Maverick if ADI becomes aware of any
unauthorized dealing by any third party in any Maverick Videos or in
Licensed Music Sites, and shall cooperate fully, at Maverick's cost, in
any dispute relating to Maverick's rights in Masters and Maverick
Videos as well as Maverick's rights under this Agreement. Maverick,
after written notice to ADI, may, at Maverick's sole cost and expense,
act in the name of ADI and Maverick to protect Maverick's rights under
this Agreement and ADI appoints Maverick ADI's attorney-in-fact to do
this; provided, however, that Maverick shall not be permitted to
execute any document on behalf of ADI without first affording ADI a
reasonable opportunity to execute such document itself. If Maverick
acts on ADI's behalf as permitted herein, Maverick shall keep ADI
informed on a current basis of such acts and all proceedings relating
thereto.
12.09 Governing Law This agreement has been entered into in the state of New
York, and the validity, interpretation and the laws of the state of New
York shall govern the legal effect of this Agreement. The New York
courts (state and federal), only, shall have jurisdiction of any
controversies regarding this Agreement; any action or other proceeding
which involves such a controversy shall be brought in these courts, in
New York County, and not elsewhere. Any process in any such action or
proceeding may, among other methods, be served upon ADI or Maverick, as
applicable, by delivering it or mailing it, by registered or certified
mail, return receipt requested, directed to the address first above
written. Any such delivery or mail service shall be deemed to have the
same force and effect as personal service within the state of New York.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
ACCEPTED AND AGREED:
MAVERICK RECORDING COMPANY ARTISTdirect, INC.
By: /s/ GUY OSEARY By: /s/ KEITH YOKOMOTO
------------------------------ ---------------------------
Name: Guy Oseary Name: Keith Yokomoto
Title: Co-Chief Executive Officer Title: President and
Chief Operating Officer
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EXHIBIT 10.33
12.15.99
WEBCASTING TRANSMISSION LICENSE AGREEMENT
This Webcasting Transmission License Agreement ("Agreement"), dated as
of December 20, 1999, is made by and between Maverick Recording Company with its
principal offices at 9348 Civic Center Drive, Beverly Hills, California 90210,
("Licensor"), and ARTISTdirect, Inc., with its principal offices at 17835
Ventura Boulevard, Suite 310, Encino, California 91316 ("Licensee").
WHEREAS, Licensee operates the Web Site that digitally transmits sound
recordings to the public;
WHEREAS, Licensee wishes to obtain a license for certain transmissions
of sound recordings on the Web Site;
WHEREAS, Licensee has agreed to pay a royalty and provide certain
additional consideration for such license, and Licensor and Licensee have agreed
upon such consideration and other terms, which are reflected in this Agreement;
NOW, THEREFORE, and in consideration of the mutual promises contained
in this Agreement and for other good and valuable consideration, including the
consideration provided by Licensee in Section 3, the adequacy and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. DEFINITIONS
1.1 "Confidential Information" means information submitted to Licensor
pursuant to Section 5.1, 5.2, 5.3 or 5.4.
1.2 "Excerpt" means a "Sample" (as defined in the Audio Sample License
Agreement between Licensor and Licensee of even date herewith) where no
more than 30 seconds thereof may be accessed by the Web Site User.
1.3 "First Transmission Date" means the date on which the Licensee makes the
first Payable Transmission of a sound recording in the Repertory.
1.4 "License Fee Report" means a report required by Section 5.
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1.5 "Payable Transmission" means each instance in which any portion of a
sound recording of a musical work in the Repertory other than an Excerpt
is delivered to a Web Site User via Web Site Transmissions (e.g., the
delivery of any portion of a single track from a compact disc to one
listener).
1.6 "Payable Transmission Rate" means the following: [***]*.
1.7 "Repertory" consists of all copyrighted sound recordings, including sound
recordings created during the term of this Agreement, in which Licensor
has or will have during the term of this Agreement the right to license
transmissions.
1.8 "Sound recordings" means such term as it is defined in Section 17 U.S.C.
Section 101.
1.9 "Territory" means the United States, its territories, commonwealths and
possessions.
1.10 "Web Site" means any Internet site or Internet sites which are: (a)(i)
majority-owned or wholly-owned or controlled by Licensee; and (ii)
wholly-programmed and operated by Licensee; or (b)(i) operated and
managed by Licensee and (ii) subject to comprehensive written web site
agreements between Licensee and recording artists (or such recording
artist's furnishing companies) ("Artists") of the type which Licensee
typically enters into with recording artists as of the date hereof;
provided, that such Artists are recording artists then-currently signed
to exclusive recording agreements with Licensor.
1.11 "Web Site Transmissions" means all digital audio transmissions to Web
Site Users from or through the Web Site of stations on the Web Site
created by Web Site Users in accordance with the parameters set out in
Exhibit A ("Web Site User Stations"), and does not include digital audio
transmissions made by any other means.
1.12 "Web Site Users" means all those who access the Web Site solely for
personal consumer use.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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<PAGE> 3
2. GRANT OF LICENSE
2.1 Licensor hereby grants to Licensee, during the term of this Agreement,
subject to the limitations set forth below, a limited nonexclusive
license to (a) transmit publicly any or all of the sound recordings in
the Repertory, within the Territory, by means of Web Site Transmissions
and (b) exhibit within the Territory album cover art in postage stamp
size adjacent to artist, album title and sound recording title
information with respect to a sound recording being transmitted pursuant
to this Agreement on the Web Site; provided, in each case, that (i)
Licensee complies with Section 17 U.S.C. 114(d)(2)(c)(i) and Section 17
U.S.C. Section 1101 and all of the terms and conditions of this Agreement
and (ii) the Web Site Transmissions comply with all non-financial terms
negotiated or determined by the Copyright Arbitration Royalty Panel
pursuant to Section 17 U.S.C. Section 114(f). In the event that
compensation system set by the Librarian of Congress pursuant to
Section 17 U.S.C. Section 114(f) would result in a double payment to
Licensor with respect to any Web Site Transmissions, then the parties
shall negotiate in good faith an adjustment that will result in the
Licensor only receiving the compensation provided for under this
Agreement with respect to such Web Site Transmissions.
2.2 Nothing in this Agreement authorizes Licensee to grant to any other
person or entity (including without limitation any Web Site User or any
operator of another Web site), any right to reproduce by any means,
method or process whatsoever, now known or hereafter developed, any of
the sound recordings in the Repertory, including, but not limited to,
transferring or downloading any such sound recordings to a computer hard
drive, or otherwise copying the sound recording onto any other storage
medium.
2.3 Nothing in this Agreement authorizes Licensee to grant to any person or
entity (including without limitation any Web Site User or any operator of
another Web site) any right to transmit publicly, by means of digital
transmission or otherwise, any of the sound recordings in the Repertory.
2.4 The licenses granted in this Agreement extend only to Licensee and the
Web Site. This Agreement grants no rights to Licensee other than those
expressly granted herein. Without limiting the generality of the
foregoing, this Agreement does not grant to Licensee (a) any copyright
interest in any sound recording; (b) any rights outside the Territory;
(c) any trademark rights; or (d) any rights to any endorsement by
Licensor or any other person.
2.5 Licensor represents and warrants to Licensee that it has the rights
necessary to grant the licenses and other rights granted under this
Agreement and will defend, indemnify and hold harmless Licensee its
parent, subsidiaries or affiliates and their directors, officers,
employees and agents from and against any and all claims, actions,
liabilities, losses, damages, costs or expenses (whether direct or
indirect, by contract, in tort, by operation of law or otherwise)
incurred by or asserted or awarded against Licensee arising out of or in
connection with a breach of any representation, warranty or covenant
hereunder or any failure of Licensor to have the rights granted to
Licensee pursuant to this Agreement.
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<PAGE> 4
3. LICENSE FEES AND OTHER CONSIDERATION
3.1 For each calendar quarter of the term of this Agreement, Licensee shall
pay Licensor, for the license granted in Section 2.1, an amount equal to
the number of Payable Transmissions during that quarterly period
multiplied by the Payable Transmission Rate.
3.2 Licensee shall pay a finance charge of one and one-half percent (1-1/2%)
per month, or the maximum rate permitted by law, whichever is less, from
the date due, on any required payment that is not made on or before its
due date, without prejudice to any other rights Licensor may have in
connection with such delinquency.
3.3 During the term of this Agreement, Licensee shall, within a reasonable
time after Licensor's written request setting forth the applicable IP
address, provide direct links, from the location on the Web Site where
artist, album title, and sound recording title information for each sound
recording is provided, (which shall be the same location on such Web Site
where Web Site Users access the transmission of such sound recording), to
one or more Web sites that provide for direct sales of substantially all
the sound recordings transmitted by Licensee on the Web Site, except to
the extent that such sales are conducted directly by Licensee from the
Web Site. In addition, at the option of Licensor, Licensee shall, within
a reasonable time after Licensor's written request setting forth the
applicable IP address, provide reasonably prominent "above the fold"
direct links from the location on the Web Site where information
regarding a particular recording artist is provided, (which shall be the
same location on such Web Site where Web Site Users access the
transmission of sound recordings), to a Web site operated by Licensor
relating to the relevant recording artist.
3.4 During the term of this Agreement, Licensee shall post an announcement on
the Web Site, in form and substance satisfactory to Licensor, concerning
the license limitations contained in Sections 2.2, 2.3, and 2.4, and, if
requested by Licensor, include a click wrap agreement in form and
substance satisfactory to Licensor, for acknowledgement by Web Site
Users.
4. TERM
4.1 The term of this Agreement commences on the First Transmission Date and
ends on December 31, 2001, unless earlier terminated pursuant to this
Section 4 or Section 8.
4.2 Either party may terminate this Agreement as to the other party if, at
any time, such other party shall file in any court or agency pursuant to
any statute or regulation of any state or country, a petition in
bankruptcy or insolvency or for reorganization or for an arrangement
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<PAGE> 5
or for the appointment of a receiver or trustee of the party or of its
assets, or if such other party proposes a written agreement of
composition or extension of its debts, or if such other party shall be
served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall not be dismissed within sixty (60)
days after the filing thereof, or if such other party shall propose or be
a party to any dissolution or liquidation, or if such other party shall
make an assignment for the benefit of creditors.
4.3 If technology becomes widely available that permits Web Site Users to
create a separate, complete and usable copy of sound recordings
transmitted by Licensee, then Licensee, upon notice from Licensor or
otherwise obtaining information as to the existence of such technology,
shall make all commercial efforts to prevent the use of such technology
by Web Site Users. Licensee shall also implement technical protection
measures, if available, to prevent the use of such technology by Web Site
Users. In the event that such commercial efforts and technical measures
fail to prevent Web Site Users from using such technology, then the
Payable Transmission Rate shall no longer apply and the parties shall
immediately enter into good faith negotiations to determine an
appropriate increased Payable Transmission Rate.
4.4 Licensor may terminate this Agreement if Licensee transmits sound
recordings using multicast technology and fails to maintain a control
connection or other mechanism with Web Site Users that permits Licensee
to count reliably the number of Payable Transmissions so that Licensor
may reliably audit such count pursuant to Section 6.
5. LICENSE FEE REPORTS
5.1 Licensee shall submit a quarterly License Fee Report to Licensor for each
quarterly period during the term of this Agreement, by the twentieth day
of the following quarter. Licensee and Licensor shall mutually agree upon
a form of License Fee Report within sixty (60) days following the date of
this Agreement. Such License Fee Report shall provide reasonably detailed
information as to the number of Payable Transmissions during such
quarterly period and shall be certified to be accurate by an officer of
Licensee.
5.2 During the term of this Agreement, Licensee shall provide Licensor with
weekly reports, by the tenth day after the end of each week, regarding
the sound recordings accessed by Web Sites Users during the preceding
week. Such reports shall be in a form to be mutually agreed upon by
Licensor and Licensee within sixty (60) days following the date of this
Agreement. Such reports shall include information as to use by title;
artist; album; label; catalogue number; UPC Code (by December 31, 1999);
release date; ISRC code (when available); number of playing dates and
times of transmission; duration of sound recording; and such additional
information as Licensor reasonably requests; provided that such requests
shall not be effective in less than sixty (60) days from the date of the
request. In the event Licensee incurs additional actual out-of-pocket
costs as a result of furnishing such additional information, such
reasonable costs will be deducted from license fees payable for the
relevant period(s).
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5.3 During the term of this Agreement, Licensee agrees to submit such
additional information as may be required under applicable rules and
regulations of the Copyright Office, including without limitation 37
C.F.R. Section 201.36.
6. VERIFICATION OF LICENSE FEE REPORTS AND OTHER REPORTS
6.1 Licensor shall have the right to examine Licensee's books and records,
and Licensee agrees to obtain for Licensor the right to examine the books
and records of any partner in, or co-publisher of, the Web Site, in order
to verify any report required by this Agreement. Licensor may exercise
this right no more than once per calendar year. Licensor shall give
Licensee thirty (30) days' notice of its intention to conduct an
examination. Licensee agrees to furnish all pertinent books and records,
including electronic records, to Licensor's authorized representatives,
during customary business hours. Such books and records shall be kept by
Licensee in accordance with Generally Accepted Accounting Principles and
shall be retained for at least three (3) years following expiration of
the term of this Agreement. Notwithstanding the foregoing, Licensee shall
not be required to provide Licensor with the access provided in this
Section 6.1 if in the preceding twelve (12) months the Licensee's
independent auditor has completed and signed an audit report for an audit
that addresses all of the information that would have been requested by
and made available to Licensor, in which event Licensee shall provide to
Licensor the audit report, work papers and other information provided to
such auditor.
6.2 Licensee agrees to provide a third-party contractor selected by Licensor
(unless Licensee identifies a conflict of interest or other material fact
that should disqualify the contractor) with such reasonable additional
information and reasonable access to Licensee's premises and equipment,
and to cooperate with such contractor in making any inquiries of Licensee
and third parties who provided products or services to Licensee, as shall
reasonably be required for Licensor to verify the accuracy and
completeness of the Licensee Fee Reports provided under Section 5,
including without limitation Sections 5.1 and 5.2.
6.3 Expenses for any examination conducted by Licensor under Sections 6.1 and
6.2 shall be paid by Licensor unless such examination results in a
determination by the auditor conducting such examination that Licensee's
actual payments for the period examined were more than [***]* below the
payments required under this Agreement, in which case Licensee shall pay
the costs of the audit.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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<PAGE> 7
6.4 The exercise by Licensor of any rights under this Section 6 shall not
prejudice any other rights or remedies of Licensor, including any other
rights of Licensor to dispute any amounts owed to Licensor under this
Agreement.
7 CONFIDENTIALITY
7.1 Licensor shall provide access to Confidential Information only to its own
employees, employees of its constituent companies and to an independent
and qualified auditor retained by Licensor with respect to the
verification of license fee payments.
7.2 Licensor shall not disclose or make any use of the Confidential
Information except as permitted in Section 7.1 or as required by law. In
the event Licensor believes it may be obligated by law to disclose any
Confidential Information, it shall advise Licensee and cooperate with
Licensee in seeking to limit the scope of such disclosure and making such
disclosure subject to a protective order or similar device designed to
maintain the confidentiality of the Confidential Information. Licensor
shall implement procedures designed to safeguard all Confidential
Information.
7.3 Except as may be required by any law, statute, or governmental rule or
regulation, neither party shall provide this Agreement, or disclose any
of the terms and rates contained in this Agreement, to any person or
entity without the prior written consent of the other party.
7.4 Neither party shall issue any press release or make any other public
statement regarding this Agreement or the transactions contemplated
herein without the prior written consent of the other party.
8. BREACH OR DEFAULT
If either party fails to perform any of the material terms or conditions
required of it by this Agreement, the non-breaching party may, at its option,
give the breaching party notice to cure such material breach or default. Such
notice shall describe the nature of such breach. If the breaching party does not
cure within ten (10) business days of any such notice, any further notice from
the non-breaching party, and any further transmissions shall be fully subject to
the copyright owners' rights under Section 17 U.S.C. Section 106(6), and the
remedies in Section 17 U.S.C. Section 501 et seq. No waiver by the breaching
party of full performance by the non-breaching party in any one or more
instances shall be a waiver of the right to require full and complete
performance of this Agreement thereafter or of the right to terminate this
Agreement in accordance with this Section 8.
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<PAGE> 8
9. NOTICES
All notices and other communications between the parties hereto shall be in
writing and deemed received (i) when delivered in person; (ii) upon confirmed
transmission by facsimile device; or (iii) five (5) days after deposited in U.S.
mails, postage prepaid, certified or registered mail, addressed to the other
party at the address set forth below (or such other address as such other party
may supply by written notice):
Licensee: ARTISTdirect, Inc.
17835 Ventura Boulevard
Suite 310
Encino, California 91316
Attn: Chief Financial Officer
with a copy to:
Lenard & Gonzalez LLP
1900 Avenue of the Stars
25th Floor
Los Angeles, California 90067
Attn: Allen D. Lenard, Esq.
Licensor: Maverick Recording Company
9348 Civic Center Drive
Beverly Hills, California 90210
Attn: Vice Chairman and General Counsel
10. MISCELLANEOUS
10.1 This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York (without giving effect to conflicts of
law principles thereof).
10.2 The remedies provided herein shall be cumulative and shall not preclude
assertion by any party hereto of any other rights or the seeking of any
other remedies against the other party hereto. No failure to exercise and
no delay in exercising any right, power or privilege granted under this
Agreement shall operate as a waiver of such right, power or privilege. No
single or partial exercise of any right, power or privilege granted under
this Agreement shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege.
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10.3 Whenever possible, each provision of this Agreement shall be interpreted
in such a manner as to be effective and valid under applicable law, but
if any provision of this Agreement shall be prohibited by or invalid
under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
10.4 This Agreement may be modified or amended only by a writing signed by
Licensor and Licensee.
10.5 This Agreement expresses the entire understanding of the parties and
supersedes all prior and contemporaneous agreements and undertakings of
the parties with respect to the subject matter hereof.
10.6 Except as otherwise provided in Section 6.3, each party will pay all of
its own expenses, including attorneys' fees incurred in connection with
the negotiation of this Agreement, and the performance of its obligations
hereunder.
10.7 Licensor and Licensee agree that all obligations of clearance, payment or
attribution to third parties, if any, including music publishers to the
extent necessary, union funds and performing rights societies, shall be
solely the responsibility of Licensee, including but not limited to
payment for use of the musical compositions embodied in sound recordings,
if any, and for any liabilities associated with such use.
10.8 This Agreement may be executed in counterparts and by facsimile
signature, each of which shall be deemed to be an original but which
taken together shall constitute one agreement.
10.9 Except as otherwise expressly provided herein, this Agreement and the
rights hereunder shall not be assignable or transferable by either party
without the prior written consent of the other party; provided, however,
that either party hereto may assign its rights to any parent or
subsidiary, or any entity that acquires substantially all of the stock or
assets of such party in which case such assignee shall assume all
obligations and rights of such party under this Agreement.
10.10 This Agreement shall not be construed to create a partnership, joint
venture, agency or other legal relationship between the parties, or to
form any other legal entity.
10.11 The titles used in this Agreement are used for convenience only and are
not to be considered in construing or interpreting this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
MAVERICK RECORDING COMPANY ARTISTdirect, INC.
By: /s/ GUY OSEARY By: /s/ KEITH YOKOMOTO
------------------------- -----------------------------------------
Title: Co-Chief Executive Officer Title: President and Chief Operating Officer
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EXHIBIT A
OPERATING RESTRICTIONS
The following parameters shall apply to transmissions licensed pursuant to this
Agreement:
1. The Web Site Transmissions shall be streamed only and shall be streamed
[***]*.
2. Except as may be mutually agreed between Licensor and Licensee in writing,
the Web Site Transmissions shall comport with such parameters so that they would
be subject to statutory licensing pursuant to Paragraph 2, Subsection d, Section
114 of title 17, United States Code (the "Digital Millennium Copyright Act").
END OF EXHIBIT
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
11
<PAGE> 1
EXHIBIT 10.43
ADVERTISING AND PROMOTION AGREEMENT
This Advertising and Promotion Agreement (the "Agreement") is entered into this
24th day of December, 1999 (the "Effective Date") between Yahoo! Inc. ("Yahoo"),
a Delaware corporation with offices at 3420 Central Expressway, Santa Clara, CA
95051, and ARTISTdirect, Inc. ("ARTISTdirect"), a Delaware corporation with
offices at 17835 Ventura Boulevard, Suite 310, Encino, CA 91316.
In consideration of the mutual promises contained in this
Agreement, Yahoo and ARTISTdirect hereby agree as follows:
1. DEFINITIONS.
The following terms are used in this Agreement with the
respective meanings set forth below:
"ARTISTdirect Banner" means an advertising unit that (a) promotes
Music Products, ARTISTdirect Content or music related services available on the
ARTISTdirect Network; (b) has dimensions no larger than 468 pixels wide by 60
pixels high; (c) does not contain more than six seconds of animation; (d) does
not contain "looped" animation; (e) has a file size no larger than 15K; and (f)
permits users to navigate directly to a Page on the ARTISTdirect Network
primarily related to the content in the ARTISTdirect Banner.
"ARTISTdirect Banner Category Pages" means those Pages within the
categories of the Yahoo Directory identified in Exhibit A.
"ARTISTdirect Banner Keywords" means those keywords identified in
Exhibit A, except that Yahoo may substitute a comparable keyword (based on
projected Page Views) for any ARTISTdirect Banner Keyword if it determines, in
its sole discretion, that such substitution is reasonably necessary to avoid
liability for third-party claims relating to alleged infringement or other
improper use of the particular ARTISTdirect Banner Keyword.
"ARTISTdirect Banner Pages" means the ARTISTdirect Banner
Category Pages and the ARTISTdirect Banner Search Results Pages.
"ARTISTdirect Banner Search Results Pages" means those Pages
displayed upon a user's search of the Yahoo Directory for an ARTISTdirect Banner
Keyword.
"ARTISTdirect Brand Features" means all trademarks, service
marks, logos and other distinctive brand features of ARTISTdirect that are used
in or relate to its business.
"ARTISTdirect Best Sellers Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit C that (a)
contains a list of the top 5 best-selling recording artists, as provided by
ARTISTdirect on a weekly basis; (b) contains an ARTISTdirect Branded Link; and
(c) permits users to navigate directly to an ARTISTdirect Biased Buy Page from
each entry of the best-seller list.
EXECUTION COPY
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"ARTISTdirect Biased Buy Page" means a Page within Yahoo Shopping
(a) to which users click through directly from the ARTISTdirect Best Sellers
Module, the ARTISTdirect Billboard Module, the ARTISTdirect Buy It Button or the
ARTISTdirect New Releases Module; (b) which permits users to purchase the Music
Products promoted in the particular advertising unit only from the ARTISTdirect
RMI Site; and (c) which is substantially similar in form to the example set
forth in Exhibit D.
"ARTISTdirect Billboard Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit E that (a)
contains a list of the top 10 albums of the Billboard 200 albums and the
corresponding recording artists, as provided by a third party; (b) contains an
ARTISTdirect Branded Link; and (c) permits users to navigate directly to an
ARTISTdirect Biased Buy Page from the first 10 album entries.
"ARTISTdirect Branded Link" means a Link substantially similar in
form to the example set forth in Exhibit F that (a) contains ARTISTdirect Brand
Features; (b) has dimensions no larger than 120 pixels wide by 20 pixels high;
(c) is saved in GIF or JPG format; (d) has a file size no larger than 2K; (e)
does not contain animation; (f) contains the phrase "Buy from" or comparable
purchase reference text; and (g) permits users to navigate directly to the front
Page of the ARTISTdirect RMI Site.
"ARTISTdirect Buy It Button" means an advertising unit
substantially similar in form to the example set forth in Exhibit G that (a) has
dimensions no larger than 88 pixels wide by 31 pixels high; (b) has a file size
no larger than 2K; (c) contains ARTISTdirect Brand Features; (d) contains text
that is provided by Yahoo; and (e) permits users to navigate directly to an
ARTISTdirect Biased Buy Page.
"ARTISTdirect Chat Banner" means an advertising unit
substantially similar in form to the example set forth in Exhibit X and to the
ARTISTdirect Banner, except that the ARTISTdirect Chat Banner (a) has dimensions
no larger than 468 pixels wide by 90 pixels high and (b) permits users to
navigate directly to a Page on the ARTISTdirect Network primarily related to the
content in the ARTISTdirect Chat Banner.
"ARTISTdirect Content" means all materials, data and similar
information relating to music that is collected or owned by ARTISTdirect, which
is a collection of HTML files, digital audio files and certain related scripts.
ARTISTdirect Content may include, but is not limited to (a) certain digital song
tracks and clips from the ARTISTdirect database; (b) certain recording artists
who participate in ARTISTdirect sponsored chat events; (c) certain webcasts of
music concerts or other music related events; and (d) certain auctions of Music
Products.
"ARTISTdirect Destination Page" means any Page on the
ARTISTdirect Network or the ARTISTdirect RMI Site to which users click through
directly from any ARTISTdirect Link. For clarity, ARTISTdirect Destination Page
does not mean any subsequent Page on the ARTISTdirect Network or the
ARTISTdirect RMI Site to which users navigate from the original Destination
Page.
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"ARTISTdirect DHTML Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit H that will be
presented to the user in 1 of 2 views:
(1) Opening View. The Opening View of this advertising unit (a)
promotes certain Music Products, certain ARTISTdirect Content
or certain music related services available on the
ARTISTdirect Network, as further promoted in the Expanded
View of this advertising unit; (b) has dimensions no larger
than 130 pixels wide by 40 pixels high; (c) does not contain
animation; (d) may contain an image in GIF or JPG format; and
(e) has a file size no greater than 3K.
(2) Expanded View. The Expanded View of this advertising unit (a)
promotes Music Products, ARTISTdirect Content or music
related services available on the ARTISTdirect Network; (b)
has a width no larger than 130 pixels and a variable height
based on the number of characters used in accordance with
subsection (d) below; (c) does not contain animation; and (d)
contains headline text of no more than 18 characters,
including spaces, and body text of no more than 200
characters, including spaces. The body text may contain text
links that permit users to navigate directly to Pages on the
ARTISTdirect Network primarily related to the content in the
Expanded View of this advertising unit, as long as at least
one text link permits users to navigate directly to a Page on
the ARTISTdirect RMI Site dedicated to the on-line purchase
of the Music Products promoted in the Expanded View of this
advertising unit.
"ARTISTdirect E-Mail Message" means an electronic mail message
substantially similar in form to the example set forth in Exhibit I that (a)
presents users with a promotional offer regarding the on-line sale of Music
Products by ARTISTdirect or the provision of ARTISTdirect Content or music
related services by ARTISTdirect at no cost to the user (e.g., 30% discount on
the purchase of compact discs, free music downloads); (b) is targeted to
participating registered Yahoo Mail users who have indicated an interest in
music in their Yahoo profiles based on 1 of the following 5 variables (as
selected by ARTISTdirect and subject to availability), which are provided by
registered Yahoo Mail users upon registration: age, gender, occupation,
interest, zip code; (c) conforms to Yahoo Delivers' then current guidelines; (d)
is a single HTML message that does not exceed 425 pixels in width, which Yahoo
will enclose within a table and place between the required header and footer
information; (e) consists of HTML code that is free of errors and passes the
weblink validation checker; (f) has a total file size, including HTML code and
graphics, no larger than 30K; (g) does not have more than six seconds of
animation; (h) does not contain "looped" animation; (i) does not contain Java,
JavaScript, frames, ActiveX, or dynamic HTML; (j) does not have body background
image or color, except that colored tables may be used to simulate a background
color; (k) addresses users as Yahoo Delivers members (e.g., "An exclusive offer
for Yahoo Delivers members."); (l) has a subject line that contains no more than
35 characters, including spaces, and conforms to the following format: "Yahoo!
Delivers: A Special Offer from ARTISTdirect"; and (m) permits users to navigate
directly to a Page on the ARTISTdirect Network primarily related to the content
in the ARTISTdirect E-Mail Message.
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<PAGE> 4
"ARTISTdirect Front Page Promotion" means a promotion that (a)
includes the ARTISTdirect Front Page Promotion Banner; (b) runs for at least 2
weeks, unless otherwise mutually agreed by the parties; (c) runs no more
frequently than once per calendar quarter; and (d) complies with Yahoo's then
current guidelines with respect to front Page promotions, currently located at
http://docs.yahoo.com/docs/advertising/csguide/index.html.
"ARTISTdirect Front Page Promotion Banner" means an advertising
unit substantially similar in form to the example set forth in Exhibit J that
(a) presents users with a promotional offer regarding the on-line sale of Music
Products by ARTISTdirect or the provision of ARTISTdirect Content or music
related services by ARTISTdirect at no cost to the user (e.g., 30% discount on
the purchase of compact discs, free music downloads, win tickets to see Sting in
concert); (b) has dimensions no larger than 230 pixels wide by 33 pixels high;
(c) does not contain more than 6 seconds of animation; (d) does not contain
"looped" animation; (e) has a file size no greater than 3K and (f) permits users
to navigate directly to a Page on the ARTISTdirect Network primarily related to
the content in the ARTISTdirect Banner.
"ARTISTdirect Keyword Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit K that (a)
promotes the on-line sale of Music Products by ARTISTdirect; (b) has dimensions
no larger than 88 pixels wide by 31 pixels high; (c) does not contain animation;
(d) has a file size no greater than 2K (e) contains ARTISTdirect Brand Features
that permit users to navigate directly to the front Page of the ARTISTdirect RMI
Site; (f) contains 3 text links on 3 lines that do not exceed 16 characters per
line, including spaces; and (g) permits users to navigate directly to Pages on
the ARTISTdirect RMI Site that ARTISTdirect deems appropriate, except that each
Page must present users with a prominent opportunity to purchase on-line the
Music Products promoted in the ARTISTdirect Keyword Module.
"ARTISTdirect Keyword Module Category Pages" means those Pages
within the categories of the Yahoo Directory identified in Exhibit B, as amended
by Yahoo from time to time to account for changes in the organization of the
Yahoo Directory.
"ARTISTdirect Keyword Module Keywords" means those keywords
identified in Exhibit B, except that Yahoo may substitute a comparable keyword
(based on projected Page Views) for any ARTISTdirect Keyword Module Keyword if
it determines, in its sole discretion, that such substitution is reasonably
necessary to avoid liability for third-party claims relating to alleged
infringement or other improper use of the particular ARTISTdirect Keyword Module
Keyword.
"ARTISTdirect Keyword Module Pages" means the ARTISTdirect
Keyword Module Category Pages and the ARTISTdirect Keyword Module Search Results
Pages.
"ARTISTdirect Keyword Module Search Results Pages" means those
Pages displayed upon a user's search of the Yahoo Directory for an ARTISTdirect
Banner Keyword.
"ARTISTdirect Link" means any Link placed by Yahoo under this
Agreement, including but not limited to the ARTISTdirect Banner, the
ARTISTdirect Chat Banner, the ARTISTdirect Shopping Banner, the ARTISTdirect
Front Page Promotion Banner, the ARTISTdirect Best Sellers Module, the
ARTISTdirect Billboard Module, the ARTISTdirect Buy
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It Button, the ARTISTdirect DHTML Module, the ARTISTdirect Keyword Module, the
ARTISTdirect Message Boards Module, the ARTISTdirect New Releases Module, the
ARTISTdirect Sweepstakes Button, the ARTISTdirect Sweepstakes Text Link, the
Yahoo Mail Welcome Module and the Yahoo Mail Logout Module.
"ARTISTdirect Message Boards Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit L that (a)
promotes Music Products, ARTISTdirect Content or music related services
available on the ARTISTdirect Network, except that the ARTISTdirect Message
Boards Module may not promote message boards on the ARTISTdirect Network; (b)
has dimensions no larger than 125 pixels wide by 125 pixels high; (c) does not
contain more than six seconds of animation; (d) does not contain "looped"
animation; (e) has a file size no greater than 10K; and (f) permits users to
navigate directly to a Page on the ARTISTdirect Network primarily related to the
content in the ARTISTdirect Message Boards Module.
"ARTISTdirect New Releases Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit M that (a)
contains 3 images of album art, where each image has dimensions no larger than
80 pixels wide by 80 pixels high, a file size no greater than 3K and permits
users to navigate directly to an ARTISTdirect Biased Buy Page; (b) contains 3
lines of text, where each line provides either the name of the artist or the
title of the album in the corresponding image and serves as a text link that
permits users to navigate directly to an ARTISTdirect Biased Buy Page; and (c)
contains an ARTISTdirect Branded Link.
"ARTISTdirect Replacement Module" means an advertising unit that
(a) contains at least one link; (b) has dimensions no smaller than the
ARTISTdirect DHTML Module Opening View and no larger than the Expanded View; and
(c) has other specifications as mutually agreed upon by the parties.
"ARTISTdirect RMI Site" means those Pages within the ARTISTdirect
Network as hosted by Yahoo and included in the Yahoo Remote Merchant Integration
Program.
"ARTISTdirect Shopping Banner" means an advertising unit
substantially similar in form to the ARTISTdirect Banner, except that the
ARTISTdirect Shopping Banner permits users to navigate directly to a Page on the
ARTISTdirect RMI Site primarily related to the content in the ARTISTdirect
Shopping Banner.
"ARTISTdirect Network" means the Web properties owned or operated
on behalf of ARTISTdirect, which are dedicated to the on-line promotion and sale
of Music Products and are currently located at http://www.artistdirect.com,
http://www.ubl.com, http://www.imusic.com and http://www.downloadsdirect.com.
"ARTISTdirect Sweepstakes Button" means an advertising unit
substantially similar in form to the example set forth in Exhibit N that (a)
contains a sweepstakes with a minimum retail prize value of [***]* (to be
provided by Yahoo); (b) contains text that is provided by Yahoo in consultation
with ARTISTdirect; (c) permits users to interact with the
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The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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ARTISTdirect Network as mutually agreed upon by the parties; (d) does not
contain ARTISTdirect Brand Features; (e) is further outlined in a production
scheduled mutually agreed upon by the parties; and (f) permits users to navigate
directly to an ARTISTdirect Sweepstakes Page that will contain ARTISTdirect
Brand Features, and the ARTISTdirect Brand Features permit users to navigate
directly to the front Page of the ARTISTdirect Network, currently located at
http://www.artistdirect.com.
"ARTISTdirect Sweepstakes Page" means a Page substantially
similar in form to the example set forth in Exhibit P that (a) is hosted by
Yahoo; (b) may contain Yahoo Brand Features and will contain ARTISTdirect Brand
Features that permit users to navigate directly to the front Page of the
ARTISTdirect Network, currently located at http://www.artistdirect.com; and (c)
permits user to register for a sweepstakes.
"ARTISTdirect Sweepstakes Text Link" means an advertising unit
substantially similar in form to the example set forth in Exhibit O that (a)
contains a sweepstakes with a minimum retail prize value of [***]* (to be
provided by Yahoo); (b) contains text that is provided by Yahoo in consultation
with ARTISTdirect; (c) permits users to interact with the ARTISTdirect Network
as mutually agreed upon by the parties; (d) does not contain ARTISTdirect Brand
Features; (e) is further outlined in a production scheduled mutually agreed upon
by the parties; and (f) permits users to navigate directly to an ARTISTdirect
Sweepstakes Page that will contain ARTISTdirect Brand Features, and the
ARTISTdirect Brand Features permit users to navigate directly to the front Page
of the ARTISTdirect Network, currently located at http://www.artistdirect.com.
"FTC Order" means that certain "Decision and Consent Order"
issued by the U.S. Federal Trade Commission on February 5, 1999 against
GeoCities, Inc., a California corporation acquired by Yahoo, attached hereto as
Exhibit T and any and all subsequent or related official materials, regulations,
laws judgements or orders.
"Launch Date" means the date on which the ARTISTdirect RMI Site
is made publicly available by Yahoo.
"Link" or "link" means a visible graphic or textual indicator
located within a Page that permits a user to navigate the World Wide Web; when
selected by a user, this indicator directs the user's internet browser
connection onward to a specified Page on the same or any other Web site via a
URL (whether perceptible or not) and establishes a direct connection between the
browser and the new Page.
"Music Merchant" means any company or other third party that
[***]* the on-line sale of Music Products.
"Music Merchant Best Sellers Module" means an advertising unit
that (a) conforms to the specifications of the ARTISTdirect Best Sellers Module
and (b) is placed on the same Pages on which the ARTISTdirect Best Sellers
Module is placed.
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The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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"Music Merchant Modules" means (a) the ARTISTdirect Billboard
Module, the ARTISTdirect Buy It Button, the ARTISTdirect DHTML Module, the
ARTISTdirect Keyword Module, the ARTISTdirect New Releases Module, the
ARTISTdirect Sweepstakes Button and the ARTISTdirect Sweepstakes Text Link, and
(b) those advertising units that (1) conform to the specifications of the
aforementioned ARTISTdirect advertising units and (2) are placed within the same
area of the same Pages on which the aforementioned ARTISTdirect advertising
units are placed, either adjacent to the aforementioned ARTISTdirect advertising
units or in rotation with the aforementioned ARTISTdirect advertising units.
"Music Products" means music recordings and other music related
merchandise (i.e., compact discs, cassettes tapes, mp3 files and other audio
formats, music videos and other audio/video formats, music concert memorabilia,
including but not limited to clothing and posters that commemorate the music
concert, and recording artist memorabilia, including but not limited to clothing
and posters that feature the recording artist).
"Music Merchant Program" means Yahoo's program consisting of
certain advertising and promotional activities with Music Merchants as further
described in this Agreement.
"Page" means any World Wide Web page (or, for on-line media other
than Web sites, the equivalent unit of the relevant protocol).
"Page View" mean a user's request for a Page as measured by
Yahoo's advertising reporting system.
"Run of Music Rooms" means banner placements in the south banner
position across the chat rooms within the music category of Yahoo Chat.
"Run of Network" means banner placements in the north banner
position across the Yahoo Properties.
"Run of Yahoo Music" means banner placements in the north banner
position across Yahoo Music.
"Run of Yahoo Shopping" means banner placements in the north
banner position across Yahoo Shopping.
"Term" means the period beginning on the Effective Date and
continuing for twenty-four (24) months from the Launch Date, unless either party
terminates this Agreement on an earlier date in accordance with Section 12.
"Yahoo Brand Features" means all trademarks, service marks, logos
and other distinctive brand features of Yahoo that are used in or relate to its
business.
"Yahoo Chat" means Yahoo's U.S. targeted chat property, currently
located at http://chat.yahoo.com.
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"Yahoo Delivers" means Yahoo's U.S. targeted direct marketing
program conducted via Yahoo Mail.
"Yahoo Digital" means Yahoo's U.S. targeted digital music
property, currently located at http://digital.yahoo.com.
"Yahoo Directory" means Yahoo's principal U.S. targeted directory
to the World Wide Web, currently located at http://www.yahoo.com.
"Yahoo Mail" means Yahoo's U.S. targeted electronic mail
property, currently located at http://mail.yahoo.com.
"Yahoo Mail Logout Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit R that (a) is
targeted to certain registered Yahoo Mail users based on age, gender, interest
or occupation (e.g., users whose Yahoo profiles reflect an age between 18 and
35); (b) has dimensions no larger than 88 pixels wide by 31 pixels high; (c) has
a file size no greater than 2K; (d) contains no more than 25 characters of text,
including spaces; (e) contains a pull down menu with a file size no greater than
1.35K and with no more than 5 options; (f) does not contain animation; and (g)
permits users to navigate directly to a Page on the ARTISTdirect Network that
(1) is dedicated to the on-line purchase of the Music Products promoted in the
Yahoo Mail Logout Module or (2) presents users with a promotional offer
regarding the on-line sale of Music Products by ARTISTdirect or the provision of
ARTISTdirect Content or music related services by ARTISTdirect at no cost to the
user (e.g., free music downloads, access to ARTISTdirect Content that is not
available to the general public, discounts on the on-line purchase of Music
Products, free shipping and handling on the on-line purchase of Music Products).
"Yahoo Mail Logout Page" means a Page substantially similar in
form to the example set forth in Exhibit R that is the first Page presented to a
user after the user clicks on the "Sign Out" Link in Yahoo Mail.
"Yahoo Mail Welcome Module" means an advertising unit
substantially similar in form to the example set forth in Exhibit Q that (a) is
targeted to certain registered Yahoo Mail users based on age, gender, interest
or occupation (e.g., users whose Yahoo profiles reflect an age between 18 and
35); (b) has dimensions no larger than 88 pixels wide by 31 pixels high; (c) has
a file size no greater than 2K; (d) contains 2 lines of text, not to exceed 25
characters, including spaces, per line; (e) does not contain animation; and (f)
permits users to navigate directly to a Page on the ARTISTdirect Network that
(1) is dedicated to the on-line purchase of the Music Products promoted in the
Yahoo Mail Welcome Module or (2) presents users with a promotional offer
regarding the on-line sale of Music Products by ARTISTdirect or the provision of
ARTISTdirect Content or music related services by ARTISTdirect at no cost to the
user (e.g., free music downloads, access to ARTISTdirect Content that is not
available to the general public, discounts on the on-line purchase of Music
Products, free shipping and handling on the on-line purchase of Music Products).
"Yahoo Mail Welcome Page" means a Page substantially similar in
form to the example set forth in Exhibit Q that (a) is the first Page presented
to a user after the user
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successfully enters a Yahoo ID and password for a Yahoo Mail account and (b) is
presented to the user each time the user accesses the Yahoo Mail account before
clicking on the "Sign Out" Link in Yahoo Mail or before the Yahoo Mail system
signs out the user (e.g., for a sustained period of inactivity).
"Yahoo Message Boards" means Yahoo's U.S. targeted message board
property, currently located at http://messages.yahoo.com.
"Yahoo Music" means Yahoo's U.S. targeted music property,
currently located at http://music.yahoo.com.
"Yahoo Properties" means any Yahoo branded or co-branded media
properties, including but not limited to Internet guides, that are developed in
whole or in part by Yahoo or its affiliates.
"Yahoo Remote Merchant Integration Program" means that program
through which Yahoo integrates certain Web sites of remote on-line merchants
into Yahoo Shopping.
"Yahoo Remote Merchant Integration Program Agreement" means the
agreement set forth in Exhibit V.
"Yahoo Shopping" means Yahoo's U.S. targeted shopping property,
currently located at http://shopping.yahoo.com.
2. ARTISTDIRECT BANNERS.
2.1 Yahoo will provide the ARTISTdirect Banner, on a rotating
basis until its Page View obligation under Section 10.1 is
met, on ARTISTdirect Banner Pages, through Run of Yahoo
Music and, based on an interest in music (i.e., targeted to
registered Yahoo users who have indicated an interest in
music in their Yahoo profiles), through Run of Network.
2.2 Yahoo will provide the ARTISTdirect Chat Banner, on a
rotating basis until its Page View obligation under Section
10.1 is met, through Run of Music Rooms.
2.3 Yahoo will provide the ARTISTdirect Shopping Banner, on a
rotating basis until its Page View obligation under Section
10.1 is met, through Run of Yahoo Shopping.
2.4 Yahoo will provide the ARTISTdirect Front Page Promotion
Banner on a rotating basis in connection with the
ARTISTdirect Front Page Promotion.
3. ARTISTDIRECT BUTTONS AND MODULES.
3.1 During the Term, Yahoo will provide the ARTISTdirect Best
Sellers Module on Pages within Yahoo Digital, Yahoo Music
and Yahoo Shopping.
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3.2 Yahoo will provide the ARTISTdirect Billboard Module, on a
rotating basis with the corresponding Music Merchant Module
of the Selected Music Merchant (as defined in Section 9.1)
during the Term, on Pages within Yahoo Shopping.
3.3 Yahoo will provide the ARTISTdirect Buy It Button, on a
rotating basis with the corresponding Music Merchant Module
of the Selected Music Merchant during the Term, on Pages
within Yahoo Music.
3.4 Yahoo will provide the ARTISTdirect DHTML Module, on a
rotating basis with the corresponding Music Merchant Module
of the Selected Music Merchant during the Term, on Pages
within Yahoo Music. In the event that Yahoo cannot provide
the ARTISTdirect DHTML Module, Yahoo will provide the
ARTISTdirect Replacement Module on a rotating basis with
the Selected Music Merchant on Pages within Yahoo Music
during the time that Yahoo is unable to provide the
ARTISTdirect DHTML Module. The continued provision of the
ARTISTdirect Replacement Module will be subject to review
at the quarterly meetings described in Section 10.3.
3.5 Yahoo will provide the ARTISTdirect Keyword Module, on a
rotating basis with and adjacent to the corresponding Music
Merchant Module of the Selected Music Merchant during the
Term, on the ARTISTdirect Keyword Module Pages.
3.6 Yahoo will provide the ARTISTdirect Message Boards Module,
on a rotating basis until its Page View obligation under
Section 10.1 is met, on Pages within the music category of
Yahoo Message Boards.
3.7 Yahoo will provide the ARTISTdirect New Release Module, on
a rotating basis with the corresponding Music Merchant
Module of the Selected Music Merchant during the Term, on
Pages within Yahoo Shopping.
3.8 Yahoo will provide the Yahoo Mail Welcome Module, on a
rotating basis until its Page View obligation under Section
10.1 is met, on the Yahoo Mail Welcome Page.
3.9 Yahoo will provide the Yahoo Mail Logout Module, on a
rotating basis until its Page View obligation under Section
10.1 is met, on the Yahoo Mail Logout Page.
4. ARTISTDIRECT SWEEPSTAKES BUTTON AND SWEEPSTAKES TEXT LINK.
4.1 Yahoo will provide the ARTISTdirect Sweepstakes Button, on
a rotating basis with the corresponding Music Merchant
Module of the Selected Music Merchant until its Page View
obligation under Section 10.1 is met, on Pages within the
music category of Yahoo Shopping.
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4.2 Yahoo will provide the ARTISTdirect Sweepstakes Text Link,
on a rotating basis with the corresponding Music Merchant
Module of the Selected Music Merchant until its Page View
obligation under Section 10.1 is met, on Pages within Yahoo
Music.
4.3 Yahoo will provide as many as [***]* separate sweepstakes
(the "Sweepstakes") in connection with the ARTISTdirect
Sweepstakes Button and the ARTISTdirect Sweepstakes Text
Link. ARTISTdirect will be responsible for creating the
Sweepstakes, including but not limited to drafting the
official rules that will govern the Sweepstakes and the
acquisition and fulfillment of all prizes in connection
with the Sweepstakes, except that Yahoo will provide
ARTISTdirect with 1 prize of retail value not less than
[***]* for each Sweepstakes that is conducted under this
Agreement. The Sweepstakes will be (a) subject to Yahoo's
approval, which will not be unreasonably withheld, and (b)
conducted in accordance with Yahoo's then current
guidelines with respect to sweepstakes. The parties
acknowledge and agree that Yahoo's approval of the official
rules for the Sweepstakes will not constitute an opinion as
to the legal appropriateness or adequacy of such rules or
their manner of use.
4.4 In connection with the Sweepstakes, Yahoo will present
users who participate in the Sweepstakes with the
opportunity to receive an electronic mail message (the
"Follow-Up E-Mail"). Upon ARTISTdirect's election, Yahoo
will deliver the Follow-Up E-Mail on behalf of ARTISTdirect
to those users who opt to receive the Follow-Up E-Mail.
ARTISTdirect will provide to Yahoo all text of the
Follow-Up E-Mail, and such text will be subject to Yahoo's
approval, which will not be unreasonably withheld.
5. ARTISTDIRECT E-MAIL MESSAGE.
5.1 Yahoo will deliver [***]* ARTISTdirect E-Mail Messages to
those registered Yahoo Mail users who (a) have indicated in
their Yahoo Mail preferences an interest in music and a
willingness to receive promotional offers via Yahoo
Delivers and (b) have provided information in their Yahoo
profiles that matches the value selected by ARTISTdirect
for purposes of targeting the ARTISTdirect E-Mail Message.
Yahoo will deliver the ARTISTdirect E-Mail Message in
accordance with Yahoo's privacy policy.
5.2 ARTISTdirect will provide to Yahoo all text of the
ARTISTdirect E-Mail Message and any other materials
necessary for ARTISTdirect to participate in Yahoo
Delivers. Such materials will be (a) subject to Yahoo's
approval, which will not be unreasonably withheld, and (b)
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The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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consistent with Yahoo's policies and guidelines for such
messages and for Yahoo Delivers generally.
6. ARTISTDIRECT FRONT PAGE PROMOTION.
6.1 During the Term, and in connection with the ARTISTdirect
Front Page Promotion Banner, Yahoo will provide the
ARTISTdirect Front Page Promotion no more frequently than
[***]* until its Page View obligation under Section 10.1 is
met.
7. ARTISTDIRECT CONTENT.
7.1 During the Term and in ARTISTdirect's sole discretion,
ARTISTdirect will apprise Yahoo of ARTISTdirect Content
when ARTISTdirect develops or acquires such ARTISTdirect
Content. Yahoo will, in its sole discretion, consider
ARTISTdirect Content for inclusion in appropriate areas of
the Yahoo Properties. Under no circumstances will
ARTISTdirect be under any obligation, express or implied,
to provide ARTISTdirect Content to Yahoo, nor will Yahoo be
under any obligation, express or implied, to include any
ARTISTdirect Content in any Yahoo Property. If Yahoo
chooses to include ARTISTdirect Content in any Yahoo
Property, the terms of such inclusion will be mutually
agreed upon by the parties.
8. IMPLEMENTATION.
8.1 Yahoo will be solely responsible for the user interface and
placement of the ARTISTdirect Links and ARTISTdirect will
be solely responsible for and will provide Yahoo with all
text, artwork and design elements of the ARTISTdirect
Links. The parties will use commercially reasonable efforts
to make available on Yahoo (a) the ARTISTdirect Banners on
or before [***]* and (b) the other ARTISTdirect Links on or
before [***]* In any event, ARTISTdirect will deliver to
Yahoo all the text, artwork and design elements of the
ARTISTdirect Banner no later than [***]* and all text,
artwork and design elements of the other ARTISTdirect Links
no later than [***]*
8.2 Yahoo reserves the right, at any time, to redesign or
modify the organization, structure, specifications, "look
and feel," navigation, guidelines and other elements of the
ARTISTdirect Links or any Yahoo Property on which an
ARTISTdirect Link is placed. If such a modification
materially and adversely affects any specific ARTISTdirect
Link, Yahoo will provide ARTISTdirect, as its sole remedy,
with a comparable promotional placement on the Yahoo
Properties.
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Securities and Exchange Commission.
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8.3 ARTISTdirect will provide to Yahoo all URLs, URL formats
(as applicable), content and other materials necessary for
Yahoo to provide the ARTISTdirect Links in accordance with
the specifications set forth in this Agreement and Yahoo's
standard advertising guidelines, currently located at
http://docs.yahoo.com/docs/advertising/ (the "ARTISTdirect
Deliverables") on or before the ARTISTdirect Deliverables
Due Date. All content and material contained in the
ARTISTdirect Links will be subject to Yahoo's approval,
which will not be unreasonably withheld, and must comply
with all applicable federal, state and local laws, rules
and regulations, including but not limited to consumer
protection laws and any rules and regulations governing
product claims, truth in labeling or false advertising.
8.4 During the Term, ARTISTdirect hereby grants to Yahoo a
non-exclusive, non-transferable, non-sublicensable,
worldwide, fully paid license to use, reproduce and display
the ARTISTdirect Brand Features solely (a) to indicate the
location of the ARTISTdirect Links as set forth herein and
(b) in connection with the marketing and promotion of
ARTISTdirect in the Yahoo Properties pursuant to this
Agreement.
8.5 In no event will any ARTISTdirect Destination Page contain
graphic or text links, advertisements or promotions of
[***]* (the "Yahoo Competitors"). Yahoo will be entitled to
update the list of Yahoo Competitors on a quarterly basis.
The foregoing exclusion of Yahoo Competitors does not apply
to any graphic or text link that serves as attribution for,
and appears adjacent to, original content that is presented
on an ARTISTdirect Destination Page, unless Yahoo
determines, in its reasonable discretion, that such link is
promotional in nature. If Yahoo makes such a determination,
or if Yahoo becomes aware of any link, advertisement or
promotion that potentially violates this Section 8.5,
[***]*. If the parties cannot resolve the matter within 5
business days of Yahoo's notice to ARTISTdirect, Yahoo
reserves the right to [***]*).
8.6 Within [***]* days after the Effective Date of this
Agreement, ARTISTdirect will place a Yahoo graphic link on
all ARTISTdirect Destination Pages. The Yahoo graphic link
must (a) be placed in a manner approved by Yahoo, which
approval will not be unreasonably withheld; (b) contain
the Yahoo name and logo as provided by Yahoo; and (c)
directly link the user back to a Page on the Yahoo
Properties designated by Yahoo.
8.7 During the Term, Yahoo hereby grants to ARTISTdirect a
non-exclusive, worldwide, fully paid license to use,
reproduce and display the Yahoo Brand Features as described
in Section 8.6.
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The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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8.8 ARTISTdirect and Yahoo will execute the Yahoo Remote
Merchant Integration Program Agreement, attached hereto as
Exhibit V, on the Effective Date of this Agreement.
8.9 ARTISTdirect will issue to Yahoo a warrant (the "Warrant")
substantially in the form attached hereto as Exhibit W on
the Effective Date of this Agreement.
8.10 The ARTISTdirect Network will (a) handle [***]*
simultaneous requests; (b) have a minimum [***]* uptime and
maximum [***]* downtime per calendar quarter of the term
(except for planned downtime that may be required for
system enhancements, upgrades or preventative maintenance);
and (c) ensure that data transfers from the ARTISTdirect
Network to the Yahoo Properties initiate within fewer than
[***]* seconds, on average, of request. The parties
acknowledge and agree that a failure of the ARTISTdirect
Network to meet the aforementioned performance standards
for any calendar quarter is a material breach for the
purposes of Section 12.2(b).
8.11 Within [***]* of this Agreement, the parties will use
commercially reasonable efforts [***]*, to credit
ARTISTdirect with the traffic and reach statistics
generated from users who view Pages on the ARTISTdirect RMI
Site, as reported by Media Metrix. If the parties cannot
devise a means of officially crediting ARTISTdirect with
these statistics, either by a change in technology or by a
change in Media Metrix's reporting policies, [***]*
9. LIMITED EXCLUSIVITY; RIGHT OF FIRST PRESENTATION.
9.1 Commencing on [***]* and continuing through the Term, Yahoo
will (a) [***]*
9.2 The parties acknowledge and agree that, with respect to the
Music Merchant Modules only, placement of ARTISTdirect's
Music Merchant Modules will [***]*
9.3 ARTISTdirect acknowledges and agrees that, except with
respect to the foregoing limited exclusivity of Sections
9.1 and 9.2 above, Yahoo is not precluded from, among other
things, promoting or placing any advertising units of a
Music Merchant or any other entity in any area of the Yahoo
Properties.
9.4 In the event that Yahoo develops enhancements that
materially improve the size, appearance or placement of (a)
any ARTISTdirect Link or (b) any other advertising unit
made available to Music Merchants generally,
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Securities and Exchange Commission.
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Yahoo will provide ARTISTdirect with written notice of such
enhancements prior to their release and will describe
Yahoo's reasonable business requirements for providing such
enhancements to ARTISTdirect.
9.5 In the event that Yahoo, in its sole discretion, elects (a)
to extend this Music Merchant Program beyond the Term or
(b) subject to the limited exclusivity set forth in Section
9.1 above, to develop for any area of the Yahoo Properties
a new merchant advertising program that promotes either the
on-line sale of Music Products or the on-line offering of
music-related content and is projected to generate 500
million or more Page Views, Yahoo will provide written
notice to ARTISTdirect that describes Yahoo's reasonable
business requirements for participation in such program
(the "Presentment Notice"). With respect to an extension of
this Music Merchant Program, Yahoo will provide a
Presentment Notice to ARTISTdirect at least 30 days prior
to the expiration of the Term. The parties will use good
faith efforts to negotiate and execute a written agreement
under reasonable terms and conditions with respect to any
opportunity presented in a Presentment Notice. If
ARTISTdirect declines to commence negotiations with Yahoo
within 5 days after ARTISTdirect receives a Presentment
Notice from Yahoo, or if the parties fail to reach
agreement within 30 days following the commencement of good
faith negotiations, or such later date as is agreed by the
parties, Yahoo may offer the opportunity to any third
party.
10. PAGE VIEWS.
10.1 With respect to the ARTISTdirect Links, Yahoo will deliver
a minimum of [***]* Page Views.
10.2 Yahoo will use commercially reasonable efforts to deliver
the aforementioned Page Views according to the allocation
set forth below, but Yahoo's Page View obligation is with
respect to the Music Merchant Program as a whole. Yahoo
will not be in breach of this Agreement for failure to
deliver the specific number of Page Views in any of the
areas set forth below:
(a) [***]*
10.3 [***]* Yahoo and ARTISTdirect will meet to discuss the
performance of this Music Merchant Program as a whole and
agree to consider in good faith ways to optimize elements
of this Music Merchant Program. In the event that Yahoo
fails to deliver the number of Page Views set forth in
Section 10.1 before expiration of the Term, [***]* If Yahoo
does not satisfy its Page View obligation within [***]*
days after the expiration of the Term, then [***]* The
parties acknowledge and agree that the [***]* referenced
above has no other significance in this Agreement other
than [***]*
10.4 On a regular basis and at ARTISTdirect's reasonable
request, Yahoo will provide ARTISTdirect with access to an
electronic database, the accuracy of which is periodically
reviewed and certified by Ernst & Young, LLP or a similarly
reputable and independent entity, that describes in
reasonable detail Yahoo's calculation of the Page Views
delivered under this Agreement. To the extent that Yahoo
elects, in its sole discretion, to conduct research or
analysis on behalf of or at the direction of ARTISTdirect,
Yahoo will share its results with ARTISTdirect at [***]*
11. COMPENSATION.
11.1 Slotting Fee. In consideration of Yahoo's performance and
obligations as set forth herein, ARTISTdirect will pay to
Yahoo [***]* of the first payment set forth in the payment
schedule below will be designated as a
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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<PAGE> 16
set up fee for the design, consultation, development,
implementation and placement of the ARTISTdirect Links.
Payment Date
------- ----
[***]*
11.2 Payment Information. Except as set forth in Section 10.3,
all payments herein are non-refundable and non-creditable
and will be made by ARTISTdirect via wire transfer into
Yahoo's main account according to the wire transfer
instructions set forth on Exhibit S.
11.3 Late Payments. Any portion of the above payments that has
not been paid to Yahoo within [***]* after the dates set
forth above will bear interest at the lesser of (a) one
percent (1%) per month or (b) the maximum amount allowed
by law. Notwithstanding the foregoing, any failure by
ARTISTdirect to make the payments specified in Section 11.1
on the dates set forth therein constitutes a material
breach of this Agreement.
11.4 Ability to Pay. ARTISTdirect represents and warrants that
it has the ability to pay to Yahoo all fees set forth in
this Agreement.
12. TERM AND TERMINATION.
12.1 Term. This Agreement will commence upon the Effective Date
and, unless terminated as provided herein, will remain in
effect for the Term.
12.2 Termination by Either Party with Cause. This Agreement may
be terminated at any time by either party (a) immediately
upon written notice if the other party (1) becomes
insolvent; (2) files a petition in bankruptcy; or (3) makes
an assignment for the benefit of its creditors; or (b) 30
days after written notice to the other party of such other
party's breach of any of its obligations under this
Agreement in any material respect (20 days in the case of a
failure to pay), which breach is not remedied within such
notice period. In the event that ARTISTdirect does not
remedy a breach of its payment obligation under this
Agreement within 20 days of Yahoo's written notice to
ARTISTdirect, Yahoo will be entitled to suspend its
performance under this Agreement immediately. Any notice of
breach provided in accordance with subsection (b) will
describe any termination of the Warrant that will result
from such breach.
12.3 Survival. The provisions of Sections 1, 10.3, 11, 13
through 17 and this 12.3 will survive expiration or
termination of this Agreement, except that ARTISTdirect's
payment obligations set forth in Section 11.1 will not
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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survive a proper termination of this Agreement by
ARTISTdirect in accordance with Section 12.2.
13. CONFIDENTIAL INFORMATION AND PUBLICITY.
13.1 Terms and Conditions. The terms and conditions of this
Agreement will be considered confidential and will not be
disclosed to any third parties except to such party's
accountants, attorneys or except as otherwise required by
law. Neither party will make any public announcement
regarding the existence of this Agreement without the other
party's prior written approval and consent. If this
Agreement or any of its terms must be disclosed under any
law, rule or regulation (e.g., as part of a filing with the
United States Securities and Exchange Commission),
excluding an order or other discovery request issued by a
court of competent jurisdiction, the disclosing party will
(a) give written notice of the intended disclosure to the
other party at least 3 days in advance of the date of
disclosure; (b) redact portions of this Agreement to the
fullest extent permitted under any applicable laws, rules
and regulations; and (c) submit a request, to be agreed
upon by the other party, that such portions and other
provisions of this Agreement requested by the other party
receive confidential treatment under the laws, rules and
regulations of the body or tribunal to which disclosure is
being made or otherwise be held in the strictest confidence
to the fullest extent permitted under the laws, rules or
regulations of any other applicable governing body. With
respect to a party's responses to the United States
Securities and Exchange Commission's comments on a
confidential treatment request, the disclosing party will
use best efforts to provide the other party with reasonable
prior notice of the intended disclosure, but a failure to
provide such notice will not be deemed a breach of this
Agreement.
13.2 Publicity. Yahoo and ARTISTdirect will jointly issue a
press release announcing this Agreement. The parties will
use commercially reasonable efforts to issue a joint press
release announcing this Agreement within 10 days after the
Launch Date, but no sooner than January 1, 2000. Any and
all publicity relating to this Agreement and subsequent
transactions between Yahoo and ARTISTdirect and the method
of its release will be approved in advance of the release,
in writing, by both Yahoo and ARTISTdirect.
13.3 Nondisclosure Agreement. Yahoo and ARTISTdirect acknowledge
and agree that the terms of the Mutual Nondisclosure
Agreement attached as Exhibit U will be incorporated by
reference and made a part of this Agreement, and will
govern the use and disclosure of confidential information
and all discussions pertaining to or leading to this
Agreement.
13.4 User Data. All information and data provided to Yahoo by
users of the Yahoo Properties or otherwise collected by
Yahoo relating to user activity
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on the Yahoo Properties will be retained by and owned
solely by Yahoo. All information and data provided to
ARTISTdirect on the ARTISTdirect Network or otherwise
collected by ARTISTdirect relating to user activity on the
ARTISTdirect Network will be retained by and owned solely
by ARTISTdirect. Notwithstanding the foregoing, [***]* will
own all information and data provided to Yahoo by users who
participate in the Sweepstakes that Yahoo makes available
via the ARTISTdirect Sweepstakes Button and the
ARTISTdirect Sweepstakes Text Link. Each party agrees to
use information and data provided to it by a user only as
authorized by that user and will not disclose, sell,
license or otherwise transfer this information to any third
party or use this information for the transmission of "junk
mail," "spam" or any other unsolicited mass distribution of
information. With respect to information and data provided
by or collected from users in connection with the
ARTISTdirect RMI Site, the Yahoo Remote Merchant
Integration Program Agreement will govern the ownership and
use of such information and data by the parties.
13.5 Privacy of User Information. ARTISTdirect will (a) ensure
that all information provided by users of the ARTISTdirect
Network is maintained, accessed and transmitted in a secure
environment and in compliance with industry standard
security specifications and (b) provide a link to its
privacy policy regarding the protection of user data on
those Pages of the ARTISTdirect Network where the user is
requested to provide personal or financial information.
Further, ARTISTdirect represents and warrants that it has
reviewed the FTC Order and will not engage in any conduct
that it reasonably believes would cause Yahoo to violate
the FTC Order. ARTISTdirect agrees to follow and comply
with all reasonable instructions and directions of Yahoo to
ensure Yahoo's compliance with the FTC Order.
14. INDEMNIFICATION.
14.1 By ARTISTdirect. ARTISTdirect, at its own expense, will
indemnify, defend and hold harmless Yahoo and its
employees, representatives, agents and affiliates against
any claim, demand, action or other proceeding brought by
any third party against Yahoo to the extent that such
claim, demand, action or other proceeding is based on, or
arises out of, a claim that any ARTISTdirect Brand Feature,
ARTISTdirect Content, any material, product or service
produced, distributed, offered or sold by ARTISTdirect, or
any material presented on the ARTISTdirect Network or the
ARTISTdirect RMI Site (excluding any Yahoo graphic links
placed by ARTISTdirect in accordance with Section 8.6)
- --------
* Confidential treatment has been requested for the bracketed portion.
The confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
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<PAGE> 19
(a) infringes in any manner any copyright, patent,
trademark, trade secret or any other intellectual
property right of any third party;
(b) is or contains any material or information that is
obscene, defamatory, libelous, slanderous, or that
violates any law or regulation;
(c) violates any rights of any person or entity, including
but not limited to rights of publicity, privacy or
personality;
(d) has resulted in any consumer fraud, product liability,
tort, breach of contract, injury, damage or harm of
any kind to any third party; or
(e) is subject to any fees, royalties, licenses or any
other payments to any third party;
provided, however, that in any such case: (1) Yahoo
provides ARTISTdirect with prompt written notice of any
such claim; (2) Yahoo permits ARTISTdirect to assume and
control the defense of such action or proceeding upon
ARTISTdirect's written notice to Yahoo of its intention to
indemnify; and (3) upon ARTISTdirect's written request, and
at no expense to Yahoo, Yahoo will provide ARTISTdirect
with all available information and assistance reasonably
necessary for ARTISTdirect to defend such claim.
ARTISTdirect will not enter into any settlement or
compromise of any such claim, which settlement or
compromise would result in any liability to Yahoo, without
Yahoo's prior written consent, which will not be
unreasonably withheld. ARTISTdirect will pay any and all
costs, damages and expenses, including but not limited to
reasonable attorneys' fees and costs awarded against or
otherwise incurred by Yahoo in connection with or arising
from any such claim, demand, action or other proceeding. It
is understood and agreed that Yahoo will not be required to
edit or review for accuracy or appropriateness any content
provided by ARTISTdirect.
14.2 By Yahoo. Yahoo, at its own expense, will indemnify, defend
and hold harmless ARTISTdirect and its employees,
representatives, agents and affiliates against any claim,
demand, action or other proceeding brought by any third
party against ARTISTdirect to the extent that such claim,
demand, action or other proceeding is based on, or arises
out of, a claim that any Yahoo Brand Feature
(a) infringes in any manner any copyright, patent,
trademark, trade secret or any other intellectual
property right of any third party;
(b) is or contains any material or information that is
obscene, defamatory, libelous, slanderous, or that
violates any law or regulation;
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<PAGE> 20
(c) violates any rights of any person or entity, including
but not limited to rights of publicity, privacy or
personality;
(d) has resulted in any consumer fraud, product liability,
tort, breach of contract, injury, damage or harm of
any kind to any third party; or
(e) is subject to any fees, royalties, licenses or any
other payments to any third party;
provided, however, that in any such case: (1) ARTISTdirect
provides Yahoo with prompt written notice of any such
claim; (2) ARTISTdirect permits Yahoo to assume and
control the defense of such action or proceeding upon
Yahoo's written notice to ARTISTdirect of its intention to
indemnify; and (3) upon Yahoo's written request, and at no
expense to ARTISTdirect, ARTISTdirect will provide Yahoo
with all available information and assistance reasonably
necessary for Yahoo to defend such claim. Yahoo will not
enter into any settlement or compromise of any such claim,
which settlement or compromise would result in any
liability to ARTISTdirect, without ARTISTdirect's prior
written consent, which will not be unreasonably withheld.
Yahoo will pay any and all costs, damages and expenses,
including but not limited to reasonable attorneys' fees
and costs awarded against or otherwise incurred by
ARTISTdirect in connection with or arising from any such
claim, demand, action or other proceeding.
15. LIMITATION OF LIABILITY.
EXCEPT AS PROVIDED IN SECTION 14, UNDER NO CIRCUMSTANCES WILL
ARTISTDIRECT, YAHOO OR ANY AFFILIATE OF EITHER PARTY BE LIABLE TO
THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL
OR EXEMPLARY DAMAGES ARISING FROM THIS AGREEMENT, EVEN IF THAT
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES,
INCLUDING BUT NOT LIMITED TO LOSS OF REVENUE OR ANTICIPATED
PROFITS OR LOST BUSINESS.
16. INSURANCE.
ARTISTdirect will maintain insurance during the Term with a
carrier that is reasonably acceptable to Yahoo and with coverage
for commercial general liability and errors and omissions of at
least $1 million per occurrence. ARTISTdirect will name Yahoo as
an additional insured on such insurance and will provide evidence
of such insurance to Yahoo within 10 days of the Effective Date.
Such insurance policy will not be cancelled or modified in a
manner inconsistent with this provision without Yahoo's prior
written consent.
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<PAGE> 21
17. GENERAL PROVISIONS.
17.1 Independent Contractors. It is the intention of Yahoo and
ARTISTdirect that Yahoo and ARTISTdirect are, and will be
deemed to be, independent contractors with respect to the
subject matter of this Agreement, and nothing contained in
this Agreement will be deemed or construed in any manner
whatsoever as creating any partnership, joint venture,
employment, agency, fiduciary or other similar relationship
between Yahoo and ARTISTdirect.
17.2 Entire Agreement. This Agreement, and all Exhibits attached
hereto, represents the entire agreement between Yahoo and
ARTISTdirect with respect to the subject matter hereof and
thereof and will supersede all prior agreements and
communications of the parties, oral or written, including
but not limited to the Letter of Understanding executed on
or about December 1, 1999 between Yahoo and ARTISTdirect.
17.3 Amendment and Waiver. No amendment to, or waiver of, any
provision of this Agreement will be effective unless in
writing and signed by both parties. The waiver by any party
of any breach or default will not constitute a waiver of
any different or subsequent breach or default.
17.4 Governing Law. This Agreement will be governed by and
interpreted in accordance with the laws of the State of
California without regard to the conflicts of laws
principles thereof.
17.5 Successors and Assigns. Neither party will assign its
rights or obligations under this Agreement without the
prior written consent of the other party, which will not
unreasonably be withheld or delayed. Notwithstanding the
foregoing, either party may assign this Agreement to an
entity that acquires substantially all of the stock or
assets of a party to this Agreement, except that consent
will be required if the non-assigning party reasonably
determines that the assignee will not have sufficient
capital or assets to perform its obligations hereunder, or
that the assignee is a direct competitor of the
non-assigning party. All terms and provisions of this
Agreement will be binding upon and inure to the benefit of
the parties hereto and their respective permitted
transferees, successors and assigns.
17.6 Force Majeure. Neither party will be liable for failure to
perform or delay in performing any obligation (other than
the payment of money) under this Agreement if such failure
or delay is due to fire, flood, earthquake, strike, war
(declared or undeclared), embargo, blockade, legal
prohibition, governmental action, riot, insurrection,
damage, destruction or any other similar cause beyond the
control of such party. If such event continues for more
than 30 days, the other party may terminate this Agreement
without further obligation.
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<PAGE> 22
17.7 Notices. Any notice, request or other communication called
for by this Agreement will be (a) in writing; (b) sent by
overnight or certified mail return receipt requested; and
(c) deemed delivered to the party to whom such
communication is directed, if by overnight mail, on the
date delivered or, if by certified mail, 2 days following
the date sent. If to Yahoo, such notices will be addressed
to 3420 Central Expressway, Santa Clara, CA 95051, Fax:
(408) 731-3301 Attention: Senior Vice President, Sales,
with a copy to its General Counsel. If to ARTISTdirect,
such notices will be addressed to 17835 Ventura Boulevard,
Suite 310, Encino, CA 91316 Attention: Chief Operating
Officer, with a copy to its counsel, Lenard & Gonzalez LLP,
1900 Avenue of the Stars, 25th Floor, Los Angeles, CA
90067, Attention: Allen D. Lenard, Esq.
17.8 Severability. If any provision of this Agreement is held to
be invalid, illegal or unenforceable for any reason, such
invalidity, illegality or unenforceability will not effect
any other provisions of this Agreement, and this Agreement
will be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
17.9 Sole Responsibility. ARTISTdirect will remain solely
responsible for the operation of the ARTISTdirect Network,
and Yahoo will remain solely responsible for the operation
of Yahoo's principal U.S. targeted Web site (the "Yahoo
Site"). Each party (a) acknowledges that the ARTISTdirect
Network and the Yahoo Site may be subject to temporary
shutdowns due to causes beyond the operating party's
reasonable control and (b) subject to the terms of this
Agreement, retains sole right and control over the
programming, content and conduct of transactions over its
respective internet-based service.
17.10 Counterparts. This Agreement may be executed in two
counterparts, both of which taken together will constitute
a single instrument. Execution and delivery of this
Agreement may be evidenced by facsimile transmission.
17.11 Authority. Each of Yahoo and ARTISTdirect represents and
warrants that the negotiation and entry of this Agreement
will not violate, conflict with, interfere with, result in
a breach of, or constitute a default under any other
agreement to which they are a party.
17.12 Attorneys Fees. The prevailing party in any action to
enforce this Agreement will be entitled to reimbursement of
its expenses, including reasonable attorneys' fees.
[SIGNATURE PAGE FOLLOWS]
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This Advertising and Promotion Agreement has been executed by the
duly authorized representatives of the parties, effective as of the Effective
Date.
YAHOO! INC. ARTISTDIRECT, INC.
By: /s/ ANIL SINGH By: /s/ KEITH YOKOMOTO
--------------------------------- ----------------------------------
Name: Anil Singh Name: Keith Yokomoto
-------------------------------- --------------------------------
Title: Senior Vice President Title: President and COO
------------------------------- -------------------------------
Attn: Senior Vice President, Sales Attn: Chief Operating Officer
3420 Central Expressway
Santa Clara, CA 95051
Tel.: (408) 731-3300 Tel: (818) 758-8700
Fax: (408) 731-3301 Fax: (818) 758-8722
e-mail: [email protected] e-mail: [email protected]
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<PAGE> 24
EXHIBIT T
FTC DECISION AND ORDER
9823015
B251544
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
COMMISSIONERS:
ROBERT PITOFSKY, CHAIRMAN
SHEILA F. ANTHONY
MOZELLE W. THOMPSON
ORSON SWINDLE
IN THE MATTER OF
GEOCITIES, A CORPORATION.
DOCKET NO. C-3850
DECISION AND ORDER
The Federal Trade Commission having initiated an investigation of certain acts
and practices of the respondent named in the caption hereof, and the respondent
having been furnished thereafter with a copy of a draft of complaint which the
Bureau of Consumer Protection proposed to present to the Commission for its
consideration and which, if issued by the Commission, would charge respondent
with violation of the Federal Trade Commission Act; and
The respondent, its attorneys, and counsel for Federal Trade Commission having
thereafter executed an agreement containing a consent order, an admission by the
respondent of all the jurisdictional facts set forth in the aforesaid draft of
complaint, a statement that the signing of said agreement is for settlement
purposes only and does not constitute an admission by respondent that the law
has been violated as alleged in such complaint, or that the facts as alleged in
such complaint, other than jurisdictional facts, are true and waivers and other
provisions as required by the Commission's Rules; and
The Commission having considered the matter and having determined that it had
reason to believe that the respondent has violated the said Act, and that
complaint should issue stating its charges in that respect, and having thereupon
accepted the executed consent agreement and placed such agreement on the public
record for a period of sixty (60) days, and having duly considered the comments
filed thereafter by interested persons pursuant to Section 2.34 of its Rules,
now in further conformity with the procedure prescribed in Section 2.34 of its
Rules, the Commission hereby issues its complaint, makes the following
jurisdictional findings and enters the following order:
1. Respondent GeoCities, is a corporation organized, existing, and doing
business under and by virtue of the laws of the State of California, with
its office or principal place of business located at 1918 Main Street, Suite
300, Santa Monica, California 90405.
2. The Federal Trade Commission has jurisdiction of the subject matter of
this proceeding and of the respondent, and the proceeding is in the
proceeding is in the public interest.
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ORDER
DEFINITIONS
For purposes of this order, the following definitions shall apply:
1. "Child" or "children" shall mean a person of age twelve (12) or under.
2. "Parents" or "parental" shall mean a legal guardian, including, but not
limited to, a biological or adoptive parent.
3. "Personal identifying information" shall include, but is not limited to,
first and last name, home or other physical address (e.g., school), e-mail
address, telephone number, or any information that identifies a specific
individual, or any information which when tied to the above becomes
identifiable to a specific individual.
4. "Disclosure" or "disclosed to third party(ies)" shall mean (a) the
release of information in personally identifiable form to any other
individual, firm, or organization for any purpose or (b) making publicly
available such information by any means including, but not limited to,
public posting on or through home pages, pen pal services, e-mail services,
message boards, or chat rooms.
5. "Clear(ly) and prominent(ly)" shall mean in a type size and location that
are not obscured by any distracting elements and are sufficiently noticeable
for an ordinary consumer to read and comprehend, and in a typeface that
contrasts with the background against which it appears.
6. "Archived" database shall mean respondent's off-site "back-up" computer
tapes containing member profile information and GeoCities Web site
information.
7. "Electronically verifiable signature" shall mean a digital signature or
other electronic means that ensures a valid consent by requiring: (1)
authentication (guarantee that the message has come from the person who
claims to have sent it); (2) integrity (proof that the message contents have
not been altered, deliberately or accidentally, during transmission); and
(3) non-repudiation (certainty that the sender of the message cannot later
deny sending it).
8. "Express parental consent" shall mean a parent's affirmative agreement
that is obtained by any of the following means: (1) a signed statement
transmitted by postal mail or facsimile; (2) authorizing a charge to a
credit card via a secure server; (3) e-mail accompanied by an electronically
verifiable signature; (4) a procedure that is specifically authorized by
statute, regulation, or guideline issued by the Commission; or (5) such
other procedure that ensures verified parental consent and ensures the
identity of the parent, such as the use of a reliable certifying authority.
9. Unless otherwise specified, "respondent" shall mean GeoCities, its
successors and assigns and its officers, agents, representatives, and
employees.
10. "Commerce" shall mean as defined in Section 4 of the Federal Trade
Commission Act, 15 U.S.C. Section 44.
I.
IT IS ORDERED that respondent, directly or through any corporation, subsidiary,
division, or other device, in connection with any online collection of personal
identifying information from consumers, in or affecting commerce, shall not make
any misrepresentation, in any manner, expressly or by
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implication, about its collection or use of such information from or about
consumers, including, but not limited to, what information will be disclosed to
third parties and how the information will be used.
II.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with any online collection
of personal identifying information from consumers, in or affecting commerce,
shall not misrepresent, in any manner, expressly or by implication, the identity
of the party collecting any such information or the sponsorship of any activity
on its Web site.
III.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with the online collection
of personal identifying information from children, in or affecting commerce,
shall not collect personal identifying information from any child if respondent
has actual knowledge that such child does not have his or her parent's
permission to provide the information to respondent. Respondent shall not be
deemed to have actual knowledge if the child has falsely represented that (s)he
is not a child and respondent does not knowingly possess information that such
representation is false.
IV.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with the online collection
of personal identifying information, in or affecting commerce, shall provide
clear and prominent notice to consumers, including the parents of children, with
respect to respondent's practices with regard to its collection and use of
personal identifying information. Such notice shall include, but is not limited
to, disclosure of:
A. what information is being collected (e.g., "name," "home address,"
"e-mail address," "age," "interests");
B. its intended use(s);
C. the third parties to whom it will be disclosed (e.g., "advertisers of
consumer products," mailing list companies," "the general public");
D. the consumer's ability to obtain access to or directly access such
information and the means by which (s)he may do so;
E. the consumer's ability to remove directly or have the information removed
from respondent's databases and the means by which (s)he may do so; and
F. the procedures to delete personal identifying information from
respondent's databases and any limitations related to such deletion.
Such notice shall appear on the home page of respondent's Web site(s) and at
each location on the site(s) at which such information is collected.
Provided that, respondent shall not be required to include the notice at the
locations at which information is collected if such information is limited to
tracking information and the collection of such information is described in the
notice required by this Part.
Provided further that, for purposes of this Part, compliance with all of the
following shall be deemed adequate notice: (a) placement of a clear and
prominent hyperlink or button labeled PRIVACY NOTICE on the home page(s), which
directly links to the privacy notice screen(s); (b) placement of the information
required in this Part clearly and prominently on the privacy notice screen(s),
followed on the same screen(s) with a button that must be clicked on to make it
disappear; and (c) at each
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location on the site at which any personal identifying information is collected,
placement of a clear and prominent hyperlink on the initial screen on which the
collection takes place, which links directly to the privacy notice and which is
accompanied by the following statement in bold typeface: NOTICE: WE COLLECT
PERSONAL INFORMATION ON THIS SITE. TO LEARN MORE ABOUT HOW WE USE YOUR
INFORMATION CLICK HERE.
V.
IT IS FURTHER ORDERED that respondent, directly or through any corporation,
subsidiary, division, or other device, in connection with the online collection
of personal identifying information from children, in or affecting commerce,
shall maintain a procedure by which it obtains express parental consent prior to
collecting and using such information.
Provided that, respondent may implement the following screening procedure that
shall be deemed to be in compliance with this Part. Respondent shall collect and
retain certain personal identifying information from a child, including birth
date and the child's and parent's e-mail addresses (hereafter "screening
information"), enabling respondent to identify the site visitor as a child and
to block the child's attempt to register with respondent without express
parental consent. If respondent elects to have the child register with it,
respondent shall: (1) give notice to the child to have his/her parent provide
express parental consent to register; and/or (2) send a notice to the parent's
e-mail address for the purpose of obtaining express parental consent. The notice
to the child or parent shall provide instructions for the parent to: (1) go to a
specific URL on the Web site to receive information on respondent's practices
regarding its collection and use of personal identifying information from
children and (2) provide express parental consent for the collection and use of
such information. Respondent's collection of screening information shall be by a
manner that discourages children from providing personal identifying information
in addition to the screening information. All personal identifying information
collected from a child shall be held by respondent in a secure manner and shall
not be used in any manner other than to effectuate the notice to the child or
parent, or to block the child from further attempts to register or otherwise
provide personal identifying information to respondent without express parental
consent. The personal identifying information collected shall not be disclosed
to any third party prior to the receipt of express parental consent. If express
parental consent is not received by twenty (20) days after respondent's
collection of the information from the child, respondent shall remove all such
personal identifying information from its databases, except such screening
information necessary to block the child from further attempts to register or
otherwise provide personal identifying information to respondent without express
parental consent.
VI.
Nothing in this order shall prohibit respondent from collecting personal
identifying information from children or from using such information, as
specifically permitted in the Children's Online Privacy Protection Act of 1998
(without regard to the effective date of the Act) or as such Act may hereafter
be amended; regulations or guides promulgated by the Commission; or
self-regulatory guidelines approved by the Commission pursuant to the Act.
VII.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall provide a reasonable means for consumers, including the parents of
children, to obtain removal of their or their children's personal identifying
information collected and retained by respondent and/or disclosed to third
parties, prior to the date of service of this order, as follows:
A. Respondent shall provide a clear and prominent notice to each consumer over
the age of twelve (12) from whom it collected personal identifying information
and disclosed that information to CMG Information Services, Inc., describing
such consumer's options as stated in Part VI.C and the manner in which (s)he may
exercise them.
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B. Respondent shall provide a clear and prominent notice to the parent of each
child from whom it collected personal identifying information prior to May 20,
1998, describing the parent's options as stated in Part VI.C and the manner in
which (s)he may exercise them.
C. Respondent shall provide the notice within thirty (30) days after the date of
service of this order by e-mail, postal mail, or facsimile. Notice to the parent
of a child may be to the e-mail address of the parent and, if not known by
respondent, to the e-mail address of the child. The notice shall include the
following information:
1. the information that was collected (e.g., "name," "home address," "e-mail
address," "age," "interests"); its use(s) and/or intended use(s); and the
third parties to whom it was or will be disclosed (e.g., "advertisers of
consumer products," "mailing list companies," "the general public") and with
respect to children, that the child's personal identifying information may
have been made public through various means, such as by publicly posting on
the child's personal home page or disclosure by the child through the use of
an e-mail account;
2. the consumer's and child's parents' right to obtain access to such
information and the means by which (s)he may do so;
3. the consumer's and child's parents' right to have the information removed
from respondent's or a third party's databases and the means by which (s)he
may do so;
4. a statement that childrens information will not be disclosed to third
parties, including public posting, without express parental consent to the
disclosure or public posting;
5. the means by which express parental consent may be communicated to the
respondent permitting disclosure to third parties of a child's information;
and
6. a statement that the failure of a consumer over the age of twelve (12) to
request removal of the information from respondent's databases will be
deemed as approval to its continued retention and/or disclosure to third
parties by respondent.
D. Respondent shall provide to consumers, including the parents of children, a
reasonable and secure means to request access to or directly access their or
their children's personal identifying information. Such means may include direct
access through password protected personal profile, return e-mail bearing an
electronically verifiable signature, postal mail, or facsimile.
E. Respondent shall provide to consumers, including the parents of children, a
reasonable means to request removal of their or their children's personal
identifying information from respondent's and/or the applicable third party's
databases or an assurance that such information has been removed. Such means may
include e-mail, postal mail, or facsimile.
F. The failure of a consumer over the age of twelve (12) to request the actions
specified above within twenty (20) days after his/her receipt of the notice
required in Part VI.A shall be deemed to be consent to the information's
continued retention and use by respondent and any third party.
G. Respondent shall provide to the parent of a child a reasonable means to
communicate express parental consent to the retention and/or disclosure to third
parties of his/her child's
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personal identifying information. Respondent shall not use any such information
or disclose it to any third party unless and until it receives express parental
consent.
H. If, in response to the notice required in Part VI.A, respondent has received
a request by a consumer over the age of twelve (12) that respondent should
remove from its databases the consumer's personal identifying information or has
not received the express consent of a parent of a child to the continued
retention and/or disclosure to third parties of a child's personal identifying
information by respondent within twenty (20) days after the parent's receipt of
the notice required in Part VI.B, respondent shall within ten (10) days:
1. Discontinue its retention and/or disclosure to third parties of such
information, including but not limited to (a) removing from its databases
all such information, (b) removing all personal home pages created by the
child, and (c) terminating all e-mail accounts for the child; and
2. Contact all third parties to whom respondent has disclosed the
information, requesting that they discontinue using or disclosing that
information to other third parties, and remove the information from their
databases.
With respect to any consumer over the age of twelve (12) or any parent of a
child who has consented to respondent's continued retention and use of
personal identifying information pursuant to this Part, such consumer's or
parent's continuing right to obtain access to his/her or a child's personal
identifying information or removal of such information from respondent's
databases shall be as specified in the notice required by Part IV of this
order.
I. Within thirty (30) days after the date of service of this order, respondent
shall obtain from a responsible official of each third party to whom it has
disclosed personal identifying information and from each GeoCities Community
Leader a statement stating that (s)he has been advised of the terms of this
order and of respondent's obligations under this Part, and that (s)he agrees,
upon notification from respondent, to discontinue using or disclosing a
consumer's or child's personal identifying information to other third parties
and to remove any such information from its databases.
J. As may be permitted by law, respondent shall cease to do business with any
third party that fails within thirty (30) days of the date of service of this
order to provide the statement set forth in Part VI.I or whom respondent knows
or has reason to know has failed at any time to (a) discontinue using or
disclosing a child's personal identifying information to other third parties, or
(b) remove any such information from their databases. With respect to any
GeoCities Community Leader, the respondent shall cease the Community Leader
status of any person who fails to provide the statement set forth in Part VI.I
or whom respondent knows or has reason to know has failed at any time to (a)
discontinue using or disclosing a child's personal identifying information to
other third parties, or (b) remove any such information from their databases.
For purposes of this Part: "third party(ies)" shall mean each GeoCities
Community Leader, CMG Information Services, Inc., Surplus Software, Inc.
(Surplus Direct/Egghead Computer), Sage Enterprises, Inc. (GeoPlanet/Planetall),
Netopia, Inc. (Netopia), and InfoBeat/Mercury Mail (InfoBeat).
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<PAGE> 30
VIII.
IT IS FURTHER ORDERED that for the purposes of this order, respondent shall not
be required to remove personal identifying information from its archived
database if such information is retained solely for the purposes of Web site
system maintenance, computer file back-up, to block a child's attempt to
register with or otherwise provide personal identifying information to
respondent without express parental consent, or to respond to requests for such
information from law enforcement agencies or pursuant to judicial process.
Except as necessary to respond to requests from law enforcement agencies or
pursuant to judicial process, respondent shall not disclose to any third party
any information retained in its archived database. In any notice required by
this order, respondent shall include information, clearly and prominently, about
its policies for retaining information in its archived database.
IX.
IT IS FURTHER ORDERED that for five (5) years after the date of this order,
respondent GeoCities, and its successors and assigns, shall place a clear and
prominent hyperlink within its privacy statement which states as follows in bold
typeface:
NOTICE: CLICK HERE FOR IMPORTANT INFORMATION ABOUT SAFE SURFING FROM THE FEDERAL
TRADE COMMISSION.
The hyperlink shall directly link to a hyperlink/URL to be provided to
respondent by the Commission. The Commission may change the hyperlink/URL upon
thirty (30) days prior written notice to respondent.
X.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall maintain and upon request make available to the Federal Trade Commission
for inspection and copying the following:
A. For five (5) years after the last date of dissemination of a notice
required by this order, a print or electronic copy in HTML format of all
documents relating to compliance with Parts IV through VIII of this order,
including, but not limited to, a sample copy of every information collection
form, Web page, screen, or document containing any representation regarding
respondent's information collection and use practices, the notice required
by Parts IV through VI, any communication to third parties required by Part
VI, and every Web page or screen linking to the Federal Trade Commission Web
site. Each Web page copy shall be accompanied by the URL of the Web page
where the material was posted online. Electronic copies shall include all
text and graphics files, audio scripts, and other computer files used in
presenting information on the World Wide Web; and
Provided that, after creation of any Web page or screen in compliance with this
order, respondent shall not be required to retain a print or electronic copy of
any amended Web page or screen to the extent that the amendment does not affect
respondent's compliance obligations under this order.
B. For five (5) years after the last collection of personal identifying
information from a child, all materials evidencing the express parental
consent given to respondent.
XI.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall deliver a copy of this order to all current and future principals,
officers, directors, and managers, and to all current and future employees,
agents, and representatives having responsibilities with respect to the subject
matter of this order. Respondent shall deliver this order to current personnel
within thirty (30) days after the date of service of this order, and to future
personnel within thirty (30) days after the person assumes such position or
responsibilities.
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<PAGE> 31
XII.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall establish an "information practices training program" for any employee or
GeoCities Community Leader engaged in the collection or disclosure to third
parties of consumers' personal identifying information. The program shall
include training about respondent's privacy policies, information security
procedures, and disciplinary procedures for violations of its privacy policies.
Respondent shall provide each such current employee and GeoCities Community
Leader with information practices training materials within thirty (30) days
after the date of service of this order, and each such future employee or
GeoCities Community Leader such materials and training within thirty (30) days
after (s)he assumes his/her position or responsibilities.
XIII.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall notify the Commission at least thirty (30) days prior to any change in the
corporation that may affect compliance obligations arising under this order,
including, but not limited to, a dissolution, assignment, sale, merger, or other
action that would result in the emergence of a successor corporation; the
creation or dissolution of a subsidiary, parent, or affiliate that engages in
any acts or practices subject to this order; the proposed filing of a bankruptcy
petition; or a change in the corporate name or address. Provided, however, that,
with respect to any proposed change in the corporation about which respondent
learns less than thirty (30) days prior to the date such action is to take
place, respondent shall notify the Commission as soon as is practicable after
obtaining such knowledge. All notices required by this Part shall be sent by
certified mail to the Associate Director, Division of Enforcement, Bureau of
Consumer Protection, Federal Trade Commission, Washington, D.C. 20580.
XIV.
IT IS FURTHER ORDERED that respondent GeoCities, and its successors and assigns,
shall, within sixty (60) days after service of this order, and at such other
times as the Federal Trade Commission may require, file with the Commission a
report, in writing, setting forth in detail the manner and form in which they
have complied with this order.
XV.
This order will terminate on February 5, 2019, or twenty (20) years from the
most recent date that the United States or the Federal Trade Commission files a
complaint (with or without an accompanying consent decree) in federal court
alleging any violation of the order, whichever comes later; provided, however,
that the filing of such a complaint will not affect the duration of:
A. Any Part in this order that terminates in less than twenty (20) years;
B. This order's application to any respondent that is not named as a
defendant in such complaint; and
C. This order if such complaint is filed after the order has terminated
pursuant to this Part.
Provided, further, that if such complaint is dismissed or a federal court rules
that the respondent did not violate any provision of the order, and the
dismissal or ruling is either not appealed or upheld on appeal, then the order
will terminate according to this Part as though the complaint had never been
filed, except that the order will not terminate between the date such complaint
is filed and the later of the deadline for appealing such dismissal or ruling
and the date such dismissal or ruling is upheld on appeal.
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<PAGE> 32
By the Commission.
Donald S. Clark
Secretary
ISSUED: February 5, 1999
SEAL
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<PAGE> 33
EXHIBIT U
MUTUAL NONDISCLOSURE AGREEMENT
1. "Confidential Information" is that confidential, proprietary, and trade
secret information being disclosed by the disclosing party pursuant to this
Agreement.
2. Except as set forth in this Section 2, all Confidential Information shall be
in tangible form and shall be marked as Confidential or proprietary
information of the disclosing party. If the Confidential Information is
disclosed orally or visually, it shall be identified as such at the time of
disclosure and confirmed in a writing to the recipient within thirty (30)
days of such disclosure.
3. Each of the parties agrees that it will not make use of, disseminate, or in
any way disclose any Confidential Information of the other party to any
person, firm or business, except to the extent necessary for negotiations,
discussions, and consultations with personnel or authorized representatives
of the other party and any purpose the other party may hereafter authorize
in writing. Each of the parties agrees that it shall disclose Confidential
Information of the other party only to those of its employees, consultants,
advisors and investors who need to know such information and who have
previously agreed, either as a condition to employment or in order to obtain
the Confidential Information, to be bound by terms and conditions
substantially similar to those of this Agreement.
4. There shall be no liability for disclosure or use of Confidential
Information which is (a) in the public domain through no fault of the
receiving party (b) rightfully received from a third party without any
obligation of confidentiality, (c) rightfully known to the receiving party
without any limitation on use or disclosure prior to its receipt from the
disclosing party, (d) independently developed by the receiving party without
use of any Confidential Information and by persons who have not had access
to any Confidential Information (e) generally made available to third
parties without any restriction on disclosure, or (f) communicated in
response to a valid order by a court or other governmental body, as
otherwise required by law, or as necessary to establish the rights of either
party under this Agreement (provided that the party so disclosing has
provided the other party with a reasonable opportunity to seek protective
legal treatment for such Confidential Information).
5. Each of the parties agrees that it shall treat all Confidential Information
of the other party with the same degree of care as it accords to its own
Confidential Information, and each of the parties represents that it
exercises reasonable care to protect its own Confidential Information.
6. Each of the parties agrees that it will not modify, reverse engineer,
decompile, create other works from, or disassemble any software programs
contained in the Confidential Information of the other party unless
otherwise specified in writing by the disclosing party.
7. All materials (including, without limitation, documents, drawings, models,
apparatus, sketches, designs and lists) furnished to one party by the other,
and which are designated in writing to be the property of such party, shall
remain the property of such party and shall be returned to it promptly at
its request, together with any copies thereof.
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<PAGE> 34
8. This Agreement shall govern all communications between the parties that are
made during the period from the effective date of this Agreement to the date
on which either party receives from the other written notice that subsequent
communications shall not be so governed, provided, however, that each
party's obligations under Sections 2 and 3 with respect to Confidential
Information of the other party which it has previously received shall
continue unless and until such Confidential Information falls within Section
4. Neither party shall communicate any information to the other in violation
of the proprietary rights of any third party. Neither party acquires any
licenses under any intellectual property rights of the other party under
this Agreement.
xi
<PAGE> 1
EXHIBIT 10.46
NEITHER THE WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO
SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii)
AN OPINION OF COUNSEL FOR THE PURCHASER, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) RECEIPT OF A NO-ACTION LETTER
FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED.
Date of Issuance: December 24, 1999 ("Date of Issuance") Warrant No.: W-4
WARRANT TO PURCHASE UP TO 1,357,016
SHARES OF COMMON STOCK OF ARTISTDIRECT, INC.
THIS CERTIFIES THAT Yahoo! Inc., a Delaware company ("Purchaser"), is
entitled to purchase under this Warrant up to One Million Three Hundred
Fifty-Seven Thousand Sixteen (1,357,016) shares (as may be adjusted pursuant to
provisions hereof, the "Shares") of Common Stock of ARTISTdirect, Inc., a
Delaware corporation (the "Company") at the prices per share set forth in
Section 1.1 and 1.2 below (as applicable, the "Exercise Price"), subject to the
provisions and upon the terms and conditions hereinafter set forth.
1. Exercise Price; Exercisibility and Term.
----------------------------------------
1.1 First Shares. This Warrant shall be exercisable with
respect to Fifty Percent (50%) of the Shares (the "First Shares") at any time
and from time to time during the period commencing on Date of Issuance and,
subject to Section 1.3, ending at 5:00 p.m. California time on the date three
(3) years after the Date of Issuance. The Exercise Price for each of the First
Shares shall be $3.482.
1.2 Second Shares. This Warrant shall be exercisable with
respect to Fifty Percent (50%) of the Shares (the "Second Shares") at any time
and from time to time during the period commencing on the earlier of (a) the
date two (2) years after the Date of Issuance or (b) the effective date of
termination of the Promotion Agreement because of Company's breach pursuant to
Section 12.2(b) of the Promotion Agreement (the "Second Shares Vesting Date")
and, subject to Section 1.3, ending at 5:00 p.m. California time on the date
three (3) years after the Second Shares Vesting Date. The Exercise Price for
each of the Second Shares shall be the initial offering price per share of the
Company's Common Stock in the Company's first public offering of Common Stock
pursuant to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission under the Securities Act (an "IPO") or, if an
IPO has not occurred on or before the Second Shares Vesting Date, then the
Exercise Price for each of the Second Shares shall be fair market value per
share of the Company's Common Stock, as determined by the Company's Board of
Directors in good faith and memorialized by written resolution.
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<PAGE> 2
1.3 Termination. Notwithstanding anything herein to the
contrary, this Warrant shall immediately terminate (and shall not thereafter be
exercisable) with respect to any unexercised Shares in the event that the
Promotion Agreement is terminated for Purchaser's breach pursuant to Section
12.2 of the Promotion Agreement.
1.4 Capitalization. The Company hereby represents and warrants
to the Purchaser that, as of November 12, 1999, its capitalization consisted of
(i) Seventy-Five Million (75,000,000) shares of Preferred Stock (the "Preferred
Stock"), of which (A) Fifteen Million (15,000,000) shares have been designated
Series A Preferred Stock, of which Twelve Million Eight Hundred Thirty-One
Thousand Two Hundred Sixty-One (12,831,261) shares were issued and outstanding;
and (B) Fifteen Million (15,000,000) shares have been designated Series B
Preferred Stock, of which Fifteen Million (15,000,000) shares were issued and
outstanding; and (ii) Two Hundred Million (200,000,000) shares of common stock
("Common Stock"), of which Fifty-Six Million Four Hundred Twenty-Nine Thousand
Eight Hundred Seven (56,429,807) shares were issued and outstanding. As of
November 12, 1999, except for (i) the conversion privileges of the Series A
Preferred Stock and the Series B Preferred Stock, (ii) the rights provided in
the Company's existing Stockholders Agreement dated as of October 6, 1999, (iii)
an aggregate of Twenty-One Million (21,000,000) shares of Common Stock reserved
for issuance under the Company's Stock Option Plan (the "Employee Plan"), of
which Fifteen Million One Hundred Ninety-Three Thousand One Hundred Twenty
(15,193,120) shares are subject to outstanding options, (iv) an aggregate of
Sixteen Million (16,000,000) shares of Common Stock reserved for issuance under
the Company's Artist Option Plan (the "Artist Plan"), of which Eight Million
Eight Hundred Fifty-Six Thousand Two Hundred Forty-Three (8,856,243) shares are
subject to outstanding options, (v) an aggregate of Five million (5,000,000)
shares of Common Stock reserved for issuance under the Company's Artist and
Artist Advisors Option Plan (the "Advisor Plan"), of which 4,196,251 shares are
subject to outstanding options, (vi) outstanding warrants to purchase Three
Million Six Hundred Twenty Thousand Five Hundred Fifty-Eight (3,620,558) shares
of Common Stock, (vii) accrued dividends on Preferred Stock which were payable
as Fifty-Seven Thousand Seven Hundred Sixty-Two (57,762) shares of Common Stock,
(viii) options granted to William Elson to purchase the lesser of (A) 100,000
shares of Common Stock and (B) 2.5% of the shares offered in the Company's
initial public offering, and (ix) agreements to issue shares of the Company's
Series C Preferred Stock, there were not outstanding any options, warrants,
rights (including conversion, exchange or preemptive rights) or agreements for
the purchase or acquisition from the Company of any shares of its capital stock.
Since November 12, 1999, the Company has not issued any shares
of its capital stock or any options, warrants, rights (including conversion,
exchange or preemptive rights) or entered into agreements for the purchase or
acquisition from the Company of any shares of its capital stock, other than (i)
amending its Certificate of Incorporation to designate Thirty-Four Million Two
Hundred Thousand (34,200,000) shares as Series C Preferred Stock, of which the
Company issued Twenty-One Million Three Hundred Ninety-Five Thousand Seven
Hundred Forty-Nine (21,395,749) shares, each of which is currently issued and
outstanding, (ii) entering into a Series C Preferred Stock Purchase Agreement
dated as of November 12, 1999 with Meadowlane Enterprises Ltd. and Universal
Music Group, Inc., pursuant to which the Company may be obligated to issue up to
an aggregate of Five Million Eight Hundred Eighty-Seven
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<PAGE> 3
Thousand Four Hundred Twenty-One (5,887,421) additional shares of Series C
Preferred Stock, (iii) entering into a Series C Preferred Stock Purchase
Agreement dated as of December 17, 1999 with the Purchaser to issue Seven
Hundred Seventeen Thousand Nine Hundred Seventy-Eight (717,978) shares of Series
C Preferred Stock, (iv) issuing options to purchase Common Stock under the
Company's existing stock option plans, and (v) additional accrued dividends on
Preferred Stock since November 12, 1999, including the possible obligation of
the Company to issue dividends on its Series C Preferred Stock.
2. Conversion.
-----------
2.1 Method of Exercise; Payment; Issuance of New Warrant. This
Warrant may be exercised by the Purchaser, in whole or in part and from time to
time, by the surrender of this Warrant (with a notice of exercise in the form
attached as Exhibit A and the investment representation certificate in the form
attached as Exhibit B duly executed) at the principal office of the Company and
by the payment to the Company by check or wire transfer, of an amount equal to
the then applicable Exercise Price per share multiplied by the number of Shares
then being purchased (the "Aggregate Exercise Price"). The person or persons in
whose name(s) any certificate(s) representing shares of Common Stock shall be
issuable upon exercise of this Warrant shall be deemed to have become the
Purchaser(s) of record of, and shall be treated for all purposes as the record
Purchaser(s) of the shares represented thereby (and such shares shall be deemed
to have been issued) immediately prior to the close of business on the date or
dates upon which this Warrant is exercised. In the event of any exercise of this
Warrant, certificates for the shares of stock so purchased shall be delivered
promptly (and, if the Company has consummated its initial public offering,
within 10 business days of receipt of notice of exercise) to the Purchaser and,
unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued promptly (and,
if the Company has consummated its initial public offering, within 10 business
days of receipt of notice of exercise) to the Purchaser.
2.2 Right to Convert Warrant into Stock; Net Issuance. In
addition to and without limiting the rights of the Purchaser under the terms of
this Warrant, the Purchaser may elect to convert this Warrant or any portion
thereof (the "Conversion Right"), but only to the extent that the Purchaser then
has a right to exercise this Warrant, into shares of Common Stock, as set forth
below. The Conversion Right may be exercised by the Purchaser by surrender of
this Warrant at the principal office of the Company together with notice of the
Purchaser's intention to exercise the Conversion Right, in which event the
Company shall issue to the Purchaser the number of shares of the Company's
Common Stock computed using the following formula:
X = Y(A-B)
------
A
3
<PAGE> 4
Where:
X The number of shares of Common Stock to be issued to the
Purchaser.
Y The number of shares of Common Stock representing the
portion of this Warrant that is being converted.
A The fair market value of one share of the Company's Common Stock.
B The Exercise Price (as adjusted to the date of such calculations).
For purposes of this Section 2.2, the "fair market value" per share of the
Company's Common Stock shall mean, the average daily Market Price (as defined
below) during the period of the most recent 20 days, ending on the last business
day before the effective date of exercise of the Conversion Right, on which the
national securities exchanges were open for trading, except that if no class of
the Common Stock is then listed or admitted to trading on any national
securities exchange or quoted in the over-counter market, the fair market value
shall be the Market Price on the last business day before the effective date of
exercise of the Conversion Right. If the Common Stock is traded on a national
securities exchange or admitted to unlisted trading privileges on such an
exchange, or is listed on the National Market System (the "National Market
System") of the National Association of Securities Dealers Automated Quotations
System (the "NASDAQ"), the Market Price as of a specified day shall be the last
reported sale price of the Common Stock on such exchange or on the National
Market System on such date or if no such sale is made on such day, the mean of
the closing bid and asked prices for such day on such exchange or on the
National Market System. If the Common Stock is not so listed or admitted to
unlisted trading privileges, the Market Price as of a specified day shall be the
mean of the last bid and asked prices reported on such date (x) by the NASDAQ or
(y) if reports are unavailable
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<PAGE> 5
under clause (x) above by the National Quotation Bureau Incorporated. If the
Common Stock is not so listed or admitted to unlisted trading privileges and bid
and ask prices are not reported, the Market Price as of a specified day shall be
determined in good faith by written resolution of the Board of Directors of the
Company.
2.3 Automatic Exercise. Subject to Section 1.3, in the event
that this Warrant would otherwise expire unexercised with respect to any First
Shares or Second Shares for which this Warrant is then exercisable and the
Conversion Right for such exercisable Shares would entitle Purchaser to the
issuance of shares of Common Stock pursuant to Section 2.2, Purchaser shall be
deemed to have automatically converted this Warrant pursuant to Section 2.2
immediately prior to the time at which it would have otherwise expired.
3. Securities Fully Paid; Reservation of Shares/Stockholder
Rights. All shares of Common Stock that may be issued upon the exercise of the
rights represented by this Warrant, upon issuance, will be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by the
Warrant may be exercised, the Company will at all times have authorized and
reserved for the purpose of issuance upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Common Stock to
provide for the exercise of the rights represented by this Warrant. Until this
Warrant is exercised by the Purchaser in accordance with the terms and
conditions hereof, Purchaser shall have no rights as a stockholder of the
Company with respect to the Shares issuable upon exercise of this Warrant.
4. Adjustment of Exercise Price and Number of Shares. The number
and kind of securities purchasable upon the exercise of the Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
4.1 Reclassification or Merger. In case of any
reclassification, change or conversion of securities in the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is a continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company,
unless this Warrant shall have been exercised or terminated in accordance with
its terms, the Purchaser of this Warrant shall have the right to exercise this
Warrant and upon such exercise to receive, in lieu of each share of Common Stock
theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and
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<PAGE> 6
property receivable upon such reclassification, change or merger by a holder of
one share of Common Stock. The provisions of this subparagraph shall similarly
apply to successive reclassifications, changes, mergers and transfers.
4.2 Subdivisions or Combination of Shares. If the Company at
any time while this Warrant remains outstanding and unexpired shall subdivide or
combine its Common Stock, the applicable Exercise Price and the number of Shares
issuable upon exercise hereof shall be proportionately adjusted.
4.3 Stock Dividends. If the Company at any time while this
Warrant is outstanding and unexpired shall pay a dividend payable in shares of
Common Stock (except any distribution specifically provided for in the foregoing
subparagraphs 4.1 and 4.2), then each applicable Exercise Price shall be
adjusted, from and after the date of determination of stockholders entitled to
receive such dividend or distribution, to that price determined by multiplying
such Exercise Price in effect immediately prior to such date of determination by
a fraction (a) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution, and
(b) the denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution and the number of
Shares subject to this Warrant shall be proportionately adjusted.
4.4 Notice of Adjustments. Whenever any applicable Exercise
Price shall be adjusted pursuant to the provisions hereof, the Company shall
within thirty (30) days of such adjustment deliver a certificate signed by its
chief financial officer to Purchaser setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the applicable Exercise Price after
giving effect to such adjustment.
5. Compliance with Securities Laws and other Restrictions.
5.1 Accredited Investor. This Warrant is conditioned upon, and
by its acceptance hereof Purchaser hereby confirms, that Purchaser is an
"accredited investor" as that term is defined under Regulation D under the
Securities Act of 1933.
5.2 Legend. Upon issuance, the Shares shall be imprinted with
a legend in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933. The securities may not be
sold or offered for sale in the absence of (a) an effective
registration statement for the securities under such Act, (b) a "no
action" letter of the Securities and Exchange Commission with respect
to such sale or offer or (c) satisfactory assurances to the Company
that registration under such Act is not required with respect to such
sale or offer."
together with any other legend required under applicable federal or state
securities laws.
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5.3 Restrictions on Transfer. This Warrant and the Shares
issuable upon exercise this Warrant may not be transferred or assigned in whole
or in part without compliance with applicable federal and state securities laws
by the transferor and the transferee. In addition, the Purchaser agrees not to
make any disposition of this Warrant or any Shares issued upon exercise hereof
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by (a) this Section 5.3, (b) Section 6 of that certain
Registration Rights Agreement dated as of November 12, 1999, as amended, among
the Company and certain of its stockholders, and (c) Article V of that certain
Stockholders Agreement dated as of November 12, 1999, as amended, among the
Company and certain of its stockholders; provided, and to the extent, this
Section and such agreements are then applicable, and:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) Purchaser shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Purchaser shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Securities Act. It is
agreed that the Company will not require opinions of counsel from the Purchaser
for transactions made pursuant to Rule 144 under the Securities Act except in
unusual circumstances and will not require opinions of counsel in transactions
involving the transfer or distribution of Securities by the Purchaser to any
direct or indirect subsidiary, parent or affiliate of the Purchaser.
6. Fractional Shares. No fractional shares of Common Stock will
be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor upon the basis
of the Exercise Price then in effect.
7. Modification and Waiver. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
8. Notices.
8.1 Notice of Certain Events. The Company shall provide the
Purchaser with at least thirty (30) business days notice (or such greater amount
of notice as Delaware law requires to be given to stockholders having the right
to vote at a meeting on any Sale Event) prior to (i) a merger of the Company
with and into, the consolidation of the Company with, or the sale by the Company
of all or substantially all of its assets to, another company (other than such a
transaction wherein the stockholders of the Company retain or obtain a majority
of the voting capital stock of the surviving, resulting or purchasing company)(a
"Sale Event"), (ii) any liquidation, dissolution or winding up of the Company or
(iii) the record date for any cash dividend declared on the Company's Common
Stock (each, a "Notice Event"). If the notice is provided pursuant to subsection
(i) or (ii) of the previous sentence, the notice will indicate the expected date
of the Notice Event.
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<PAGE> 8
8.2 Notice Procedure. Any notice required or permitted
pursuant to this Warrant shall be in writing and shall be deemed sufficient when
either (a) delivered personally, (b) sent by e-mail or fax with confirmation of
receipt or (c) deposited in the U.S. mail, as certified or registered mail, with
postage prepaid, addressed as follows:
IF TO THE PURCHASER:
Yahoo! Inc.
3420 Central Expressway
Santa Clara, California 95051
Attention: Senior Vice President Corporate Development
e-mail: [email protected]
Fax: (408) 731-3510
with a copy to:
Yahoo! Inc.
3420 Central Expressway
Santa Clara, California 95051
Attention: General Counsel
e-mail: [email protected]
Fax: (408) 731-3400
IF TO THE COMPANY:
ARTISTdirect, Inc.
17835 Ventura Boulevard, Suite 310
Encino, California 91316
Attention: Chief Financial Officer
Facsimile: (818) 758-8722
with a copy to:
Brobeck, Phleger & Harrison LLP
38 Technology Drive
Irvine, California 92618
Attention: Richard Fink, Esq.
Facsimile: (949) 790-6301
Each of the foregoing parties shall be entitled to specify a different
address by giving five (5) days advance written notice as aforesaid to the other
parties. All such notices and communications shall be deemed to have been
received (i) in the case of personal delivery or delivery be e-mail or fax, on
the date of such delivery (provided there is confirmation of such delivery) and
(ii) in the case of mailing, on the third business day following the date of
such mailing.
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<PAGE> 9
9. Lost Warrants or Stock Certificates. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant or any stock certificate and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
10. Non-Disclosure. The terms and conditions of this Warrant shall be
considered confidential and shall not be disclosed to any third parties except
to Company's or Purchasers's accountants, attorneys, or except as otherwise
required by law. Neither Company nor Purchaser shall make any public
announcement regarding the existence of this Warrant without the other party's
prior written approval and consent. If Company or Purchaser desires to make a
public announcement regarding the existence of this Warrant, it shall provide
the other with a minimum of three (3) business days notice of the intended
disclosure. If this Agreement or any of its terms must be disclosed by Company
under any law, rule or regulation, Company shall (i) give written notice of the
intended disclosure to Purchaser at least five (5) days in advance of the date
of disclosure, (ii) redact portions of this Agreement to the fullest extent
permitted under any applicable laws, rules and regulations, and (iii) submit a
request, to be agreed upon by Purchaser, that such portions and other provisions
of this Agreement requested by Purchaser receive confidential treatment under
the laws, rules and regulations of the body or tribunal to which disclosure is
being made or otherwise be held in the strictest confidence to the fullest
extent permitted under the laws, rules or regulations of any other applicable
governing body.
11. No Impairment. The Company will not, through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution,
issuance or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this Warrant and in the taking of
all such action as may be necessary or appropriate in order to protect the
rights of the holder of this Warrant against impairment.
12. Governing Law. This Warrant shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the laws
of the State of California.
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<PAGE> 10
IN WITNESS WHEREOF, this Warrant has been executed as of the Date of
Issuance.
ARTISTDIRECT, INC.
By
------------------------------------
Name
----------------------------------
Title
---------------------------------
YAHOO! INC.
By
-------------------------------------
Name
-----------------------------------
Title
----------------------------------
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<PAGE> 11
EXHIBIT "A"
NOTICE OF EXERCISE FORM
(To be executed only upon partial or full
exercise of the within Warrant)
The undersigned registered Purchaser of the within Warrant hereby
irrevocably exercises the within Warrant for and purchases shares of Common
Stock of ARTISTdirect, Inc. and herewith makes payment therefor in the amount of
$______, all at the price and on the terms and conditions specified in the
within Warrant and requests that a certificate (or _______certificates in
denominations of shares) for the shares of Common Stock of ARTISTdirect, Inc.
hereby purchased be issued in the name of and delivered to (choose one) (a) the
undersigned or (b) [NAME], whose address is____________________________________
and, if such shares of Common Stock shall not include all the shares of Common
Stock issuable as provided in the within Warrant, that a new Warrant of like
tenor for the number of shares of Common Stock of ARTISTdirect, Inc. not being
purchased hereunder be issued in the name of and delivered to (choose one) (a)
the undersigned or (b) [NAME], whose address is ______________________________.
Date: ______________________
By:
-------------------------------------
(Signature of Registered Purchaser)
Title:
------------------------------------
NOTICE: The signature to this Notice of Exercise must correspond with
the name as written upon the face of the within Warrant in
every particular, without alteration or enlargement or any
change whatever.
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<PAGE> 12
EXHIBIT "B"
INVESTMENT REPRESENTATION CERTIFICATE
Purchaser:
Company: ARTISTdirect, Inc.
Security: Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to the Company as
follows:
The Purchaser is aware of the Company's business affairs and financial
condition, and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. The Purchaser is
purchasing the Securities for its own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933, as amended (the "Securities
Act");
The Purchaser understands that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefor, which
exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in the view of the Securities and Exchange
Commission ("SEC"), the statutory basis for such exemption may be unavailable if
the Purchaser's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. The Purchaser is an "accredited investor" as that term is
defined under Regulation D promulgated by the Securities Exchange Commission
under the Securities Act;
The Purchaser further understands that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, except as
provided in that certain Third Amended and Restated Registration Rights
Agreement dated as of November 12, 1999, as amended, among the Company and
certain of its stockholders, the Purchaser understands that the Company is under
no obligation to register the Securities. In addition, the Purchaser understands
that the certificate evidencing the Securities will be imprinted with the
legends referred to in this Warrant under which the Securities are being
purchased;
The Purchaser is aware of the provisions of Rule 144, promulgated under
the Securities
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<PAGE> 13
Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: (i) the availability of certain public information about the Company;
(ii) the resale occurring not less than one (1) year after the party has
purchased and paid for the securities to be sold; (iii) the sale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934) and the amount of securities being sold during any
three-month period not exceeding the specified limitations stated therein;
The Purchaser further understands that at the time it wishes to sell
the Securities there may be no public market upon which to make such a sale, and
that, even if such a public market upon which to make such a sale then exists,
the Company may not be satisfying the current public information requirements of
Rule 144, and that, in such event, the Purchaser may be precluded from selling
the Securities under Rule 144 even if the one-year minimum holding period had
been satisfied; and
The Purchaser further understands that in the event all of the
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Date: ______________________
PURCHASER:
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<PAGE> 1
EXHIBIT 23.2
The Reverse Stock Split as described in Note 2 to the consolidated financial
statements has not been consummated at March 16, 2000. When this event has
been consummated, we will be in a position to render the following consent.
/s/ KPMG LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our reports dated February 23,2000 (except as to
note 2, which is dated as of , 2000) included herein with respect to the
consolidated balance sheets of ARTISTdirect, Inc. (and its predecessor company
ARTISTdirect, LLC) and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, changes in members' and
stockholders' equity (deficit), and cash flows for each of the years in the
three year period ended December 31, 1999 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
March 16, 2000
